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

Saturday, December 14, 2013

week ending Dec 14

Federal Reserve’s Balance Sheet Jumps to $3.994 Trillion - The Federal Reserve’s record balance sheet neared $4 trillion as the central bank amasses Treasuries and mortgage-backed securities to help lower long-term interest rates to spur economic growth. Assets rose $61.3 billion to $3.994 trillion in the past week, the Fed said in a weekly report. The third round of so-called quantitative easing involving $85 billion in monthly bond buying began in September last year and was increased in December 2012. The Federal Open Market Committee is scheduled to meet Dec. 17-18 to discuss whether to scale back the asset purchases. The balance sheet has increased from $869 billion in August 2007, when credit markets started to freeze.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- Thursday, December 12, 2013 - Federal Reserve Statistical Release: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Fed closer to strategy for tapering bond buying - The US Federal Reserve is closer to a strategy for the wind down of its $85bn-a-month asset buying programme, although the odds of a December slowing are finely balanced. The nature of the plan under discussion would see the Fed add extra monetary easing by another means, at the same time as winding down asset purchases, with a goal of a broadly neutral effect on financial conditions. The extra stimulus measures which have the most support on the rate-setting Federal Open Market Committee – which meets next week – are the provision of more guidance about how the Fed will behave after unemployment falls below its 6.5 per cent threshold, or a cut in the interest it pays on bank reserves. Setting a minimum inflation “floor” for interest rate rises is also possible, but has less backing. If the Fed pursues this kind of policy it would hope to taper its purchases without the market disruption caused when it considered slowing purchases in September. Fed officials were encouraged by a recent pick-up in the economic data even before solid US payrolls growth of 203,000 in November was reported last week. They are also more confident than in September that higher bond yields reflect optimism about growth rather than mistaken expectations of early interest rate rises.

Fed’s Plan to Taper Stimulus Effort Not Expected Until Next Year - Federal Reserve officials are in no hurry to retreat from their bond-buying campaign to stimulate the economy and are likely to postpone any cuts to the program until next year, according to public statements by Fed officials and interviews with some of them.  Job growth has strengthened in recent months, and Fed officials expect continued improvement in the coming year. The Fed’s chairman, Ben S. Bernanke, predicted in June that the Fed would taper its purchases by the end of this year, and officials say they still could announce such a cut next week, when the Fed’s policy-making committee is scheduled to hold its final meeting of the year.  But influential Fed officials see little harm in postponing the decision, particularly compared with the risks of pulling back too soon. Significant details of the eventual retreat also remain the subjects of unresolved debates, according to the public statements and interviews. And some officials argue that the slow pace of inflation is itself a reason for the Fed to maintain its stimulus campaign.

Fed’s Fisher: The Time to Taper Fed Bond Buys Is Now -- Federal Reserve Bank of Dallas President Richard Fisher said Monday that it is time for the central bank to begin winding down its easy-money policies and give a clear time table for how that process will play out. “The current program of purchasing $85 billion per month in U.S. Treasuries and mortgage-backed securities comes at a cost that far exceeds its purported benefits,” Mr. Fisher said. “We at the Fed should begin tapering back our bond purchases at the earliest opportunity.” “To enable the markets to digest this change of course with minimal disruption, we should do so within the context of a clearly articulated, well-defined calendar for reducing purchases on a steady path to zero,” he said. Mr. Fisher long has opposed the Federal Reserve‘s aggressively easy-money stance, arguing the central bank had done more than enough to get the economy back on track. The official, who next year will gain a voting slot on the monetary-policy-setting Federal Open Market Committee, is one of a clutch of officials who are among the last to speak ahead of the Dec. 17-18 policy meeting. Expectations for what the Fed will do at the gathering are up in the air. Improved economic data, especially on the jobs front, suggest it is possible the Fed will begin to slow the pace of its asset purchases at next week’s meeting. Mr. Fisher’s desire to slow things down is no surprise, but officials who have supported the effort haven’t sent clear signals of what their preferred path would be. Mr. Fisher said that when the Fed does begin to cut its bond purchases, it should make it clear the reductions will continue as long as there is no “serious economic crisis” to argue for a different policy path. The official said slower bond purchases don’t argue for raising short-term rates any time soon. He said “we may wish to keep overnight rates low for a prolonged period, depending on economic developments.”

Fed’s Bullard: Recent Job-Market Gains Boost Case for Fed Taper - Improvements in the labor sector are clearly boosting the chance the Federal Reserve will soon cut back on its easy-money policy stance, a key central-bank official said Monday. “Recent labor market results seem to suggest that coming months will show continued labor market improvement,” Federal Reserve Bank of St. Louis President James Bullard said. “Based on labor market data alone, the probability of a reduction in the pace of asset purchases has increased.” Mr. Bullard has been a steadfast supporter of the Fed’s $85-billion-per-month program of bond-buying. The effort has been aimed at driving up growth and lowering unemployment. Improved economic data, most notably on the jobs front, has boosted expectations the Fed will soon begin to cut back on the pace of asset purchases, perhaps at the Federal Open Market Committee meeting scheduled for Dec. 17-18. Mr. Bullard is a voting member of the FOMC. Expectations of a cutback in bond-buying–tapering, in the lingo of the market–grew even stronger in the wake of Friday’s release of robust November hiring data. That said, there remains a good bit of uncertainty what the Fed will do next week because officials who have been supporters of the effort haven’t given any explicit signals what will happen. Much of what Mr. Bullard said in the text of a speech prepared for delivery before a group in St. Louis reprised recent remarks of his. The official has long argued that Fed policy is data dependent. Mr. Bullard has also underscored that even as the economy’s outlook has improved, inflation continued to undershoot the Fed’s 2% target, and central bankers don’t have a good explanation for why this is happening.

Fed Watch: Bullard Offers Up The Tiny Taper - The employment report put the December taper squarely on the table. But what about inflation? Does low inflation take the December taper off the table? That is the question I asked last week, and Gavyn Davies at the FT follows up on the theme. Davies draws attention to this line from the FOMC statement: In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. As Davies notes, surely low inflation must create a headache for central bankers desperately seeking to taper. In the US, not only is inflation not trending back up to the Fed's objective, it is actually trending away from the objective. St. Louis Federal Reserve President James Bullard acknowledges the difficult position the Fed finds itself in: . “There is no widely accepted reason why inflation is running as low as it is in the face of extraordinarily accommodative policy from the Fed,” he said. They don't know why inflation is falling, only that it is. What should they do with respect to policy? Bullard offers a solution: “A small taper might recognize labor market improvement while still providing the Committee the opportunity to carefully monitor inflation during the first half of 2014,” Bullard said. “Should inflation not return toward target, the Committee could pause tapering at subsequent meetings,” he added. The tiny taper is back. What makes this extraordinary is that Bullard is an inflation hawk in the sense that he typically defends the inflation target from above or below. He is believed responsible for this addition to the FOMC statement: The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance...

Update: Four Charts to Track Timing for QE3 Tapering - Here is an update of the four charts I'm using to track when the Fed will start tapering QE3 purchases. In general the year-end data might be "broadly consistent" with the June (and September) FOMC projections. However I suspect the FOMC is very concerned about the low level of inflation, and also the decline in the employment participation rate. The December FOMC meeting is on the 17th and 18th.  Note: Another key is that a budget agreement is reached by December 13th. The first graph is for the unemployment rate. The current forecast is for the unemployment rate to decline to 7.1% to 7.3% in Q4 2013. We only have data through November, but it is pretty clear that the unemployment rate is tracking the FOMC forecast (lower is better). However, in July, Bernanke said that the unemployment rate "probably understates the weakness of the labor market." He suggested he is watching other employment indicators too, and I suspect the FOMC will also discuss the decline in the participation rate. The second graph is for GDP. The current forecast is for GDP to increase between 2.0% and 2.3% (the FOMC revised down their forecast from 2.3% and 2.6% in June). This is the increase in GDP from Q4 2012 to Q4 2013. The third graph is for PCE prices. The current forecast is for prices to increase 1.1% to 1.2% from Q4 2012 to Q4 2013. This was revised up from 0.8% to 1.2% in June. We only have data through October, but so far PCE prices are below this projection - and this projection is significantly below the FOMC target of 2%. The fourth graph is for core PCE prices The current forecast is for core prices to increase 1.2% to 1.3% from Q4 2012 to Q4 2013. Through October core PCE prices are below this projection - and, once again, this projection is significantly below the FOMC target of 2%. BR>

Former Fed No. 2 Kohn Says He Would Wait Until 2014 to Taper - If former Federal Reserve Vice Chair Donald Kohn were still on the central bank’s policy-setting committee at its meeting next week, he would recommend policy makers hold off until next year before pulling back on their bond-buying program. “I think I would wait, but it’s a close call,” he said Friday during a question-and-answer session with The Wall Street Journal’s David Wessel at a George Washington University conference on the Fed. Mr. Kohn, a 40-year veteran of the Fed who retired in 2010, said he understands a propensity by top officials to want to move away from bond purchases, which are unconventional and carry risks, and toward verbal guidance on the future path of interest rates. “I can see argument that there’s more emphasis on the forward guidance. That’s an easier tool to use. That’s more like the fed funds rate,” he said, referring to a benchmark overnight interbank rate that the Fed uses to influence short-term rates. The Fed will meet Tuesday and Wednesday. Investors are unsure the bank will use the occasion to begin dialing down its current $85 billion-a-month purchases of mortgage and Treasury bonds. Mr. Kohn’s remarks could be parsed closely in the markets because he worked closely for many years with the Fed’s top leaders and knows well how they think about policy decisions.

Timing Is (Not) Everything - Kunstler - Everybody knows that the Federal Reserve’s money-pumping operations have become a replacement for what used to be an economy. Therefore, no more money pumping = no more so-called economy. It’s that simple. But it doesn’t mean that the Federal Reserve won’t make a gesture and I wouldn’t be surprised if they try it during the season that Santa Claus hovers over the national consciousness — or what little of that remains when you subtract the methedrine, the Kanye downloads, the fear of an $11,000 bill for an emergency room visit requiring three stitches, and all the other epic distractions of our time.   The next meeting of the Fed’s Open Market Committee (FOMC), where such things as taper-or-not are considered, is Dec. 17. The Fed has to make some kind of gesture to retain any credibility, so I suspect they’ll go for a symbolic shaving of five or ten billion a month off the current official bond-buying operation number of $85 billion a month (or $1.2 trillion a year). If they don’t do it, no one will ever believe them again. I call it the “head-fake” taper, because it is essentially a false move.   The catch is that the Fed has more than one back door for vacuuming up all sorts of other miscellaneous financial trash paper securitized by promises already broken, moldy sheet-rock housing, college loans defaulted on, car payments that stopped arriving eighteen months ago, credit cards maxed to oblivion, sovereign foreign economies visibly whirling down the drain, and untold casino bet derivative hedges. Loose talk has it that the Fed is buying up way more dodgy debt than the official number of $85 billion a month. And why not? They bailed out way more than the $700 billion official TARP figure back in 2009 — everything from insolvent European banks to Floridian motels on the REO junk-pile — so nobody should take any particular taper number seriously. They’ll just backfill as necessary.   But even in a world of seemingly no consequence, things happen. One pretty sure thing is rising interest rates, especially when, at the same time as a head-fake taper, foreigners send a torrent of US Treasury paper back to the redemption window. This paper is what other nations, especially in Asia, have been trading to hose up hard assets, including gold and real estate, around the world, and the traders of last resort — the chumps who took US T bonds for boatloads of copper ore or cocoa pods — now have nowhere else to go.

Safe assets and the QE enigma –Snooping on an exchange between Steve Waldman and Dan Davies this morning about Tyler Cowen’s “entrance fee” theory got me thinking again about the narratives that we have built around QE. In particular the idea that whether QE is inflationary or deflationary is key to the story of what exactly large-scale asset purchases (LSAPs) do has caused tempers to flare but mostly, it seems, added to the general confusion. I want to start with the basics, as summarised by Dan: “ "Safe asset" yields are depressed by the fact that it is the policy of the Federal Reserve to make them depressed. This is what I mean. The story is basically "if people were prepared to extend credit, then credit would expand".”. We know that as the sub-prime mortgage crisis hit it created a cascade effect on bank balance sheets forcing widespread deleveraging and consequent economic contraction. We know too that central banks tried to offset this both by dropping interest rates to near zero and bringing in LSAPs.  Cowen’s point is that demand for some of the assets targeted under QE programmes, in particular government securities, has driven real returns negative. As he puts it: “[F]inancial institutions and traders have to hold large quantities of T-Bills (and similar assets) to participate in financial markets. That may be to satisfy collateral requirements, to meet government regulations, to be credible in private market transactions, and so on….The demand for these assets is now so high and so persistent that the assets have persistently low nominal returns and often negative real returns.” Cowen, indirectly, points to one of the charges levelled at LSAP programmes – that it decreases the supply and increases the cost of collateral. Of course, as Dan says, it is a deliberate policy aim of central banks to depress yields on government bonds in order to make it more appealing for investors to invest in other riskier assets. Critics, however, argue that this impairs financial markets further and prevents credit expansion into the real economy through rehypothecation (looking at you Richard).

The Fed’s options - At last December’s FOMC meeting, Ben Bernanke announced the new Evans Rule (forward guidance thresholds) framework at least one meeting before most observers had expected it. This year, market participants and Fed reporters have differing predictions for what the same meeting will bring, but they aren’t ruling much out.  Here’s a summary of potential changes, each of which could be announced in isolation or in combination with others (and do note that “none of the below” is also very possible):

  • 1) Tapering - In his recent speech on communications, Ben Bernanke said that “to the extent that the use of LSAPs engenders additional costs and risks, one might expect the tradeoff between the efficacy and costs of this tool to become less favorable as the Federal Reserve’s balance sheet expands.”The latest readings for GDP growth and the unemployment rate were better than the Fed’s projections earlier in the year. Yet both are problematic as indicators of renewed economic vigour. The new estimate for third-quarter GDP growth was bolstered mainly by inventory accumulation, while there continues to be debate about the factors behind the decline in labour force participation these past few years.
  • 2) A change to the forward guidance thresholds: This would most likely consist of lowering the unemployment rate threshold to adjust for the lack of clarity on the labour force participation rate (and suggesting that the decline in the unemployment rate has overstated labour market momentum). Along with the other ideas suggested here, it would be considered a dovish move to encourage a distinction between tapering and tightening. The idea received support in a much-discussed Fed staff paper last month.
  • 3) Adding an inflation floor to the existing thresholds: Bernanke referred to this policy during the September presser as a “sensible modification or addition to the guidance”. The idea is to add a lower inflation floor, perhaps 1.75 per cent or higher, to the extant thresholds. The Fed would be agreeing not to begin raising rates until inflation had climbed above 1.75 per cent even if the unemployment rate threshold is crossed.
  • 4) A small reduction in IOER - Because of the Fed’s new reverse repo facility, a reduction in the 0.25 per cent interest paid on reserves is more of a legitimate possibility than it was in the past, when Fed officials considered and then dismissed the idea. The reverse repo facility can help keep short rates positive and further compress secured and unsecured rates. (Earlier coverage here and here.)

Fed’s Lacker Glum on Growth, Still Opposes Bond Buys -- U.S. economic growth is unlikely to pick up appreciably next year but there is not much the Federal Reserve can do to further bolster the expansion, Jeffrey Lacker, president of the Richmond Fed, said Monday.Mr. Lacker, an inflation hawk who has been a staunch opponent of the central bank’s bond-buying stimulus, says he expects policy makers will debate cutting back on the current $85 billion monthly pace of asset purchases.But he added that despite a solid employment report for November showing over 200,000 new jobs were created, he didn’t foresee a renewed burst of hiring in the near term.“Businesses appear to be quite reticent to hire and invest,” Mr. Lacker said in prepared remarks to a Charlotte Chamber of Commerce conference. “An imminent acceleration in employment does not seem likely to me.” Mr. Lacker said he remained confident that recent low readings on inflation, which has fallen well below the Fed’s official 2% target, would be fleeting. However, he added the central bank’s policy-setting Federal Open Market Committee, which meets Tuesday and Wednesday next week, should remain vigilant against persistent disinflation.

Plosser: Fed Should Define Total Size of Bond-Buying Program - The Federal Reserve should soon announce a cap on the amount of bonds it will buy through its currently open-ended program, Charles Plosser, president of the Philadelphia Fed said Friday. Limiting the program to some dollar amount would reduce the uncertainty about it, which is damaging its effectiveness, Mr. Plosser told reporters during a conference in Philadelphia. Mr. Plosser said he was encouraged by the November employment report, which showed as surprisingly robust net increase of 203,000 jobs and a drop in the jobless rate to a five-year low of 7%. The figures fueled market speculation that the Fed might start scaling back its $85 billion per month in bond purchases at its next meeting on Dec. 17-18. But Mr. Plosser, a critic of the program, said that he would rather limit its size than gradually reduce, or “taper,” the amount of monthly purchases. “I was never a big fan of this program in the first place. So part of me says the sooner we can end this thing the better,” Plosser said. “But the sooner we can say we’re going to end this program once we’ve purchased X, the better. Don’t even taper — just reduce the uncertainty.”

Will Low Inflation Delay The Taper Decision? - It seems that crowd is increasingly inclined to expect that the Federal Reserve will begin to slow its bond-buying program next week, at the conclusion of its FOMC policy meeting on Wednesday, Dec. 18. Yesterday’s sharp drop in the US stock market is one sign that the Mr. Market is preparing for a change in the monetary weather in a few days. But is this fate? One reason for remaining a skeptic: inflation, which still looks quite low relative to the Fed’s target. Tim Duy offers a round-up of recent analysis that leaves room for doubt that next week will formally mark the beginning of the end for quantitative easing. He concludes:The Federal Reserve wants to taper. Wants very badly to taper, in my opinion. The recent employment reports seem to be giving a green light, and I suspect they are coming around to the idea that the decline in the labor force participation rate is largely permanent at this point, which will only increase their angst about the asset purchase program. But inflation is a thorn in their sides. The Fed will need to do a 180-degree turn on its current inflation concerns. If they dismiss the inflation concern in their drive to taper, I suspect they will lean on the stable inflation expectations and Phillips Curves arguments to justify a forecast that has inflation quickly reversing course and trending to target. I still tend to believe the Fed will delay tapering until 2014. Whether December or January or later, policy is close to an inflection point with a shift from more to less accommodation in the works. Meanwhile, The Wall Street Journal notes that the Fed’s “preferred inflation measure has been undershooting the central bank’s official 2% target in recent months, hovering at about half that level. A new paper from the San Francisco Fed suggests the trend is likely to continue despite policy makers’ hopes that the decline would be temporary.”

A Fed Dissident on Policy and Transparency - Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, who will become a voting member of the Fed’s policy-making committee in 2014, spoke with a small group of reporters in Philadelphia last week about his view of the economy, why he doesn’t think the Fed should taper its bond-buying campaign, and why he intends to continue airing his disagreements with the Fed’s leaders. Mr. Plosser, who has opposed the Fed’s efforts to stimulate the economy in recent years, argues that the central bank is taking large risks for small rewards.During his last term as a voter, in 2011, he opposed the Fed’s third round of bond buying, known as Operation Twist. And he has called regularly for the Fed to curtail its fourth round of bond buying, putting him at odds with Janet L. Yellen, the Fed’s vice chairwoman, who is awaiting Senate confirmation as its next chief. But Mr. Plosser also worked closely with Ms. Yellen as part of a small group of Fed officials that put together the Fed’s first specific declaration of its policy goals, published in 2012, including its intent to keep inflation at about 2 percent a year. They share a conviction that clear communication helps to increase the Fed’s power.  A lightly edited transcript follows.

The Fed Plan to Revive High-Powered Money – Blinder --Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of "excess reserves" buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: "[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage." As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous. The Fed is famously given to understatement. So when it says that "most" members of its policy committee think a change "could be worth considering," that's almost like saying they love the idea. That's news because they haven't loved it before. Like most central banks, the Fed requires banks to hold reserves—mainly deposits in their "checking accounts" at the Fed—against transactions deposits. Any reserves held over and above these requirements are called excess reserves. Not long ago, banks held virtually no excess reserves because idle cash earned them nothing. But today they hold a whopping $2.5 trillion in excess reserves, on which the Fed pays them an interest rate of 25 basis points—for an annual total of about $6.25 billion. That 25 basis points, what the Fed calls the IOER (interest on excess reserves), is the issue. Unlike the Fed's main policy tool, the federal-funds rate, the IOER is not market-determined. It's completely controlled by the Fed. So instead of paying banks to hold all those excess reserves, it could charge banks a small fee, i.e., a negative interest rate, for the privilege.

Blinder and the Banks -- Alan Blinder, writing in the Wall Street Journal on Tuesday, expresses enthusiasm about some recent hints at a possible change in the Fed’s policy on interest paid on excess reserves. The hints were contained in the minutes of the Federal Open Market Committee’s last policy meeting, which included a passage indicating that most participants in the meeting “thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.” Blinder has been a strong proponent of changing the current policy, so he thinks the hinted changes are of the utmost importance. But I have always found Blinder’s arguments about the importance of the rate of interest on excess reserves to be unpersuasive, and I continue to be puzzled by his reasoning. In the recent piece he again moots the possibility of imposing a negative rate of interest on excess reserves, thus charging banks money to hold them. He then says:  At this point, you’re probably thinking: “Wait. If the Fed charged banks rather than paid them, wouldn’t bankers shun excess reserves?” Yes, and that’s precisely the point. Excess reserves sitting idle in banks’ accounts at the Fed do nothing to boost the economy. We want banks to use the money. . They’d find other uses for the money. One such use would be buying short-term securities. Another would probably be lending more, which is what we want. I am unclear as to how changing the rate of interest of excess reserves could succeed in changing the quantity of excess reserves banks are holding.

Federal Reserve Eyes New Tool for Setting Interest Rates - An experimental bond-trading program being run at the Federal Reserve Bank of New York could fundamentally change the way the central bank sets interest rates. Fed officials see the program, known as a "reverse repo" facility, as a potentially critical tool when they want to raise short-term rates in the future to fend off broader threats to the economy. Of particular concern for the Fed is finding a way to contain inflation once the trillions of dollars it has sent into the financial system get put to use as loans.  Like the plumbing beneath the floorboards in a home, this program is unseen by most investors and it isn't part of the Fed's current efforts to spur growth. Launched this year, it is still in a testing stage and isn't expected to be fully implemented for years.Under this system, the Fed would raise short-term interest rates by borrowing in the future against its large and growing securities portfolio.The Fed traditionally has managed short-term interest rates by shifting its benchmark federal-funds rate, an overnight intrabank rate. It did this by controlling how much money flowed into and out of the banking system on a daily basis. Small adjustments could significantly impact short-term rates. Since the Fed has pumped $2.5 trillion into the economy by purchasing bonds, the old system won't work unless the central bank pulls much of this money out. Instead, what Fed officials increasingly envision is a system in which it would tie up this money as needed by offering investors and banks interest on their funds.

The Fed Doesn’t Really Trust the Banks Either - Here is a Wall Street Journal article about how the Federal Reserve is experimenting with reverse repo agreements as a tool of monetary policy. "The Fed traditionally has managed short-term interest rates by shifting its benchmark federal-funds rate, an overnight intrabank rate," but the reverse repo mechanism wouldn't be limited to banks. In the reverse repos, counterparties would lend the Fed money -- secured by Treasuries -- at a rate determined directly by the Fed. (In the experimental reverse repos the Fed is currently conducting, that's 5 basis points.) There's some stuff on the substance of monetary policy and the Fed's plans for future tightening,1 but I feel like that's the least interesting part. The more interesting part is that "The reverse-repo program extends the Fed's reach beyond traditional banks to Fannie, Freddie and others, and in theory should give the central bank more control over interest rates." Right now, to hear the Fed describe it, banks are in a weirdly lucrative place. The Fed's interest on excess reserves program pays them 25 basis points per annum for depositing money overnight with the Fed. In an efficient competitive market you'd expect them to borrow in size at around 0.25 percent: If they could borrow at 0.24 percent, they'd do that all day long, borrow at 0.24 percent (from whomever) and lend at 0.25 percent (to the Fed), and make riskless profit, which should drive the price of borrowing up to 0.25 percent. But in fact the fed funds rate -- the rate at which banks borrow reserves -- is around 8 or 9 basis points these days. The reason has to do with who lends the fed funds. It's not banks: Banks can get 25 basis points, so why settle for 8? A New York Fed blog post last week explains that something like 75 percent of fed funds lending comes from the Federal Home Loan Banks, which aren't eligible for interest on excess reserves and so have to lend their excess cash in the fed funds market

Taper & Quantitative Easing Reality Check - The potential "tapering" of quantitative easing can be likened to a lessening of chemotherapy treatments when a cancer patient's symptoms change. It means one thing if the patient is being cured. It means something quite radically different when there has not been a cure, and the underlying cancer remains as bad as ever. We are told that quantitative easing (QE), a.k.a. "cheap money", exists for the purpose of stimulating economic growth and corporate profits, and is thereby helping the United States and other nations that are struggling with persistent and deep-rooted economic and unemployment problems. If this were the whole truth, then QE is a temporary and technical fix, a mere "accommodative policy" that can be stepped down and then eliminated altogether once markets improve and economies no longer need assistance. This common narrative is dangerously mistaken, however, because the primary purpose behind the strategy is something else altogether: quantitative easing started as and remains a defensive attempt to prevent what could otherwise very quickly become an annihilation scenario for global financial markets. Today, the core underlying problems of "Too-Big-To-Fail" banks – which face a toxic three way combination of counterparty risk, contagion risk and liquidity risk – are larger than ever. Because heavily indebted sovereign nations lack the financial resources to handle another crisis by way of conventional bail-outs, this creation of unlimited amounts of artificial money – in a manner that is independent of both taxes and budgets – remains the bulwark, and the primary line of defense against existential threats to global financial markets.

Helicopters Don't Help (Wonkish) - Paul Krugman -- David Beckworth has a good piece on a point I’ve also tried to make: the irrelevance of “helicopter money”, and in particular the irrelevance of the decision to finance budget deficits by printing money as opposed to selling bonds. Why is this an issue? Because a fair number of people have in fact argued that we can get extra bang for the stimulus buck if we pay for infrastructure investment and so on through the printing press rather than conventional finance. Now, the truth is that this would do no harm — but it would also do no good. It doesn’t take fancy analysis to make this point — just an acknowledgement that in financial terms, at least, the central bank is part of the government. So, compare two cases. In case 1, the government runs a budget deficit, which it finances by selling bonds to banks (it could be anyone, but let’s assume that banks are the buyers.) At the same time, the central bank — an arm of the government — is engaged in quantitative easing, buying bonds from banks with newly created monetary base. I think we’re all agreed that the second part of this story isn’t very effective in a liquidity trap; the limitations of QE are why we’re even talking about helicopter money. But now consider case 2, in which the government pays for deficits simply by “printing money”, that is, adding to the monetary base. How do these cases differ?

Krugman, Helicopters, and Consolidation - Paul Krugman has a new post that explains why the debate over money- vs. bond-financing of government deficits is really much ado about nothing.  In it, he essentially echoes longstanding MMT-core principles, as we will show below.  Indeed, MMT blogs have written as much many times previously (for example, see here, here, here, and here). Krugman’s post looks at two alternative scenarios:

  • Case 1: The government runs a deficit, selling bonds to offset the shortfall, while the Federal Reserve does QE
  • Case 2: The government runs a deficit but does not sell bonds, instead financing all of its spending by “printing money” (i.e. with newly created base money)

Let’s look more closely at his Case #1, where the government deficit spends and “finances” that spending by selling bonds to commercial banks while the Fed does QE.  This is shown in Table 1, where we have T-accounts for the private sector (here referring to households and non-financial businesses), banks, dealers (which are assumed to purchase T-bills at auction and engage in open market operations with the Fed), the Fed, and the Treasury.

Stanley Fisher’s views on monetary policy - Stanley Fischer is reportedly slated to be nominated the Fed vice chair, and it’s impossible to think of anyone more qualified for the gig (for any central banking gig, really). A number of instant profiles are already circulating, and of course Fischer was honoured at an IMF research conference on crises last month. As to his views on monetary policy, he does believe in the efficacy of asset purchases when rates have hit the zero lower bound. They help “either by the provision of liquidity… or by changing interest rates other than the central bank’s interest rates, moving them for instance in markets where longer-term interest rates are determined”, he said in his speech at the IMF. But he does add that asset purchases are imperfect: their benefits simply outweigh the costs. In comments to Bloomberg TV in October, he appeared to favour a tapering soon (hat tip Scott Sumner): Asked in an Oct. 11 Bloomberg Television interview when the Fed should begin tapering $85 billion in monthly bond buying, Fischer said, “there is an efficient way to do it, which is to start doing it pretty soon and to do it gradually.”“It would be good to start,” Fischer said. His comments at a conference in Hong Kong earlier this year have raised questions about whether he would support the Fed’s use of forward guidance. As reported originally by Real Time Economics: “You can’t expect the Fed to spell out what it’s going to do,” Mr. Fischer said. “Why? Because it doesn’t know.”

The Federal Reserve: Balancing Multiple Mandates - Alice Rivlin (Testimony - Committee on Financial Services, U.S. House of Representatives) Thank you for inviting me to testify on this very important question: what economic goals should Americans expect their central bank to aim for? I do not believe there is a simple answer to this question. We can’t tell the Federal Reserve; just control inflation or just maximize employment or just keep the financial system stable. Americans, quite rightly, have multiple objectives for the performance of their economy, including high employment, low inflation, and financial stability. The job of the Federal Reserve and other economic policy-makers is to balance those multiple objectives as effectively as they can. This is not an easy task. It requires analysis and judgment in the face of necessarily uncertain forecasts. But focusing on a single objective would lead to less satisfactory economic performance. I will expand on this basic thought briefly this afternoon.

Saving the Fed From Itself - Martin Feldstein - THE Federal Reserve is pursuing a very risky monetary policy. Its leaders are correct that the American economy needs more stimulus, and they believe that the central bank, because of political paralysis, is the only game in town. But if Congress and the Obama administration could agree on a fiscal stimulus that goes beyond a short-term budget deal, the Fed would not have to take such risks.  The Fed’s strategy has been to stimulate the economy by driving down long-term interest rates by amassing long-term bonds and pledging to keep short-term rates near zero. A result has been to increase home and stock prices and, by lifting household wealth, encourage consumer spending.  But the magnitude of the effect has been too small to raise economic growth to a healthy rate. Home building has increased rapidly, but from such a low level that its contribution to gross domestic product has been very small. And the increase in total consumer spending has slowed, despite the soaring stock market.  The net result is that the economy has been growing at an annual rate of less than 2 percent. (The latest estimate overstates the strength of demand because half of that increase was just because of inventory accumulation.) Weak growth has also meant weak employment gains. Total private-sector employment is actually less than it was six years ago.  While doing little to stimulate the economy, the Fed’s policy of low long-term interest rates has caused individuals and institutions to take excessive risks that could destabilize the economy just as it did before the 2007-9 recession.

I Am Pleased to See Martin Feldstein Wisely Calling for Large, Immediate Fiscal Stimulus to Boost Employment! - But the rest of his column leaves me puzzled… Martin Feldstein calls for the U.S. to fight deficient aggregate demand by spending an extra trillion dollars on infrastructure over the next five years–and then to keep that program from worsening the government debt-to-GDP ratio by also enacting tax increases and spending cuts that would bring the debt down to its baseline level between, say, years five and fifteen, by, say, 2028. With idle labor and slack capacity at their current levels, the best bet is that such a program would boost total real GDP by at least $2 trillion over the next five years–and actually raise the government’s debt five years hence by at most $333 billion because of the federal, state, and local taxes that would be paid on the added income from higher real GDP. But there is no need to also find the political will to reach agreement on longer-run tax increases and spending cuts in order to keep this program from worsening the long-run debt outlook. The U.S. can now borrow and lock in a real interest rate on its debt of 1.66%/year by issuing 30-year TIPS–that means that the interest cost of financing the extra debt is only $5.5 billion a year. And an extra trillion dollars of infrastructure will boost U.S. national income in the long run by at least $40 billion a year–and the U.S. government will then collect $13.3 billion a year in extra taxes because of higher levels of income. Thus Feldstein’s short-run program alone, without the hard-to-pass long-run component, would free up more than $7.8 billion a year of debt-amortization capacity: it would all by itself improve the long-run fiscal picture.

Relax, that $2 trillion jump in US wealth isn’t because of Fed-induced ‘bubbles’ - US household wealth increased by $1.9 trillion to $77.3 trillion from July through September, according to new Federal Reserve data. That’s up by 2.6% from the previous three months. Of that nearly $2 trillion, $1.5 trillion came from an increase in the value of financial assets, including stocks and pension fund holdings. Another $400 billion came from the rising value of real-estate assets.But does this increase in wealth merely reflect a Fed-generated stock and housing bubble? Not really. For one thing, there is certainly little price inflation to speak of, which one would expect to see in a “sugar high” economy. Getting to asset bubbles, let’s look at US stocks. They are trading at around 25x times the cyclically-adjusted PE ratio developed by Yale’s Robert Shiller. While that’s above the historic average of 16.5, it’s still way below the peak of 44 reached during the internet stock bubble. Now let’s say a nasty bear market dropped stocks by a third, returning the Shiller PE to its historic average. Even then, stocks would still be 100% from their 2009 lows. Are stocks even overvalued? Maybe not if the economy accelerates next year as some are forecasting.  Shiller, in various interviews, is mildly concerned about stock, less so about housing: As he recently told Barron’s: We went through the biggest housing bubble in U.S. history in the 2000s, and there is a knee-jerk reaction among some people who think maybe we are doing that again. But you have to consider that these are very rare phenomena, and it was such a decisive break at the end of the last housing bubble that we might not be psychologically ready for another bubble.

Federal Reserve Interest Rates Should Be Near Zero Forever -- I am a strong proponent of making the Fed's current near 0 percent interest rate policy permanent. A low-rate policy encourages long-term investments for businesses to expand and become more efficient, and for households to invest in new homes, improvements and appliances that can also add to efficiency, all of which increases long-term productivity and our real wealth. Low rates also keep the cost of holding business inventory down, and lower interest costs mean businesses sell at lower prices and also keep the shelves stocked, helping to prevent sudden shortages from disrupting output and employment.However, savers are on the other side of low interest rates, and the private sector overall, including households, is a net saver. And lower interest rates mean less income to savers, which hurts the economy.  The remedy is quite simple. We can, again, either cut taxes (I've proposed a full payroll tax holiday, which would increase the average working family's take home pay by over $600 per month) and/or increase public spending (I've proposed establishing a minimum social security payment of $2,000 per month). Others options for increasing public spending might include restoring our public infrastructure for the likes of transportation, public safety, healthcare or education. Based on today's weak economy, I calculate the needed adjustments to be about $1 trillion per year.

Fed’s Evans Wary of Inflation Drop - A senior Federal Reserve policy maker said Friday that he was becoming skeptical that the drop in inflation was transitory, though would retain an “open mind” about starting to reel back its bond-buying program at the Fed’s upcoming meeting. Federal Reserve Bank of Chicago President Charles Evans also said the latest dip in the unemployment rate probably overstates the improvement in the U.S. economy, and backed continuing its accommodative monetary policy. Mr. Evans has long been a strong supporter of the Fed taking aggressive actions to aid the economy, notably to improve the labor market and bring down unemployment. He told reporters after a speech here that the drop in the jobless rate had been surprising given the sluggish expansion of the economy. However, while the jobless rate has fallen to 7% from 7.2% between September and November, most of this reflects people leaving the workforce. Mr. Evans described the November employment report as “good,” but said he’d like to see a couple of more months of similar data for assurance that the improvement was sustainable. The drop in inflation was another key reason to maintain an accommodative monetary policy, he said. “It’s a really big puzzle,” he said of the latest dip in inflation, noting that a phenomenon described by some observers as transitory had continued for some time.

Low inflation is becoming a major headache - In recent months, inflation has again reared its head as a problem in the developed economies. But this is not because it is too high. In most countries, headline CPI inflation has been falling significantly since the end of 2011, and it has now dropped to less than 1 per cent in both the US and the euro area.Furthermore, the pervasive decline in headline inflation has been accompanied by a similar decline in core inflation rates, which are also hovering at worryingly low levels in most countries. In fact, out of the 25 developed economies that publish regular data on Haver Analytics, only Iceland is currently experiencing an inflation rate that could be considered markedly too high by any of these measures.  The vast majority of developed countries are currently reporting a headline inflation rate of below 1.5 per cent, with the trend in virtually all of them headed downwards. Five countries, all in the the troubled region of the euro area, are experiencing outright deflation. Of the six economies that are currently reporting stable or rising trends in their inflation rates, Japan and Switzerland are emerging from prolonged periods of deflation, and are still attempting to achieve much higher inflation. Of the remaining four, three now report headline inflation close to 2 per cent, and all three of them have core inflation rates below that threshold.

Why Do Measures of Inflation Disagree? -  San Fran Fed - Inflation as measured by the personal consumption expenditures price index is near historical low levels, below the Federal Reserve’s 2% longer-run goal. Another common inflation measure, the consumer price index, is also historically low, but remains closer to 2%. The recent gap between these two measures is due largely to the cost of shelter, which makes up a larger proportion of the CPI consumption basket. Based on history, the gap between the two inflation measures should close at a rate of 0.05 percentage point per month.

Inflation Likely to Continue Below 2%, Fed Paper Suggests - The Federal Reserve‘s preferred inflation measure has been undershooting the central bank’s official 2% target in recent months, hovering at about half that level. A new paper from the San Francisco Fed suggests the trend is likely to continue despite policy makers’ hopes that the decline would be temporary. The authors are primarily concerned with identifying the key reason for the gap between two key gauges of price growth: the core personal consumption expenditures index, or PCE, which the Fed favors, and the more widely known consumer price index, or CPI. It all comes down to differences in the way the indexes gauge property price appreciation. They say the gap between the PCE and the CPI “should close at a rate of 0.05 percentage point per month.” Disturbingly for the Fed, the convergence will happen in the wrong direction, with a loftier CPI trending toward a more subdued PCE. The economists note that, since August 2011, annual “core” PCE inflation, which excludes food and energy costs, has exceeded its core CPI counterpart by an average 0.34 percentage point. “This is the longest sustained gap between these measures in the past ten year.” The reason? Housing. The sector, finally recovering from a historic slump, is weighted much more heavily in the CPI than in the PCE — 32% vs. 15% respectively.

We know the economy needs a bubble; but how big? - Nick Rowe -- Mr Ponzi issues a financial asset. Assume that the demand to hold that asset grows at the same rate as GDP. If people are willing to hold that asset at a rate of return less than the growth rate of GDP, Mr Ponzi can run a sustainable Ponzi scheme. He can issue new assets to pay the interest on the existing assets, and still issue a few more to provide some income for himself. Another name for a sustainable Ponzi scheme is a rational bubble. "Does the economy need a bubble?" is the wrong question. We know it needs a bubble. The empirical evidence is right there in our pockets. The only question is: how big a bubble does it need? Or, what does it depend on? People willingly hold paper currency, even at a very low rate of return, because it is more liquid than other assets, which need to pay a higher rate of return.We can imagine an economy in which the only liquid asset is paper currency, and all other assets are much less liquid, and in which paper currency is the only Ponzi asset, and all other assets pay a rate of return greater than the growth rate of GDP. If the issuer of that paper currency promises a real rate of return of minus 2%, and people choose to hold (say) 5% of their annual income in paper currency, then that economy needs a bubble equal to 5% of GDP.

Current economic conditions - The economy is slowly improving. On Thursday the BEA announced its revised estimate of U.S. real GDP. The initial estimate had been that the economy grew at a 2.8% annual rate in Q3, but that has now been revised up to 3.6%. Unfortunately, most of the gain came in the form of more inventory accumulation. Fourth-quarter production was higher than originally estimated, but final sales are now claimed to have grown at only a 1.9% annual rate, a little weaker than the original 2.0% estimate. Moreover, the added detail in the new release gives us the first look at a second way to estimate overall growth. We usually calculate GDP by adding up expenditures on all domestically produced final goods and services. In principle, we should be able to arrive at the same magnitude by adding up the incomes earned by all Americans. In practice, when the BEA collects data from different sources, the estimates turn out to be different, and the difference between the expenditure-based estimate and the income-based estimate is simply described as a "statistical discrepancy." Since we don't have a good theory for what the statistical discrepancy represents, it's a good idea to look at both measures. While the expenditures-based measure (the one officially reported) registered real GDP growth of 3.6%, the income-based measure suggests growth was in fact only 1.4%. Despite the sluggish growth of real final sales, the labor market continues to improve. The Bureau of Labor Statistics reported on Friday that nonfarm establishments added 203,000 workers on a seasonally adjusted basis in November, and have averaged almost as much over the last year. Job growth was enough to bring the estimated unemployment rate (based on the BLS's separate survey of households) down to 7.0%. While still quite high by historical standards, a 7% unemployment rate is back within the range of values that have characterized other extended episodes in recent U.S. history. For example, unemployment was 7% or higher from December 1974 through June 1977 (a period when the year-over-year PCE inflation rate averaged 7.0%) and also from May 1980 to December 1985 (with an average inflation rate of 5.5%). There is nevertheless clearly still a lot of slack in the U.S. economy, with PCE inflation over the last year of only 0.7%.

Economy To See Modest Pickup Next Year, NABE Forecast Shows -- That’s the latest consensus among economists surveyed by the National Association for Business Economics. The group’s members forecast the U.S. economy will grow by a not-amazing, but not-so-bad 2.8% next year. That’d be better than the 2.1% growth they’re estimating for 2013. But they still expect the labor market to remain on a similar growth path. The survey — conducted Nov. 8-19, before last week’s data showing steady hiring in November — indicates economists had a slightly less upbeat outlook for the economy than they did in the survey released in September. Here are some highlights from the survey, released Monday:

  • * Consumer spending, which makes up more than two-thirds of U.S. economic output, will grow 2.4% next year, a bit faster than the 1.9% growth they estimate for 2013.
  • * Business investment will be slightly better. Spending on nonresidential equipment and software will rise by 3.4% in 2014, compared to a 2.7% estimate for 2013, according to their forecasts.
  • * The pace of export growth will double. The group’s members forecast exports will grow 5% in 2014 after rising 2.5% in 2013.
  • * Government spending will continue to fall, but at a slower pace. Government outlays will drop 0.3% in 2014 after declining 2% in 2013, according to their forecasts.
  • * Job growth will continue at a steady pace, but the health-care overhaul will be a drag. Economists forecast an average 197,000 jobs a month will be added in 2014, up from their estimate of 177,500 jobs a month added in 2013. They said believe the Affordable Care Act will slow job growth by 10,000 a month.

Is inequality bad for economic growth? - On Wednesday, just as President Obama was giving his big speech on inequality and the economy, the Center for American Progress released three new papers on this very topic. Perhaps the most interesting paper here is economist Jared Bernstein's exploration (pdf) of whether rising income inequality in the United States is bad for economic growth. His conclusion: There are compelling reasons to believe that inequality can harm growth, but it's surprisingly difficult to prove this is happening. That doesn't mean that rising inequality is benign or that there isn't a link — it's just hard to establish empirically, perhaps because of how many other factors are at play. "When you’re trying to figure out the relationship between two extremely complex variables, it’s always going to be tricky," says Bernstein, the former chief economist to Vice President Biden. Economists used to think that income inequality was a necessary condition for growth, at least in emerging economies — the famous Kuznets curve suggests that inequality should rise sharply at first, and then the benefits of productivity become more widely shared over time. But this doesn't appear to describe the United States since the 1970s. Income inequality has soared, but the benefits of productivity growth haven't flowed as widely. So in recent years, some economists — and even groups like the International Monetary Fund — have started wondering if high levels of inequality might even be detrimental to growth. The theories are often elegant. But, as Bernstein details in his paper, empirical support remains difficult to tease out, particularly in the case of the United States. Here's a rundown:

Standards of evidence - - In a broadly excellent discussion of theories relating inequality and growth, Jared Bernstein writes: all of this research is relatively new, and while it makes suggestive connections, there is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth. Bernstein absolutely right, of course. But really? “concrete proof to lead objective observers to unequivocally conclude” Is that a remotely meaningful standard of evidence for, well, anything? People on the political right, including many respected economists, make strong claims that ceteris paribus taxation is bad for growth. They certainly have plausible models in which it would be. But as an empirical matter, the fair thing to write would be there is not enough concrete proof to lead objective observers to unequivocally conclude that taxation has held back growth. The evidence is very conflictatory! To steal Bernstein’s apt metaphor, there are a lot of moving parts! It is in fact almost certainly false to claim that taxation is always and everywhere bad for growth, and almost certainly true that there are circumstances under which it has been and would be good. If you are behaving as a scientist, it’s kind of a shitty, stupid question, “how does XXX affect growth?” How does molybdenum affect life? They are related! But if you start running regressions of liveliness against concentrations of molybdenum, you won’t get very far. . But we are not always, or even usually, behaving as scientists. The Tax Foundation will tell you right off that taxes are bad for growth, much worse than spending cuts. Studies prove it, and if you disagree you are simply wrong. Steve Roth aptly wonders why so few voices among “respectable progressives” are willing to even give fair consideration to the case that inequality might be an impediment to growth. I think he has a point. This isn’t a general phenomenon.  But on connections between inequality and the macroeconomy, it feels like respectable progressives are always looking for an excuse to say there’s no there there.

Growth: It's not just that unequal income distributions are just, well, you know, bad. And that it's worse that working hard and following the rules doesn't work so well anymore. But what's getting lost in the ZOMG, inequality! discussion is that supply-side and austerity policy regimes have lowered growth rates--that the result has been idle capital and idle labor sacrificed to the confidence fairies. Every economist is supposed to agree that more growth is better than less. Policies that increase inequality AND lower growth rates should be uniformly rejected by Serious People and politicians alike. The only thing worse than crappy wages is not being able to get a job at crappy wages, while factories degrade and earthmovers rust.

Brad DeLong Sez It! Inequality Kills Growth - Steve Roth - Okay well he doesn’t say it quite so succinctly. In fact he hedges his statement several ways from Sunday, and uses a hundred-and-twenty-three-word paragraph to do so: The near-consensus view over here at Equitable Growth and at the Equitablog is that U.S. economic growth over the past generation has been very disappointing. Too-much of our economic growth has been wasted producing the wrong stuff and delivering it to the wrong people, and we have failed to properly and productively invest at the rate we could in people, machines and buildings, ideas and organizations, and institutions. The hunch around here is that these two are tightly coupled: that the rapid rise in inequality as a result of the derangement of incentives has both decoupled the links between higher measured real GDP and human economic welfare and material well-being, and has also slowed the growth of our potential to produce real GDP. I know: he’s being responsible and careful not to overstate the case or torture the known evidence to date. But still. Goddam liberals. Happily, he then passes you on to Ashok Rao and Evan Soltas, who comprehensively eviscerate the inequality-causes-growth arguments of Scott Winship

Terrible - I guess I couldn’t ask for a better example of the phenomenon I described in “Standards of Evidence” than this piece by Ezra Klein.  It’s terrible. I have no idea whether inequality is the “defining challenge of our time”. That’s a meaningless trope. But Klein takes the phrase from a speech by President Obama and turns it into a question in order to knock inequality down a few pegs from the economic priority list. He does a very dishonest job of it. Here’s the worst: Economist Jared Bernstein has been worrying about inequality since way before worrying about inequality was cool. But in a careful paper released on the same day as Obama’s speech, Bernstein found that there wasn’t strong evidence for the idea that inequality is weakening demand — or for any of the other theories tying inequality to a weaker economy. There “is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth,” Bernstein wrote. That doesn’t mean inequality isn’t hurting growth. It just means it’s difficult to find firm proof of it. But if inequality really was the central challenge to growth, would proof really be so hard to come by? Read Bernstein’s paper. Klein is misrepresenting Bernstein’s views. An intelligent reader would interpret Klein as saying that Bernstein looked for evidence, failed to find it, and concluded it just wasn’t there. In fact, Bernstein reviews the research and finds lots of suggestive connections between inequality and growth. The unfortunate bit that Klein quotes reflects a kind of handwringing on Bernstein’s part — no, the research is not incontrovertible, there are a lot of “moving parts”, the research is young. Bernstein offers a cautious invitation to take seriously evidence of connections between inequality and growth. Klein pulls the caution out of context and misuses it as an excuse to dismiss those connections.

GDP Growth and Consumers' Perception of Well-Being - While we keep reading mainstream media reports that the United States recovery is underway and that consumer confidence is at its highest level since before the Great Recession, as you will see, consumer sentiment is in the eye of the beholder.  Here is a chart from FRED showing consumer sentiment since the beginning of the Great Recession:  The current reading of 84.5 is up significantly from its Great Recession nadir of 55.3 seen in November 2008.  That's just wonderful, isn't it?  All must be well!  Before we draw any hasty conclusions, let's look at a graph that shows a more complete history of  consumer sentiment dating back to the mid-1970s: Unfortunately, just prior to the plunge in confidence, the University of Michigan Consumer Sentiment reading hit 96.9 at the beginning of 2007, just before the wheels fell off America's economic bus.  In fact, for the entire period between November 2003 and March 2005, consumer confidence was above 90, peaking at 103.9 in January 2004.  Going back even further, during the halcyon days of the Clinton Administration in the last half of the 1990s, consumer confidence remained firmly stuck at a level in excess of 100 for the entire period between March 1997 and November 2000 save for one single month when it fell to 97.4.  Even during the dark days of late 2001 after the World Trade Centre attack, consumer confidence only fell to a low of 81.8 and was below 90 for only four short months between September and December 2001 and then snapped back up to above a reading of 90 until July 2002.  A lack of consumer confidence has led to rather anemic annual growth (i.e. no growth) in consumer loans compared to the recovery after the 2001 recession as shown here:

Secular Stagnation Arithmetic - Paul Krugman -- Still playing around with the question of secular stagnation. Based on some recent conversations, it seems to me that it’s useful to put some numbers to the issue – to quantify, at least roughly, the hole that seems to have developed in sustainable demand. In doing all this, the key point is NOT to focus on events since crisis struck; this is not a case of taking a business-cycle slump and imagining that it will last forever. Instead, the argument is that the sources of demand during the good years – the Great Moderation from 1985-2007 – are not going to be available even when the aftereffects of crisis have faded away. Start with the point I’ve raised several times, and others have raised as well: underneath the apparent stability of the Great Moderation lurked a rapid rise in debt that is now being unwound: Debt was rising by around 2 percent of GDP annually; that’s not going to happen in future, which a naïve calculation suggests means a reduction in demand, other things equal, of around 2 percent of GDP.  That’s not the only factor. We also seem to have a slowdown in the rate of growth of potential output, mainly because of demography – the baby boomers are now exiting the work force, all the women are in, etc. – but also perhaps because of slowing productivity. Just to put a number to it, here’s the CBO projection of the rate of potential growth: CBO thinks that we’re looking at potential growth around 1 percentage point slower than it was during the Great Moderation. To think about how this affects demand, consider the simple “accelerator”, in which producers, other things equal, invest enough to keep the ratio of capital to output constant as the economy grows. Here’s the ratio of fixed assets to GDP:

Potential Misunderstandings - Paul Krugman -- Izabella Kaminska reports on a “strongly worded” riposte to the secular stagnation hypothesis, in which analysts at Independent Strategy declare that we don’t have inadequate demand, we have debt causing the economy to grow above potential. Unfortunately, the paper itself isn’t available, only Kaminska’s description, so I can’t see how strong the wording is. If her description is accurate, however, some other stuff is … not so strong. For it seems that like so many writers in this area, the authors don’t understand the meaning of potential output. Once again, potential output is a supply-side concept. Just as structural unemployment is defined as the lowest rate of unemployment consistent with stable low inflation, potential output is defined as the highest level of output consistent with stable low inflation. If you want to claim that an economy has grown unsustainably above potential, you need to show me the accelerating inflation. In particular, if the Great Moderation era of rising debt was a case of growth above potential, it should be an era that ended with inflation well above where it started. It wasn’t:

2013 could end a on a strong economic note - Most of the Wall Street research I see these days argues for a better 2014 but doubts 4Q 2013 will be anywhere near as strong as 3Q. The econ team at RDQ Economics takes a different view I thought worth highlighting: For real GDP accounting purposes, we look at business inventories excluding autos and petroleum (auto inventory data in GDP are taken from industry sources and petroleum inventories can be influenced by oil price swings).  These inventories in October are up $80 billion at an annual rate versus a $60 billion annualized increase in the third quarter.Thus, while it is still early days for fourth-quarter inventory calculations and auto inventories in GDP may have slowed in the fourth quarter (given industry data that show soft auto production but robust auto sales), there is no evidence in this report that slower inventory investment is offsetting the strength of consumer spending in the fourth quarter.At this early point, it appears that real GDP is on track to grow by close to 3% in the fourth quarter following a gain of 3.6% in the third quarter.  From a big picture perspective, though inventory investment has picked up in recent months, inventories remain very well contained with the I-S ratio unchanged for six straight months at a relatively low level.

U.S. Records $135.2 Billion November Deficit - The U.S. government ran a much smaller deficit through the first two months of the budget year than last year, signaling further improvement in the nation’s finances. The Treasury Department says the gap between revenue and spending for November was $135.2 billion. That’s 21.4 percent lower than November 2012. Through the first two months of the budget year, which begins on Oct. 1, the deficit totals $226.8 billion — 22.7 percent lower than the same period a year ago. Higher tax rates and a better economy have boosted revenue, while spending has slowed. Those trends led to an annual deficit of $680 billion in the 2012 budget year, the lowest deficit in five years. Private economists predict the annual deficit this year will fall further, to around $600 billion.

Get ready for the US budget surplus of 2016? - Hard to believe it now, but back in 2007 the Congressional Budget Office was predicting the federal budget was about to move from red to black. The CBO forecasted a $170 billion surplus in 2012 and total surpluses of $1.2 trillion from 2012 through 2017. The following chart is from the CBO’s 2007 budget outlook: Those surpluses never happened. By 2012, the budget deficit was $1.1 trillion, the debt-to-GDP ratio was 70%, and publicly held debt was $11 trillion.. Still, the deficit is now falling fast, a much underappreciated fact. And we just may see a surplus before too long. Here is the latest budget update from Potomac Research:Data released yesterday by the Treasury Department show the deficit down by 22% compared to the first two months of last year, with receipts up by 10% to $362 billion. Cynics respond that about $30 billion of that total comes from Fannie and Freddie, which are pumping profits back to the government. True — but that will continue for the foreseeable future.With the economy clearly gaining momentum, we’d guess that the CBO will lower its fiscal 2014 deficit outlook from its outdated $560 billion forecast to about $500 billion — bringing red ink a little below 3% of GDP this year. Actually, 3% is the annual post-World War II average. The deficit in fiscal 2015 could easily fall below 2% of GDP, with a surplus not out of the question by 2016.So maybe it will turn out that the CBO was only off by four years, though obviously things haven’t played out quite the way the budgeteers expected. But rising entitlement spending means the good fiscal news will be fleeting. The worry here is that the improving short-term fiscal picture will cause Washington to become even more complacent about the nation’s long-term fiscal challenges.

New Economic Perspectives on the Government Budget, Deficits, and the National Debt - YouTube - The featured speakers, in order of appearance:

  • L Randall Wray - Professor, Economics, University of Missouri-Kansas City. Senior Scholar, Levy Economics Institute. Author, Understanding Modern Money, Modern Money Theory
  • Stephanie Kelton - Professor, Economics, and Chair of the Department of Economics, University of Missouri-Kansas City
  • Warren Mosler - President, financial services firm Valance Co. Inc. Author, Soft Currency Economics, The Seven Deadly Innocent Frauds of Economic Policy

Why the Next Debt Limit Debacle Might be Worse - Congress’s latest flirtation with debt-limit default caused barely a ripple in the financial markets. Rates on short-term Treasuries spiked in early October, before quickly subsiding to more normal levels. The spread between one- and three-year Treasuries temporarily widened, but quickly fell back to a more normal trend. All told, financial markets barely blinked. Unfortunately, the next time may be worse. Here’s why. If Congress is going to threaten the country with defaulting on bond payments, late October is a relatively good time to do it. In the year spanning October 1, 2013 to September 30, 2014, just 0.8 percent of interest payments were due on October 15st and only 6.3 percent were due on October 31st. (These calculations include Treasury bonds and notes, but not T-Bills.) The small share of interest payments due in October meant that financial markets could absorb the threat of default—however small—without causing too much disorder. Under the last-minute agreement reached on October 17th, the debt limit is suspended through February 8th. Unlike last October, large shares of Treasury interest payments are in mid- and late-February. As shown below, about one-third—32.8 percent—of Treasuries are owed payments on February 15th and another 5.5 percent are owed payments on February 28th (see chart). This time, money market funds and the repo markets might have more trouble handling the threat of default. With such a large share of Treasuries potentially becoming toxic from the perspective of repo market and money market funds, the worry is that yields might spike. Demand for Treasuries not owing interest on February 15th or February 28th could rapidly increase, and market players might seek to replace these Treasuries with other highly rated securities. If this happens, we could see the differentiation between those Treasuries with payments due in February 2014 and those without.

How Washington May Turn June Into Fiscal February - For those of you keeping score, the Congressional Budget Office now figures the next showdown over the nation’s debt limit will occur in March, or maybe as late as May or early June. That means up to six more months of fiscal uncertainty, unless Congress decides to kick the can further down the road before the next government shutdown–now scheduled for mid-January.You may recall that our last fiscal crisis concluded a month ago when Congress and President Obama agreed to reopen the government they had closed and suspend the debt limit until February 7.But, as it happens, February 7 doesn’t really mean February 7. In your nation’s capital, February really means March. Or May. Or possibly June.Thus, May, or possibly June, is the same as February here, only hotter.June may become fiscal February because the Treasury Department has the ability to take what are called extraordinary measures to keep borrowing for months after the law says it can’t. This is somewhat of a euphemism, however. I say this because Congress turns the debt limit into a political crisis practically every year. And each time Treasury takes the same steps to continuing borrowing long past the supposed deadline. At some point, an annual event probably stops being extraordinary.

Congress Readies a Year-End Dash - A Congress stymied by partisan divides, blown deadlines and intraparty squabbling gets a late chance this week to end the year with an elusive budget deal and to make headway on other fronts. In the final week of 2013 that the Senate and House are scheduled to be in Washington at the same time, lawmakers and aides are optimistic that negotiators can reach a budget accord and continue to make progress on a farm bill and other measures. Meanwhile, a Senate rule change pushed through by Democrats should help ease the way for confirmation of several of President Barack Obama's executive-branch and judicial nominees, even as Republicans still have the power to prolong the process. Lawmakers' top priority is avoiding the prospect of another government shutdown, after congressional warring led to a partial closure in October. Late last week, Senate Budget Committee Chairman Patty Murray (D., Wash.) and House Budget Committee Chairman Paul Ryan (R., Wis.) appeared to be closing in on a modest budget deal expected to allow spending of roughly $1 trillion in each of the next two years, potentially averting the threat of a shutdown with weeks to spare before current government funding runs out Jan. 15. "I'm hopeful that next week we can show the people of this country that we can produce something that is smarter than the way we're going about things now," House Majority Leader Eric Cantor (R., Va.) said on the House floor shortly before lawmakers left town last week.

Budget deal expected this week amounts to a cease-fire as sides move to avert a standoff - House and Senate negotiators were putting the finishing touches Sunday on what would be the first successful budget accord since 2011, when the battle over a soaring national debt first paralyzed Washington. The deal expected to be sealed this week on Capitol Hill would not significantly reduce the debt, now $17.3 trillion and rising. It would not close corporate tax loopholes or reform expensive health-care and retirement programs. It would not even fully replace sharp spending cuts known as the sequester, the negotiators’ primary target.  After more than two years of constant crisis, the emerging agreement amounts to little more than a cease-fire. Republicans and Democrats are abandoning their debt-reduction goals, laying down arms and, for the moment, trying to avoid another economy-damaging standoff. The campaign to control the debt is ending “with a whimper, not a bang,” said Robert Bixby, executive director of the bipartisan Concord Coalition, which advocates debt reduction. “That this can be declared a victory is an indicator of how low the process has sunk. They haven’t really done anything except avoid another crisis.”

What is Deficit Mania Doing on the News Pages? - Here is Lori Montgomery in the Washington Post on the congressional budget negotiations currently in progress: The deal expected to be sealed this week on Capitol Hill would not significantly reduce the debt, now $17.3 trillion and rising....Republicans and Democrats are abandoning their debt-reduction goals, laying down arms and, for the moment, trying to avoid another economy-damaging standoff. The campaign to control the debt is ending “with a whimper, not a bang,” said Robert Bixby, executive director of the bipartisan Concord Coalition, which advocates debt reduction. “That this can be declared a victory is an indicator of how low the process has sunk. They haven’t really done anything except avoid another crisis.”   There's nothing wrong with talking about the federal deficit in a story about the budget. But this entire story is framed around a sense of dismay that Congress has "abandoned" its debt-reduction goals. This is done with no mention of the fact that Congress has already slashed the 10-year deficit by nearly $4 trillion over the past couple of years. No mention that we've been engaged in this frenzy of deficit cutting despite the fact that the economy is still fragile, which means that reducing the deficit is almost certainly a terrible idea. No mention that deficit cutting of any size in the wake of recession is unprecedented in recent history. No mention of the fact that the deficit has been falling for years and will continue to decline in 2014 and 2015.

Counterattack of the Deficit Scold Deadenders - Paul Krugman -  The deficit scolds have not had a good year. They’ve seen their forecasts of fiscal disaster fizzle; they’ve seen their favorite economic analyses crash and burn; they’ve seen the rise of a faction with actual power in the Democratic party that refuses to acknowledge their wisdom. This last bit is crucial: deficit scoldery has always depended on the illusion of consensus, in which all the, well, serious people agreed that debt is the most important enemy.  What the scolds have left, however, is a significant part of the press corps that hasn’t gotten the memo, that still believes, for some reason, that all normal journalistic standards should be set aside when the deficit is concerned, that even news reporters should openly take sides. And so, as Kevin Drum points out, today’s WaPo has a report on the apparent mini-budget deal that simply takes it for granted that the failure to achieve a large-scale deficit reduction plan is a terrible failure. Actually, it’s even worse than Drum suggests. Near the endave aside the extent to which this is an editorial posing as a news report.  of the piece, we are told The most recent Congressional Budget Office projections show the red ink receding over the next two years. But annual deficits would start growing again in 2016 as the baby-boom generation moves inexorably into retirement. And the debt would again soar. Ah. So we look at the CBO’s latest projection, and right on the cover we see this:  See that debt soar! Or, actually, be more or less stable for the next decade. In fact, CBO’s projections are distinctly non-alarming even 20 years out.

U.S. Congress budget talks could produce Tuesday deal, aides say | Reuters: (Reuters) - A budget deal aimed at avoiding a U.S. government shutdown on January 15 and relieving federal agencies of some indiscriminate spending cuts that are set to begin with the new year could emerge in Congress on Tuesday, congressional aides said on Monday. Democratic Senator Patty Murray and Republican Representative Paul Ryan are scheduled to meet on Tuesday with the goal of finalizing a deal, according to aides who asked not to be identified. While Ryan and Murray have not yet struck a deal and negotiations could still fall apart, one of the aides said, "They are very close. You could maybe see a handshake come out of that meeting" on Tuesday. If such a deal is reached, the specifics could then be given to senators who are holding closed-door meetings during lunches that Democrats and Republicans hold separately on Tuesdays. For the past several weeks, Murray and Ryan, who head their chambers' respective budget panels, have been privately trying to reach a two-year budget deal that aims to end the Republican-Democratic brinkmanship over fiscal affairs that led to October's 16-day partial federal government shutdown. According to aides, Ryan and Murray have been discussing an unambitious plan that would suspend some of the automatic spending cuts, known in Washington as "sequestration," that hit the Pentagon and other agencies hard. In return for suspending some of the spending cuts, some revenues would be raised by cutting federal employees retirement benefits and raising some fees, such as those paid by air travelers.

Today in Fiscal Policy: Is There a Little Deal in the Offing? - So, there’s apparently a little fiscal deal in the air.  What’s one to make of it?  The WaPo has not much good to say about it—too timid, doesn’t whack the debt enough, etc.  The WSJ is a bit more positive.The deal under discussion, as far as I can tell, is to offset about $60 billion of the sequestration cuts in 2014 and 15, with most of the offset next year.  The increased discretionary spending would be paid for by increased fees—the papers mention airport fees, increased worker contributions to federal pensions, and auctioning off some of the publically-owned radio spectrum.  These payfors would be incrementally back-loaded, meaning reduced fiscal drag over the next two years.Now don’t get me wrong: they’re partially defusing a fiscal time-bomb they set themselves, so no one should mistake this for a great advance in bi-partisan fiscal policy.  And the sequester keeps going for a bunch more years after 2015, so again, this is a doubly partial fix (it buys down some of the sequester for some of the time it’s in effect).  Also, and this is a big mistake, at this point the deal does not appear to include extending UI benefits. Plus, it should be underscored: there ain’t no deal yet! But that said, and grading on the steepest of curves, and with a big caveat regarding the extension of UI benefits, I’m a little impressed:

Wonkbook: The ‘Grand Bargain’ is over The budget deal Patty Murray and Paul Ryan are crafting isn't a "grand bargain."  But the deal does lift about a third of sequestration's cuts while giving agencies more flexibility to deal with the rest. It does mean the 2014 budget is the work of human hands rather than automatic cuts. It might be a vehicle for Capitol Hill to extend expiring unemployment benefits. And it would be a small but real boost to the economy. Joel Prakken of Macroeconomic Advisors says the deal "would be a modest boost to GDP growth (relative to sequester). Maybe 1/4 percentage point." Moody's Mark Zandi adds in the possibility of extending unemployment insurance and estimates that "the lift to GDP next year compared to current law is .4. Small, but it matters."Politically, the deal is a signal that the age of grand bargains is over. Republicans and Democrats recognize that they can't come to a big agreement. What we don't know is if the age of mini-deals has yet begun. This deal could well fail before it's unveiled before Congress. It could well fail in the House of Representatives, where Democrats are pushing for an extension of unemployment benefits and conservative Republicans say they prefer sequestration.

Remember: It Doesn't Matter If The Budget Conference Doesn't Agree To Anything This Week - The big budget question for this week is whether the budget conference committee will be able to agree to anything by its deadline this Friday. My big budget answer: It doesn't matter. Here's why.

  • 1. The budget world won't end at midnight this Friday. The government won't shut down, the debt ceiling won't be breached and no sequester will occur. So there's no immediate practical impact if the conference committee fails to come up with anything.
  • 2. Even if the conference committee does agree to something this week, there's only a limited chance that the deal will actually be voted on by one or both houses. If it happens at all, it will happen in January.
  • 3. It's not at all clear, however, that whatever the conference committee comes up with will be acceptable to the full House and Senate. In fact, there have been increasing signs over the past 10 days that the deal being discussed -- eliminating the sequester and a smaller deficit in exchange for higher spending, an increases in fees and other non tax revenues and mandatory spending program reductions other than Social Security or Medicare -- isn't acceptable to significant factions in both houses and both political parties.

The great fallacy behind the creation of the conference committee was always that its mere existence somehow would change the intractable budget politics of the past few years. That was based largely on the premise that a deal cut by House Budget Committee Chairman Paul Ryan (R-WI) automatically would convince the House GOP caucus to abandon its previously fixed-in-cement positions on budget issues.

Congressional Negotiators Reach Budget Deal— House and Senate budget negotiators reached agreement Tuesday on a budget deal that would raise military and domestic spending over the next two years, shifting the pain of across-the-board cuts to other programs over the coming decade and raising fees on airline tickets to pay for airport security. The deal, while modest in scope, amounts to a ceasefire in the budget wars that have debilitated Washington since 2011 and gives lawmakers breathing room to try to address the real drivers of the national debt – burgeoning health care and entitlement programs like Medicare and Social Security – and to reshape the tax code. But it quickly drew fire from conservatives who saw it as a retreat from earlier spending cuts and a betrayal by senior Republicans. “We have broken through the partisanship and gridlock and reached a bipartisan budget compromise that will avert a government shutdown in January,” said Senator Patty Murray of Washington, the chairwoman of the Budget Committee and the chief Democratic negotiator. The agreement eliminates about $65 billion in across-the-board domestic and defense cuts while adding an additional $25 billion in deficit reduction by extending a 2 percent cut to Medicare through 2022 and 2023, two years beyond the cuts set by the Budget Control Act of 2011.

House, Senate Negotiators Announce Budget Deal - House and Senate negotiators, in a rare bipartisan act, announced a budget agreement Tuesday designed to avert another economy-rattling government shutdown and to bring a dose of stability to Congress's fiscal policy-making over the next two years. Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), who struck the deal after weeks of private talks, said it would allow more spending for domestic and defense programs in the near term, while adopting deficit-reduction measures over a decade to offset the costs. Revenues to fund the higher spending would come from changes to federal employee and military pension programs, and higher fees for airline passengers, among other sources. An extension of long-term unemployment benefits, sought by Democrats, wasn't included. The plan is modest in scope, compared with past budget deals and to once-grand ambitions in Congress to craft a "grand bargain" that would restructure the tax code and federal entitlement programs. But in a year and an institution riddled by gridlock and partisanship, lawmakers were relieved they could reach even a minimal agreement.

Lawmakers agree on $85 billion budget package - House and Senate negotiators unveiled an $85 billion agreement late Tuesday to fund federal agencies through the fall of 2015, averting another government shutdown and ending the cycle of crisis that has paralyzed Washington for much of the past three years. In a rare display of bipartisan cooperation, House Budget Committee Chairman Paul Ryan (R-Wis.) stood side by side in the Capitol with Senate Budget Committee Chairman Patty Murray (D-Wash.) to announce the deal, which would cancel half of the sharp spending cuts known as the sequester for the current fiscal year. "I am very proud to stand here today with Chairman Ryan to say that we have broken through the partisanship and gridlock and reached a bipartisan budget compromise,” Murray said, calling the agreement “an important step in helping to heal some of the wounds here in Congress and show we can do something without another crisis around the corner.” Ryan called the agreement “a step in the right direction” that protects the Pentagon from fresh cuts set to hit in January while trimming deficits by more than $20 billion over the next decade. With the deal already under fire from conservatives for weakening the sequester, Ryan argued that the package represents “a clear improvement on the status quo” by replacing one-time cuts to agency budgets with permanent savings from other programs.

U.S. Budget Agreement Eases Spending Cuts Over Two Years - U.S. budget negotiators unveiled an agreement to ease automatic spending cuts by about $63 billion over two years and reduce the deficit by $23 billion, breaking a three-year cycle of fiscal standoffs. Chief architects Senator Patty Murray and Representative Paul Ryan today said the compromise avoids a government shutdown when funding authority expires Jan. 15 and aids the U.S. economy, which they said had been damaged by a series of fiscal feuds. “It is an important step in helping heal some of the wounds here in Congress,” Murray, a Washington state Democrat, said today at a Capitol Hill news conference. Ryan, a Wisconsin Republican, said he sees the deal as “a step in the right direction.” He said: “In divided government, you don’t always get what you want.” The bipartisan budget plan, which will be considered by the Republican-led House later this week, would set U.S. spending at about $1.01 trillion for this year, higher than the $967 billion required in a 2011 budget accord. The agreement sets spending for defense at $520.5 billion and for non-defense at $491.8 billion. The accord would reduce the U.S. budget deficit by $20 billion to $23 billion, the lawmakers said.

Vital Signs: More Spending, Less Drag - The latest budget deal, if passed, would lessen the fiscal drag next year. The agreement hammered out by Sen. Patty Murray (D., Wash) and Rep. Paul Ryan (R, Wis.) would reverse some of the spending cuts currently in place under sequestration. Instead of discretionary spending for fiscal 2014 declining by about $19 billion, the spending authority (appropriations excluding war and emergency spending) would increase by roughly $26 billion. Other government programs, including emergency jobless benefits and the farm bill, still need to be decided, but the budget deal, if passed, means Washington will be less of a hindrance to growth next year. Economists at Goldman Sachs estimate the deal would lessen the fiscal drag in 2014 (on a fourth-quarter to fourth quarter basis) from 0.5 percentage point to 0.4 point, compared to the more than 1.5-point drag they calculate for 2013.

Ryan-Murray Budget Deal Announced To Remove Defense Cuts -- Representative Paul Ryan and Senator Patty Murray announced a budget deal yesterday. The deal replaces $63 billion in sequester cuts over two years and cuts an additional $23 billion in long term deficits. The deal will restore defense spending. The funding comes from increased fees for air travel and cuts to federal worker pension programs. Military spending would be set at $520.5 billion this fiscal year, while domestic programs would get $491.8 billion. The $63 billion increase over the next two years would be spread evenly between Pentagon and domestic spending, nearly erasing the impact of sequestration on the military. Domestic programs would fare particularly well because the 2 percent cut to Medicare health providers would be kept in place, alleviating cuts to programs like health research, education and Head Start. The increase would be paid for in part with higher airline fees that underwrite airport security. Higher contributions from federal workers to their pensions would save about $6 billion. Military pensions would see slower cost-of-living increases, a $6 billion savings over 10 years. Private companies would pay more into the federal Pension Benefit Guaranty Corporation. The rich were once again spared and yes the carried interest loophole stands. In fact, not a single tax loophole was closed. But at least the war economy has had sequestration reversed, isn’t that what really matters? Democrats gave up their demand that the deal extend unemployment benefits that expire at the end of the month, but they hope to press for an extension in a separate measure.Of course. And not only will it cut off benefits this deal ensures no programs to stimulate job growth will be passed. It solidifies a do-nothing austerity based posture from the federal government.The Republicans got everything they wanted. They get more cuts while none of their friends in the defense industry get hurt – actually they even got to do some damage to the federal pension system. All that while avoiding another shutdown that killed their poll numbers before the 2014 elections. Christmas came early for the GOP.

The Budget Deal: A Needed Time Out From Washington’s Fiscal Tantrums - House and Senate budget negotiators have reached what can only be called a temporary fiscal truce—if they can convince their congressional colleagues to accept it. House Budget Committee Chair Paul Ryan (R-WI) and Senate Budget Committee Chair Patty Murray (D-WA) hammered out a lowest-common-denominator deal that gives both parties two years of breathing room—and talking points. The agreement reached last night doesn’t end the budget wars. Far from it. Democrats are furious that the measure does not extended long-term unemployment benefits that will expire after Dec. 31. Tea party Republicans are angry that the plan would boost spending and diminish the automatic spending cuts known as sequester.And sometime next spring lawmakers will have the chance to lock horns again when the federal government reaches its borrowing limit. In what these days passes for an era of good feeling, however, congressional aides are optimistic lawmakers would finesse the debt limit as well. Far from the Grand Bargain some lawmakers have been seeking, this bill is built on the narrowest strip of common ground on which the conservative Ryan and the liberal Murray could stand together.  It effectively would do nothing to reduce the deficit—the stated goal of many Republicans—or stimulate economic growth—the wish of many Democrats including President Obama.  It does not even mention taxes, much less take steps toward tax reform. Nor does it address Social Security or Medicare, except for a small future cut in Medicare payments to providers.

Budget Deal Is a Tipping Point for the US Economic Recovery --Whisper it—we may be at a tipping point in the US economic recovery. The announcement that U.S. budget negotiators have reached a provisional two-year deal to avert another government shutdown (which had been set to happen, sans deal, in early 2014) was fantastic news. For the last few years, government has been a headwind, rather than a help, to the recovery. If you’d have stripped the public sector out of the growth numbers over the last year or so, you’d find that the U.S. was already in a 3 percent growth economy, rather than the sluggish “New Normal” of 2 percent that we’ve all gotten used to. If this deal, which still has to be voted on in both the House and Senate, marks a move from gridlocked, partisan politics in Washington to something more constructive, that’s a big deal.  But the real proof of whether we’re truly in a stronger recovery will come toward the end of the first quarter of 2014 when business leaders are asked why they aren’t investing more of the $2 trillion on their balance sheets in the U.S. That would obviously spur job growth and lower unemployment, but executives often point to “fiscal uncertainty,” meaning that they have no idea given the recent history of gridlocked politics what policy will be around things like taxes and regulation. If the budget agreement is a sign that politics as usual is changing, and growth is back as it has been in the last quarter, then businesses should start spending some of that cash.

Budget Deal Does Little to Address the Needs of the Economy: While all the details have yet to be released, it seems clear that the budget agreement announced by Senator Patty Murray and Representative Paul Ryan, which sets discretionary budget authority limits for fiscal years 2014 and 2015, will do essentially nothing to alter the disastrous trajectory that has characterized fiscal policy since 2011. I support reaching an agreement that will end the culture of periodic crises that has driven policy in recent years. However, this deal addresses the wrong set of priorities: deficit reduction ten years out rather than a stronger recovery now, and tweaking domestic spending for a few years as we continue to ignore the public investments our country needs. The worst part of the budget deal by far is what it doesn’t address: unemployment insurance for America’s four million long-term unemployed workers. This deal asks essentially nothing of the richest Americans while placing terrible burdens on new federal employees and the unemployed, and continuing the fiscal policy drag on our still-unfinished recovery.

US budget deal: What does it add up to? - Patty Murray and Paul Ryan, the Democratic and Republican chairs of the US budget conference committee, reached a cross-party agreement on Tuesday that marked a rare moment of fiscal policy comity on Capitol Hill. From the beginning of their negotiations in the wake of the October government shutdown – Mr Ryan and Ms Murray lowered expectations about what they could achieve, betting that a small deal would be the easiest to sell politically. And the agreement was indeed small. So what’s in it?

  • 1. The key numbers: The agreement sets discretionary spending – which funds government agencies, including the Pentagon, at $1.012tn in 2014 – or $45bn higher than the $967bn level it would fall to under planned automatic budget cuts, known as sequestration. For 2015, spending levels were set $18bn higher, offering more relief from fiscal drag. But even at $63bn, this only replaces a fraction of the $1.2tn in automatic cuts forced by sequestration over a decade. If the deal stopped there, it would have no impact on US deficits.
  • 2. The deficit effect: However, negotiators agreed to extend an often overlooked portion of sequestration which cuts payments to healthcare providers such as hospitals by 2 per cent under Medicare, the health plan for seniors. Those reductions will now be in place beyond 2021 and into 2022 and 2023, saving the US government more than $20bn, and allowing Mr Ryan to sell it to sceptical Republicans as reducing the deficit.
  • 3. The balance: The replacement of sequestration cuts is achieved by finding $63bn in savings elsewhere. Part of those savings came from spending cuts, and part from revenue increases taken from higher fees, rather than tax rises, which Republicans have been adamantly opposed to. Below are some examples.

Federal budget deal hits worker pensions - New federal employees are going to feel the sting from the federal budget deal unveiled on Tuesday. Of the proposed legislation’s nearly $1 trillion in savings, an estimated $6 billion comes out of the pensions of any federal workers hired after Dec. 31, 2013. Those newer workers would have to pay for 4.4% of their retirement benefits, more than five times what older employees would pay.Shortly before the details of the budget plan were announced, National Treasury Employees Union president Colleen Kelly told msnbc that changing her members’ retirement benefits would be “unacceptable.” “There are too many in Congress who do not value and respect federal employees and the work they do,” she said. Kelly’s union estimates that federal workers have already lost some $113 billion to deficit-reduction efforts, thanks in part to a multi-year pay freeze lasting from 2010 to the end of the 2013 government shutdown. Many federal employees also lost money to unpaid furlough days as a result of the across-the-board budget cuts known as sequestration. In addition, federal employees hired after 2012 already contribute more to their own pensions than those hired before, thanks to a bill Congress passed in February of that year. Whereas older hires pay 0.8% of their salaries into the federal retirement system, those hired after the law went into effect contribute 3.1%.

The 5 Big Budget Deal Losers - Regardless of whether it's actually adopted, five individuals, groups and organizations stand out as being the biggest losers from the budget deal announced Tuesday evening. They are:

  • 1. Fix The Debt. FTD is the high-profile corporate-funded organization that has been pushing hard for a grand bargain dealing with the long-term budget issues. In spite of the statement FTD issued, this deal was a total rejection of what FTD has raised and spent so much money trying to get Congress to do.
  • 2. Paul Ryan. Yes, I know that many are giving House Budget Committee Chairman Paul Ryan (R-WI) high fives for putting the deal together. But there's little doubt that he has hurt his credentials with the tea party wing of the GOP and it is critical to anyone who wants to run for president some day as Ryan supposedly wants to do.
  • 3. Health Care Providers. The the threat of mandatory program spending cuts from a sequester, which primarily affect health care providers under Medicare, ended ended in 2021 before the deal but were extended to 2023 in the deal.
  • 4. Senator Max Baucus (D-MT) and Rep. Dave Camp (R-MI). With the prospects of another deal on the budget now gone through the 2016 presidential election, the chairs of the Senate Finance and House Ways and Means Committees are now going to find it even more difficult to push their colleagues to consider comprehensive tax reform any time soon.
  • 5. Deficit Hawks. In spite of how House Republicans leaders are trying to sell it, this deal does virtually nothing to reduce the deficit and it puts further deficit reduction on hold through the end of 2015.

Absent From the Budget Deal: Benefits for Long-Term Unemployed - The budget deal announced Tuesday night doesn’t address a deadline looming later this month: the expiration of emergency benefits for the long-term unemployed. “That’s not part of our agreement,” Rep. Paul Ryan (R., Wis.), chairman of the House Budget Committee, said Tuesday night in unveiling the deal he brokered with Senate Budget Committee Chairman Patty Murray (D., Wash.). The budget deal’s exclusion of the emergency benefits could cost it the support of some liberal Democrats. Many Democrats had lobbied to include in any budget deal an extension of extra assistance for the long-term unemployed beyond Dec. 28, when 1.3 million Americans are at risk of losing their benefits. Many Republicans have balked at the price tag of continuing the often-extended program, which is expected to cost around $25 billion. Some in the GOP also argue that the program, which was meant to be a temporary response to the recession, does not create jobs or help people find them. Individuals are eligible for emergency compensation after they have exhausted their state benefits, which typically last for 26 weeks. The program now allows for a maximum 73 weeks of combined benefits in states where the unemployment rate is above 9%. Before the budget deal was formally released, some Democrats had indicated that the failure to include the unemployment insurance extension could prevent them from supporting the budget agreement. “I strongly oppose a budget deal that asks federal employees to endure another pay cut, ends an important economic lifeline for out-of-work Americans, and preserves unfair corporate tax giveaways,” Rep. Raul Grijalva (D., Ariz.), co-chairman of the Congressional Progressive Caucus, said in a written statement Tuesday.

More than two million Americans on verge of screw job because unemployment aid not in budget deal - As Jed Lewison has reported, congressional negotiators reached a budget deal late Tuesday that will restore $63 billion in automatic cuts, a $23 billion reduction in the deficit and no raise in taxes. A vote in both houses is expected before Congress adjourns Friday for the holidays.  Not part of the deal: a 12th renewal of the federally funded Emergency Unemployment Compensation program originally implemented in June 2008 to assist Americans who have been unemployed 27 weeks or more because of the Great Recession. Consequences if last-minute efforts fail to pass separate legislation renewing the extension? As of Dec. 28, 1.35 million out-of-work people will receive no more compensation checks. ver the next few months, however many of the 1.77 million Americans who have been out of work for 15 to 26 weeks and do not find jobs will exhaust their state compensation benefits and just have to suck it up because the EUC won't be there for them. The National Employment Law Project puts the number who will lose benefits at half the total: 850,000. But it could easily be more. And, paradoxically, that loss of assistance could bring the unemployment rate down, giving the appearance that the economy has gotten better when just the opposite will have happened. More on that in a minute. Many Democrats are decidedly unhappy about the failure to include an EUC extension and are seeking a means in the next three days to get it passed somehow. But there is no clear path forward:

Leaving Extended Unemployment Benefits Out of the Budget Deal is Cruel and Stupid - The budget deal announced last night by conference chairs Senator Patty Murray (D-WA) and Representative Paul Ryan (R-WI) is better than another government shutdown, but nicer words than this are hard to find to say about it. By far the worst aspect of it is the failure to extend the Emergency Unemployment Compensation program (EUC) in 2014. Without these extensions, 1.3 million workers will have their benefits cut off at the end of 2013, and another 850,000 workers will exhaust normal UI benefits over the first quarter of 2014. The share of long-term unemployed workers in the total labor force was 2.6 percent in November—double the share of June 2008, when President Bush first signed the UI extensions into law. Besides cutting off a vital lifeline to millions of Americans, cutting these extensions also continues the disastrous march towards budget austerity; a march that has been by far the primary contributor to our failure to recover from the Great Recession. Cutting these UI extensions in 2014 will create a fiscal drag on the U.S. economy that will reduce job growth by more than 300,000 over the year. A bizarre irony is that the cost of these extensions is nearly identical to the ten-year “deficit savings” achieved in the deal—between $20 and 25 billion. This amount of money is a rounding error in ten-year deficit projections.  But Congress has chosen to save an amount of money that doesn’t even rise to the level of symbolic over a decade rather than provide real relief to millions of distressed Americans, as well as provide a mild boost to a still-weak job market.

A Cruel, Irresponsible and Dysfunctional Budget Deal | Common Dreams: The trouble with making "functional" government the great aspiration of the American experiment -- as so many pundits and politicians now do -- is that a smoothly operating Congress is not necessarily moral, humane or even economically smart.It is important to remember this disconnect as we consider the budget deal announced late Tuesday . Murray and Ryan are excited that they had stopped fighting for long enough to agree to $63 billion in “sequester relief” -- as opposed to an actual end to sequestration -- and $23 billion in net deficit reduction. They also glad that they have set the discretionary spending level for fiscal year 2014 at $1.012 trillion, while setting the level at $1.014 trillion for fiscal year 2015. That apparently qualifies – in the eyes of the budget negotiators -- as a sufficient alternative to lurching from crisis to crisis. But the agreement does not address the crises that matters. "This plan won't create jobs, get the economy back on track, or meaningfully cut the deficit," explains Congressman Peter DeFazio, D-Oregon. And that's not the worst of it. What of the 1.3 million jobless Americans who -- with a fully Dickensian twist -- now stand to lose Federal unemployment benefits three days after Christmas?

House Republicans signal support for budget deal: House Republicans signaled support Wednesday for a budget deal worked out a day earlier, a plan narrowly drawn but promoted as a way to stabilize Congress' erratic fiscal efforts, avert another government shutdown and mute some of the partisan rancor that has damaged Americans' attitudes about their lawmakers. Still, there was some grumbling from both liberals and conservatives since the plan wouldn't solve long-term tax and spending issues, and ignores expiring unemployment benefits. Sen. Rand Paul announced his opposition, saying that "undoing tens of billions of this modest spending restraint is shameful and must be opposed."  The agreement, among other things, seeks to restore $63 billion in automatic spending cuts affecting programs ranging from parks to the Pentagon. The deal to ease those cuts for two years is aimed less at chipping away at the nation's $17 trillion national debt than it is at trying to help a dysfunctional Capitol stop lurching from crisis to crisis. It would set the stage for action in January on a $1 trillion-plus spending bill for the budget year that began in October. The measure unveiled by Ryan and Murray blends $85 billion in spending cuts and revenue from new and extended fees — but no taxes or cuts to Medicare beneficiaries — to replace a significant amount of the mandated cuts to agency budgets over the coming two years. The package would raise the Transportation Security Administration fee on a typical nonstop, round-trip airline ticket from $5 to $10; require newly hired federal workers to contribute 1.3 percentage points more of their salaries toward their pensions; and trim cost-of-living adjustments to the pensions of military retirees under the age of 62. Hospitals and other health care providers would have to absorb two additional years of a 2-percentage-point cut in their Medicare reimbursements. House Majority Leader Eric Cantor, R-Va., said the measure will serve as a vehicle to delay a 24 percent cut in Medicare reimbursements to physicians that would otherwise take effect Jan. 1 The idea is to buy negotiators more time to try to permanently fix the problem, which dates to miscalculations enacted in a 1997 budget law.

Budget Deal is a Victory For Deficit Hawks, Loss for Economy - A proposed budget deal brokered by Senator Patty Murray and Representative Paul Ryan is headed for the Senate after passing a the House on a bipartisan vote yesterday. Not everyone is happy about it. Conservatives would have liked to see more new deficit cutting measures. “In the coming days, members of Congress will have to explain to their constituents what exactly they achieved by increasing spending, increasing fees and offering up another round of promises waiting to be broken,” grumbled Michael Needham of Heritage Action. Many liberals are unhappy with the deal, too. “Here we are still having the conversation about how to cut government instead of how to improve the prospects of the long-term unemployed and improve the overall economy, which would take expanding spending, not shrinking it,” economist Laura Dresser lamented to The Progressive. With both the right and the left denouncing the deal, who is the real winner? If we look at the numbers, it is hard not to conclude that the pending deal, which would lock in the status quo, is a victory for the deficit hawks who have pretty much had their way with fiscal policy in recent years. True, on the downslope of the recession, first the Bush and then the Obama administrations tried fiscal stimulus. Without their actions, the downturn would very likely have been even deeper. However, the stimulus has long since run its course. Since the recovery officially began in mid-2009, fiscal policy has tightened markedly. Some people evidently don’t believe that. The Tea Party News Network, for example, continues to rant about “years marked by runaway spending and out-of-control deficits,” but those years ended some time ago. To see what has really been going on, we need to take a closer look at the evolution of fiscal policy over the course of the Great Recession and the still-incomplete recovery from it.

The War Over Austerity Is Over. Republicans Won -The main thing you need to know about today's budget agreement is that it's very modest. It repeals a little bit of the sequester cuts, and pays for it with a few small cuts in entitlements and some even smaller increases in user fees. Overall, the numbers are tiny enough that it's hard to see how anyone can get either too excited or too outraged over it.Needless to say, this hasn't stopped the usual suspects (Heritage, Club for Growth, various tea party groups) from acting as though it represents the end of Western civilization. But they've overplayed their hands this time, and GOP leaders in the House have apparently had enough of these clowns. Both John Boehner and Eric Cantor essentially told them to piss off, and I suspect that this agreement is going to get a lot of Republican votes. I'll predict at least 150 Republican votes in the House, maybe more. The tea party rump is truly going to be a rump this time.That said, it was interesting reading the reaction of conservative wonk-star Yuval Levin to the deal:...That the Democrats would accept a deal like this is a pretty striking indication of how the Republican House has changed the conversation on the spending front since 2010. Think of it this way: In their first budget after re-taking the majority—the FY 2012 Ryan budget, passed in 2011—the House Republicans wanted discretionary spending to be $1.039 trillion in 2014 and $1.047 trillion in 2015. These budgets were of course described by the Democrats and the political press (but I repeat myself) as some reversion to humanity’s barbaric past. Yet this proposed deal with the Democrats would put discretionary spending at $1.012 trillion in 2014 and $1.014 trillion in 2015—in both cases below that first House Republican budget.

For some government agencies, it’s only official if it’s on floppies - Imagine this scenario: your job is to take hundreds of pages worth of content every day and publish it to the Web, but the only way you're guaranteed to get that content is on paper. If you're lucky, the paper copy comes with an electronic version on CD—or a 3.5-inch floppy disk. That's exactly what happens at the Federal Register, the New York Times reports. The federal publication, a record of executive orders, proposes regulatory changes and other official federal notices. It's assembled by an office of the National Archives and published on the Web and in print daily by the Government Printing Office. And while the laws and regulations that govern how agencies are required to submit content to the Register allow for digitally signed e-mail messages, some agencies haven't implemented the public-key infrastructure (PKI) required to send such messages. Flash drives and SD cards aren't even allowed yet because they didn't exist at the time the regulations were written.  That means that a number of agencies still submit their notices by courier and on floppy disk.

Budget Deal Doesn’t Raise Taxes But Many Will Still Pay More - The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes. The plan would raise fees in four areas.Higher fees on air travelers would bring in an additional $12.6 billion over the next decade. Flyers would pay $5.60 for each one-way trip, up from today’s $2.50 per flight leg. . But, as the budget committee explains, the fee is voluntary—you only have to pay it if you choose to fly. Boosting the amount paid by employers to fund the Pension Benefit Guarantee Corporation (PBGC) would bring in another $8 billion. The basic premium was already scheduled to rise from $42 per participating worker to $49 in 2014 and to climb with inflation after that. The budget plan would take it up to $57 in 2015 and $64 in 2016. Additional premiums for underfunded company plans and for discontinued plans would also increase. Of course, only firms that choose to hire workers have to pay the higher premiums. One other group would get hit with a non-tax that feels like a tax: government workers. People who take jobs with the federal government after 2013 will pay more into FERS—4.4 percent of their pay, up from 1.3 percent today—adding $6 billion to federal receipts over ten years.  Paying more won’t give workers higher pensions. To them, the higher premiums will look a lot like a tax.

Whither the Tax Extenders? - In three weeks, more than 60 expiring tax provisions will…expire. At least for a while. It isn’t unusual for these mostly-business tax breaks to temporarily disappear, only to come back from the dead a few months after their technical expiration. But this time businesses are more nervous than usual. Their problem: Congress may have few opportunities to continue these so-called extenders in 2014.This doesn’t mean the expiring provisions won’t be brought back to life. In the end, nearly all will. But right now, it is hard to see a clear path for that happening. When Congress extended the full package of expiring provisions in January, it reduced 2013 revenues by about $70 billion (not counting a patch to the Alternative Minimum Tax—more about that in a minute). It included widely used subsidies such as the Research and Experimentation Tax Credit as well as highly targeted breaks for auto racetrack owners and Manhattan real estate developers.Assuming Congress does extend the expiring provisions sometime in calendar 2014, the delay would have no impact on the 2014 final tax returns that most business wouldn’t file until in 2015.But it would make business executives nervous since it adds a layer of uncertainty to their investment and other decisions.

House Easily Passes Budget Agreement in 332-94 Vote - Lawmakers took a step away from the confrontational politics and brinkmanship that has roiled the economy in recent years, as the House on Thursday passed a budget bill designed to avoid a government shutdown next month and relax spending limits in the next two years. The bill passed with a wide bipartisan margin, on a vote of 332-94. Voting for the measure were 169 Republicans and 163 Democrats, while 62 Republicans and 32 Democrats voted against. Approval of the bill, which is expected to pass the Senate next week, clears the way for a less-glamorous stage of budgeting as lawmakers set out to make line-by-line spending decisions before current funding runs out Jan. 15. That will be a laborious process, but less politically charged than what it has taken to pass a bill that raises spending limits by $62 billion in fiscal 2014 and 2015 to take the edge off the across-the-board cuts, known as a sequester, due to take effect in mid-January. Negotiated by Rep. Paul Ryan (R., Wis.) and Sen. Patty Murray (D., Wash.), the hard-won deal was modest compared with the big budget plans discussed in recent years—a reflection of how little common ground there is between the two parties. But lawmakers welcomed the budget agreement as a marginal improvement over the status quo.

5 reasons why Congress might (finally) pass a budget - -- The words "budget" and "compromise" haven't been connected in Congress in recent years. But legislators stunned observers and perhaps each other this week when Republicans and Democrats proved that they can, indeed, agree on government spending. Republican Rep. Paul Ryan and Democratic Sen. Patty Murray worked out a budget framework to fund the government into 2015. The House approved the compromise agreement Thursday. The measure now goes to the Senate, where it is expected to pass as early as next week. The White House supports the proposal. It was the first full budget agreement by a divided Congress -- in which different parties control the House and Senate -- since 1986, Ryan boasted in announcing the deal. After years of bruising political fights over spending and the federal borrowing limit, dysfunction reigned supreme in October when the government shut down for 16 days. A short-term spending plan got it going again, but a CNN/ORC International poll found that 71% of Americans thought another shutdown would occur when the money ran out in January. Instead, such repeated budget brinksmanship would be put on hold if Congress passes the Ryan-Murray proposal. While neither side loves the compromise legislation, it appears to be on a path to approval.

Mini Budget Deal Easily Clears House - The bipartisan budget I wrote somewhat favorably about the other day easily cleared an important hurdle today, passing the House by a large majority (332-94). On the plus side, assuming the Senate approves the deal and both chambers can finish the spending allocation steps that have to occur before January 15—and I’d give those outcomes high odds—we’ll have the first budget, as opposed to “continuing resolution,” in years.  And the plan will cancel $63 billion in sequester cuts–$45 billion next year and the rest in 2015–which will help tamp down the fiscal headwinds estimated to have shaved 1.5 percentage points off of growth this year.  The “payfors” for this sequester relief are back-loaded in time, so if this goes through, we’ll face a bit less fiscal drag next year. The deal also signals that another government shutdown is highly unlikely.  The Republican leadership is, in fact, quite explicitly and publically scolding the dysfunctionistas. On the downside, the deal fails to extend UI benefits for the long-term unemployed, despite the fact that the share of the long-term unemployed remains highly elevated.   Note that removing this support before there are enough jobs available for the estimated five million who will lose benefits next year goes in precisely the opposite direction in terms of fiscal support as does the sequester relief. Note also that as part of the plan, the House Republican leadership will extend the “doc fix,” increasing Medicare payments to doctors that were scheduled for a large cut.  This juxtaposition of holding harmless doctors’ salaries will stiffing the unemployed did not escape my CBPP colleagues: House leaders have indicated that they plan to link the budget agreement to a measure to extend relief for three months for physicians from scheduled cuts in the Medicare payment rates that they receive but will not provide a similar reprieve to jobless workers.

Bipartisan Budget Deal Forged in House Faces Opposition in Senate -  — A bipartisan budget deal that sailed through the House on an overwhelming, bipartisan vote is running into difficulty in the Senate, where Republicans — some furious, some conservative and some running for office — are vowing to vote against the measure, which would roll back broad spending cuts.After two years of legislation passing the Senate with bipartisan support only to implode in a conservative firestorm on the House floor, myriad Senate Republican grievances have combined in a legislative twist, threatening the comity that was supposed to end the budget wars, at least for now. The two Republican senators with presidential aspirations — Marco Rubio of Florida and Rand Paul of Kentucky — are actively working up opposition. Republican senators running for re-election in 2014 and facing Tea Party challenges have all come out no or leaning no. Senator Jeff Sessions, the top Republican on the Senate Budget Committee, is angry that his House Budget Committee counterpart, Representative Paul D. Ryan, Republican of Wisconsin, left him out of the negotiations that produced the accord. And some Republicans cannot declare their support for the deal after the Democratic strong-arm tactics that changed the Senate’s rules and ended filibusters of presidential nominees. “I’m disappointed,” said Senator Bob Corker, Republican of Tennessee and someone who was expected to be a “yes” vote. “For three years in a row, Congress has spent less on discretionary programs than the year before. Unfortunately, the deal announced this week busts these budget caps without making meaningful changes to mandatory programs, so it violates the only real progress we have made in getting our fiscal house in order.”

Unprecedented Austerity - Paul Krugman - As many people have noted, a strange thing has happened on the fiscal policy front. Intellectually, the case for austerity has pretty much collapsed, having been reduced at this point to the Three Stooges Theory: we’re supposed to consider austerity a success because it feels good when you stop, or at least let up. At the same time, however, austerity policies continue to be imposed, on both sides of the Atlantic. And amid the punditizing over the latest budget deal, it’s worth considering just how unprecedented US austerity has been. Look at total government spending — federal, state, and local — and correct it for inflation, as measured by the core personal consumption expenditures deflator (the Fed’s preferred measure). (It doesn’t matter much which measure you use, but this one has less noise). Smooth it out by looking at three-year changes. Here’s what you get: You can see that there was a brief, modest spurt in spending associated with the Obama stimulus — but it has long since been outweighed and swamped by a collapse in spending without precedent in the past half century. Taking it further back is tricky given data non-comparability, but as far as I can tell the recent austerity binge was bigger than the demobilization after the Korean War; you really have to go back to post-World-War-II demobilization to get anything similar.

Stockman: Budget deal a 'joke and betrayal' (video) House Republicans "capitulated" in agreeing to the two-year budget deal reached last night and left the country to deal with an unsustainable fiscal situation until the peak of the presidential primaries in 2015, when nothing will get done, former federal budget director David Stockman told CNBC on Wednesday.  "First, let's be clearit's a joke and betrayal," Stockman, who served under President Ronald Reagan, said on "Squawk on the Street." "It's the final surrender of the House Republican leadership to Beltway politics and kicking the can and ignoring the budget monster that's hurtling down the road."  Stockman added that the budget deal means lawmakers would take a "two-year vacation" from dealing with the country's fiscal situation and revisit it in 2015 at around the same time as the Iowa straw polls. Without an incumbent in the presidential race, both political parties will be too busy to touch the budget, he said.

Boehner Blasts Tea Party Groups Over Budget Deal Criticism - Some moments feel like turning points. Speaker John Boehner's rhetorical takedown of his party's Tea Party faction seems like one such moment. For two days running, Boehner, R-Ohio, has made clear that he's heard just about enough from conservative advocacy groups such as the Heritage Foundation, Americans for Prosperity and Freedomworks. On Wednesday, he called them "ridiculous." On Thursday, he said "they've lost all credibility." Stoking Boehner's anger was their rapid-fire opposition to the modest budget deal reached by fellow Republican Rep. Paul Ryan and Democratic Sen. Patty Murray, Congress' respective budget committee chairmen. The measure was passed by the House Thursday evening. But he seemed even more ticked off by what he said, in so many words, was an unserious approach to governing demonstrated by those groups and their allies in Congress. All of it resulted in the normally buttoned down Boehner delivering a GIF-ready performance as he showed his disgust for the attitude hard-liners took toward the government shutdown. We may be witnessing the new Boehner, the fed-up Boehner, the Boehner who's done with having his leadership and even his manhood questioned.

The Biggest Losers, by Paul Krugman - The pundit consensus seems to be that Republicans lost in the just-concluded budget deal. Overall spending will be a bit higher than the level mandated by the sequester, the straitjacket imposed back in 2011. Meanwhile, Democrats avoided making any concessions on Social Security or Medicare. But if Republicans arguably lost this round, the unemployed lost even more: Extended benefits weren’t renewed, so 1.3 million workers will be cut off at the end of this month, and many more will see their benefits run out in the months that follow. And if you take a longer perspective — if you look at what has happened since Republicans took control of the House of Representatives in 2010 — what you see is a triumph of anti-government ideology that has had enormously destructive effects on American workers.  First, some facts about government spending.  One of the truly remarkable things about American political discourse at the end of 2013 is the fixed conviction among many conservatives that the Obama era has been one of enormous growth in government. Where do they think this surge in government spending has taken place? Well, it’s true that one major new program — the Affordable Care Act — is going into effect. But if you ask people ranting about runaway government what other programs they’re talking about, you draw a blank.

U.S. House passes bill authorizing $633 billion in defense spending  (Reuters) - The U.S. House of Representatives approved the annual defense policy bill on Thursday, authorizing $633 billion in spending for 2014, strengthening protections for victims of sexual assault in the military and easing some transfers from the prison at Guantanamo Bay in Cuba. The House voted 350-69 to pass a slimmed down version of the National Defense Authorization Act, which was introduced as a compromise early this week. Its passage clears the way for the measure to be considered by the U.S. Senate, likely next week.

Does the US Have Enough Military Bases? - Inquiring minds might be interested in the analysis of artist Josh Begley who catalogs every U.S. military base in the world. Here is a representation. Gizmodo comments on the Chilling Geometry of Every US Military Base Seen From SpaceThe United States military is everywhere. It's so big that it's hard to quantify just how massive it is—any number used to describe it is so large that it defies the understanding of an ordinary human brain.  A self-described "data artist," Begley has started an ongoing effort to collect satellite imagery from every U.S. military installation in the world. The initial map, parked at, collects all of the data listed in the Department of Defense's 2013 Base Structure Report. The official report doesn't include the military's secret bases, though, so Begley has included others that have been unearthed—and he encourages people to submit information for others that he's missing. The resulting collection is mind-boggling. At the top, there's a zoomable world map with all of the installations plotted. Keep zooming in, and eventually the map will reveal the satellite imagery for each location, assuming it exists. As Begley points out, plenty of sites have been censored from public view.

US Spends $1 Billion on Russian Helicopters for Afghan Military: Why? -- According to a top secret 2010 report the Russian-made Mi-17 helicopter is better then the US-made Chinook helicopter built by Boeing in Pennsylvania. Army Secretary John McHugh wrote in a 2011 memo "that the Mi-17 stands apart" when compared with other helicopters.  Another study shows the Chinook was found to be "the most cost-effective single platform type fleet for the Afghan Air Force over a twenty year" period. This has the Christian Science Monitor and many others asking Why is US buying Russian helicopters for Afghan military? I am not qualified to comment on which helicopter is better. Instead I want to ask a higher quality question:What the hell are we still doing in Afghanistan?  We should have declared the war won 10 years ago and left. Better yet, we should not have gone there at all in the first place. Based on that simple logic, we should buy neither the Russian-made Mi-17 helicopters nor the Boeing Chinook for Afghanistan.Either way, I wonder if the real reason we bought Russian helicopters is fear for what happens to Chinook technology once we leave Afghanistan and the country falls to the Taliban once again. Regardless of "why" many important high-level questions remain.

A Value-Added Tax That Won’t Raise Revenues Or Boost Taxes on the Poor - For many years, Michael Graetz, now a law professor at Columbia University, has been promoting a national Value-Added Tax (VAT) that would become the principal levy paid by most Americans. VATs–and similar broad-based consumption taxes–are enormously controversial in the U.S. even though they are ubiquitous throughout the rest of the world and enjoy widespread support among many economists. By proposing a plan that would vastly broaden the tax base, reduce the number of individual income tax filers by 80 percent, and simplify tax preparation for nearly everyone, Graetz sets a goal. If, in the end, politicians get just halfway there, we could well have a better tax system than we do today. Michael recently tweaked his plan and the Tax Policy Center ran the numbers. We found that, in 2015, despite the huge changes he’d make to the Revenue Code, his plan would raise the same amount of money as today’s tax law. Just as important, his VAT would not change the overall distribution of the tax burden by very much, and even result in small increase in average after-tax income for low-income households. Under his plan, those low-income households would enjoy an average boost in after-tax income of about 1.2 percent, while highest-income households would see their average after-tax income fall by about 0.9 percent. Other income groups else would pay pretty much the same tax they do today. Within those groups there would be winners and losers (low income workers without kids would do better than those with children, and middle-income households that don’t itemize would be better off than those that do).

Here Is The "Wealth Effect": Wealthiest 400 Americans Accounted For 16% Of All Capital -- Hidden deep inside the IRS' most recent annual report focusing on just the Top 400 Individual Tax returns, titled "The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992-2009" we find the definitive confirmation of just where the Fed's Wealth Effect has gone. As seen in the highlighted cell on the table below, just the top 400 individual tax returns account for a whopping 16% of the net Capital Gains tax paid in the US in all of 2009 (the most recent year recorded).  Putting this number in context, since 1992 the average percentage of the total capital gains attributable to the top 400 earners was "only" 8.69%. In 2009, or the year QE officially began, it was doulbe this or 16%.

Whistleblower Describes How Private Equity Firms Flagrantly Violate SEC Broker-Dealer Requirements -  Yves Smith -  Last week, Crain’s Business Daily and Fortune reported that whistleblower has provided the SEC with evidence of massive, ongoing violations of securities laws, specifically, the Securities Exchange Act of 1934, by several unnamed private equity firms.  The violations result from the long-established practice of PE firms charging “transaction fees” to investors in their funds when the PE firms, as managers of various funds, buy and sell of portfolio companies. They also levy transaction fees when portfolio companies issue debt or equity securities. Bear in mind that these fees are not in lieu of fees paid to investment bankers and brokers; they are additional charges, on top of both those third party fees and the private equity firm’s management fee, the famed “2 and 20″ (2% annual management fee, 20% of the gains, although the management fee is lower for the very large funds). And these transaction fees are typically comparable in size to the fees paid to investment bankers.  This controversial practice has been going on for decades, and it is no secret. The PE firms collectively have reaped billions of dollars through this ruse. Dozens, if not hundreds, of articles have been written about it. Typically, these stories depict these transaction fees as an abuse of both the portfolio companies and the private equity fund investors, since portfolio company revenues are diverted into the pockets of private equity managers. For instance, a account about the whistleblower published last week by the usually pro-industry CNBC, where the headline itself described transaction fees as “private equity’s ‘crack cocaine.’”  But as scandalous as this ongoing looting ought to be, the whistleblower focuses on another glaring problem with the private equity firm transaction fees: the private equity firms are not registered broker-dealers.

J.P. Morgan to Pay $1 Billion Over Madoff Criminal Probe --  J.P. Morgan Chase is expected to pay more than $1 billion in penalties to the Justice Department to end a criminal probe into whether it provided adequate warnings about Bernard L. Madoff.  The deal, which would also include a deferred-prosecution agreement with U.S. Attorney Preet Bharara, could be wrapped up by the end of year, said others close to the case. Prosecutors have been looking for whether the bank failed to alert regulators despite numerous red flags. A central component of the case is why the bank didn't provide a formal report raising concerns about Mr. Madoff in the U.S. despite filing such a document with authorities in the U.K.

Worst year in history for bond funds - Forget about the bond bloodbath in 1994. This is shaping up to be the worst year in history for bond funds. Investors have pulled out $72 billion from bond mutual funds this year through the first week of December, according to data from TrimTabs. This is the first time in nearly a decade that investors have taken more money out bond funds than they've put in -- and it tops the previous record from 1994 when investors withdrew almost $63 billion. That year, the 10-year Treasury yield rose from just under 6% to over 8%. (Bond yields rise when investors are selling bonds and pushing prices lower.) Rising interest rates have also been the catalyst for the rush out of bonds this year. "The 'taper talk' that started in May proved to be a huge inflection point for the credit markets," said CEO of TrimTabs David Santschi, referring to Federal Reserve chief Ben Bernanke's hints that the central bank could begin to scale back, or taper, its $85 billion a month in bond purchases. Related: Tapering or tap dancing? The Fed began the first of three massive bond buying programs at the end of 2008 in the aftermath of the financial crisis. The goal of this quantitative easing was to keep long-term interest rates low, and in turn, stimulate the economy and the stock market. But ever since Bernanke mentioned the possibility of tapering, bond investors have been spooked. The 10-year Treasury yield rose from 1.6% May to almost 3% by September, when economists and investors initially expected the Fed to take action. In fact, investors had continued to plow money into bonds up until May. The outflows have all occurred in the final seven months of the year.

How Markets Are Rigged Against You - Every day, trillions of dollars are exchanged by buyers and sellers on trading floors across the world. The places where that happens are colloquially known by the faceless moniker of “the markets" but every time somebody buys a barrel of oil, a shipment of potash, a Royal Bank share or a Japanese yen, there’s a real person behind that transaction. Historically, the system works because people have confidence in the rules and believe they are treated the same as anybody else.But it’s getting harder and harder to ignore the stories of powerful people cheating the system for their own gain. As the bad apples add up, it gets harder and harder to ignore a troubling realization — “everything is rigged.” That’s what financial journalist Matt Taibbi says in an interview with Amanda Lang airing on Monday night's The National. After years of reporting on some of the best examples of Wall Street stacking the deck in its favour, Taibbi has concluded that the entire system underpinning the global economy is rigged in some form or another. And it’s not just financial markets that are at stake. The real economy, with factories, services, goods and jobs for real people, is under threat. “There’s a few smaller, inside actors who always seem to win,” he told Lang. “They have more information than anyone else.”  'Certain people always win and certain people always lose.'

The Volcker rule is nearly finished. Here’s how we’ll know if it’s any good.: We've nearly reached the end of the road with the Volcker Rule, but, to quote Boyz II Men, we can’t just let it go. At least not yet. This is the part of Dodd-Frank, remember, that’s designed to prevent banking entities from engaging in “proprietary trading” — transactions in which a bank uses its own capital to assume the principal risk in order to benefit from short-term price movements. Or, in plain English, it removes the parts of banks that gamble and act like hedge funds, because those parts can blow up quickly. The Volcker Rule isn’t, however, supposed to interfere with “market-making,” or those activities in which a bank either matches buyers with sellers or acts as an intermediary by using financial instruments. The rule also isn’t supposed to mess with a bank’s ability to hedge against risk. The tricky part for regulators is figuring out how to tell the difference between “proprietary trading” and these latter, legal activities. So when the final rule comes out, how will we be able to tell the difference between a strong rule and a weaker one? Here are a few areas to pay attention to:

Regulators seek to curb Wall Street trades with Volcker rule (Reuters) - U.S. regulators toughened key sections of the Volcker rule's crackdown on Wall Street's risky trades on Tuesday as they finalized one of the harshest reforms after the credit meltdown. The rule - named after former Federal Reserve Chairman Paul Volcker, who championed the reform - generally bans banks from proprietary trading, or speculative trading for their own profits. The final rule includes strictly defined carve-outs for trades executed to serve clients' interests or to protect against market risks, and forces banks to show regulators that they are not trying to pass off speculative bets as legitimate trades. Regulators are eager to prevent a repeat of trading debacles such as JPMorgan's $6 billion trading loss in 2012, dubbed the "London Whale" because of the huge positions the bank took in credit markets. Still, it is unclear exactly how regulators will police banks' trading activity and officials acknowledged the sprawling, 882-page rule was a complex document. "Many of us - myself included - had hoped for a final rule substantially more streamlined than the 2011 proposal. I think we need to acknowledge that it has been only modestly simplified," Federal Reserve Governor Dan Tarullo said. The Fed was just one of five regulatory agencies tasked with reaching agreement on one of the most hotly debated parts of the 2010 Dodd-Frank Wall Street reform act, aimed at preventing a repeat of the taxpayer bailouts during the 2007-2009 financial crisis. Similar rules in Europe are far weaker.

Near a Vote, Volcker Rule Is Weathering New Attacks - Even as five regulatory agencies prepared to vote Tuesday on a regulation that seeks to rein in risk-taking on Wall Street — an effort known as the Volcker Rule — lawyers and lobbyists were gearing up for another round of attacks against it. In recent letters and meetings with financial regulators, lobbyists for Wall Street banks and business trade groups issued thinly veiled threats about challenging the Volcker Rule in court, people briefed on the matter said. The groups, including the U.S. Chamber of Commerce, are hinting that they could use litigation to either undercut or clarify the rule, which is intended to bar banks from trading for their own gain and limit their ability to invest in hedge funds. The rule, a cornerstone of the 2010 Dodd-Frank Act and a barometer for the overall strength of the regulatory overhaul, is aimed at preventing future trading blowups on Wall Street. In July, Treasury Secretary Jacob J. Lew instructed the agencies drafting the Volcker Rule — the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation and the Comptroller of the Currency — to complete their work by year’s end. Over the past few months, the agencies overcame internal squabbling to draft identical versions of the rule, according to the people briefed on the matter, who were not authorized to speak publicly, and have scheduled votes for Tuesday. The agencies came together to write a tougher-than-expected final text despite two years of persistent prodding and pushing from Wall Street lobbyists to water down major provisions of an October 2011 draft version.

After vote, lawsuits likely next hurdle for Volcker rule (Reuters) - When U.S. regulators adopt the Volcker rule on Tuesday, they will make good on a promise by politicians to rein in banks' ability to gamble with their own money. The coordinated action by five separate regulatory agencies is seen sparking a court challenge as Wall Street tries once again to avoid one of the harshest elements of the post-financial crisis crackdown. The rule, championed by former Fed Chairman Paul Volcker, was a last-minute addition to the 2010 Dodd-Frank Wall Street reform law and takes aim at a business that had been a big money spinner for banks before the crisis. The measure bans banks from making bets for their own profits, an activity known as proprietary trading that regulators deemed too risky for banks that enjoy government backstops. But banks argue the roughly 800-page rule will hurt markets because it is virtually impossible to distinguish profit-seeking trades from those needed to hedge against risks or trades executed on behalf of clients. Banks had hoped the rule would be watered down from when it was proposed more than two years ago, but JPMorgan Chase & Co's $6 billion loss in 2012 - named the London Whale after the giant trading bets the bank took - put an end to that speculation. The final rule is expected to tighten potential loopholes, and could trim billions of dollars in annual revenues from large banks including Goldman Sachs, Morgan Stanley and JPMorgan.

Volcker Rule Details Revealed: Compensation For Prop Trading Will Be Barred... Just Not Prop Trading Itself - The WSJ has revealed the latest developments of tomorrow's "fluid" Volcker Rule vote on prop trading:

  • Volcker Rule Will Bar Compensation Arrangements That Reward Proprietary Trading, Rule Text Says
  • Rule Will Exempt Foreign Sovereign Debt From Proprietary Trading Ban, According To Rule Text Reviewed By Wall Street Journal
  • Volcker Rule Will Apply To Foreign Banks With Operation In U.S.
  • Market Making Language Will Require Banks Provide "Demonstrable" Analysis Of Historical Customer Demand
  • Volcker Rule Requires Banks Detail Specific Risk Hedges Designed To Mitigate
  • Rule Requires Ongoing Review Of Hedges To Ensure Compliance
  • Volcker Rule Will Restrict Banks From Sponsoring Or Making Investments In Most Hedge, Private Equity and Venture Capital Funds
  • Rule Considers "Covered Fund" Any Fund That Would Be Investment Company If Not For Investment Company Act Exemptions

Oh, and this pearl:

  • VOLCKER RULE TO REQUIRE HEDGES TO ``DEMONSTRABLY'' REDUCE RISK - risk of lower year end bonuses?

In other words, prop trading itself will not be explicitly barred, just associated compensation (and banks can still buy as much Italian and Spanish bonds for their accounts as they want). Which means banks can engage in as much prop trading as they wish (which courtesy of $2.4 trillion in excess deposits aka excess reserves is a lot) and bang as much VIX closes as they desire, they just need to have trader bonus "arranagements" to be tied to something else. Like make-believe flow trading which can be manipulated to show anything and everything

Wall Street wins Volcker concession on hedging risks - Wall Street has won a key concession in the drafting of the so-called Volcker rules aimed at reining in risk-taking by big banks in trading. US regulators on Tuesday are set to vote on the Volcker rule, which prohibits banks from making risky trades from their own accounts. The rule comes nearly four years after President Barack Obama first endorsed the measure in 2010. Treasury secretary Jack Lew put pressure on the five agencies involved in writing the rule to finish it before the end of the year. It is one of the hallmarks of the Dodd-Frank financial reform legislation. A draft of the Volcker rule puts additional burdens on banks to evaluate their efforts to mitigate risks. However, it does not explicitly prohibit banks from making trades to hedge risks in specific circumstances. Banks had feared the draft might be tougher, especially after the $6bn derivatives trading loss suffered by JPMorgan in 2012. Mr Lew has said the Volcker rule would prevent such an incident. Banks will have to set up ways for “ongoing recalibration of the hedging activity” to prove “specific, identifiable” risks, the draft says. But it does not explicitly ban hedging as long as it is done under certain conditions. Still a backlash against the overall Volcker package of rules is expected to intensify after Tuesday’s vote, with banks stepping up legal and lobbying efforts to water it down or legally stop it.

Rule That Curbs Bank Risk-Taking Nears Approval - Wall Street is entering an uncertain new era as the rule that has come to symbolize Washington’s efforts to rein in financial risk-taking finally takes hold. Five years after the financial crisis, federal regulators are poised to approve the so-called Volcker Rule, the keystone of the most sweeping overhaul of financial regulation since the Depression. The rule, a copy of which was reviewed by The New York Times, imposes some requirements that are tougher than the banks had hoped.  Five federal agencies are expected to vote to approve the rule on Tuesday, though some might do so in private because of inclement weather in the Washington area, representing a potential shift in the balance of power in financial reform as regulators gain more leverage over the largest banks. Although it counts as only one of 400 rules under the Dodd-Frank financial overhaul law — and nearly two-thirds of the regulations remain unfinished — the Volcker Rule became a litmus test for the overall strength of the law. But the rule, which aims to draw a line between everyday banking and Wall Street wheeling-dealing, is no panacea. Some critics say the rule, which regulators agreed to delay until July 2015, does not go far enough.  For its part, Wall Street is expected to scour the rule for loopholes and consider whether to challenge it in court.

Fed Unveils "Self-Regulated" Volcker Rule -- And so it is done (as we detailed here)... and due to be put in place as of April1st 2014 (rather ironically). The 100-plus-pages of rules and regulations prohibit two activities of banking entities: (i) engaging in proprietary trading; and (ii) owning, sponsoring, or having certain relationships with a hedge fund or private equity fund. But the kicker... requires banking entities to establish an internal compliance program designed to help ensure and monitor compliance with the prohibitions and restrictions of the statute and the final rule. Great! Because self-regulation worked so well in the past for the financial services industry. Some excellent color from Bloomberg, Merriam-Webster’s Dictionary defines “speculation” in 31 words. The key ones are “risk of a large loss.” When Paul Volcker, the former U.S. Federal Reserve chairman, proposed banning speculation by federally insured banks to reduce risk to the world economy, he did it in one paragraph. Four years later, the nation’s regulators are poised to vote on Volcker’s proposal. The rule now runs close to 100 pages, with hundreds more in supporting material — and no one is quite sure how it would be enforced. It’s a lesson in how complicated simplifying Wall Street can be.

Volcker Rule Finalized With Wall Street Responsible For Judging Compliance -- Big Wall Street banks face an uneasy future after U.S. regulators on Tuesday finalized the Volcker Rule, a measure that attempts to curtail big bets on certain financial instruments. But in a potential concession, the banks themselves largely will be responsible for determining whether they're in compliance. As Wall Street, Washington and the lawyers that advise them digested the rule, investors appeared to brush off concerns that the final version would dent banks’ profitability. Share prices of banks seen as most vulnerable to the rule rose. Named after former Federal Reserve Chairman Paul Volcker, the idea began in 2010 as a simple effort to ban short-term speculative trading and investments in hedge and private equity funds by financial institutions that enjoy federal deposit insurance. Over the last few years, regulators had struggled to define what constituted speculation and what was merely the accumulation of financial instruments meant to be sold to clients, such as asset managers or other large investors. More than 18,000 comment letters to the five federal agencies charged with developing the rule further clouded regulators’ efforts, and the rule became a symbol of whether the Obama administration and financial supervisors in Washington would rein in big banks or succumb to relentless industry pressure at a time when calls to break up the biggest banks appear to be growing. Officials said the final rule attempts to straddle the line between banning so-called proprietary trading -- trading by banks for their own account -- but preserving big banks’ abilities to hedge their risks and buy and sell securities in order to serve their customers, otherwise known as market-making. The rule promises unprecedented surveillance of big banks' trading operations, mostly through documentation requirements that force banks to justify trades and strategies and to keep running tallies of whether their activities conform to the rule.

What Volcker Rule means for Wall Street trading - At the heart of the Volcker Rule is the distinction between proprietary trading and trades aimed at market-making or hedging risk. The success of the rules, the final draft of which were just released on Tuesday morning, will depend on how effectively regulators fenced off banned prop trading from permitted market making and hedging. The basic structure of the rule, outlined in 71 pages of regulation and more than 900 pages of commentary from regulators, reflects the simplicity of the idea and the complexity of its implementation. The simple part: Banks are banned from engaging in prop trading. The complex part: That ban is subject to several exemptions intended to allow banks to facilitate customer trading and hedge their own risks. Let's focus on two that are central to the business of Wall Street: market making and hedging. The first set of exemptions revolves around market making, in which banks take positions in markets by purchasing, holding and selling financial instruments in anticipation of the needs of their customers. Why can't banks just wait for customer orders before buying a security? This would allegedly lead to less liquid markets, slower processing of customer trades, and poorer pricing. Another exemption required by law was for hedging. Regulators agreed on allowing banks to take positions to offset the risks they take in making loans and market making. And since some individual positions are extremely difficult or costly to offset, regulators agreed that banks should be allowed to engage in trades meant to offset "aggregate" risks across many parts of the bank. This hedging of aggregate risk is also known as a "portfolio hedge." Here the rule is haunted by the ghost of the London Whale, the $6.2 billion loss suffered by JPMorgan Chase on positions taken by a unit supposed engaged in hedging risk.

Volcker Rule: The Devil’s in the Unimpressive Enforcement Details - Yves Smith - If you managed to be late to the Volcker Rule party, you can learn a great deal of what you’d need to know via the revealing contrast between two reasonably detailed accounts, one at Huffington Post by Shahien Nasiripour, the other by Matt Levine at Bloomberg. If you didn’t know better, you’d wonder if they were talking about the same rule. But in fact the disparity makes perfect sense: bank stalwart Levine is chipper about the outcome, while Nasiripour stresses how many of the provisions recommended by regulators themselves (!) never made it into the final version.  But let’s step back a bit. The Volcker Rule was an afterthought to regulatory reform, not that the authorities were as serious about that as they should have been in the first place. Remember the genesis: This was a sketchy idea put forth by the White House right after it lost its filibuster-proof Senate majority due to the election of Scott Brown in Massachusetts and it thus felt pressured to burnish its leftie credentials. It was surprising that Volcker allowed his name to be attached to it. But then again, Volcker never demonstrated much enthusiasm for it. I’m told on good authority that he was asked repeatedly to put forth a serious proposal (clearly, the use of his name allowed him to take advantage of the situation) and he demurred every time. And we were never keen about it: the prop trading/customer trading was a spurious distinction, and treating commercial banks as the only backstopped entities after the rescues of then non-banks Goldman and Morgan Stanley as well as AIG was also dubious. That’s not to say the high concept could not have been massaged into something to reduce subsidized speculation, but it was obvious there was not the will to do that.  Now with that low expectation, the progress of the Volcker Rule has had some positive effects. In a “I guess a half a loaf is better than none” outcome, banks had some modest limits put on the size of their in-house hedge and private equity funds. And they all felt pressured to, and did, shut down their formal proprietary trading desks. And it also boosted the reputation of the wonky Occupy the SEC, which got a full 285 citations in the final rule. OSEC was fast out of the box with an initial take, which was a grade of C-:

Occupy the SEC’s Volcker Rule Role - The final Volcker rule was shaped in part by an array of comments that came from members of Congress, foreign banking entities, and trade associations. It was also shaped in no small part by Occupy the SEC, a lesser-known group that grew out of Occupy Wall Street, a movement against social and economic inequality that led to arrests, camp outs in New York’s Zuccotti Park, and the slogan “We are the 99 percent.” Regulators drafting Volcker paid attention, referring about 280 times to Occupy the SEC’s comments in footnotes found in a 882-page preamble to the rule. “It’s heartening to shift the dialogue to the left side and away from banking and lobbying. Normally the parties involved are those negatively affected in terms of the bottom line,” said Akshat Tewary, an administrative lawyer in New York and founding member of Occupy the SEC, which refers to the Securities and Exchange Commission. “Volcker affects average people, so it was important to have a voice and the number of footnotes show they took into account our considerations.”Occupy the SEC, however, did give the Volcker rule a grade of C minus and said numerous flaws remain. Among their concerns: The rule inappropriately defines the scope of covered funds, paving the way for bank holding companies to evade the Volcker Rule by shifting their proprietary trading activities away from hedge funds into other, non-covered funds, according to a press release yesterday from the organization. Occupy the SEC’s letter was written largely by seven core members without a regular office, and the organization also met in person or over the phone with four of the five regulatory agencies drafting the proposal, said Mr. Tewary. Occupy the SEC is comprised of activists and finance professionals focused on public interest rather than lobbying and Wall Street, according to their web site.

Occupy the SEC shows us all how to occupy - mathbabe - Today is a remarkably cold day in New York but that’s done nothing to dampen the spirits of the members and supporters of Occupy the SEC, which had a real influence on the final Volcker Rule, as reported by the Wall Street Journal and The Washington Post, among others. I’m not saying the Volcker Rule is perfect – in fact Occupy the SEC gave it a C- grade overall. And it was maddeningly delayed. As I’ve mentioned before, Occupy the SEC sued the regulators for the delay, or tried to, but the judge found that they had no standing.  Even so, there’s a clear victory here for Occupy the SEC. The final rule, or at least its preamble, references Occupy the SEC’s public commenting letter 284 times. The rule could have been way worse, and probably would have been without OSEC’s contribution. Just to get some idea of the other voices in this debate – i.e. the lobbyists – take a look at this graphic on access to the rule-writers by parties interested in influencing the final rule: My conclusions:

  • Those guys are awesome.
  • Public commenting is a critical tool.
  • This wouldn’t have worked without a receptive set of regulators.
  • This is inspiring and will hopefully help my Occupy group, Alt Banking, plan our next project.
  • I particularly like the idea of report cards, which Occupy has created for regulation.

Volcker Rule Is a Puzzle That Will Take Years to Understand  - The Volcker Rule, which will limit the way in which banks can conduct risky trading operations using federally insured funds, is due to be adopted today. Is this a step in the right direction on banking reform?Yes. Does it end the Too Big To Fail Problem? No. As always, there’s plenty of fine print in the draft rule and lawyers will be parsing it (and banks will be challenging it) for years to come. But FDIC Vice Chairman Thomas M. Hoenig, a reformer who supports the rule, summed it up well in his statement today: “The Volcker Rule is often described, accurately, as being highly complex. However it is complex because SIFIs [systematically important financial institutions] are highly complex, engage in a broad range of complex trading activities and also, because of the number of exceptions to the Rule that the largest banks have been granted regarding these trading activities.” The word “exceptions” is crucial. The rule as it stands right now has strengthened some of the language around how banks trade, and exactly what constitutes a legitimate “risk” which can be mitigated with hedging. That should make it somewhat tougher to do the sort of trades that got the London Whale into such trouble. But to be clear, the banking lobby was able to get loopholes written into the law that make it possible to continue that sort of proprietary trading. They just have to define the portion of their portfolio and the risks being hedged in a way that’s believable to regulators.

Celebrations of Too Big to Fail’s Demise Are Premature - Simon Johnson - In a major speech last week, Treasury Secretary Jack Lew argued that we need to keep pushing forward with financial reform. He made some encouraging points about the need to reduce systemic risks arising from money-market mutual funds and for appropriate funding levels at the Securities and Exchange Commission and the Commodity Futures Trading Commission, and he spoke clearly about the need for accountability of regulators and of bank executives. But a huge misconception in his remarks threatens to swamp everything.  Lew argued that the problem of “too-big-to-fail” banks is well on its way to being fixed. Lew is arguing that we are on the verge of making it possible for large complex financial institutions -- really the six biggest U.S. banks -- to fail. Could these entities now really go bankrupt, unencumbered by any kind of government support, with their shareholders wiped out and major potential losses for their creditors, as is the case with almost all other private-sector companies? (In July, Lew set the end of 2013 as a deadline for the disappearance of too big to fail; this seems to be another red line that the administration won’t enforce.)  It is very difficult to find anyone in the private sector - - in finance or elsewhere -- who shares Lew’s view. (With the exception, of course, of people working for the Big Six or supported by them financially.)

Structural Stagnation, Bubbles, and the Volcker Rule - It’s pretty hard to miss the shampoo cycle—bubble, bust, repeat—that has characterized the last few business cycles in the American, and more recently, European and even Scandinavian economies.  It’s also the case that choice economists since Adam (Smith, of course) have recognized this proclivity towards financial market instability, including Keynes and most notably, in terms of the depth of his analysis, Hy Minsky. Most recently, financial bubbles propped up demand in the 1990s ( and 2000s (housing).  Thus far in the current expansion that began in 2009Q3, financial markets and corporate profitability have far outpaced the rest of the economy.  Real GDP is up 10% over the expansion and the real value of the S&P 500 is up 70%.  Real median household income is down 4%. I’m not saying we’re in another financial bubble, though no less than Robert Shiller recently raised that concern.  But I’m decidedly saying that unless we enact and enforce tough financial market regulation, that’s where we’re headed. It is in that regard that I’m very glad to see what looks like a tougher-than-expected Volcker rule coming out of the implementation phase of Dodd-Frank financial reform.  This rule is designed to restrict proprietary trading, where federally insured banks trade their own books, thus putting taxpayers at risk.  Like I said, it won’t work if we don’t enforce it—regulators can sleep even at the best switch—and there are still parts that need to be fleshed out.  But here’s why it’s looking pretty good.

The Volcker Rule That Isn’t: The Velvet Rope Approach to Criminal Behavior - If you were a fan of the Dodd-Frank financial reform legislation that did absolutely nothing to rein in Wall Street’s ability to plunder the life savings of the little guy, you will absolutely love the Volcker Rule that was approved, but not instituted, yesterday by five regulators. Just like Dodd-Frank, it’s voluminous, running over 800 pages, postpones the actual enactment into the distant future, and is chock full of loopholes and slippery passages. The so-called Volcker Rule is Section 619 of the Dodd-Frank legislation. Its original intent was to quickly stop banks holding insured deposits from speculative trading for their own account (proprietary trading). It was also meant to prevent banks from owning hedge funds and private equity funds which could potentially blow up an insured depository institution and require the kind of taxpayer bailouts that occurred in 2008. We can now emphatically tell you that both the Dodd-Frank legislation and its Volcker Rule are nothing more than full employment programs for Wall Street’s legions of lobbyists and lawyers. They have been charitably handed millions of billable hours that will continue for endless years. According to the Federal Register, it has received 328 final or proposed rules related to Dodd-Frank in the past year. Dodd-Frank was signed into law on July 21, 2010. It’s now December 11, 2013. The Volcker Rule that was “approved” yesterday is not set to take full effect until July 21, 2015. That’s five years after the original Dodd-Frank legislation was passed and almost seven years after Wall Street crashed the financial system and the U.S. economy. But the authors of the Volcker Rule have one more caveat about when it might actually take full effect. The rule says: “The Board will continue to monitor developments to determine whether additional extensions of the conformance period are in the public interest, consistent with the statute.” This is the same as waving a flag and saying, “lobbyists, rev up your engines…”

Volcker Rule Gets Poor Marks Out of the Box - The Volcker rule was a last minute financial regulation rule in an attempt to stop speculative trading by Wall Street.  It has been politicized, lobbied against, delayed, watered down and modified heavily.  The final rule just approved is over 900 pages and still is littered with loopholes and exceptions to stop speculative proprietary trading done by Too Big To Fail, FDIC backed banks.  The rule is so complex, it is seen as a boondoggle for lawyers to analyze and advise on.A watchdog group, Occupy the SEC gave the final Volcker rule a C- as an initial grade.  They acknowledge some of the positive parts of the Volcker rule.  For example there is a new CEO certification requirement in the rule since banking executives are the final arbitrators on risky speculative bets.   Yet Occupy the SEC's initial criticisms amplify the rat maze confusing, loophole ridden, 900 page legal bonanza the Volcker rule became.The Final Rule inappropriately defines the scope of “covered funds.” Section 619 permitted regulators to limit bank investment into private equity funds, hedge funds, and “any other such similar funds.” The Agencies did not adequately use their authority to include “similar funds” into the scope of the prohibition. This omission paves the way for bank holding companies to evade the Volcker Rule by shifting their proprietary trading activities away from hedge funds into other, non­covered funds. For instance, recent reports suggest that Goldman Sachs intends to avoid the Volcker restrictions by focusing some of its speculative activities in Business Development Companies, which are not only exempt from Volcker compliance, but are also eligible for relaxed oversight and compliance responsibilities under the JOBS Act.

Regulators face heavy Volcker burden - US regulators who approved the Volcker rule face a heavier workload to uphold it, but it is unclear if the cash-strapped agencies have the resources to deal with another regulatory task. Regulators say the Volcker rule, which prohibits proprietary trading, will help prevent another incident such as JPMorgan’s $6bn-plus derivatives trading loss in 2012 and other episodes that could harm the financial system. But that means regulators need enough personnel to examine banks, swaps dealers and other market participants, analyse the large amount of information that will be reported to them and set up technology to assess data to catch unusual or non-compliant activity. The Volcker rule requires the largest banks to report reams of data related to their market making, hedging and investing activities to ensure those moves are not violating the measure. But some agencies, such as the Commodity Futures Trading Commission, are already overwhelmed by the amount of new data they are receiving. “I encourage Congress to give these regulators adequate funding to effectively and efficiently implement the rule, which will help protect hardworking families and business owners from future crisis,” President Barack Obama said of the Volcker rule. Five regulatory agencies were involved in writing the Volcker rule and three of them will have the primary responsibilities for upholding it: the Office of the Comptroller of the Currency, the Securities and Exchange Commission and the CFTC. Although compliance for the Volcker rule does not take effect until July 2015, the largest banks will have to begin reporting data to regulatory agencies in June 2014. Supervising the companies that fall under Volcker will be the most fiscally challenging, and regulators will probably rely on their discretionary power to overcome those hurdles. The OCC does not rely on Congress for its budget so it is in the best financial position, and is hiring more than 100 additional staff in the next year. But a recent independent review of the agency showed that many of its examiners are at or near retirement age, and the agency should consider consolidating office locations to address staff shortfalls.

Making the Volcker Rule Work - Simon Johnson - The approval of the Volcker Rule, restricting proprietary trading and limiting other permissible investments for very large banks, is a major step forward. Almost exactly four years after the general idea was first proposed by Paul A. Volcker, the former chairman of the Federal Reserve, and nearly three and a half years after it was mandated as part of the Dodd-Frank Act, the regulators have finally managed to produce a rule. This rule could be meaningful, and that’s why there has already been so much pushback from the big banks. Their main strategy so far – denial that there is a problem to be addressed – has failed completely. Their legal challenges are also unlikely to succeed. The main issue now is whether the regulators force enough additional transparency so that it is possible to see the new ways that proprietary bets are hidden. The Volcker Rule is intended to impact only the very largest banks – the material impact will be mostly on JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. The goal is simple and sensible. Given that these banks are supported by large implicit government backstops (e.g., from the Federal Reserve), they should be more careful in their activities and should not engage in large-scale bets that have the potential to cause insolvency for them and disruption for the rest of the global financial system. These companies could choose to become smaller, with the constituent pieces operating under fewer restrictions. But their managements want to stay big, so they should face additional constraints.

This Is How Much The Banks Paid To Get The "Volcker Rule" Outcome They Desired - Curious how much the various banks who stood to be impacted by or, otherwise, benefit from either a concentration or dilution of the Volcker rule? According to OpenSecrets, which crunched the numbers, here is how much being able to continue prop trading meant to some of the largest US banks and lobby groups:

Not bad considering the loophole-ridden Volcker Rule will effectively permit "hedge" books (where an army of lawyers paid $1000/hour defines just what a hedge is) to continue piling on billions of dollars in wildly profitable, Fed reserve funded trades. From OpenSecrets: The American Bankers Association, which represents the interests of banks of all sizes, spent nearly $6.5 million on lobbying in the first nine months of 2013, with much of that money going to lobbying on behalf of "Dodd-Frank issues." Wells Fargo and Citigroup each spent just over $4 million, while the Independent Community Bankers of America, another organization that represents banks, spent nearly $3.6 million. All three lobbied on the Dodd-Frank legislation. Bank of America, meanwhile, spent just under $2 million on the Volcker rule and other issues, while JPMorgan Chase spent more than $4 million and listed "implementation and interpretation of the Volcker Rule" as one of its concerns.

Post Volcker Rule, Banks Still Aren’t Safe Enough -  FDIC vice chairman Tom Hoenig, perhaps the smartest banking reformer around, gave an important speech in Europe this week. His talk, entitled “Global Banking: A Failure of Structural Integrity,” gets at exactly why, despite all the hoopla this week over the passing of the (very much modified) Volker Rule, our financial system isn’t really safer than it was before the 2008 crisis. One of the most telling figures in Hoenig’s speech was buried in the middle: from 2008 to 2011, commercial and industrial loans to American businesses declined from $1.6 trillion to $1.24 trillion. While banks would argue that this is because demand fell off post financial crisis, the Alliance for American Manufacturing argues that it was because credit tightened so dramatically. I’m inclined to believe the manufacturers, since they’ve actually been having a substantial renaissance in recent years, and manufacturing recoveries historically pre-date larger consumer recoveries.  The point is that banks used to be the servants of American business. Now, they are its masters. Hoenig believes this is because even post-Volcker, giant banking conglomerates aren’t being broken up into smaller entities, divided along business lines (i.e. commercial lending, investment bank, trading, etc.), which would eliminate conflicts of interest that still exist as well as the Too Big To Fail (and Manage) problem. “I’m not sure [even with the Volker Rule] that customers are safer and the financial system is stronger,” he told me. “These big institutions need to be split up. I don’t know any manager who can safely handle one institution that’s holding $3-4 trillion of assets. It’s just too big.”

The Church of “Stop Shopping”: Meet the Man Leading An Uprising Against The World’s Biggest Banks -- Reverend Billy is no stranger to the law.  Recognizable by his trade-mark attire: a white suit, black shirt and clerical collar, the activist performer known as Bill Talen has been arrested alongside his activist choir group, The Church of Stop Shopping, more than 70 times in his decade-long crusade against consumerism, corporate commercialism and militarism.   The Reverend has graced sidewalks, banks, parks and businesses world-wide passionately preaching political satire since he moved to New York in the 1990s upon where his character Reverend Billy was born - a hybrid of a street evangelist preacher and Elvis Presley.  Talen appeared as a sole performer preaching anti-consumerism in Times Square, before expanding his one-man performance act in 1999 to a 40-person choir and 5-person band.   Since then, Talen has written extensively on economic systems and environmental practices, has been featured in Morgan Spurlock’s film, “ What Would Jesus Buy?”, and built a performance empire on community action and catchy gospel hymns performed by The Church of Stop Shopping's choir such as “We are the 99%”, “Revolution” and “End of the World”.  In recent years, the group has shifted its focus away from consumerism and towards large corporate banks which Reverend Billy argues are responsible for global warming, based on a five-year study by BankTrack.Org.  The research found that big banks such as JP Morgan Chase, UBS, Deutsche Bank and HSBC create climate change by actively paying money to companies that pour carbon dioxide into the atmosphere.  

Who’s Borrowing in the Fed Funds Market? - NY Fed - The federal funds market plays an important role in the implementation of monetary policy. In our previous post, we examine the lending side of the fed funds market and the decline in total fed funds volume since the onset of the financial crisis. In today’s post, we discuss the borrowing side of this market and the interesting role played by foreign banks.

US judge approves $5.7bn Visa and Mastercard settlement: A US judge has approved a $5.7bn (£3.5bn) class action settlement against credit card firms Visa and MasterCard. The two firms were accused of fixing the credit card fees charged to merchants each time a credit or debit card was used. It is believed to be the largest settlement of an antitrust class action suit ever. Some retailers objected, claiming the terms weren't satisfactory. Merchants first sued Visa and MasterCard in 2005. An initial settlement of $7.2bn was agreed on, but the amount was lowered after around 8000 retailers, including Amazon and Target, opted out of the agreement. Many of those retailers have subsequently filed their own lawsuits.

CoStar: Commercial Real Estate prices increase in October, Distress Sales Lowest Level in Five Years - Here is a price index for commercial real estate that I follow. From CoStar: Commercial Real Estate Prices Resume Upward Trend in October The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index—advanced by 1.1% and 1.4%, respectively, in October 2013. ... On an annual basis, the equal weighted CCRSI Composite Index has risen 7.4% while the value-weighted Composite CCRSI Index has advanced by 9.5%. ... The percentage of commercial property selling at distressed prices dropped to 10.7% in October 2013 from nearly 20% one year earlier, the lowest level since December 2008. ... Distress levels vary widely by market, however. In housing bust markets including, Atlanta, Las Vegas and Orlando, distress deals still accounted for more than 20% of all sales activity in the third quarter of 2013, suggesting there is still significant room for price appreciation in those markets. Conversely, in healthier markets such as San Francisco, Boston, Los Angeles, Seattle and New York, the share of distressed sales fell into the single digits in the third quarter of 2013. emphasis added Click on graph for larger image. This graph from CoStar shows the Value-Weighted and Equal-Weighted indexes. CoStar reported that the Value-Weighted index is up 50.3% from the bottom (showing the earlier and stronger demand for higher end properties) and up 9.5% year-over-year. However the Equal-Weighted index is only up 17.0% from the bottom, and up 7.4% year-over-year.

Unofficial Problem Bank list declines to 643 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for December 6, 2013.  Changes and comments from surferdude808:  There were only two removals this week to the Unofficial Problem Bank List, which now stand at 643 institutions with assets of $219.8 billion. A year ago, the list held 849 institutions with assets of $316.2 billion.  Note on the unofficial list:  Because the FDIC does not publish the official list, a proxy or unofficial list can be developed by reviewing press releases and published formal enforcement actions issued by the three federal banking regulators, reviewing SEC filings, or through media reports and company announcements describing that the bank is under a formal enforcement action. For the most part, the official problem bank list is comprised of banks with a safety & soundness CAMELS composite rating of 4 or 5 (the banking regulators use the FFIEC rating system known as CAMELS, which stands for the components that receive a rating including Capital adequacy, Asset quality, Management quality, Earnings strength, Liquidity strength, and Sensitivity to market risk. A composite rating is assigned from the components, but it does not result from a simple average of the components. The composite and component rating scale is from 1 to 5, with 1 being the strongest). Customarily, a banking regulator will only issue a safety & soundness formal enforcement when a bank has a composite CAMELS rating of 4 or 5, which reflects an unsafe & unsound financial condition that if not corrected could result in failure. There is high positive correlation between banks with a safety & soundness composite rating of 4 or worse and those listed on the official list.

Audit Shows FHA Faces $1.3 Billion Deficit - The Federal Housing Administration ran a projected shortfall of $1.3 billion at the end of September, down from a much larger projected deficit of $16.3 billion one year earlier, according to the agency's independent financial review, released Friday. .. In September, the FHA received a $1.7 billion infusion from the U.S. Treasury, its first such injection in its 79-year history. The agency is required to maintain enough cash to pay for projected losses on the more than $1 trillion in loans that it guarantees. A separate report next year from White House budget officials will determine whether the FHA needs additional taxpayer money... Most of the agency's losses stem from loans made between 2007 and 2009, when the housing bust deepened. Loans made since 2010 are profitable, the report found.

LPS' October Mortgage Monitor: Nearly Half of All Second Lien HELOCs Could Begin Amortizing Over Next Three Years; U.S. Negative Equity Population Down to 11.6 Percent -- -- Lender Processing Services October Mortgage Monitor reported that 48 percent of outstanding second lien home equity lines of credit (HELOCs) were originated between 2004 and 2006. Given that the vast majority of HELOCs originated during this time have draw periods of 10 years, they are set to begin amortizing over the next several years. As the payments on these HELOCs become fully amortizing, many borrowers may see monthly payments increase. According to LPS Senior Vice President Herb Blecher, recent increases in new problem loans among the HELOCs originated prior to 2004 (that have already begun amortizing) indicate increased risk of more delinquencies ahead.  "In the aggregate, the home equity market is experiencing lower delinquencies," said Blecher. "However, among the HELOC population that has already begun amortizing, we are actually seeing an increase in new seriously delinquent loans. As of today, only 14 percent of second lien HELOCs have passed this 10-year mark, leaving a very large segment of the market at risk of payment increases over the coming years.. If this trend toward post-amortizing delinquencies carries over, we could be looking at significant risk to the home equity market over the coming years."Turning to the first mortgage market, LPS found that the share of borrowers in negative equity positions has continued to decline as home prices have risen. As of September, that number was just 11.6 percent of active mortgages, down from almost 19 percent in January. As reports of estimated U.S. negative equity tend to vary widely, and to clarify our approach, we are applying a highly refined methodology to our calculations, accounting for not only the current combined loan amount of first and second liens using comprehensive loan and property data, but also the impact of distressed sale discounts on loans in serious delinquency or foreclosure. While distressed sales are making up an ever-shrinking portion of real estate transactions -- just 14.2 percent in September, the lowest share since 2007 -- these sales have prices about 25 percent lower than traditional transactions. Improperly weighing the influence of second liens or distressed sale discounts can skew measures of Americans' equity, or lack thereof, in their homes."

Big Banks About to Start Booking Second Mortgage Losses They Can No Longer Extend and Pretend Away - Yves Smith - Reuters has a new article, Insight: A new wave of U.S. mortgage trouble threatens, which is simultaneously informative and frustrating. It is informative in that it provides some good detail but it is frustrating in that it depicts a long-standing problem aided and abetted by regulators as new. When the mortgage mess was a hotter topic than it has been of late, we would write from time to time about the second mortgage time bomb sitting at the major banks, particularly Bank of America. Unlike first mortgages, which were in the overwhelming majority of cases securitized and sold to investors, banks in the overwhelming majority of cases kept second liens (which in pretty much all cases were home equity lines of credit, or HELOCs) on their books). This arrangement led to tons, and I mean tons, of abuses, which regulators chose to ignore or worse, actively promoted. But the banks that had HELOCs on their books were often the servicer of the related first liens. And even though they had a contractual obligation to service those first liens in the interest of the investors, they’d predictably watch out for their own bottom line instead. For instance, if a borrower was deeply underwater, it would make sense to at least partially write down the second. If the borrower was delinquent, the servicer should write off the second and restructure (aka modify) the first mortgage. But instead you’d see banks use their blocking position as second lien holder to obstruct mortgage modifications. Worse, Bank of America had modified subprime mortgages securitized by Countrywide (as in reduced their value) without touching the seconds, a clear abuse. Regulators played a direct hand in this chicanery. If the regulators had forced the banks to write down HELOCs, banks would have much less incentive to try to wring blood out of the turnip of underwater borrowers (particularly if the regulators had made clear they took a dim view of that sort of thing). But the authorities were far more concerned about preserving the appearance of solvency of the TBTF players.

Foreclosures are Seasonal -- Once again the press is all up in it over RealtyTrac's November foreclosure report for it shows the lowest level of foreclosure filings since December 2005 on a month to month basis. A total of 52,826 U.S. properties started the foreclosure process for the first time in November, down 10 percent from the previous month and down 32 percent from a year ago to the lowest level since December 2005, when 49,236 U.S. properties started the foreclosure process. November foreclosure starts increased from a year ago in 15 states, including Pennsylvania (up 233 percent), Delaware (up 104 percent), Maryland (up 74 percent), Oregon (up 38 percent), and Connecticut (up 37 percent). There were a total of 30,461 U.S. bank repossessions (REO) in November, down 19 percent from the previous month and down 48 percent from a year ago to the lowest level since July 2007, a 76-month low. Only five states posted year-over-year increases in REOs: Delaware (179 percent increase), Maryland (41 percent increase), Connecticut (9 percent increase), Maine (6 percent increase), and Iowa (2 percent increase). Thing is this happened in 2010 when the robo signing scandal broke and also foreclosures are seasonal.  Even Realtytrac says it is doubtful to see another onslaught of foreclosures and this is true, but it does not mean a return to 2005 in terms of less people losing their homes either.  All one needs to do is look at their graph on foreclosures and foreclosure starts to see there is variance on a month to month basis.

Concern Grows that Aging Home Equity Loans Threaten New ‘Wave of Disaster’ - Nearly half of the nation’s outstanding second lien home equity lines of credit (HELOC) will amortize over the next several years, raising monthly payments and increasing the risk of a rash of new delinquencies that could result in new defaults and foreclosures. Lender Processing Services today joined Equifax in raising alarms about prospect that aging HELOC loans written in the final years of the housing boom could result in a huge number of defaults, creating a “wave of disaster.” Some 48 percent of outstanding second lien home equity lines of credit, which were originated between 2004 and 2006, will begin amortizing on their tenth anniversaries.. As the payments on these HELOCs become fully amortizing, many borrowers may see monthly payments increase. Recent increases in new problem loans among HELOCs originated prior to 2004 that have already begun amortizing indicate the huge wave of newly amortized loans poses increased risk of more delinquencies ahead, LPS said. “In the aggregate, the home equity market is experiencing lower delinquencies,” said LPS Senior Vice President Herb Blecher. “However, among the HELOC population that has already begun amortizing, we are actually seeing an increase in new seriously delinquent loans. As of today, only 14 percent of second lien HELOCs have passed this 10-year mark, leaving a very large segment of the market at risk of payment increases over the coming years. Nearly half of all of these lines of credit were originated between 2004 and 2006, with the oldest set to begin amortizing next year. If this trend toward post-amortizing delinquencies carries over, we could be looking at significant risk to the home equity market over the coming years.” Data from consumer credit agency Equifax is even more alarming, indicating that the number of HELOC borrowers missing payments can double in the eleventh year of the loans. Particularly concerning to lenders is that they stand to lose 90 cents on the dollar when these loans go bad. Because a HELOC is typically a second mortgage, foreclosure proceeds will go to the first mortgage and leave little if anything for the home equity lender,

Fannie, Freddie to Raise Loan Fees - Mortgage-finance giants Fannie Mae and Freddie Mac will boost certain fees that they charge lenders ... The firms’ federal regulator, the Federal Housing Finance Agency, said Monday it would direct the companies to increase by 0.1 percentage points the so-called “guarantee” fees that the companies charge to lenders. Those fees have nearly doubled since 2009. But the latest increase will be muted in most states because the FHFA also said that it would direct the companies to eliminate separate fees that had been implemented in the aftermath of the financial crisis. ..  The upshot is that borrowing costs could rise slightly in the four states—New York, Florida, New Jersey and Connecticut—where the latest fee increases won’t be offset by the removal of the crisis-era fees.

The 1% Also Don't Pay Their Bills: 10 Ultra Luxury Properties In Foreclosure -- As we reported yesterday, something odd is happening in the US, which supposedly is deep in a "housing market and economic recovery" - foreclosures on ultraluxury homes, those worth $5 million and over, have soared by 61% in 2013 (even as overall foreclosures continue to decline due to the well-known and much discussed "foreclosure stuffing" process, which means millions of properties are held in bank shadow inventory just waiting for the moment to be unleashed and end the implicitly home price subsidy abused by banks for the past three years). Granted, the overall sample is relatively small, with fewer than 200 properties in the ultraluxury category compared to 1.2 million for all properties tracked, but as RealtyTrac notes, "each of these high-value properties represents a much bigger potential loss for the foreclosing lender compared to a median priced property."  Additional thoughts from RealtyTrac: This trend may indicate lenders are now financially stable enough to more comfortably weather the big-ticket losses that these properties potentially represent. In addition, an improving housing market means more prospective buyers, even for these ultra high-end homes. A bigger buyer pool translates into higher sales prices on these properties, allowing lenders to recoup more of their losses on these jumbo loans gone bad. Regardless of the arbitrage opportunities available to "all cash" buyers, who would be happy to park some cash in real estate, the fact that ultraluxury foreclosures are soaring also means that even the "1%" is starting to succumb to reality and beginning to feel the pressure of a financial reality in which only the "too biggest" can never fail.  So what are the properties in question? The photo gallery below, courtesy of RealtyTrac, shows just where any given $5 million + property stopped making its mortgage payments.

Lawler: Preliminary Table of Distressed Sales and Cash buyers for Selected Cities in November -- Economist Tom Lawler sent me the preliminary table below of short sales, foreclosures and cash buyers for several selected cities in November.  First, from Lawler on November sales: "While I do not have enough reports to produce an accurate estimate of existing home sales for November, reports I’ve seen so far suggest that home sales declined again on a seasonally adjusted basis last month." From CR: This is just a few markets, but total "distressed" share is down significantly, mostly because of a decline in short sales.  Foreclosure are down in most areas too.The All Cash Share (last two columns) is mostly declining year-over-year.  As investors pull back in markets the share of all cash buyers will probably decline. In general it appears the housing market is slowly moving back to normal.

Lawler: Update Table of Distressed Sales and Cash buyers for Selected Cities in November - Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in November. From CR: This is just a few markets, but total "distressed" share is down significantly, mostly because of a decline in short sales.  Foreclosure are down in most areas too. The All Cash Share (last two columns) is mostly declining year-over-year.  As investors pull back in markets (like Vegas and Phoenix) the share of all cash buyers will probably decline. Note: Several key areas have not reported for November yet.   Existing home sales for November will be released next week on Thursday, and the consensus is for sales to decline to a 5.05 million seasonally adjusted annual rate (SAAR), down from 5.12 SAAR in October.

MBA: Mortgage Applications Increase in Latest Survey - From the MBA: Mortgage Applications Fall During Holiday-Shortened Week Mortgage applications increased 1.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 6, 2013. The previous week’s results included an adjustment for the Thanksgiving holiday. ... The Refinance Index increased 2 percent from the previous week and was 16 percent lower than the week prior to Thanksgiving. The seasonally adjusted Purchase Index increased 1 percent from one week earlier and was 3 percent lower than the week prior to Thanksgiving. ...The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.61 percent, the highest rate since September, from 4.51 percent, with points decreasing to 0.26 from 0.38 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. The refinance index is down sharply - and down 68% from the levels in early May. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index is now down about 8% from a year ago.

Lawler on Fed Note: “Business Investor Activity in the Single-Family-Housing Market” - Economist Tom Lawler writes: A “FEDS Note” (by Fed economists Malloy and Zarutskie), available on the Federal Reserve’s website, Business Investor Activity in the Single-Family-Housing Market, is a brief note on purchases of SF homes by “business investors” over the past few years. The data are based on an analysis of CoreLogic real estate transactions by analysts at Amherst Holdings. While the note does not give details on how a “business investor” was determined, the note says that this determination was made by looking at the names of the buyers of record. A link to the chart says that “(b)usiness investors are defined as business entities identified as purchasing homes for primarily for the purpose of earning a financial return.” Here is a chart from the report on the Business Investor share of national home purchases.As noted above, this chart only reflects the BUSINESS INVESTOR” share of home purchases, and does not include INDIVIDUAL investors. Back in 2004 and 2005 the investor share of mortgage-financed home purchases was extremely high, with such purchases mainly being by individuals (many of whom purchased multiple properties.) At first glance this share increase, while noticeable, may not seem “large.” However, these shares suggest that business investor purchase of SF homes from 2010 to 2013 (using full-year estimates for 2013) totaled over 950,000, more than double the total number of business investor purchases over the previous SIX years (2004-2009).

Weekly Update: Housing Tracker Existing Home Inventory up 1.8% year-over-year on Dec 9th - Here is another weekly update on housing inventory ... for the eight consecutive week, housing inventory is up year-over-year.  This suggests inventory bottomed early 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 October).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years.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 now 1.8% above the same week in 2012 (red is 2013, blue is 2012). We can be pretty confident that inventory bottomed early this year.  Inventory is still very low, but this increase in inventory should slow house price increases. 

Few Places to Go  -- Ms. Torres, a 54-year-old nanny, pays $828 a month for a rundown one-bedroom that she keeps spotlessly clean, making the rent only by letting an acquaintance sleep on a mattress in the living room for about $400 a month. But her one-bedroom happens to be in the booming Columbia Heights area here, where such an apartment, once renovated, would easily command twice the price. Her landlords have been trying to drive the tenants out of the building, she explained in Spanish. The broken fire alarms go off in the middle of the night. The common areas are filthy, and the apartments have been infested by rats, bedbugs and cockroaches. Ms. Torres struggles to stay and cannot afford to leave. She makes about $1,000 a month caring for two toddlers. She sends $250 to her mother, who recently emerged from a diabetic coma and needs insulin. And $100 goes to her mother’s caretaker. After rent, that leaves just $200 or $250 for her. Today, millions of poor Americans are caught in a similar trap, with the collapse of the housing boom helping stoke a severe shortage of affordable apartments. Demand for rental units has surged, with credit standards tight and many families unable to scrape together enough for a down payment for buying a home. At the same time, supply has declined, with homebuilders and landlords often targeting the upper end of the market. “We are in the midst of the worst rental affordability crisis that this country has known,” Shaun Donovan, the secretary of housing and urban development, said at a conference here on Monday.

"The Rent Is Too Damned High" - “In 1960, about one in four renters paid more than 30% of income for housing. Today, one in two are cost burdened,” according to a new study (ironically) by Harvard University. As Bloomberg BusinessWeek's Peter Coy notes, the availability of apartments, especially cheaper ones, hasn’t nearly kept up with demand, and the problem has worsened since the 2007-09 recession. Remarkably, the number or people with severe cost burdens (paying over 50% of income to rent) is up by 2.5 million in just four years, to 11.3 million; and as usual, the pinch is hardest on the poor. The share of cost-burdened renters increased by a stunning 12 percentage points between 2000 and 2010, the largest jump in any decade dating back at least to 1960. Via Bloomberg BusinessWeek,If you can’t afford to own, you can rent. But what if you can’t afford to rent, either? Millions of Americans are in precisely that situation, according to a study released today by the Joint Center for Housing Studies of Harvard University. The availability of apartments, especially cheaper ones, hasn’t nearly kept up with demand, and the problem has worsened since the 2007-09 recession, the study says. “In 1960, about one in four renters paid more than 30 percent of income for housing. Today, one in two are cost burdened,” according to the study, America’s Rental Housing. “Cost-burdened” means you’re paying more than 30 percent of income for housing and “severely cost-burdened” means you’re paying more than half. “By 2011, 28 percent of renters paid more than half their incomes for housing, bringing the number with severe cost burdens up by 2.5 million in just four years, to 11.3 million,”

America’s rental crisis - But the attitude being skewered here — the idea that people who can’t pay their rent deserve no sympathy and should just move out of sight and out of mind — is actually deeply American. The problem is simple arithmetic, as laid out in a sobering new report from Harvard University: In 2011, 11.8 million renters with extremely low incomes (less than 30 percent of area median income, or about $19,000 nationally) competed for just 6.9 million rentals affordable at that income cutoff—a shortfall of 4.9 million units. The supply gap worsened substantially in 2001–11 as the number of extremely low-income renters climbed by 3.0 million while the number of affordable rentals was unchanged. Making matters worse, 2.6 million of these affordable rentals were occupied by higher-income households. When you have 11.8 million households chasing 4.3 million affordable rental units, no amount of moving out of town is going to solve the problem, which is only getting worse, thanks to the way in which inequality is getting worse in America. Here’s the chart, which shows the inexorable rise of rents, even as the median income of renters has declined dramatically since 2000:

Vital Signs: Housing Is No Longer the Piggy Bank It Used to Be - Home prices have been increasing for over a year, which is improving the finances of many homeowners. Fewer are underwater and according to the latest data from the Federal Reserve, net home equity—real estate holdings less mortgages outstanding) stood at 50.8% of household real estate value in the third quarter, up from 38.4% in 2009. But as a share of net worth, housing isn’t the windfall it was during the boom. Net home equity is less than 13% of household wealth, compared to close to 19% in 2006. Households who own equities directly and mutual funds have profited much more, thanks to soaring stock prices.

More Americans fork half their salaries over to landlords - Renting has become significantly less affordable in recent years, a report released Monday by the Harvard Joint Center for Housing Studies finds. In fact, 50% of U.S. renters spent more than 30% of their gross income on rent (the traditional measure of affordability) in 2010, up a record 12 percentage points from the 38% of households facing such a burden a decade prior. And many of those households, about 27% of renters, spent more than half of their salary on rent, up from just 19% of renters a decade ago. This comes at a time when more Americans are renting: 35% in 2012 versus 31% in 2004. The consequences for those who can’t find affordable housing can be dire, the report noted, leading families on already tight budgets to spend significantly less on health care and retirement savings. One contributor to deteriorating affordability was rising unemployment, the report noted. But there are other factors at work as well. “Slow housing starts and stagnant wages have been a bad combination for renters,” says Lawrence Yun, chief economist with the National Association of Realtors. Construction of housing units has averaged around 1.5 million a year for the past five decades, he says, but is likely to be less than 1 million this year. Taking into account the collapse in the housing market after 2008, he says, the inventory of newly constructed homes is at a 50-year low and housing construction needs to increase 50% to reach normal levels. Meanwhile, the average seasonally adjusted hourly earnings of all employees on private nonfarm payrolls was $24.15 in November, largely unchanged from $23.67 a year earlier, according to the Bureau of Labor Statistics.

Mortgage Equity Withdrawal Slightly Negative in Q3 -- The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation.  For Q3 2013, the Net Equity Extraction was minus $24 billion, or a negative 0.8% of Disposable Personal Income (DPI).  This is the smallest negative equity extraction since Q1 2008.This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.   There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now).  The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding increased by $10.0 billion in Q3. This was the first increase in mortgage debt since Q1 2008. Since some mortgage debt is related to new home purchases, net negative equity extraction was still slightly negative in Q3.The Flow of Funds report also showed that Mortgage debt has declined by over $1.3 trillion since the peak. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance. With residential investment increasing, and a slower rate of debt cancellation, it is possible that MEW will turn positive again soon.

 Jump in mortgage borrowing a good for US consumption - The US has reached an important milestone in its recovery from the financial crisis after the first rise in outstanding mortgage debt since the beginning of 2008. After reducing debt for 21 consecutive quarters, US households increased their net mortgage liabilities at an annualised rate of 0.9 per cent in the third quarter of 2013, according to new data from the US Federal Reserve. The rise in mortgage borrowing is a sign that US households are making progress in their painful develeraging after the financial crisis, and may be better able to increase their consumption, supporting economic growth next year. The pick-up in mortgage debt is likely to reflect the improvement in the housing market and the big decline in foreclosures. The drop in outstanding mortgages has mainly been driven by banks writing off debt when they foreclose rather than consumer repayments. Total mortgage debt of $9.4tn is now 12 per cent below its peak in the first quarter of 2008. Although outstanding mortgage debt rose, it continues to fall as a share of gross domestic product. It is now down to 55.6 per cent of GDP compared with a peak of 73.6 per cent. The figures from the quarterly Fed’s flow of funds data show the slow recovery in consumer and business demand for credit and a sudden halt in government borrowing. Total household credit grew at an annualised pace of 3 per cent, a little slower than the growth of nominal GDP, while credit in the business sector expanded at a pace of 7.5 per cent. But whereas outstanding government debt grew by more than 10 per cent in every year from 2008 to 2012, in the most recent quarter it expanded at an annualised pace of just 1.5 per cent, reflecting the sharp narrowing of the budget deficit caused by spending cuts and tax rises this year.

Fed's Q3 Flow of Funds: Household Mortgage Debt increased slightly, First Mortgage Debt increase since Q1 2008 - The Federal Reserve released the Q3 2013 Flow of Funds report today: Flow of Funds. According to the Fed, household net worth increased in Q3 compared to Q2, and is at a new record. Net worth peaked at $69.1 trillion in Q3 2007, and then net worth fell to $55.7 trillion in Q1 2009 (a loss of $13.4 trillion). Household net worth was at $77.3 trillion in Q3 2013 (up $21.6 trillion from the trough in Q1 2009). The Fed estimated that the value of household real estate increased to $19.0 trillion in Q3 2013. The value of household real estate is still $3.6 trillion below the peak in early 2006. This is the Households and Nonprofit net worth as a percent of GDP.  Although household net worth is at a record high, as a percent of GDP it is still below the peaks in 2000 (stock bubble) and 2006 (housing bubble).This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.  This graph shows homeowner percent equity since 1952.   Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008.  In Q3 2013, household percent equity (of household real estate) was at 50.7% - up from Q2, and the highest since Q2 2007. This was because of both an increase in house prices in Q3 (the Fed uses CoreLogic) and a reduction in mortgage debt. Note: about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 50.7% equity - and millions have negative equity.   The third graph shows household real estate assets and mortgage debt as a percent of GDP.  Mortgage debt increased by $10.0 billion in Q3.  (Still declined as percent of GDP).  This is the first increase in mortgage debt since Q1 2008. Mortgage debt has now declined by $1.32 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

In The Third Quarter, The Rich Got Richer By $1.9 Trillion - The quarterly Flow of Funds report by the Fed has been released and the latest household net worth numbers are out. While not nearly quite as dramatic as last quarter's wholesale dataset revision, which saw all of America suddenly worth $3 trillion more primarily due to a change of how "pension entitlements" (formerly "pension reserves") are calculated (more more in the full breakdown from September), with the resulting total net worth rising to a total of $74.8 trillion, according to the just released data, in the third quarter, US housholds, or rather a very tiny subset of them, saw their net worth rise once again, this time to $77.3 trillion from a revised $75.3 trillion. The reason for this increase, and why we say a "subset" is because virtually all of the net worth increase was the result of a $1.5 trillion bounce in financial assets (read: capital markets) to a new all time high of $63.9 trillion. As most know by know, the bulk of the exposure to this asset class is held by the ultra wealthy, particularly in the form of Corporate Equities, the category which rose by the single largest amount in the quarter, or $600 billion. Away from financial assets, the remainder, or $500 billion of the increase, was due to a rise in real estate values to $21.6 trillion, still over $3 trillion lower than the all time high for the category reached in Q4 2006. Curiously enough, the ongoing increase in assets, and thus net worth, continues without any comparable increase in liabilities, as total household debt rose by a minuscule $116 billion, of which the $71 billion increase in consumer credit (read student and car loans) was the biggest offset to net worth growth.

Rising Riches: 1 in 5 in U.S. Reaches Affluence - It’s not just the wealthiest 1 percent. Fully 20 percent of U.S. adults become rich for parts of their lives, wielding outsize influence on America’s economy and politics. This little-known group may pose the biggest barrier to reducing the nation’s income inequality. The growing numbers of the U.S. poor have been well documented, but survey data provided to The Associated Press detail the flip side of the record income gap — the rise of the “new rich.”Made up largely of older professionals, working married couples and more educated singles, the new rich are those with household income of $250,000 or more at some point during their working lives. That puts them, if sometimes temporarily, in the top 2 percent of earners.Even outside periods of unusual wealth, members of this group generally hover in the $100,000-plus income range, keeping them in the top 20 percent of earners. In a country where poverty is at a record high, today’s new rich are notable for their sense of economic fragility. They’ve reached the top 2 percent, only to fall below it, in many cases. That makes them much more fiscally conservative than other Americans, polling suggests, and less likely to support public programs, such as food stamps or early public education, to help the disadvantaged.

Consumer borrowing rose $18.2 billion in October: (AP) — Americans boosted their borrowing in October, led by another big increase in auto and student loans and the biggest rise in credit card debt in five months. Consumers increased their borrowing by $18.2 billion in October to a seasonally adjusted $3.08 trillion, the Federal Reserve reported Friday. That is a record level and follows a September increase of $16.3 billion. The increase was led by a $13.9 billion rise in borrowing for auto loans and student loans. But borrowing in the category that covers credit cards rose by $4.3 billion following a decline of $218 million in September. It was the biggest monthly credit card gain since May and could be a sign that consumer spending will increase in coming months. Credit card borrowing has lagged other types of debt. Through October, the measure of auto loans and student loans has risen 6.2 percent from a year ago and has increased in every month but one since May 2010. But credit card debt is up just 1 percent from where it was a year ago. And it is 16.1 percent below its peak hit in July 2008 — seven months after the Great Recession began. Slow job growth and small wage gains have made many Americans more reluctant to charge goods and services. But at the same time, the weak economy is persuading more people to go back to school to learn new skills. The Federal Reserve Bank of New York quarterly report on consumer credit shows student loan debt has been the biggest driver of borrowing since the Great Recession officially ended in June 2009.

Why Our Consumer-Debt Dependent Economy Is Doomed - Yesterday I explained Why We're Stuck with a Bubble Economy: Now that interest rates are near-zero and mortgage rates are rising from historic lows, there is no more juice to be squeezed from low rates. Asset bubbles always burst, destroying collateral and rendering borrowers and lenders alike insolvent. Without organic demand from rising real income and new households with good-paying jobs and low levels of debt, the consumer-debt based economy stagnates. This has left the economy dependent on serial asset bubbles that create phantom collateral that can support new debt, albeit temporarily. The other critical dynamic is the marginal utility of additional consumption in a debt-dependent consumer economy. In an economy in which 49% of all residents (156 million people out of a total population of 317 million) receive a direct transfer of cash or cash-equivalent benefit from the central government, poverty is relative rather than absolute for the vast majority of Americans. As noted yesterday, with the earned income of the lower 90% of wage earners stagnant for four decades, America has enabled consumption by leveraging income and collateral into ever-rising mountains of debt. The problem with debt, of course, is that it accrues interest, and that paying interest reduces the amount of income left to spend on consumption. In this way, depending on debt to finance consumption is akin to the snake eating its own tail: at some point, the cost of servicing the debt reduces the income available to be spent on additional consumption to zero. Additional consumption becomes impossible without asset bubbles to temporarily enrich the households that own assets or "helicopter drops" of interest-free cash into household checking accounts.

Retail Sales increased 0.7% in November - On a monthly basis, retail sales increased 0.7% from October to November (seasonally adjusted), and sales were up 4.7% from November 2012. Sales in October were revised up from a 0.4% increase to 0.6%. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $432.3 billion, an increase of 0.7 percent from the previous month, and 4.7 percent above November 2012. ... The September to October 2013 percent change was revised from +0.4 percent to +0.6 percent. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).Retail sales ex-autos increased 0.4%.  The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 5.5% on a YoY basis (4.7% for all retail sales). This was a solid report, and especially strong considering the upward revision to October sales.

November Advance Retail Sales Beat Expectations - The  Advance Retail Sales Report released this morning shows that sales in November came in at 0.7% month-over-month, an increase from October's 0.6%. Today's headline number came slightly above the forecast of a 0.6% gain. Core Retail Sales (which excludes Autos) were up 0.4%. That was a decline from last month's 0.5% but better than the forecast of 0.2%. The first chart below is a log-scale snapshot of retail sales since the early 1990s. I've included an inset to show the trend in this indicator over the past several months. Here is the Core version, which excludes autos. Here is a year-over-year snapshot of overall series. Here we can see that the YoY series is off its peak in June of 2011 and has been relatively range-bound since April of last year. Here is the year-over-year performance of at Core Retail Sales.

November Retail Sales Beat Modest Expectations Despite Another Decline In Clothing Sales - There was much concern that heading into the holiday season the US consumer would hunker down, which is why the just released retail sales came as a bit of good news: the headline and core (ex-autos) numbers both beat expectations of 0.6% and 0.2%, printing at 0.7% and 0.4% respectively, and refuting rumors of a big consumer slowdown into the holiday season. On the other hand, core retail sales, ex-autos, showed a declining growth rate, following the 0.5% increase in October, declining to 0.4% in the past month, while the ex-autos and gas number remained flat from October to November, or 0.6%. It is unclear if this number is good enough to send futures sliding on the back of the horrible claims report which has so far managed to push futures into green territory, but with the bulk of the monthly change contained in the seasonal adjustment, any 0.1% increments of change or beats of expectations are very much noise.

Vital Signs: It Wasn’t Holiday Spending That Boosted Retail Sales -- Retail sales were strong in November, but not necessarily because people were doing more holiday shopping. When you just look at categories where people buy gifts, such as electronics, clothing and department stores and even add in online retailers, and exclude car dealers, gas stations and restaurants, sales were up just 2.8% in November from a year earlier. That represents the weakest nonrecession November in at least 20 years and compares to a 4.7% gain for total retail sales. There may be a silver lining here, though. With overall sales so strong, the consumer still looks pretty good. So maybe it just means that more people decided to get their holiday shopping done in December. And if that holds true, it means December’s retail sales could be a blockbuster.

US Consumers Remarkably Resilient: Above is a chart of the year over year percentage change in personal consumption expenditures (PCEs; blue) and retail sales (red). The retail sales numbers are typically presented in monthly fashion. The above chart uses an average of each three month period to provide a valid comparison. Notice that both figures have been consistently strong for the duration of this expansion. But the chart I find most fascinating is the year over year percentage change in auto and light truck sales. These numbers have also been averaged into quarterly form to make the chart a bit easier to read. But notice the sheer strength of the above numbers; they indicate that auto purchases are in good shape. More importantly, they've been consistently good. While we should remember that auto sales are rising from a low bottom making the initial YOY comparisons easy, the strength has continued for the duration of this expansion.

BLS: Producer Price Index declines 0.1 percent in November - From the BLSThe Producer Price Index for finished goods edged down 0.1 percent in November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Prices for finished goods decreased 0.2 percent in October and 0.1 percent in September...In November, the decrease in the finished goods index can be traced to a 0.4-percent decline in prices for finished energy goods. By contrast, prices for finished goods less foods and energy advanced 0.1 percent. This slight decline was expected, and was mostly due to a decline in energy products. However this is another indicator showing little inflation. A key question for the Fed next week is if the below target "rate of inflation experienced so far this year has become ingrained in the economy" (using some of Bernanke's words from 2011 when he argued a small increase in inflation was transitory - and Bernanke was correct then). To start to reduce asset purchases next week, the FOMC would probably have to argue that the current low inflation is transitory.

November Producer Prices Decline For Third Consecutive Month, Rising Pork Offset By Falling Chicken Prices -- In the aftermath of a series of "better than expected", and thus "taper on" economic data, there is just one wildcard remaining for the Fed: inflation, or rather the lack thereof. And while next week's CPI report will be very closely watched in this regard, producer prices also provide a glimpse into pricing pressures and resource slack. And judging by the just announced -0.1% drop in finished goods producer prices in the month of November, below the 0.0% expected if up from last month's -0.2%, which happens to be the third consecutive decline in overall PPI, a first in the past year, the Fed's December taper decision just got even more complicated. Looking into the components, core PPI rose by the tiniest possible fraction, or 0.1%, in line with expectations, while it was energy prices that dipped 0.4%, pulling the overall number lower with the BLS noting that home heating oil's 5.7% decline was among the key culprits for the drop. Food producer prices were unchanged for the month, with higher prices for pork offset by lower prices for processed young chickens. At the earlier stages of processing, prices received by manufacturers of intermediate goods declined 0.5 percent, and the crude goods index fell 2.6 percent

Producer Price Index: Third Month of Decline -- Today's release of the November Producer Price Index (PPI) for finished goods shows a 0.1% month-over-month decline, seasonally adjusted, in Headline inflation. Today's data point matched the forecast. In contrast, Core PPI rose 0.1% from last month, also matching the forecast. We've now had three months of declining Headline PPI for finished goods.  Year-over-year Headline PPI is up only 0.71%, but that's an increase from 0.30% last month. The YoY 1.31% Core PPI is a virtually unchanged from last month's 1.31%. Here is the essence of the news release on Finished Goods: In November, the decrease in the finished goods index can be traced to a 0.4-percent decline in prices for finished energy goods. By contrast, prices for finished goods less foods and energy advanced 0.1 percent. The index for finished consumer foods was unchanged.  Finished energy: The index for finished energy goods declined 0.4 percent in November after falling 1.5 percent in October. Nearly three-quarters of the November decrease is attributable to gasoline prices, which moved down 0.7 percent. Lower prices for diesel fuel and home heating oil also were factors in the decline in the index for finished energy goods. (See table 2.)  Finished core: The index for finished goods less foods and energy inched up 0.1 percent in November, the third consecutive advance. Leading the November rise, prices for light motor trucks increased 0.6 percent. Higher prices for agricultural machinery and equipment also contributed to the advance in the finished core index.  Finished foods: Prices for finished consumer foods were unchanged in November subsequent to a 0.8-percent rise a month earlier. In November, higher prices for pork were offset by lower prices for processed young chickens.   More... Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI (the blue line) declined significantly during 2009 and stabilized in 2010, increase in 2011 and then began falling in 2012. Now, in the last quarter of 2013, the YoY rate is approximately the same as in mid-2010. The more volatile Headline number is near the bottom of its range since the early months of the recovery from the Great Recession.

Vital Signs: Chicken Falling Off the Menu -- The wholesale price of processed young chickens fell 2.3% in November, the largest one-month decline in nearly three years, the Labor Department said. Meanwhile, the price of pork jumped 5.6% and turkey prices rose 2.9% last month. All monthly price changes are seasonally adjusted.  The fluctuation for each meat was unusual. Turkey and pork prices had held fairly steady in recent Novembers, while chicken prices rose during the month in three of the previous four years. A Labor Department analyst said demand is the reason — orders for turkey and pork surged last month but grocery stores and butchers wanted less chicken. From a year ago, wholesale turkey prices are up 11% and chicken costs are down 4%.  While varying tastes near the holidays is causing meat prices to move in opposite directions, the net result is a wash for overall food costs. The producer price index for foods was unchanged in November. And where’s the beef? Prices for red meat were up in November but are down from a year ago

U.S. wholesale prices point to muted inflation pressures (Reuters) - U.S. producer prices fell for a third straight month in November, pointing to a lack of inflation pressure that could give the Federal Reserve pause as it weighs the future of its bond-buying stimulus. The Labor Department said on Friday its seasonally adjusted producer price index slipped 0.1 percent as gasoline prices maintained their downward trend. Prices received by the nation's farms, factories and refineries fell 0.2 percent in October. It was the first time since October of last year that producer prices had fallen for three consecutive months and analysts had expected prices would be flat in November. "There is no inflation coming up the pipe into what producers are receiving for their goods, which means they are not going to be passing anything on to consumers," In the 12 months through November, producer prices gained 0.7 percent after rising 0.3 percent in October. Wholesale prices stripping out volatile food and energy costs nudged up just 0.1 percent last month after rising 0.2 percent in October. The 12-month gain slipped to 1.3 percent from 1.4 percent in October.

Wholesale Inventories Spike Most In 2 Years As "Hollow Growth" Continues - We can only imagine the upward revisions to GDP that will occur due to the largest mal-investment-driven wholesale inventory build in over 2 years. The 1.4% MoM gain is over 4x the expectation and biggest beat since Q4 2011, when - just as now - a mid-year plunge was met by a rabid over-stocking only to see the crumble back into mid 2012. As we noted previously, 56% of economic "growth" this year was inventory accumulation (cough auto channel stuffing cough) and this print merely confirms "hollow growth" continues. As we noted previously, So how does inventory hoarding - that most hollow of "growth" components as it relies on future purchases by a consumer who has increasingly less purchasing power - look like historically? The chart below shows the quarterly change in the revised GDP series broken down by Inventory (yellow) and all other non-Inventory components comprising GDP (blue).

Inventories pose near-term risks to US growth - In spite of some relatively strong economic data coming out of the US (see post), risks to near-term growth remain. One of those risks comes from higher than expected inventory build. We saw this come through in the latest GDP numbers. TD Economics: - While the headline certainly looks good, the significant upward revision to inventories is not great from the point of view of the fourth quarter. The accumulation in inventories appears somewhat excessive for the quarter. After the 1.8 pp contribution in Q3, we believe inventories alone will likely subtract close to a percentage point from Q4 real GDP growth. In addition to the drag on government spending from the shutdown in October, this will likely amount to fairly modest economic growth at the close of 2013.  This inventory growth is clear in the monthly data as well.This could be especially problematic if retail sales weaken. While it is difficult to say how retail sales are faring in December, at least one indicator is pointing to less than stellar performance (see chart).

NFIB: Small Business Optimism Index increases in November -From the National Federation of Independent Business (NFIB): Small Businesses Optimism Up Slightly : Owner sentiment increased by 0.9 points to 92.5 ... Over half of the improvement was accounted for by the labor market components which is certainly good news, lifting them closer to normal levels.  Fifty-one percent of the owners hired or tried to hire in the last three months and 44 percent reported few or no qualified applicants for open positions. This is the highest level of hiring activity since October 2007. This graph shows the small business optimism index since 1986. The index decreased to 92.5 in November from 91.6 in October.   Another positive: During the recession, the single most important problem was "poor sales".  The percentage of owners naming "poor sales" has fallen significantly, and small business owners are once again complaining about taxes and government - this is what they complain about in good times!

The Job Report Mirage - The Wall Street-Washington media multinationals can’t stop crowing about Friday’s 7% (U-3) unemployment report.  I love hearing, over and over and over again, how the economy is now so strong we gained 203,000 jobs in November — 27,000 in American manufacturing alone. Now I ask you: what kind of person would repeat a story like this, much less believe a story like this?  Even more shameful: the very same November unemployment report included the unadjusted figures showing that we lost 3,000 jobs in American manufacturing last month.  (Good grief, we lost 7,800 jobs in food manufacturing.)  The jobs gain was in retail — 471,000 — but these are typically low-wage, part-time, and gone after Christmas.  Retail trade means foreign-made goods, mostly, anyhow. A few things come to mind: “The price of freedom is eternal vigilance,” someone once said, and this is very good to remember.  I want to add that freedom, most importantly in the American context, is the exercise of responsibility over one’s existence — but this might leave me trapped having said that freedom and eternal vigilance are the same thing. Also — back to the unemployment report, believe it or not — no matter what happens or who’s supposedly at the helm, our Nation’s central bank will do anything not to lose face.It will be interesting to watch this play out:

Employment Stats Misleading - The payroll jobs report for November from the Bureau of Labor Statistics says that the US economy created 203,000 jobs in November. As it takes about 130,000 new jobs each month to keep up with population growth, if the payroll report is correct, then most of the new jobs would have been used up keeping the unemployment rate constant for the growth in the population of working age persons, and about 70,000 of the jobs would have slightly reduced the rate of unemployment. Yet, the unemployment rate (U3) fell from 7.3 to 7.0, which is too much for the job gain. It seems that the numbers and the news reports are not conveying correct information. As the payroll jobs and unemployment rate reports are released together and are usually covered in the same press report, it is natural to assume that the reports come from the same data. However, the unemployment rate is calculated from the household survey, not from payroll jobs, so there is no statistical relationship between the number of new payroll jobs and the change in the rate of unemployment. It is doubtful that the differences in the two data sets can be meaningfully resolved. Consider only the definitional differences. The payroll survey counts a person holding two jobs as if it were two employed persons, while the household survey counts a person holding two jobs as one job. Also the two surveys treated furloughed government workers during the shutdown differently. They were unemployed according to the household survey and employed according to the payroll survey. To delve into the meaning of the numbers produced by the two surveys, keep in mind that payroll jobs can increase simply because the birth-death model used to estimate the numbers of unreported business shutdowns and startups can underestimate the former and overestimate the latter. The unemployment rate can decline simply because the definition of the work force excludes discouraged workers. Thus, an increase in the number of discouraged workers can lower the measured rate of unemployment.

Graphs: Duration of Unemployment, Unemployment by Education, Construction Employment and Diffusion Indexes - A few more employment graphs by request ... This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. The general trend is down for all categories, and both the "less than 5 weeks" and 6 to 14 weeks" are close to normal levels. The long term unemployed is at 2.6% of the labor force - the lowest since May 2009 - however the number (and percent) of long term unemployed remains a serious problem. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older). Unfortunately this data only goes back to 1992 and only includes one previous recession (the stock / tech bust in 2001). Clearly education matters with regards to the unemployment rate - and it appears all four groups are generally trending down. Note: This says nothing about the quality of jobs - as an example, a college graduate working at minimum wage would be considered "employed". This graph shows total construction employment as reported by the BLS (not just residential). According to the BLS, essentially no construction jobs have been over the last five months. The BLS diffusion index for total private employment was at 63.5 in November, up from 61.1 in October. For manufacturing, the diffusion index increased to 63.0, up from 56.8 in October. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

U.S. Labor Force Participation Rate on Trend? - The labor force participation rate (LPR) is defined as the share of the civilian noninstitutionalized that is employed (working) or unemployed (looking for work). In 1970, the U.S. LPR was about 60%. It rose steadily for 30 years, reaching peak of 67.1% in 2000. It has been declining since that time, dropping sharply in the recent recession, and currently sits at around 63%. Question: How much of the recent decline in LPR is due to a bad economy (cyclical factors)? And how much of it might be due to long-term trends associated with changing demographics (structural factors)?The answer to this question is important for policy because a cyclical interpretation suggests the presence of an undesirable "output gap," whereas a structural interpretation does not.  Christopher Erceg and Andrew Levin have a new paper out which suggests that cyclical factors are responsible (Labor Force Participation and Monetary Policy in the Wake of the Great Recession). Much of their estimate of LPR trend, however, seems to be based on a particular BLS projection. On pages 9-10, they state:In our view, the labor force projections published by the BLS in November 2007 serve as an invaluable resource in assessing the influence of demographic factors on the subsequent decline in the LFPR. In making such projections, BLS sta¤ consider detailed demographic groups using state-of-the-art statistical procedures in conjunction with micro data from the Current Population Survey (CPS) and various other sources, including interim updates from the U.S. Census Bureau. But as the following figure demonstrates, BLS projections of trend LPR seem to vary quite a bit over time:

Falling Unemployment and Falling Labor Force Participation - The U.S. unemployment rate has been dropping, from its peak of 10% in October 2009 to 7% in November 2013. But the labor force participation rate--that is, the share of U.S. adults who either have jobs or are actively looking for jobs--has also been dropping. It was 66.4% in January 2007 before the start of the recession, and has now fallen to 63%. Thus, is the fall of three percentage points in the unemployment rate really showing that roughly three percentage points of adults have become so discouraged by the dismal labor market prospects of the last few years that they have stopped looking for work?  Shigeru Fujita offers some facts and trends in "On the Causes of Declines in the Labor Force Participation Rate," a "Research Rap" from the Federal Reserve Bank of Philadelphia. To orient oneself among the arguments here, consider this graph showing the unemployment rate and the labor force participation rate since 1995. The fact that both have decline in the last few years is apparent on the right-hand side of the graph. But what is also apparent is that the decline in the labor force participation rate seems to speed up in the aftermath of the Great Recession, but it actually started back in the late 1990s.What's the evidence on why adults are not participating in the labor market, and how it has changed over time? This figure shows that retirement doesn't account for a lower rate of labor force participation up to about 2010, when it starts rising. Disability has been accounting for a higher rate of labor force participation since the late 1990s, as has "other."

Millions of ‘missing workers’ continue to make the monthly jobs reports look better than they are - The latest job growth report—released Friday by the Bureau of Labor Statistics—would in normal times be an unalloyed piece of good news. The official unemployment rate fell to 7 percent (a five-year low), 203,000 new jobs were created (putting the economy on track to show the best job growth since 2005), the labor-force expanded and the labor-force participation rate grew, wages edged up and the percentage of people forced to work part-time fell (only partly due to a return to work by employees furloughed by the government shutdown). Add November's results to the total, and 7.4 million new jobs have been created since February 2010, definitely nothing to sneeze at. But those improvements conceal a continuing problem that keeps being ignored or explained away as just a matter of demographics: The missing workers.The folks at the Economic Policy Institute have done an excellent job of keeping track of "missing workers." They explain the category thusly:In today’s labor market, the unemployment rate drastically understates the weakness of job opportunities. This is due to the existence of a large pool of “missing workers”—potential workers who, because of weak job opportunities, are neither employed nor actively seeking a job. In other words, these are people who would be either working or looking for work if job opportunities were significantly stronger. Because jobless workers are only counted as unemployed if they are actively seeking work, these “missing workers” are not reflected in the unemployment rate. That's not just a handful of missing workers, but, by EPI's calculations for October, 5.66 million of them. If those missing workers were looking for a job, the employment rate would be 10.3 percent instead of 7.0 percent.

Falsely Blaming Baby Boomers for Smaller Labor Force - Ever since the owner of Fox News bought the Wall Street Journal in 2007, it appears that the once esteemed and unquestionable newspaper appears to be much more ideological these days.Fox News, who regularly blames the jobless and the poor for being jobless and poor, now has their sister company, the Wall Street Journal, blaming Social Security, older workers, retirees and the disabled for a 35-year record low in the labor force participation rate. And as soon as the almighty Wall Street Journal publishes something, everyone else in the media (without fact-checking) regularly jumps on their band wagon and just regurgitates their inaccurate bile. As of today, the labor force participation rate is the lowest it's been since February 1978 when Jimmy Carter was president. But it's not just because the Baby Boomers have been retiring, that the work force is shrinking, this has been going on since late in the Clinton administration. The first Baby Boomer, who born in 1946 (and who became eligible in 2011 to retire at the age of 65) didn't retire until last year. The labor force participation rate, according to data from the Bureau of labor Statistics:  The share of Americans 25 to 54 years old (who are in the labor force, either by working or actively looking for work), have also been dropping out of the labor force. The participation rate fell during the 2001 recession and has never recovered since then. Another slide began because of the 2008 financial crisis. But this trend among prime-working-age Americans cannot be simply explained away by retiring Baby Boomers, as the Wall Street Journal claims.

More Than Three-Quarters of Workers Missing from the Labor Force Are Under Age 55 -- A blog post by Pedro Nicolaci da Costa in the Wall Street Journal highlights findings from a paper from the Federal Reserve Bank of Philadelphia that much of the shrinking of the U.S. workforce has been due to workers retiring early, and that given that people who retire early are less likely to reenter the labor force when job opportunities improve, improving economic conditions may not draw these workers back in. I’ve looked at the breakdown by age of the 5.6 million “missing workers”—potential workers who, because of weak job opportunities in the aftermath of the Great Recession, are neither employed nor actively seeking work. More than three-quarters of missing workers are under age 55 and are therefore unlikely to be early retirees. That means that even if all of the missing workers age 55 and over are early retirees who will never reenter the labor force no matter how strong job opportunities are (a very strong assumption), that still leaves 4.3 million missing workers under the age of 55 who are likely to re-enter the labor force when job opportunities strengthen. In other words, weak labor force participation rate remains a key component of the total slack in the labor market.

The Awful Service Jobs Replacing Skilled Labor - We already knew it anecdotally, of course, but a  new MIT study adds further weight to the notion that outsourcing and mechanization are turning previously well-paying skilled jobs into low-paying service jobs:  The widening chasm in the U.S. job market has brought many workers a long-term shift to low-skill service jobs, according to a study co-authored by an MIT economist.  The research, presented in a paper by MIT economist David Autor, along with economist David Dorn, helps add nuance to the nation’s job picture. While a widening gap between highly trained and less-trained members of the U.S. workforce has previously been noted, the current study shows in more detail how this transformation is happening in stores, restaurants, nursing homes, and other places staffed by service workers.   Specifically, workers in many types of middle-rank positions — such as skilled production-line workers and people in clerical or administrative jobs — have had to migrate into jobs as food-service workers, home health-care aides, child-care employees, and security guards, among other things. It's not just that these jobs pay less, are less fulfilling, and have less room for advancement and mobility. It's also that their schedules are more haphazard, making life more difficult:

Covered Employment Update: Employment vs. Federal Spending - Here's some new charts from reader Tim Wallace on "Covered Employment" (working in a job eligible for unemployment benefits). Typically, hours worked and wages paid to employees in covered employment are used as a basis in establishing unemployment benefits should an employee becomes unemployed by no fault of their own. Self-employed people are not covered by unemployment insurance but we still have to pay into the system.  Covered employees are entitled to unemployment benefits if they earn enough wages and meet eligibility requirements of their state. For example, the State of Washington requires 680 hours of covered employment to be eligible for unemployment benefits.Covered Employment Notes

  • Covered employment hit 128,673,493 in January 2002.
  • Since then, the working age population has grown by 30 million.
  • Covered employment was 133,902,387 in December 2008.
  • Covered employment is 130,396,096 now, a decline of 3,560,291

Compensation, Productivity and Labor Share - Productivity outpaces real wages, deflated using the output deflator, or using the CPI.  Note that a large portion of the gap between productivity and real compensation is due to the use of the CPI index as the deflator. Nonetheless, the gap still exists using the output deflator. And that gap (mechanically) explains the declining labor share of income in nonfarm business sector.   The rate of decline is 0.8 ppts of GDP per annum after 2000, while it is a mere 0.1 ppts from 1967-2000. What's the explanation for this precipitous decline in the labor share? I'm going to appeal to a recent (Fall 2013) BPEA article by Elsby, Hobijn and Sahin: Over the past quarter century, labor’s share of income in the United States has trended downwards, reaching its lowest level in the postwar period after the Great Recession. Detailed examination of the magnitude, determinants and implications of this decline delivers five conclusions. First, around one third of the decline in the published labor share is an artifact of a progressive understatement of the labor income of the self-employed underlying the headline measure. Second, movements in labor’s share are not a feature solely of recent U.S. history: The relative stability of the aggregate labor share prior to the 1980s in fact veiled substantial, though offsetting, movements in labor shares within industries. By contrast, the recent decline has been dominated by trade and manufacturing sectors. Third, U.S. data provide limited support for neoclassical explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods. Fourth, institutional explanations based on the decline in unionization also receive weak support. Finally, we provide evidence that highlights the offshoring of the labor-intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years.

The Technological Transformation in Thomas Friedman's Mind - Dean Baker - No one expects Thomas Friedman to base his columns on evidence, but he strayed even farther than usual today. The piece is a complaint that the United States is not prepared to deal with "a huge technological transformation in the middle of a recession." The data won't support that one.  The usual measure of technological progress is productivity growth. That has been lagging in this upturn, averaging close to 1.0 percent for the last three years.  We know that Thomas Friedman has lots of stories from his cab drivers and other people that he talks to, but most of us might opt to rely on the data from the Bureau of Labor Statistics instead.  Friedman is also a bit behind the times in telling us about the loss of middle skilled jobs. That might have been a story for the 1980s, but the data have not supported Friedman's story for at least a decade.

The Great Labor Dump - In a Brookings conference paper, Mike Elsby takes on a hugely important question that has been on everyone's minds of late: Why has labor's share of income declined in advanced countries?There are basically three competing stories. These are:

  • 1. Robots. Technology has made it cheap to replace humans with automation, driving profits up and wages down.
  • 2. Unions. The relentless decline of organized labor in rich countries has robbed workers of their bargaining power, causing owners to scoop up the surpluses.
  • 3. China/India. The end of the Cold War caused a huge, relatively well-educated labor force to be suddenly dumped onto world markets. A glut of labor on the market means the return to labor goes down and the return to capital goes up.

Mike Elsby and his coauthors find support mostly for story #3. In their own words: U.S. data provide limited support for...explanations based on the substitution of capital for (unskilled) labor to exploit technical change embodied in new capital goods...[I]nstitutional explanations based on the decline in unionization also receive weak support...[W]e provide evidence that highlights the offshoring of the labor intensive component of the U.S. supply chain as a leading potential explanation of the decline in the U.S. labor share over the past 25 years.

When Robots Make Drones: The Brave New World of Secular Stagnation - Amazon’s Jeff Bezos is all over the news with his statement that drones will sooner or later be delivering packages to your home. Predictably, this has generated two types of buzz: what about the inevitable mishaps, and what about the poor displaced UPS workers?  For me, the first is a wee bit scary. With the coming of drones we’ll have to constantly scan the sky for incoming errant flights and packages falling to earth. I suppose the drones are scarier than the trucks. However, it is the second worry that is getting most of the attention: What are we going to do as robots increasingly replace human workers? That sort of apocalypse has been featured in science fiction from time immemorial. Not only do we have the worry of rising unemployment of humans, but also the growing intelligence of robots as they realize they don’t need no damn humans any more. An interesting piece in Salon addresses these latter issues. Indeed, the title tells it all: “Amazon, Applebee’s and Google’s job-crushing drones and robot armies: They’re coming for your job next.” The typical economist’s take on this, however, is that by filling the lower-skilled jobs with robots, we will be able to move human workers into the higher-skilled work. Of course, as robots get smarter (or as we continually reduce complex processes to a series of simple steps—which has been the basis of automation since the days of Adam Smith), humans will be funneled into ever-higher-order tasks. Not to worry, say the economists, because we’ll need more and more robots, too. Hence, the final refuge for human workers will be to make the robots that do everything else.

Is Job Market Stronger Than Fed Thinks? -- Is the labor market better than Federal Reserve officials think? Sustaining the recent pace of payrolls gains into 2014 will depend on consumers and businesses increasing their spending. But two reports released Tuesday confirm the demand for labor is picking up at least for this quarter. Reuters The Labor Department reported job openings in October were at their highest level so far in this recovery. And the National Federation of Independent Business says more small businesses increased their staffs in November. In addition, in recent months, more NFIB members have raised compensation recently, and more plan to do so in coming months. The increase in wages paid–either already done or planned–suggests the demand for labor is strengthening to the point that businesses are willing to raise compensation to keep valued employees or attract new talent. Indeed, the share of small-business owners who report difficulty filling certain jobs is at its highest level since January 2008, just as the last recession was getting started. The interplay between wages and labor demand plays into the ongoing discussion of whether this year’s drop in the jobless rate from 7.9% in January to 7.0% in November reflects a true tightening in the labor markets–or just discouraged job seekers dropping out of the labor force. The trend in small business compensation supports the former view on unemployment, say economists at Barclays Research. “As the unemployment rate has fallen, the fraction of firms raising wages has been rising, just as experience would suggest,” they write.

Weekly Initial Unemployment Claims increase to 368,000 - The DOL reports: In the week ending December 7, the advance figure for seasonally adjusted initial claims was 368,000, an increase of 68,000 from the previous week's revised figure of 300,000. The 4-week moving average was 328,750, an increase of 6,000 from the previous week's revised average of 322,750. The previous week was up from 298,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 328,750. Weekly claims are frequently volatile around the holidays (Thanksgiving), and the level of the four week average of weekly claims suggests an improving labor market.

U.S. Unemployment Aid Applications Surge to 368,000 — The number of people seeking U.S. unemployment benefits rose 68,000 last week to a seasonally adjusted 368,000, the largest increase in more than a year.The surge in first-time applications could be a troubling sign if it lasts. But it likely reflects the difficulty adjusting for delays after the Thanksgiving holiday. The Labor Department said Thursday that the less volatile four-week average rose 6,000 to 328,750. That is close to pre-recession levels and generally a positive sign for job gains. Applications had tumbled in recent weeks to nearly six-year lows, partly because of a late Thanksgiving holiday that may have distorted the government’s seasonal adjustments. Economists believe this week’s jump in claims was a dose of payback. Applications for unemployment aid are a proxy for layoffs. A steady decline over the past year suggests that fewer Americans have lost their jobs. Economists will track the next few weeks closely to see if that trend is reversing, or if the surge is a temporary blip caused by seasonal adjustments.

BLS: Job Openings "little changed" in October -- From the BLS: Job Openings and Labor Turnover Summary There were 3.9 million job openings on the last business day of October, little changed from September, the U.S. Bureau of Labor Statistics reported today. The hires rate (3.3 percent) and separations rate (3.1 percent) were also little changed in October. ... Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. Layoffs and discharges are involuntary separations initiated by the employer. ... The number of quits (not seasonally adjusted) increased over the 12 months ending in October for total nonfarm and total private and was little changed for government.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for October, the most recent employment report was for November.

JOLTS Report Shows Labor Market Static - The BLS JOLTS report, or Job Openings and Labor Turnover Survey shows there are 2.9 official unemployed per job opening for October 2013.  The headlines blare job openings are at the highest level in five years, but that's not the real story as hiring is way below pre-recession levels.   Job openings have increased 80% from July 2009, while hires have only increased 24% from the same time period.  Every month JOLTS reports the same bleak labor market conditions with little improvement.  Despite what many want and the press headlines imply, this month's report is no different.  Once again the United States labor market is showing little change.  There were 1.8 official unemployed persons per job opening at the start of the recession, December 2007.  Below is the graph of the official unemployed per job opening, currently at 2.9 people per opening.  The reason for the slight decline is the drop in the official unemployment rate.  JOLTS reports any job opening, regardless of pay.  There is no information on the ratio of part-time openings to full-time ones.   Graphed below are raw job openings.  Job openings are still below the 4.7 to 4.3 million levels of 2007.  Currently job openings stand at 3,925,000, so clearly headlines proclaiming job openings at the highest level in five years is simply feel good headline buzz.  Since the July 2009 trough, actual hires per month have only increased 24%.  This is simply terrible and the most important indicator in our view for employers are clearly refusing to increase hiring, across the board and thus not recover from our jobs crisis.  Businesses can say there are job openings, but if they do not hire an American and fill it, what's the point?  The truth is business are refusing to hire Americans and this is while profits are at roaring highs.  Below is the graph of actual hires, currently at 4,509,000, to show how flat line actual hiring really is.

U.S. Job Openings Reach 5-Year High — U.S. employers advertised the most job openings in more than five years in October, and the number of people quitting also reached a five-year high. The figures are an encouraging sign for the unemployed.The Labor Department said Tuesday that job openings rose 1 percent to a seasonally adjusted 3.93 million. That is the highest figure since March 2008, three months after the Great Recession began. And the number of workers who quit rose 2.5 percent to 2.39 million, the most since October 2008. More workers quitting can signal a healthy job market, because most of those people likely either have a new job or are confident they can find one. Total hiring, though, slipped 2.6 percent to 4.5 million after reaching a five-year high in September. Still, overall hiring has risen 5.2 percent in the past year. More hiring, job openings and quits point to a more dynamic job market. That trend creates more opportunities for people out of work or looking for a new job. Another positive sign in the report: Layoffs plunged 16 percent to 1.47 million, the lowest level on records dating to 2001. Still, while fewer layoffs are welcome, businesses need to step up hiring to more quickly reduce the still-high unemployment rate of 7 percent.

JOLTS October Net Turnovers Surge To 260K, Highest Since February -Back in September, courtesy of an unprecedented discrepancy between the JOLTS "net turnovers" (or hires less separations) print, which traditionally has been the equivalent of the NFP's establishment survey monthly job additions, we highlighted just what happens when the BLS has caught itself in a estimation lie, and is forced to adjusted the data set both concurrently and retroactively to correct for cumulative error.  We suggested that as a result of this public humiliation, the BLS would have no choice but to ramp up its monthly net turnovers print in order to "catch up" to what the monthly payrolls survey indicated is America's "improving" jobs picture.  Sure enough, when moments ago the latest October JOLTS survey was released, the October "net turnovers" number soared from 155K in September to a whopping 260K in October, more than eclipsing the revised NFP print of 200K job gains in October, and leading to the second highest JOLTS turnover print since February's 271K, and before that - going back all the way to the 287K in February of 2012. And yes, this was in the month when the government had shut down and the result was supposedly major, if temporary, job losses. Today's number also means that the YTD monthly average job gain based on either the payroll data or the JOLTS survey has declined to just 24K (160K for JOLTS, 184K for NFP), the lowest average difference in 2013.

Four Signs the Job Market Is Getting Better --Friday’s jobs report wasn’t a game-changer, but it was clearly positive: Employers added 200,000 jobs for the second month in a row, a clear pick-up from the summer, and the unemployment rate fell to a five-year low. But the even better news for the labor market may have come today in the Labor Department’s monthly report on job openings and turnover. The report, known as JOLTS, typically gets less attention than the main jobs figures because it lags a month behind — today’s report is from October. But that’s a good excuse to take a step back and focus on the bigger picture. And though that picture remains far from rosy, it’s becoming increasingly clear that the job market is moving in the right direction.

  • Layoffs keep on falling: 1.5 million Americans were laid off or fired in October, the fewest since the government began keeping track in 2001. The October drop was unusually large and may be a fluke, but the trend is clear: Layoffs are back at or below prerecession levels. If you have a job, your odds of keeping it are the best they’ve been in years.
  • Quits are rising: Long after the recession ended, workers remained reluctant to quit their jobs. That was bad news for the unemployed because it left fewer jobs available, and it was bad for the employed too, because changing jobs is a key path to higher wages and better opportunities. Now workers may finally be gaining the confidence to make a move. 2.4 million Americans left their jobs voluntarily in October, the most since the recession ended and 15% more than a year earlier.
  • And openings too: Employers posted 3.9 million job openings in October, also a postrecession high. Job openings fell for four out of five months in the middle of the year, a worrying sign that companies were preparing to pull back on hiring. But they’ve since rebounded, and rose in October despite the partial government shutdown, which some economists feared could lead companies to become more cautious. There were 2.9 unemployed workers for every job opening in October, the third straight month under 3 and down from a more than 6:1 ratio during the recession.
  • Hiring is finally rebounding: Employers hired 123,000 fewer new workers in October than in September, which hardly qualifies as good news. But the bigger picture is brighter: Hiring has topped 4.5 million for three straight months for the first time in the recovery, and has been up year-over-year for four consecutive months.

Vital Signs: Desperately Seeking Skills - Two reports out Tuesday confirm that businesses are loosening up their hiring plans—but finding the best worker is getting harder to do. The Labor Department reported that job openings in October increased to a new high for this recovery. Nonfarm entities had 3.925 million unfilled positions at the end of October, up 7.7% from year-ago levels. Despite the high level of unemployment and underemployment in the U.S., businesses, especially small firms, are finding it increasingly difficult to find the right person to fill a slot. The National Federation of Independent Business reported Tuesday that 23% of its members had positions they could not fill in November. (The percentage is similar to the results of a survey of New York City businesses compiled by the New York chapter of the Institute for Supply Management). NFIB members are increasing compensation, a sign that companies are willing to pay more to get or keep their talent they need. The high share of openings still open, however, shows the mismatch going on in the U.S. labor markets: millions of jobseekers who may not have the skills businesses want.

Econ Chart Update- Initial Claims, Retail Sales, and Job Openings – All Bad News - First time unemployment claims had their worst performance last week since 2009. Actual, not seasonally adjusted claims were up 7.5% versus the same week last year. That’s outside the normal range. Is it a calendar anomaly? Even though the seasonally adjusted headline number was worse than the consensus expectation, the pundits were sanguine. I’m not so sure they should be, but we won’t know for a few weeks. Withholding tax collections, which are reported in real time, were below trend that week, and the trend has been weakening. The economy may be slowing just when virtually everyone expects the Fed to taper. If this weaker data sticks, it’s an ugly omen versus bubbly stock prices. Real retail sales excluding gasoline sales, actual not seasonally adjusted, rose 3.5% year to year. That’s right on trend.  The headline seasonally adjusted number slightly beat consensus expectations. While the nominal retail sales have been surging to new highs since 2010, actual unit volume, excluding gasoline, just began to exceed 2007 levels in recent months. This is in spite of the fact that US population is 6% higher now than in 2007. Real sales per capita remain at 1998 levels, well below the peak level of 2003-2007. It’s no secret that while the top 7% are doing well, the vast majority of Americans are worse off and are spending less than they were a dozen years ago. Also out this week was the Job Openings and Labor Turnover Survey (JOLTS) for October, reported to be a favorite of Janet Yellen. Job openings for that month were up 7.9% versus October 2012, virtually unchanged from the September gain, and slightly better than the growth rate earlier in the year. But its much slower growth than in 2012. The growth rate of job openings actually slowed when the Fed started QE 3 and 4 in November of last year. So much for QE helping the economy. But it helped stock prices go into bubble mode.

America’s Most Wanted: Boeing -- Boeing is America’s Most Wanted Corporation in two senses. First, now that the Machinists’ union in Washington state has refused the company’s contract demands, it is shopping production (h/t Pacific Northwest Inlander) of the 777x aircraft nationwide and lots of states are making offers for it. Second, it is emblematic of everything the 1% is doing to destroy the middle class: despite being highly profitable, it pays virtually no taxes; it accepts billions of dollars in government subsidies; it is trying to eliminate pensions and cut salaries for its highly skilled workforce; and it is trying to move production away from its unionized workforce, something it has already accomplished in part. The first part of the story is nauseating enough. With Boeing already threatening to leave its home in Washington state if it didn’t get what it wanted from both the state and the union, Democratic governor Jay Inslee called a special session of the state legislature that took three days to approve subsidies for Boeing. The incentive package is the largest ever in U.S. history for a single company, according to Greg LeRoy of Good Jobs First, an astounding $8.7 billion over 16 years (2025-2040). By my own back-of-the-envelope calculations, this looks to be the largest-ever U.S. subsidy on a present value basis as well as in nominal terms. By the way, this represents a huge jump from Boeing’s current tax break package for the 787 Dreamliner, passed in 2003, which was $160 million a year for 20 years ($2.0 billion in present value, by my calculations). Under the new package, this would more than triple to $543 million annually.

Workers’ Pay, Benefits Up 38 Cents per Hour From Last Year -- Workers’ pay is hardly growing, with average hourly compensation only rising 38 cents, or 1.2%, over the last year. Including both wages and benefits, employers paid an hourly average of $31.16 to each worker in September, compared with $30.78 a year ago, according to a Labor Department report released Wednesday. Wages and salaries made up nearly 70% of total compensation. The agency’s quarterly report measures the average costs of wages, salaries and benefits for employees in the nonfarm private sector and state and local government workers. It doesn’t include people who work for the federal government or are self-employed. Benefit costs include paid leave, such as vacation or personal time, and the legally required benefits of Social Security, Medicare, unemployment insurance and workers’ compensation. In September, higher payments at the state and local government level outweighed costs for private industry workers. State and local governments spent an average of $42.51 per hour on employees in September, up nearly $1 from a year ago. Private companies paid on average $29.23 per hour, up 30 cents from a year earlier. The largest component of benefits was insurance, particularly health insurance. The overall category accounted for 9% of total compensation.

More than two million Americans on verge of screw job because unemployment aid not in budget deal --As Jed Lewison has reported, congressional negotiators reached a budget deal late Tuesday that will restore $63 billion in automatic cuts, a $23 billion reduction in the deficit and no raise in taxes. A vote in both houses is expected before Congress adjourns Friday for the holidays.  Not part of the deal: a 12th renewal of the federally funded Emergency Unemployment Compensation program originally implemented in June 2008 to assist Americans who have been unemployed 27 weeks or more because of the Great Recession. Consequences if last-minute efforts fail to pass separate legislation renewing the extension? As of Dec. 28, 1.35 million out-of-work people will receive no more compensation checks. Over the next few months, however many of the 1.77 million Americans who have been out of work for 15 to 26 weeks and do not find jobs will exhaust their state compensation benefits and just have to suck it up because the EUC won't be there for them. The National Employment Law Project puts the number who will lose benefits at half the total: 850,000. But it could easily be more. And, paradoxically, that loss of assistance could bring the unemployment rate down, giving the appearance that the economy has gotten better when just the opposite will have happened. Many Democrats are decidedly unhappy about the failure to include an EUC extension and are seeking a means in the next three days to get it passed somehow. But there is no clear path forward:

 The Punishment Cure, by Paul Krugman - Six years have passed since the United States economy entered the Great Recession, four and a half since it officially began to recover, but long-term unemployment remains disastrously high.   Republicans have a theory about why this is happening. .Unemployment insurance, which generally pays eligible workers between 40 and 50 percent of their previous pay, reduces the incentive to search for a new job. As a result, the story goes, workers stay unemployed longer.Correspondingly, the G.O.P. answer to the problem of long-term unemployment is to increase the pain of the long-term unemployed: Cut off their benefits, and they’ll go out and find jobs. How, exactly, will they find jobs when there are three times as many job-seekers as job vacancies? Details, details. ... The view of most labor economists now is that unemployment benefits have only a modest negative effect on job search — and in today’s economy have no negative effect at all on overall employment. On the contrary, unemployment benefits help create jobs, and ... slashing unemployment benefits — which would have the side effect of reducing incomes and hence consumer spending — would just make the situation worse.

Jobless Fear Looming Cutoff of Benefits -  Since being laid off from a large banking firm in April, Ms. Gillespie, 57, has been living on little more than her unemployment insurance payments of $384 a week. She has burned through her savings and moved back in with her parents.   “There are times where I’ll go two, three, four days where I only have five dollars in my wallet and no money in my checking account,” said Ms. Gillespie, who worked as a corporate compliance officer at her previous employer, choking “I’ve been making decisions such as: Do I buy groceries or do I buy prescriptions?”  Ms. Gillespie’s 26 weeks of state benefits ran out this month, but she remained eligible for the emergency federal unemployment-insurance program, which has provided as many as 73 additional weeks of checks in states with high jobless rates. Until now. Unless Congress acts — suddenly and unexpectedly — that recession-era initiative will expire at the end of the month. About 1.3 million current beneficiaries will lose aid. Also affected are an estimated 1.9 million more who would have been eligible for the program in the first half of 2014 after their state benefits ran out. Democrats in Congress are pushing for an extension, which would cost the government an estimated $25 billion through 2014, while providing a modest lift, according to the Congressional Budget Office, to overall economic activity.

Unemployment Insurance Isn’t the Problem, It’s the Solution - On Monday, Paul Krugman dissected the Republican view that emergency unemployment insurance should be ended, throwing 1.3 million jobless workers into immediate financial crisis. Sen. Rand Paul (R-KY), for example, claims that unemployment compensation keeps workers from taking jobs and that people should be cut off from unemployment benefits after six months to keep them from becoming dependent. The fact is, as Krugman points out, there are far more people looking for work than there are job openings, and for two out of three unemployed workers it is literally impossible to find a job, no matter how hard they work or how small a paycheck they are willing to work for. The notion that people would rather get unemployment compensation than a job ignores how low weekly benefits actually are. In many states with unemployment rates above the national average, the average pay replacement rate is far lower than the national average. Mississippi, for example, has 8.5% unemployment and a UI pay replacement rate of 28.6%. Tennessee’s unemployment rate is 8.4% and its UI pay replacement rate is 28.2%. And Arizona’s unemployment is 8.2%, while its UI pay replacement rate is a near-rock bottom 24.9%. It’s hard to argue that such stingy benefits are keeping anyone from taking a job. The average weekly benefit in Mississippi in 2013 was $194, which works out to less than $5 an hour for a 40-hour work week. The sad fact is that the unemployment insurance system is completely failing most of the unemployed workers who need its help. After decades of government neglect and hostility from the business community, the recipiency rate—the share of unemployed workers who get regular state UI benefits—has fallen to the lowest point in history. Just a little more than one jobless worker in four receives regular benefits.

Democrats Plan to Fight For Unemployment Benefits -  Greg Sargent reports on the latest Democratic plan to get Republicans to agree to extend unemployment benefits: Dems who are pushing for an extension have hatched a new plan to do just that: Once Congress returns, they will refuse to support the reauthorization of the farm bill — which will almost certainly need Dem support to pass the House — unless Republicans agree to restart unemployment benefits with the farm bill’s savings. “Under no circumstances should we support the farm bill unless Republicans agree to use the savings from it to extend unemployment insurance,” Dem Rep. Chris Van Hollen, a top party strategist, told me today. “This is a potential pressure point. We’re going to have to resolve differences in the farm bill because otherwise milk prices will spike. If past is prologue, they are going to need a good chunk of Democrats to pass the farm bill.” Good. In normal times, of course, all the usual arguments against extending benefits would be pretty compelling. It really would provide a disincentive to go out and find work. But today, when there are three or four job seekers for every job available, that's just not an issue. People aren't unemployed for long periods because they're lazy. They're unemployed because they can't find a job. Lots of them are married and college educated. As AEI's Michael Strain points out, "Someone who has been unemployed for 30 or 35 or 40 weeks, and is in their prime earning years with kids and education ... It strikes me as implausible that this person is engaged in a half-hearted job search."

America's Economy Is Officially Inside-Out - This is the first generation of Americans in modern history expected to enjoy lower living standards than their forebears. It is the first generation in modern history whose life expectancy is dwindling. It is the first generation of modern Americans whose educational attainment is declining. It is the first generation of modern Americans who face less opportunity than their parents.  Shorter, nastier, dumber, harder, bleaker. That’s the future for not only Americans, but for many in the world’s richest countries. Let me be clear why this is so remarkable. It’s not that the great wheel of prosperity is merely decelerating. It is that it actually seems to be turning backwards. The great wheel of progress already ground to a halt—several decades ago, if measured in terms of average incomes. And the real danger now? That it may be beginning to spin—in reverse. For that is what tells us we are in truly uncharted water. The economy is indeed “growing.” But the top 1 percent have taken 95 percent of the gains in this so-called “recovery.”  The plain fact is that the average household is poorer in the “recovery” than during the “recession.” We cannot suggest that an economy is perfectly fine—nay, even healthy—just because a tiny number are growing richer while the lives of the vast majority are literally growing shorter, nastier, dumber, harder, and bleaker.

Our Coming Chronic Discouraged-Worker Epidemic: Friday Focus -- This morning the BLS tells us that we had in November a civilian adult employment-to-population ratio at 58.6%, no better than in October 2009… The civilian unemployment rate down to 7.0%, more than halfway back to its business-cycle peak value from the Lesser Depression nadir… The labor force participation rate down to 63.0%–when demography tells us it would be 65.5% in a healthy economy… The nightmare: that we will never get those 2.5% of adults who are the missing members of the labor force back into looking for jobs, and then into employment. Can we get them back into the labor force? What would we have to do to get them back into the labor force?

An economy of outsourced servants - At least one class of American workers is having a much harder time today than a decade ago, than during the Great Depression and than a century ago: servants. The reason for this, surprisingly enough, is outsourcing. Let me explain. Prosperous American families have adopted the same approach to wages for servants as big successful companies, hiring freelance outside contractors for all sorts of functions — from child care and handyman chores to gardening and cleaning work — to reduce costs. Instead of live-in servants, who were common in prosperous U.S. households before World War II, better-off families now outsource the family cook, maid and nanny. It is part of a problem in developed countries around the globe that is getting more attention worldwide than in the U.S. We are falling backward in America, back to the Gilded Age conditions of a century and more ago when a few fortunate souls grew fabulously rich while a quarter of families had to take in boarders to make ends meet. Only back then, elites gave their servants a better deal. But outsourcing has changed circumstances for the worse for those who would do a servant’s work today. Consider the family cook. Many family cooks now work at family restaurants and fast-food joints. This means that instead of having to meet a weekly payroll, families can hire a cook only as needed.

American "Servants" Make Less Now Than They Did in 1910 - While much has been said about the benefits of Bernanke's wealth effect to the asset-owning "10%", just as much has been said about the ever deteriorating plight of the remaining debt-owning 90%, who are forced to resort to labor to provide for their families, and more specifically how their living condition has deteriorated over not only the past five years, since the start of the Fed's great experiment, but over the past several decades as well. However, in the case of America's "servant" class, Al Jazeera finds that their plight is now worse than it has been at any time over the past century, going back all the way to 1910! According to Al Jazeera, "at least one class of American workers is having a much harder time today than a decade ago, than during the Great Depression and than a century ago: servants.  The reason for this, surprisingly enough, is outsourcing. Let me explain. Prosperous American families have adopted the same approach to wages for servants as big successful companies, hiring freelance outside contractors for all sorts of functions from child care and handyman chores to gardening and cleaning work to reduce costs. Instead of the live-in servants, who were common in the prosperous households of America before World War II, better off families now outsource the family cook, maid and nanny. It is part of a global problem in developed countries that is getting more attention worldwide than in the U.S."

Upstairs, Downstairs, Outside -- Krugman - David Cay Johnston has a great piece noting that today’s service economy is in many ways like the Edwardian-era economy in which a small number of wealthy people employed a large number of servants — except that we tend to outsource the service, relying on restaurants and cleaning services instead of cooks and maids. And our outsourced servants are, he notes, arguably paid and treated worse than the in-house servants of the past, even in absolute terms — let alone relative to per capita GDP. It’s a novel and useful way to think about just how unequal our society has grown.

CBO Finds Growing U.S. Income Inequality -- Just as President Obama was decrying our nation’s rising income inequality, the Congressional Budget Office provided him with some new ammunition. CBO’s latest report on household income and taxes—which goes only through 2010—shows that the rich have indeed gotten richer. (Full disclosure: In my former life at CBO, I helped assemble these income and tax data.)  CBO finds that over the past three decades, a growing fraction of income has gone to the top of the income distribution (see first graph). The top fifth saw its share of pretax income rise from 43 percent in 1979 to more than 50 percent in 2010. Much of the gain went to the top 1 percent whose share increased from 9 percent to 15 percent over that period. In contrast, households in the bottom two quintiles saw their income shares drop. The poorest 20 percent collected just 5.1 percent of pretax income in 2010, down from 6.2 percent in 1979. Households in the second quintile suffered a bigger decline—from 11.2 percent to 9.6 percent over the period.

What Obama Left Out of His Inequality Speech: Regulation -- President Obama’s speech on inequality last Wednesday was important in several respects. He identified the threat to economic stability, social cohesion and democratic legitimacy posed by soaring inequality of income and wealth. He put to rest the myths that inequality is mostly a problem afflicting poor minorities, that expanding the economy and reducing inequality are conflicting goals, and that the government cannot do much about the matter.Mr. Obama also outlined several principles to expand opportunity: strengthening economic productivity and competitiveness; improving education, from prekindergarten to college access to vocational training; empowering workers through collective bargaining and antidiscrimination laws and a higher minimum wage; targeting aid at the communities hardest hit by economic change and the Great Recession; and repairing the social safety net.But there’s a crucial dimension the president left out: the revival, since the mid-1970s, of the laissez-faire ideology that prevailed in the Gilded Age, roughly the 1870s through the 1910s. It’s no coincidence that this laissez-faire revival — an all-out assault on government regulation — has unfolded over the very period in which inequality has soared to levels not seen since the Gilded Age.  History tells us that in periods when protective governmental institutions are weak, irresponsible companies tend to abuse their economic freedom in ways that harm ordinary workers and consumers. The victims are often less affluent citizens who lack the power either to protect themselves from harm or to hold companies accountable in the courts. We are in such a period today.

Poll: Americans No Longer Believe In American Dream - With even President Obama lamenting the loss of social mobility in America it now seems the majority of the American people no longer believe in the American Dream. According to a Bloomberg Poll the “land of opportunity” meme, long established irrespective of evidence, has finally been smothered by the realities of plutocracy.  The widening gap between rich and poor is eroding faith in the American dream. By almost two to one — 64 percent to 33 percent — Americans say the U.S. no longer offers everyone an equal chance to get ahead, according to a Bloomberg National Poll. And some say the government isn’t doing much to help. Which is to say, despite the happy rhetoric from corporate politicians and the various jingly jangly distractions provided by the corporate media – the American people know they’ve been hosed.

Raise the Federal Minimum Wage (But Not Too Far)—Posner -- Minimum-wage laws are a traditional bête noire of free-market economists because a government-mandated wage floor interferes with freedom of contract between employers and employees. Moreover, a law that increases wages is expected to reduce employment, because the marginal product of some workers, though equal to or above the free-market wage, may be below the minimum wage.   Despite this, there is very little evidence that minimum wage laws have a significant disemployment effect. Studies have found, for example, that when one state raises its minimum wage, and an adjacent state does not, a comparison of employent in adjacent counties consisting of one in one state and one in the other state0 reveals no drop in employment in the county located in the state that increased its mininmum wage.  One reason the federal minimum wage seems not to have a significant disemployment effect is that it has been falling in real terms for many years. In current (2013) dollars it was $10.60 in 1968; today it is $7.25. That is a poverty-level wage, as it translates into an annual income (assuming a worker works 50 40-hour weeks in a year) of only $14,500. With the federal minimum wage so low, it strains credulity to think that increasing it would cause significant disemployment.  Many persons who can’t command a wage higher than the federal minimum will prefer not to work, but instead to live on public benefits, engage in petty crime, switch to household work, engage in protracted search for better employment (and not work during the search), or even beg. An increase in the minimum wage will increase their incentive to seek productive work. In addition, forced to pay a higher wage, employers may invest more in their workers’ human capital—may give them better training, for example, to make them more productive and thus worth their higher wage to the employer.

The Minimum Wage Ain’t What It Used to Be - Proponents of raising the minimum wage often point out that the real minimum wage is lower now than it was decades ago.  But the federal policy aimed at low-wage work and low-income families has shifted — wisely — away from reliance on the minimum wage and toward a generous earned-income tax credit, which is better focused on poor families.  There is nothing wrong with reducing our reliance on a less effective policy when we have adopted a more effective one.  In fact, we should hope that research on public policy leads to exactly this kind of outcome.  The decline in the real value of the minimum wage is indisputable. As shown in the chart below, the real value of the federal minimum declined sharply over the 1980s, and then further in the mid-2000s, before partly recovering with the fairly steep increases in the minimum wage in 2007-9.  But despite those increases and low inflation in recent years, it still remains well below its real value in the 1970s. There has been a significant policy shift, however, in how to guarantee a minimally acceptable income to families with low-wage workers.  In particular, the earned-income tax credit was instituted in 1976, and its generosity has since been expanded considerably.  Through the tax system, the earned-income tax credit pays benefits to families with low income and employed workers.  For example, in 2013 a low-income family with two children could receive a refundable tax credit of 40 percent of its income up to a maximum credit of $5,372. This maximum applied to families with income of $13,430, and it is phased out as their income rises. In addition, many states supplement this with their own earned-income tax credits.

EITC is better than the Minimum Wage -- From David Neumark: Suggesting that federal policy addressing low-wage work and low-income families has somehow failed because the minimum wage has not kept pace with inflation ignores the fact that we have moved away from a focus on the minimum wage — a policy with many flaws — and toward the earned-income tax credit.  We shouldn’t be asking simply how much the real minimum wage has changed, but rather how much the combined income floor generated by the two policies has changed. To provide an example, the blue line in the figure below shows the wages received by a single adult worker earning the minimum wage and working full time throughout the year. This can be interpreted as the income floor established by the minimum wage. The red line shows the level of family income when the earned-income tax credit for a family with two children is added (all in 2012 dollars). The lower line illustrates the income consequences of the real decline in the minimum wage. But the upper line shows that, because of the sharp increase in the generosity of the earned-income tax credit, the combined effect of the two policies is that the real income of this family is as high or higher than it was in past decades — when the real minimum wage was relatively high — and much higher than it was in most of the intervening years.

Raising the Minimum Wage: Old Shibboleths, New Evidence - Laura Tyson - The last several decades have been especially hard on American workers in jobs that pay the minimum wage. Adjusted for inflation, the federal minimum wage of $7.25 an hour today is 23 percent lower than it was in 1968. If it had kept up with inflation and with the growth of average labor productivity, it would be $25 an hour. Congressional Democrats have proposed legislation to raise the minimum wage to $10.10 an hour and index it to inflation, and President Obama signaled support in a recent speech highlighting the economic and political dangers of growing income inequality. Predictably, opponents of an increase in the minimum wage are once again invoking the hackneyed warning that it will lead to higher unemployment, especially among low-skilled, low-wage workers who are the intended beneficiaries. I heard the same refrain in 1996 when I served as chairwoman of President Bill Clinton’s National Economic Council, and he worked with congressional Democrats to raise the minimum wage to $5.15 an hour at a time when it had fallen in real terms to a 40-year low. To hear Republican opponents and lobbyists for retailers and fast-food companies, we were about to inflict a cold-hearted fate on young people and minority workers. The same chorus is voicing the same dire predictions today. As it happened, the United States experienced a spectacular boom in employment and prosperity from 1996 to 2000. Indeed, these years proved to be a rare and all-too-brief period when incomes improved at every wage level. Contrary to the warnings of the naysayers, a higher minimum wage did not impede robust employment growth; it did contribute to healthy income gains for low-wage workers.

Wage subsidies -  There has been a lot of talk about raising the minimum wage lately. Minimum wage is one of those things where the public strongly disagrees with economists - Americans are very strongly in favor of minimum wage hikes, but most economists think it's a bad idea. Economists generally prefer the EITC, also called a "negative income tax". Minimum wages can cause higher unemployment, and often just give money to high school kids who don't need it; EITC suffers these problems much less. Why do Americans like minimum wage hikes and ignore the EITC? Two reasons, I'm guessing. The first reason is that people like feeling like they are being rewarded for work. Wages are money that people feel like they have "earned", even if the government has mandated above-market wage levels. Second, EITC is  just clunky to use - you have to file for it through the clunky tax system, you have to know about it in order to claim it, and the acronym "EITC" itself has no meaning for the vast majority of poor Americans. A bunch of eligible Americans don't even claim their EITC. Minimum wages, on the other hand, are easy to use, because the company does all work of administering it. So is there a policy that would combine the economic efficiency of the EITC with the popularity of the minimum wage? I believe that there is. It's called a wage subsidy. This means paying companies to offer their employees higher wages. Jim Pethokoukis of the AEI has recently endorsed this idea (I think I managed to convince him in our recent podcast interview, if he wasn't convinced already). It's a good one.

Dwindling Tools to Raise Wages - In the late 1960s, a full-time job at minimum wage could almost lift a family of four above the poverty line. By the late ’80s, it left them 40 percent below it. That is about where things stand today. Perhaps it is no wonder, then, that the minimum wage is in the spotlight. Low-paid workers across the nation are pressing for a raise. Fast-food workers in particular — many of whom earn little more than the $7.25 an hour federal minimum — are pushing for $15. Senate Democrats want to raise the minimum to $10.10 over three years. At the center of the debate is economic inequality, which has reached levels not seen since the Gilded Age. Poverty is at a two-decade high. The share of poor working-age Americans is the highest since at least 1967, according to a new study by researchers at Columbia University.  This sobering reality raises two questions. First, can the minimum wage be raised significantly without prompting employers to dump workers, close franchises and replace cashiers with computers? Second, could the minimum wage play a significant role in mitigating poverty and, perhaps, slowing the widening gap in American incomes? Neither has an easy answer. Perhaps the most compelling argument for raising the minimum wage is simply this: It is worth a try. It might not be the most effective tool to raise the incomes of the working poor. But given the erosion of collective bargaining and the absence of other labor market regulations, it is one of the few we have.

Why Every City Needs Its Own Minimum Wage - Democrats in both the House and the Senate have proposed a hike from the current $7.25 to $10.10, with further increases pegged to inflation. This is a much-needed jump. But even at the new rate, full-time minimum wage employees would earn just 37 percent of the median full-time wage across America, as economist Arindrajit Dube pointed out in a recent New York Times op-ed. Real purchasing power would still be much lower than it was several decades ago. And given the substantial differences in housing and living costs across U.S. cities and metros, a single minimum wage makes little sense. Workers need much more to get by in San Francisco or New York than in smaller, less expensive cities. Already, state and municipal governments are at the leading edge of efforts to raise the minimum wage, adopting local minimums significantly above the federal requirements. Last month, voters in SeaTac, Washington – a town notable for its major airport, filled with minimum-wage workers at newsstands and fast-food joints – narrowly approved a huge hike in their minimum wage to $15. And in a more modest move, but one that will affect far more workers, the District of Columbia City Council recently backed an $11.50 minimum wage. Nineteen states have set their minimum wages above the federal level. California, Connecticut, New York , Rhode Island, and New Jersey are set to do the same over the next year or two.

Rethinking the Idea of a Basic Income for All - In October, Swiss voters submitted sufficient signatures to put an initiative on the ballot that would pay every citizen of Switzerland $2,800 per month, no strings attached. Similar efforts are under way throughout Europe. And there is growing talk of establishing a basic income for Americans as well. Interestingly, support comes mainly from those on the political right, including libertarians. The recent debate was kicked off in an April 30, 2012, post, by Jessica M. Flanigan of the University of Richmond, who said all libertarians should support a universal basic income on the grounds of social justice. Professor Flanigan, a self-described anarchist, opposes a system of property rights “that causes innocent people to starve.” She cited a paper by the philosopher Matt Zwolinski of the University of San Diego in the December 2011 issue of the journal Basic Income Studies, which also contained other papers by libertarians supporting the basic income concept. While acknowledging that most libertarians would reject explicit redistribution of income, he pointed to several libertarians, including the economists F.A. Hayek and Milton Friedman, who favored the idea of a basic universal income. Friedman’s argument was called a negative income tax. His view was that the concept of progressivity ought to work in both directions and would be based on the existing tax code. Thus if the standard deduction and personal exemption exceeded one’s gross income, one would receive a subsidy equal to what would have been paid if one had comparable positive taxable income.

Racial/Ethnic Income Gaps vs. Wealth Gaps - Apropos of nothing other than my constant pursuit of social and economic justice bumping into my constant pursuit of interesting data, here’s a figure I made for a presentation the other day that warrants a broader look.  It compares the economic resources of non-whites—mostly blacks and Hispanics—to those of non-Hispanic whites, looking at both median income and net worth.  The latter concept is a family’s assets minus its liabilities, including housing wealth, which is the largest wealth component for most families in the middle of the income scale.The income ratio is about two-thirds; the wealth ratio about 15%.  Just a pretty potent reminder that when you’re talking about racial disparities, the largest differences—the ones that really take account of the legacy of discrimination—are the ones that compare wealth, not income. But is this just a 2010 story, given the loss of housing wealth when the bubble burst?  Nope.  By these data, that implosion was not particularly racist: the net worth of both whites and non-whites and non-whites fell by about 30% in real terms, 2007-10, so the net worth ratio didn’t change much.

Number of the Week: Half of U.S. Lives in Household Getting Benefits - 49.2%: Percent of the population that lives in a household where at least one member received some type of government benefit in the fourth quarter of 2011. The share of Americans living with someone receiving government benefits continued to rise well into the economic recovery, reflecting a weak labor market that pushed more families onto food stamps, Medicaid or other programs. Nearly half of the U.S., or 49.2% of the population, living a household that received government benefits in the fourth quarter of 2011, up from 45.3% three years earlier, the Census Bureau said.  By the end of 2011, the economy was two and a half years out of the recession, but the unemployment rate remained above 8%. Government benefits as defined by Census include Medicaid, Medicare, Social Security, food stamps, unemployment insurance, disability pay, workers’ compensation and other programs. Part of the increase comes from an aging population, with the 16.4% of the population living in a household where someone gets Social Security and 15.1% where someone receives Medicare. That was up from 15.3% and 14%, respectively, at the end of 2008. But the biggest increases were in benefits aimed at helping the poor. The program experiencing the sharpest rise in participation was food stamps, officially known as the Supplemental Nutrition Assistance Program. About 16% of people lived in a household where someone was receiving SNAP benefits, up from just 11.4% at the end of 2008.

Making the poor — and the U.S. — poorer still - Congress may take up legislation this week to cut food stamps. The Senate passed a bill in June mandating $4 billion in cuts over 10 years; the House version, passed in September, imposes nearly $40 billion in reductions. A conference committee has been charged with resolving these differences. Somehow, this negotiation is occurring amid the worst poverty levels in two decades, a weak overall economy and rapidly falling budget deficits. Under these circumstances, it would be economically and morally unsound to carry out the cuts. Nearly 20 percent of Americans are officially poor or near poor. The Census Bureau reports that 15 percent of the population — nearly 47 million people — lives in poverty, including 22 percent of children. For an individual, this means annual income of $12,000 or less. For a family of four, the poverty threshold is $24,000 or less. Consider what living on those amounts would mean. Roughly 18 million other people are near poor, living within 130 percent of the poverty line, according to census data. For individuals, this means earning $15,000 or less. These people often weave in and out of official poverty, depending on the month. Most Americans living in poverty experience hunger or the pervasive fear of it. The U.S. Department of Agriculture reported that 49 million Americans, including 16 million children, lived in food-insecure households last year. That means that at some point in 2012, these households did not have enough food or were uncertain of having enough. That is as if all of California, Oregon and Washington were experiencing hunger or were afraid of it. There are serious social, economic and health consequences; for instance, diabetes, obesity and other chronic conditions afflict Americans who don’t have access to adequate nutrition.

House Dems Can Block GOP Food Stamp Cuts—by Killing the Farm Bill - The food stamps program—which helps feed 1 in 7 Americans—is in peril. Republicans in the House have proposed a farm bill—the five-year bill that funds agriculture and nutrition programs—that would slash food stamps by $40 billion. But by taking advantage of House Republicans' desire to cut food stamps as much as possible, Democrats might be able to prevent cuts from happening at all. It's an idea rooted in the last food stamp fight: In June, the House failed to pass a farm bill that cut $20 billion from the food stamp program. The bill went down because 62 GOP conservatives thought the $20 billion in cuts weren't deep enough, while 172 Democrats thought they were too drastic. After the bill failed, House conservatives passed a much more draconian food stamps bill with $40 billion in cuts. But that bill was dead-on-arrival in the Democrat-controlled Senate. House Speaker John Boehner (R-Ohio) has vowed to pass a farm bill. To win agreement from the Senate and President Barack Obama, he's going to have to bring forward a bill with much shallower food stamp cuts. But introducing a farm bill with less than the full $40 billion in food stamp cuts will cost Boehner a lot of Republican votes.   That means Boehner is going to need some Democratic votes. His problem is the same as it was in June: math. He needs 216 votes to pass a bill. In June, 62 Republicans voted against a bill with $20 billion in cuts. If Boehner loses the same 62 Republicans this time around, he'll need at least 47 Democrats to vote yes. But just 24 Democrats voted for the June bill. So Boehner will likely have to introduce a bill with lower cuts—costing him more Republican votes. The more Republicans Boehner loses, the more Democrats he'll need.

New bipartisan plan to ‘only’ cut food stamp benefits for 1.7 million -- Congressional Democrats reportedly think they've found just the food stamp cut—one that they can sell as a not completely heartless "administrative fix" yet will satisfy enough Republicans to pass a farm bill. The big problem is that it's a food stamp cut, and that's a terrible idea in a country with a hunger problem. The cut in question involves the Low Income Home Energy Assistance Program (LIHEAP). Currently, if states award a family a LIHEAP of even $1 or $5, it can increase the amount of a family's Supplemental Nutrition Assistance Program benefits. Republicans and some Democrats like to frame this as a loophole that gets people benefits they don't deserve. The answer? Raise the amount of LIHEAP benefit required to get families increased food stamps to $20, so that states can't boost benefits for as many. That would have a big impact: 850,000 households, a total of around 1.7 million people, could lose $90 a month from their already inadequate SNAP benefits. Of course, LIHEAP is underfunded and only available to a fraction of eligible households but you don't hear Congress talking about dramatically expanding that program to cover all those who need it. No, it's only when a program is on the chopping block that we start hearing a lot about who deserves what or is eligible for how much.

SNAP benefits affected local food pantries -- At the Focus Food Pantry, organizers are gearing up for an overload in demand as cuts to food stamps have led to an increasing number of those who need help. The pantry serves around 400 families in Albany County each month, according to Executive Director Reverend Debra Jameson. She says she has seen a 60 percent increase over the past few years in the number of people who need the pantry's services. "As soon as something comes in within a day it's already out to a family," said Jameson. Jameson and the CEO Food Pantry of Rensselaer County already find it difficult to keep the shelves stacked each week and now with more coming in because of the SNAP cuts, they worry about being able to serve the growing need. "We're seeing more folks that have less resources and now they're coming in with less SNAP benefits to spend. We're very concerned," says Rev. Jameson.

Demand rises sharply at Tri-City food pantry - On a Thursday afternoon last month, staff and volunteers at the Salvation Army's Tri-City Corps realized they had distributed their monthly supply of food in just two weeks. It was the first time the St. Charles pantry had run out of food since its establishment in 1951. "We literally had to stop making bags because we ran out of food items," said Major Jon Miller, Tri-City Corps officer and Fox Valley coordinator for the Salvation Army. The pantry's advisory board appealed to friends on Facebook and ordered an emergency supply from the Northern Illinois Food Bank. Students spent all of Saturday collecting food and donations from the community. "The month of November hit us hard," On average, the Salvation Army pantry distributes 500 bags of food each month. But in September and October, that number increased to 800. In November, the pantry distributed almost 900 bags.

A Decline in Homelessness - Homelessness in America has apparently declined in the last few years despite the effects of the Great Recession. This unexpectedly welcome news is from the annual Point-in-Time survey of homeless carried out by Abt Associates for the U.S. Department of Housing and Urban Development, and reported in  "The 2013  Annual Homeless  Assessment  Report (AHAR)  to Congress." A national survey of homeless across the country is conducted for a single night in late January. Here's one figure summarizing the results:  The report includes lots more detail of the survey results: for example, nearly one out of every five homeless people are either in Los Angeles or New York. About one-third of the homeless are children About 109,000 of the homeless are classified as "chronically" homeless.  But the survey results raise an obvious puzzle. The number of "sheltered" homeless people is essentially the same in 2007 as in 2013. All of the decline is in the category of "unsheltered" homeless people. It seems obvious that when the Great Recession hit in late 2007, one should see a substantial rise in homelessness, whether sheltered or unsheltered. The report carefully points to a 2010 "Federal Strategic Plan to Prevent and End Homeless" called "Opening Doors." The date of this report is why the year 2010 is shaded in the figure above. But the survey data clearly shows a large change in the "unsheltered" homeless before the 2010 plan in 2008 and 2009, in the worst of the Great Recession, before the 2010 plan took effect.

US prison population jumps 27% in a decade over harsh drug sentencing - The number of Americans incarcerated in federal prisons throughout the country has increased by nearly 30 percent over the past ten years, according to a new report by an investigative arm of Congress. The Government Accountability Office (GAO) report released Monday attributed the 27 percent surge in prison population to mandatory sentencing minimums. The practice, in which a judge's discretion is almost completely removed from the sentencing process, mandates that nonviolent drug offenders are given pre-determined sentences. Critics have asserted that those prison terms are needlessly harsh and can put someone who presents no physical threat to society behind bars for decades.  “The Department of Justice's (OJ) Federal Bureau of Prisons (BOP) is responsible for the custody and care of over 219,000 federal inmates – a population that has grown by 27 percent in the past decade,” the GAO report states. “BOP is composed of 119 institutions, 6 regional offices, 2 staff training centers, 22 residential reentry management offices (previously called community corrections offices), and a central office in Washington DC.  “With a fiscal year 2013 operating budget of about $6.5 billion – the second-largest budget within DOJ – BOP projects that its costs will increase as the federal prison population grows through 2018...A variety of factors contribute to the size of BOP's population. These include national crime levels, law enforcement policies, and federal sentencing laws, all of which are beyond BOP's control,” the report continued.

Recession Still Not Totally in Rearview for States - State governments continue to slowly recover from the deep recession as its effects on tax revenues, spending and hiring still linger, according to a survey released Tuesday by the National Association of State Budget Officers.  Spending and revenue totals for the 50 states eclipsed prerecession levels for the first time in the fiscal year that ended June 30, but continue to lag behind when adjusted for inflation. The association also expects states in the aggregate to continue shrinking the size of their workforces as a slow but steady recovery in employment nationally continues to miss much of the public sector. The report shows tax collections surged in past quarters, rising 5.7% in the last fiscal year. But those gains are expected to slow considerably with the association projecting growth at 0.8% for the current fiscal year. Personal income tax collections are expected to decline for the first time since 2010.“State budgets are growing, just not at the same rates as before the recession,” said George Naughton, chief finance officer for Oregon and association president. The jump in revenue growth last year was fueled by taxpayers trying to avoid federal tax increases starting this year. Also states in the aggregate cut taxes with reductions in states such as Texas and Ohio offsetting increases in states such as Minnesota.

Pa.'s bleak outlook: A $2 billion deficit may be in Pa.'s future - The state's Independent Fiscal Office has issued a report that is less than hopeful. Viewed in a vacuum, it is downright bleak. The five-year Economic and Budget Outlook notes that a return to historical economic growth patterns will occur, but not for some time. That's because the state is faced with growing pension liabilities, rising health care costs and a diminishing working-age population. Revenues are projected to grow over the next five years, but they will be outpaced by expenditures. The IFO projects a state deficit of roughly $530 million this year, in excess of $800 million in 2014-15 and more than $2 billion by 2018-19. Unfunded liabilities in the Public School Employees' Retirement System and the State Employees' Retirement System are the primary drivers of the growing deficit. That's the result of the state's failure to properly fund those accounts for more than a decade. Proposals to alter the system — to place new hires in a defined contribution program rather than a defined benefit plan, for example — would actually increase costs for the foreseeable future.

Billions of Tax Dollars Later, No New Jobs for New York - The fast-increasing use of tax incentives by all 50 states has failed to increase jobs or investment, two respected experts on state tax policy found after reviewing more than 50 years of giveaways. This year, state government subsidies to corporations, partnerships, and other businesses in New York state alone will total $1.7 billion, triple the giveaways in 2005,, according to the new study. That’s $235 taken from the average Empire State household this year and redistributed to business owners on the theory that redistribution will create jobs. During those years, the number of jobs in New York declined, the state’s official jobs data website shows.2 The total number of New Yorkers employed in 2012 was down 175,000, or 2 percent, compared with 2005. Think of it this way: Over nine years, the state of New York gave businesses roughly $10 billion, or almost $1,400 from each household, in a jobs program that eliminated 175,000 jobs at an average cost of $57,000. And that’s just state-level subsidies, not those from industrial development agencies. The 143-page study was prepared for the New York State Tax Reform and Fairness Commission created by Gov. Andrew Cuomo (D). But its findings apply to all 50 states, where tax incentives have been growing like weeds since the turn of the millennium. However

Robbing Illinois's Public Employees - In the span of a few hours on December 3, two Midwestern states changed America’s relationship to its public employees, perhaps irrevocably. If courts approve plans for bankruptcy in Detroit and a new law in Illinois, retirees who worked their careers as sanitation engineers and teachers, firefighters and police officers, public defenders and city clerks, under a promise of pension benefits protected by state constitutions, will not receive their promised share. “This is a bipartisan collection of politicians who essentially don’t respect democracy,” says Steve Kreisberg, director of Research and Collective Bargaining for the public-employee union AFSCME. “They authorized a violation of their own state constitutions.” The implications for the future of public pensions are grave. Michigan and Illinois are two of just seven states with clauses in their state constitutions prohibiting cuts to public pensions. If they can nevertheless slash benefits, cities, and states with less stringent laws will leap at the chance to shed their obligations to retirees. And no collective bargaining agreement could in good faith agree to defer compensation into retirement if even constitutional guarantees on that money can be ignored. Pensions would become a thing of the past in the public sector, just as they have become in the private sector, where retirement security stands on shaky ground. The slow disappearance of public pension funds, $3 trillion pools for capital investments, would have much broader negative consequences for our economy.

Detroit Puts $1.1 Trillion of G.O.’s Under Scrutiny: Muni Credit - Detroit’s bankruptcy has some investors fretting that the case will set a precedent for $1.1 trillion of U.S. general obligations. That hasn’t kept the debt from beating revenue bonds for the first time since 2010. A federal judge last week approved the city’s record $18 billion Chapter 9 filing and said its pensions can be cut in bankruptcy. Detroit’s emergency manager has sought concessions from creditors, including retirees and holders of $369 million of general obligations that the city had promised to repay using its unlimited taxing power. The potential for losses on Detroit G.O.s means investors may now demand extra yield on obligations of localities struggling to balance budgets, said portfolio managers at T. Rowe Price Group Inc. and UBS Global Asset Management. Even with the prospect of added scrutiny, general obligations are outperforming revenue-backed munis in 2013, Bank of America Merrill Lynch data show. The bonds, the safest part of the municipal universe, are benefiting as investors favor their shorter maturities amid mounting bets that a growing economy will drive interest rates higher. “The market will have to adjust how they price the risk, including how they judge general obligations versus revenue bonds,” said Hugh McGuirk, Baltimore-based head of T. Rowe Price’s muni group, which manages $20 billion. At the same time, “G.O. debt is typically shorter” in maturity, shielding it this year, he said.

No Longer Motor City - Don’t call it Motor City anymore; the link between the auto industry and its birthplace has shattered. The world dominance of General Motors, Ford and Chrysler built Detroit into a prosperous city of 1.85 million residents in 1950. Later, the decline of the Big Three brought Detroit low as they moved factories out of the city and foreign competitors won the hearts of drivers. General Motors and Chrysler declared bankruptcy in 2009 and Detroit followed this year, after the state turned over control of the city’s finances to an emergency manager. Today, packs of dogs, limited police and fire response and broken streetlights plague a population shrunken to 700,000, with about 42 percent of them living in poverty. Car companies are having their best year since 2007  GM’s debt has improved to investment grade for the first time in eight years. Chrysler has reported nine straight quarters of profit. Ford returned to investment grade last year and was able to take its blue oval logo out of hock.  Detroit owes $18 billion, mostly for health insurance and pensions it promised retired municipal workers; its rating has been cut to junk. Car companies have hired or recalled thousands of workers; unemployment in Detroit is 16 percent. GM, Ford and Chrysler are investing millions to add extra shifts at their factories, few of which remain in the city, to meet demand for their suddenly popular sedans. Detroit is discussing whether to sell or rent Rembrandts, Titians and Rodins from among the 60,000 works at Detroit Institute of the Arts.

Plan to eliminate blight in Detroit may top $1 billion, task force says - Detroit’s latest effort to count the number of blighted buildings and lots gets under way in earnest Monday when 75 teams of surveyors set out to map at least 350,000 parcels in the city. Known as the Motor City Mapping project, the survey forms a key part of the work of a newly created blight task force headed by three co-chairs: Quicken Loans founder and Chairman Dan Gilbert, former Marygrove College President Glenda Price and community activist Linda Smith, executive director of U-Snap-Bac. The results are due by early February, and then the three co-chairs will craft a final report with policy recommendations, due probably by early March. Price said Thursday that it may cost as much as $1 billion to totally remediate the blight in Detroit. Detroit, of course, has been tearing down blighted buildings for decades, and the city now contains perhaps 100,000 vacant residential lots as well as tens of thousands of vacant buildings. Price said that the new survey and the plan that will result from it will deliver a new focus to the effort.

Detroit's water drains away from ravaged pipes — Torrents of water spew from broken pipes in Detroit's Crosman School, cascading down stairs before pooling on the warped tile of what was once a basketball court. No one knows how long the water has flowed through the moldy bowels of the massive building a few miles north of downtown, but Crosman has been closed since 2007. It's not the only empty structure where city water steadily fills dark basements or runs into the gutter, wasting money and creating safety hazards. As Detroit goes through the largest municipal bankruptcy in U.S. history, the city's porous water system illustrates how some of its resources are still draining away even as it struggles to stabilize its finances and provide basic services. More than 30,000 buildings stand vacant in neighborhoods hollowed out by Detroit's long population decline, vulnerable to metal scavengers who rip out pipes, leaving the water to flow. The city's water system has no way of tracking the leaks, and the water department doesn't have enough workers to check every structure. "The water was running all last winter," said 32-year-old Delonda Kemp as she pointed to a vandalized two-story bungalow across from her home on Detroit's eastside. "You can actually hear it running." She says she reported the leak, but water officials say they have no record of it.

Invisible Child: Dasani’s Homeless Life - She wakes to the sound of breathing. The smaller children lie tangled beside her, their chests rising and falling under winter coats and wool blankets. A few feet away, their mother and father sleep near the mop bucket they use as a toilet. Two other children share a mattress by the rotting wall where the mice live, opposite the baby, whose crib is warmed by a hair dryer perched on a milk crate. Slipping out from her covers, the oldest girl sits at the window. On mornings like this, she can see all the way across Brooklyn to the Empire State Building, the first New York skyscraper to reach 100 floors. Her gaze always stops at that iconic temple of stone, its tip pointed celestially, its facade lit with promise. “It makes me feel like there’s something going on out there,” says the 11-year-old girl, never one for patience. This child of New York is always running before she walks. She likes being first — the first to be born, the first to go to school, the first to make the honor roll. Her family lives in the Auburn Family Residence, a decrepit city-run shelter for the homeless. It is a place where mold creeps up walls and roaches swarm, where feces and vomit plug communal toilets, where sexual predators have roamed and small children stand guard for their single mothers outside filthy showers. It is no place for children. Yet Dasani is among 280 children at the shelter. Beyond its walls, she belongs to a vast and invisible tribe of more than 22,000 homeless children in New York, the highest number since the Great Depression, in the most unequal metropolis in America.

New York City Has The Most Homeless Children Since The Great Depression - At a time when Wall Street is absolutely swimming in wealth, New York City is experiencing an epidemic of homelessness.  According to the New York Times, the last time there was this many homeless children in New York City was during the days of the Great Depression.  And the number of homeless children in the United States overall recently set a new all-time record.  As I mentioned yesterday, there are now 1.2 million public school kids in America that are homeless, and that number has gone up by about 72 percent since the start of the last recession.  As Americans, we like to think of ourselves as "the wealthiest nation on the planet", and yet the number of young kids that don't even have a roof over their heads at night just keeps skyrocketing.  There truly are "two Americas" today, and unfortunately most Americans that live in "good America" don't seem to really care too much about the extreme suffering that is going on in "bad America".  In the end, what kind of price will we all pay for neglecting the most vulnerable members of our society?

Solano County student homeless numbers hit record high - A record 2,200 students attending Solano County public schools were homeless this past year, a nearly 40 percent increase from the previous year and a nearly four-fold increase since 2010-11, the Solano County Office of Education reported.  Based on SCOE midyear data released in January and year-end data released earlier this fall, all but Vacaville Unified School District reported increases from last year. Some districts, including Travis, Dixon and Vallejo City, reported a doubling or more in homeless student numbers.  Also, the county's largest school district, Fairfield-Suisun, which is tracking some 1,110 homeless students, accounted for nearly half of the county numbers.  The news comes as the U.S. Department of Education also reported its highest-ever numbers, estimating that 1.2 million students nationwide were homeless in the 2012-13 school year, a 10 percent increase from the previous year. Forty-three states reported increases from last year, with 10 states citing jumps of 20 percent or more.  Despite recent media reports about an improved U.S. economy, the number of homeless students nationwide has grown nearly 25 percent during the past three years, with the numbers starting to rise at the outset of the Great Recession in late 2007, DOE officials noted in an October press release.

Pre-K Education Is a Long-Term Winner - Austan Goolsbee: Most of us watching the looming budget showdown do so with a sense of dread. The last one left congressional approval at 9%, the president's popularity at a new low, and consumer confidence at levels not seen since the 2008 financial crisis. The trouble, of course, is finding common ground on a 10-year budget framework or even on a six-week punt. Hopefully, they will find common ground. If we are committed to evidence, though, there's one area where we ought to be able to agree: early-childhood education. Investments in pre-kindergarten education have among the highest payoffs of any government policy, and whatever budget agreement emerges should restore the country's long-standing commitment to early education. The budget-sequester cuts agreed to in 2011, under the guise of saving money, have knocked as many as 70,000 kids out of such programs. How myopic. It doesn't save money beyond the narrowest definition of the immediate term. Incarceration, special education, teen pregnancy, low earnings—avoiding these outcomes will actually save money, and early education helps achieve that. Decades of research from many different states and cities, some of it from randomized trials, demonstrate the value of early-childhood education in the short and long term. University of Chicago economist and 2000 Nobel Laureate James Heckman, for instance, has documented the direct returns and spillover benefits of investing in high-quality early education. 

The kids are actually ok - Every time I read a story on the “kids these days”. I roll my eyes. Sexting, Internet porn, grinding, twerking, blah, blah, blah. Get this: The teen birth rate in 2012 was a record low. It’s less than half what it was in 1991. The teen abortion rate is at an all time low. It’s less than half of what it was in the 1970′s, and is now at 38% of its peak in 1988. Even the teen pregnancy rate is at an all time low. It’s only 56% of its peak in 1990. African American teens? All time low. Hispanic teens? All time low. Non-Hispanic White teens? All time low. Will that stop us from going on and on and on about the “good old days”, how sex is ruining everything, and how today’s kids are just the worst? I doubt it.

College Pays, Sort Of- Here’s the good news: Young adults who have finished college continue to earn significantly more than mere high school graduates.  The gap between the median earnings of high school graduates and those with a bachelor’s degree or higher – the red versus the purple lines in the graphs above – remains wide. The difference, over a lifetime, is more than enough to justify the expense of attaining a bachelor’s degree.  Here’s the bad news: Adjusted for inflation, median earnings for young men with a bachelor’s degree or higher in 2011 were significantly lower than they were in 1971. Young women have slightly improved their position (by $630) since 1971. But as a comparison between the two graphs shows, their median is still lower than that of male high school graduates in 1971.  The College Board report that provides the basis for the charts above shows that the trend in real earnings of young college graduates is worse if restricted to those with a bachelor’s degree alone, but the historical time series for that category doesn’t go back as far.

A’s Have Been Harvard’s Most Common Grade for 20 Years - In the last few days, reports that Harvard’s most common grade is an “A” have  now gone viral. But despite the shocked-shocked! tone of some of the coverage, this is actually very old news. The last time A-range (that is, the combination of A and A-) grades or their equivalent were not the most common grades awarded at Harvard was 20 years ago. That’s according to Stuart Rojstaczer, who tracks and aggregates grading data at colleges, including some data going back to prewar times. (You may recall he previously answered your questions on grade inflation here).  He used the term “equivalent” because Harvard converted from a 15-point grading system to a conventional A-F system in the 2000s. Harvard defined its “15″ as an A and its “14″ as an A-, Dr. Rojstaczer explained in an email. Dr. Rojstaczer wrote that as of the 1989-90 academic year, A- was the grade most commonly awarded to undergraduates at Harvard. By 2000-01, A- was very close to being replaced by A (within 1.3 percent) as the modal grade (that is, the grade that appears with the most frequency). The A-range combination of A/A- became the modal grade (in comparison to B+/B/B-) in the 1994-95 academic year.

Thoughts on Student Debt -- Following up on my quarterly look Federal at student loans on the government's balance sheet, I wanted to call attention to a fascinating video clip assembled by The Atlantic senior editor Derek Thompson on the question Why Are Colleges Getting So Expensive? As he explains, different schools are getting expensive for different reasons. After listening to Derek's analysis, I reread an earlier Atlantic article published back in July: A Mystery Behind the Rise of Student Debt. The mystery is embedded in this set of observations:"...out-of-pocket spending started to slide during the '90s. Adjusted for inflation, students contributed about $4,000 of their own money a year towards tuition at the start of that decade. By 2000, though, student contributions were down to about $3,000. They roughly stabilized until the recession, at which point they plunged once more. Today, students are paying just $2,125 out of pocket." The mystery, it seems, is how to explain the 25% decline in real (inflation-adjusted) out-of-pocket funding during the roaring '90s, when real household incomes actually rose, unlike the 21st century (more on household income here).The Atlantic article comes to no conclusion, and I have nothing definitive to offer in that regard. However, it's useful to consider the out-of-pocket funding in the context of the long-term trend for college tuition and fees. Here is a chart of data from the relevant Consumer Price Index subcomponent reaching back to 1978, the earliest year Uncle Sam provides a breakout for College Tuition and Fees. As an interesting sidebar, I've thrown in the increase in the cost of purchasing a new car as well as the more substantial increase for the broader category of medical care, both of which pale in comparison.

Let's get this straight: AIG execs got bailout bonuses, but pensioners get cuts? - As we passed the fifth anniversary of the peak of the financial crisis this fall, the giant insurance company AIG was prominently featured in the retrospectives. AIG had issued hundreds of billions of dollars of credit default swaps (CDS) on subprime mortgage backed securities. When these mortgage-backed securities failed en masse, AIG didn't have the money to back them up.   The Bush administration and the Federal Reserve board decided that they would stop the cascade of failing financial institutions and bail out AIG. As a result, the government agreed to honor all the CDS issued by AIG and effectively became the owner of the company.  Folks may recall that AIG paid out $170m in bonuses to its employees in March 2009 with its top executives receiving bonuses in the hundreds of thousands of dollars.   In other words, the bonus beneficiaries were among the leading villains in the economic disaster that is still inflicting pain across the country.  This provides a striking contrast to what might happen to current and former city employees in Chicago and may happen to current and former employers of the state of Illinois and Detroit. In these cases, it seems that the contracts workers had with their employers may not be honored. Employees who worked decades for these governments, with part of their pay taking the form of pensions in retirement, are now being told that these governments will not follow through on their end of the contract.

Lies, Damn Lies, and Retirement Savings - The American Benefits Council, the American Council of Life Insurers, and the Investment Company Institute released a study this week entitled (no joke): Our Strong Retirement System: An American Success Story. College professors may want to bookmark this study for textbook examples of cherry-picked data, outdated findings, and hypothetical scenarios contradicted by real-world outcomes. To cite one example: the authors tout the fact that 401(k) participants with at least 30 years’ tenure with the same employer (an unrepresentative group to say the least) have significant savings in their accounts. The authors devote a later section of the report to the unsubstantiated claim that “the 401(k) is a good fit for America’s mobile workforce. Mostly, though, the report simply ignores the biggest economic challenge of our time: inequality. As Natalie Sabadish and I note in our Retirement Inequality Chartbook, it doesn’t matter if the “average” household has $86,000 saved in retirement accounts if the median (50th percentile) household has only $2,500 while the 99th percentile household has $1.3 million. Simply put, Mitt Romney’s gargantuan IRA doesn’t make up for the fact that most families have virtually nothing saved for retirement, any more than Romney’s lavish Bain Capital compensation made up for the fact that most workers haven’t seen a real raise in years.

2013 Trustees Report: - I did not take a hard look at the 2013 Trustees Report when it came out last Spring because I thought I knew pretty much what it would say, and what it would amount to. And I really have better things to do than keep up with the latest wild guesses presented in hysterical and misleading form. Subsequently CBO came out with its own report projecting a 9.6 Trillion Dollar deficit, and I tried to answer some hysterical letters from the usual commenter on AB. At that time I did not know the timing of the CBO’s increased deficits, so I was unable to give a precise analysis of what they amounted to. Since then I was able to go back to the 2013 Trustees Report which also projected a 9.6 Trillion Dollar deficit over 75 years. But it gave details that I could use to calculate exactly what this means in terms of “how much is it going to cost “me” over a time period I can make sense of. The answer turns out to be…. wait for it… about eighty cents per week, in today’s terms, per year, starting in 2018, repeated each year for 15 years to 2033. Then it would only need to be repeated an average of once every six years… this amounts to an average increase in the tax of 13 cents per week per year…for forty five years… with the last increase occurring in 2078, which brings the tax rate up to 2.2% higher than it is today (for each the worker and the employer), which is enough to fund Social Security forward into “the infinite horizon” as far as the eye can see.

Pathetic Centrists - Krugman - So progressive Democrats have seized on an op-ed by the group Third Way — an op-ed attacking Elizabeth Warren and Bill de Blasio for their terrible, horrible economic populism — as a way to start reclaiming the party from the “centrists”. And it’s working: the centrists are very much on the run.Why? Part of the answer is that the Democratic party has become more progressive. But I would argue that the centrists are also suffering from their own intellectual bankruptcy.I mean, going after Warren and de Blasio for not being willing to cut Social Security and their “staunch refusal to address the coming Medicare crisis” ??? Even aside from the question of exactly what the mayor of New York has to do with Medicare, this sounds as if they have been living in a cave for years, maybe reading an occasional screed from the Pete Peterson complex.  On Social Security, they’re still in the camp insisting that because the system might possibly have to pay lower benefits in the future, we must move now to cut future benefits. Oh, kay.  But anyway, they declare that Medicare is the bigger issue. So what’s this about “staunch refusal” to address Medicare? The Affordable Care Act contains lots of measures to limit Medicare costs and health care more generally — it’s Republicans, not progressive Democrats, who have been screaming against cost-saving measures (death panels!). And health cost growth has slowed dramatically, feeding into much better Medicare projections

Congress out to end annual Medicare drama - It’s that time of year again: Doctors caring for Medicare patients once more face a steep pay cut. But this time Congress is pursuing a permanent fix to the annual drama that has undermined the medical profession’s confidence in the nation’s premier health program. A fundamental change in the budget equation has handed lawmakers a rare opportunity to repeal Medicare’s broken physician payment policy, while also freeing them from having to waive billions of dollars in impending cuts every year. Democrats and Republicans on both sides of the Capitol plan to push ahead this week with a framework for a new payment policy. Although a final fix will have to wait for next year, the new approach would set up financial carrots and sticks for doctors to provide quality, cost-effective care to more than 50 million elderly and disabled Medicare recipients. Up to 10 percent of an individual physician’s pay eventually could be linked to the doctor’s performance on quality indicators. The plan would repeal the centerpiece of the old payment formula, a 1990s budget provision that mandates automatic cuts to doctors to limit Medicare spending and Congress’ habit of regularly issuing temporary reprieves, lest doctors stop accepting Medicare patients. Expers say the old payment formula needs to go not just because it’s ineffective, but also because it encourages a costly, piecemeal approach to health care. Doctors bill for as many services as they can to maximize Medicare reimbursement, but there’s no consistent focus on keeping patients as healthy as possible.

Obamacare update: This isn’t a good sign – 70% of MDs in California are boycotting the state’s exchange -- This can’t be good…… The Washinton Examiner reports:An estimated seven out of every 10 physicians in deep-blue California are rebelling against the state’s Obamacare health insurance exchange and won’t participate, the head of the state’s largest doctors’ association said.California offers one of the lowest government reimbursement rates in the country — 30 percent lower than federal Medicare payments. And reimbursement rates for some procedures are even lower. In other states, Medicare pays doctors $76 for return-office visits. But in California, Medi-Cal’s reimbursement is $24. In other states, doctors receive between $500 to $700 to perform a tonsillectomy. In California, they get $160. Only in September did insurance companies disclose that their rates would be pegged to California’s Medicaid plan, called Medi-Cal. That’s driven many doctors to just say no.They’re also pointing out that Covered California’s website lists many doctors as participants when they aren’t. “Some physicians have been put in the network and they were included basically without their permission,” Lisa Folberg said. She is a California Medical Association’s vice president of medical and regulatory Policy. “They may be listed as actually participating, but not of their own volition,” said Donald Waters, executive director of the Alameda-Contra Costa Medical Association. “This is a dirty little secret that is not really talked about as they promote Covered California,” Waters said. He called the exchange’s doctors list a “shell game” because “the vast majority” of his doctors are not participating.

Obamacare: Californians signing up at a stunning rate - In the first week of December, Californians signed up for private health insurance on the state's new online exchange at nearly three times the rate as the first week of last month, figures released Thursday showed. Almost 50,000 individuals signed up through Dec. 7 at a stunning rate of 7,100 per day, according to the exchange, called Covered California. Since the marketplace was launched on Oct. 1, at least 156,143 people have signed up. That means roughly a third of the people who enrolled nationally have done so through California's website. In addition, 179,000 Californians will probably be eligible for the expanded version of Medi-Cal, the state's health program for the poor, Covered California officials said.The numbers not only reflect an obvious desire for health care, but also the beginning of a last-minute rush to enroll before the Dec. 23 deadline for insurance coverage that would begin Jan. 1.

Would All State-Based Exchanges Have Been Just as Problematic? - While’s first two months were a disaster, the federal exchange’s performance was about average when compared to all states that tried to created their own. I find this chart from Kevin Drum at Mother Jones comparing how well the exchanges have done at enrollment fascinating. (Red is state-based, blue is federal) First, it proves the Obama administration really could have done a better job, like Vermont and Kentucky did. The early problems with were unacceptable administrative incompetence.This graph also shows, though, that creating these complicated exchanges is really different. While was dreadful in October, it has still managed to perform much better than blue states like Maryland and Oregon who really tried to build state-based exchanges. Despite all of problems its performance appears be right in the middle compared to the 13 states-based exchanges. Looking at this data, it is fair to assume that even if all the states actually tried to set up their own exchanges –like the law initially envisioned– the early roll out of the ACA probably won’t have gone much better or worse

Hidden Obamacare Website Costs Show Lack of Transparency - President Barack Obama’s health agency said it has spent $319 million building an online health-insurance marketplace through October. More than three years after the passage of Obama’s signature health-care law in 2010, it’s almost impossible to verify and track that spending through public records. What the estimates don’t include is the around-the-clock effort to repair the website, which hundreds of thousands of Americans found unusable after its Oct. 1 debut. The race to fix it brought in computer engineers from companies such as Google Inc., Red Hat Inc. and Oracle Corp. and is ongoing today. The figures include what has been paid to contractors, according to Aaron Albright, a spokesman for the Centers for Medicare and Medicaid Services, part of the health department. The spending details should be accessible on public websites intended to offer government transparency. Instead, the sites present incomplete and sometimes contradictory data, according to open government advocates. “The administration hasn’t been transparent about enrollment figures, costs and other key metrics -- almost everything they release has a qualifying asterisk with a built-in spin,” U.S. Representative Darrell Issa, a California Republican and chairman of the House Oversight committee, said in an e-mailed statement. “‘The most transparent administration in history’ is as much of a punch line as ‘if you like your plan, you can keep it.’”

The GOP says Obamacare will cancel 80-100 million insurance plans. Nope - Mike Rogers, a Republican congressman from Michigan, said Obamacare's effects turned out to be more dire than I'd ever imagined.  "The next go-round on the business side is 80 to 100 million people will get cancellation notices," he said. Challenged by Democrat Chris Van Hollen, Rogers doubled down. "Eighty million people are going to get pink slips," he continued. "Their own estimate. Eighty million." That's more cancellation notices than the estimates I've seen by a factor of at least 10. I asked Rogers's press secretary where the number came from. Turns out it's not exactly the administration's own estimates. It's a Daily Caller interview with Christopher Conover, an adjunct scholar at the American Enterprise Institute. According to Conover, Rogers, if anything, understated his case: Conover says "at least" 129 million people will lose their coverage by the end of 2014. How does Conover reach such a startling estimate? By redefining what it means to lose your coverage. What Conover's talking about here isn't cancellation notices or pink slips, as Rogers says. It's any change to a plan at all. One of the examples he gives is the requirement to cover children up to age 26. Though plans offered by large employers are exempt from most of Obamacare's regulations, they have to abide by that one. And that regulation, popular as it is, costs money. So millions of employer plans expanded to cover older children and, in most cases, raised premiums slightly. According to Conover, all the people in those plans lost their plans because they "no longer have the health plans they used to have."

‘Creepy Uncle Sam’ doubles down on Snapchat! Is he scaring Millennials from Obamacare? "Creepy Uncle Sam" is doubling down! He’s got new ads out, and he’s using the image-sharing site Snapchat in his campaign to scare young Americans away from Obamacare. Will he and his creator, the conservative political nonprofit Generation Opportunity, successfully convince Millennials they shouldn’t sign up for insurance via President Obama’s signature Affordable Care Act? The final answer to that won’t be clear until March 31 of next year, the deadline for 2014 enrollment, if then. But Creepy Uncle Sam’s weird vibe does appear to have irritated Mr. Obama himself. At a White House Youth Summit devoted to the ACA last week, the president said “believe it or not, there are actually organizations that are out there working to convince young people not to get insurance.”“Now think about that. That’s a really bizarre way to spend your money,” In case you’ve never heard of him, Creepy Uncle Sam is a large-head costumed actor similar in appearance to a college sports mascot. But the frozen expression on his enormous face is ... creepy. There’s no other word for it. As we’ve previously said, he looks like a freaky, patriotic garden gnome. And Generation Opportunity has employed him in ads creepy enough to be controversial on their own. In one, a young woman is set to have a gynecological exam, when Creepy arises from between her legs snapping a speculum. “Don’t leg government play doctor,” reads the video’s tagline. “Opt out of Obamacare.”

New Affordable Care US health plans will exclude top hospitals - Americans who are buying insurance plans over online exchanges, under what is known as Obamacare, will have limited access to some of the nation’s leading hospitals, including two world-renowned cancer centres. Amid a drive by insurers to limit costs, the majority of insurance plans being sold on the new healthcare exchanges in New York, Texas, and California, for example, will not offer patients’ access to Memorial Sloan Kettering in Manhattan or MD Anderson Cancer Center in Houston, two top cancer centres, or Cedars-Sinai in Los Angeles, one of the top research and teaching hospitals in the country. Experts say the move by insurers to limit consumers’ choices and steer them away from hospitals that are considered too expensive, or even “inefficient”, reflects the new competitive landscape in the insurance industry since the passage of the Affordable Care Act, Barack Obama’s 2010 healthcare law. It could become another source of political controversy for the Obama administration next year, when the plans take effect. Frustrated consumers could then begin to realise what is not always evident when buying a product as complicated as healthcare insurance: that their new plans do not cover many facilities or doctors “in network”. In other words, the facilities and doctors are not among the list of approved providers in a certain plan. Under some US health insurance plans, consumers can elect to visit medical facilities that are “out of network”, but they would probably incur high out of pocket costs and may need referrals to prove that such care is medically necessary. The development is worrying some hospital administrators who see the change as an unintended consequence of the ACA.

Some claim insurers limiting drug coverage under health law - The nation’s new health-care law says insurers can’t turn anyone away, even people who are sick. But some companies, patient advocates say, have found a way to discourage the chronically ill from enrolling in their plans: offer drug coverage too skimpy for those with expensive conditions. Some plans sold on the online insurance exchanges, for instance, don’t cover key medications for HIV, or they require patients to pay as much as 50 percent of the cost per prescription in co-insurance — sometimes more than $1,000 a month. “The fear is that they are putting discriminatory plan designs into place to try to deter certain people from enrolling by not covering the medications they need, or putting policies in place that make them jump through hoops to get care,” . As the details of the benefits offered by the new health-care plans become clear, patients with cancer, multiple sclerosis, rheumatoid arthritis and autoimmune diseases also are raising concerns. “The easiest way [for insurers] to identify a core group of people that is going to cost you a lot of money is to look at the medicines they need and the easiest way to make your plan less appealing is to put limitations on these products,” Boutin said.

Conflicting Pressures on Demand for Doctors - The supply and demand for health services will experience a variety of changes in the near future, especially those from the Affordable Care Act. But nobody has quantified their net impact on the market for doctors. The new law pushes demand for physicians in both directions, making it is easy for advocates on either side of the law to cherry-pick provisions they support. The law is beginning to build new markets for individual insurance policies that in some ways can reduce the demand for health care and doctors. Participating families above 250 percent of the poverty line will, on average, pay 30 percent of their medical expenses out of pocket, as compared with the 17 percent out of pocket that is typical for employer-sponsored health plans. That gives patients almost twice the incentive to avoid using doctors or to seek treatments that are less expensive and likely less physician-intensive. In some states, patients are being pushed toward less physician-intensive care because the insurance plans offered on the exchanges have narrower networks that exclude some of the more expensive facilities. Some of these excluded providers may be considered among the best in the industry, because state regulators seek to keep insurance premiums low. This is a force that could help limit the demand for doctorss in narrow-network states. Other states include their top facilities in the networks accessible by residents who buy their insurance on the exchanges and do not have this force limiting physician demand. Moreover, the broad-network states will likely pull dcotorss away from the narrow network states where demand for them is less.

Capitol Hill Staffers Warned "Do Not Rely" On Obamacare Website - On a day when Sebelius faces more music, but small golf-claps are heard around Democrat offices at the sign-up rates for Obamacare, The Hill reports - rather dishearteningly, Capitol Hill staffers who signed up for ObamaCare through the Washington, D.C. healthcare exchange are being told to confirm their enrollments in person, and not to rely on data provided by the website... "Do not rely on your 'My Account' page or other correspondence from DCHL... do not assume you are covered." Via The Hill,The Hill obtained an email sent to staffers on Wednesday warning them, “it is essential that you confirm your coverage in DCHL through the Disbursing Office.”“Do not rely on your ‘My Account’ page or other correspondence from DCHL,” the email reads.“Please do not assume you are covered unless you have seen the confirmation letter from the Disbursing Office,” the email continues.

Socialism: Converting Hysterical Misery into Ordinary Unhappiness for a Hundred Years - In yesterday’s New York Times, Robert Pear reports on a little known fact about Obamacare: the insurance packages available on the federal exchange have very high deductibles. Enticed by the low premiums, people find out that they’re screwed on the deductibles, and the co-pays, the out-of-network charges, and all the different words and ways the insurance companies have come up with to hide the fact that you’re paying through the nose. For policies offered in the federal exchange, as in many states, the annual deductible often tops $5,000 for an individual and $10,000 for a couple. By contrast, according to the Kaiser Family Foundation, the average deductible in employer-sponsored health plans is $1,135. It’s true that if you’re a family of three, making up to $48,825 (or, if you’re an individual, making up to $28,725), you’ll be eligible for the subsidies. Those can be quite substantive at the lower ends of the income ladder. But as you start nearing those upper limits (which really aren’t that high; below the median family income, in fact), the subsidies start dwindling. Leaving individuals and families with quite a bill, as even this post, which is generally bullish on Obamacare, acknowledges.

 Next Year, Will Your Employer’s Insurance Cover 62 Services and Products with No Co-Pay or Deductible? How Much Will You Save? - Under the ACA,  some 62 preventive services and products will be free (in the past much of the preventative medicine was charged to patient on a non-negotiated rate. Today, they are financed through regulations applied to the insurance industry): no copays and the deductible will not apply. The list includes vision checks for children, birth control, and more than a dozen vaccines.  This rule will hold true not just for plans sold in the exchanges, but for most employer-sponsored plans. Under Obamacare, they, too, must offer preventive care without cost-sharing – unless they are “grandfathered.” This year, just 36 percent of Americans who have health benefits at work are enrolled in a grandfathered plan,, down from 48 percent in 2012 and 56 percent in 2011. Each year, more plans will lose their grandfathered status. The ACA’s list of preventive services and products covers most of the reasons that many of us visit a physician – for blood pressure checks, cholesterol checks, flu shots, mammograms, tetanus shots, Pap smears or colorectal cancer screening.  Some of us go to the doctor because we want help losing weight, or quitting smoking. Counseling and smoking cessation products – including nicotine patches – all make the list.  If we feel sad, and don’t know why, we may want to be screened for depression. Under Obamacare, this is a free preventive service. If you are a new mother who is feeling blue – or a 60-year-old man who just doesn’t want to get up in the morning – and your primary care physician (PCP) determines that you are depressed, he will send you to a someone who can provide counseling and or medication. The initial consultation with your PCP is free.

With Affordable Care Act, Canceled Policies for New York Professionals - Many in New York’s professional and cultural elite have long supported President Obama’s health care plan. But now, to their surprise, thousands of writers, opera singers, music teachers, photographers, doctors, lawyers and others are learning that their health insurance plans are being canceled and they may have to pay more to get comparable coverage, if they can find it. They are part of an unusual, informal health insurance system that has developed in New York, in which independent practitioners were able to get lower insurance rates through group plans, typically set up by their professional associations or chambers of commerce. That allowed them to avoid the sky-high rates in New York’s individual insurance market, historically among the most expensive in the country. But under the Affordable Care Act, they will be treated as individuals, responsible for their own insurance policies. For many of them, that is likely to mean they will no longer have access to a wide network of doctors and a range of plans tailored to their needs. And many of them are finding that if they want to keep their premiums from rising, they will have to accept higher deductible and co-pay costs or inferior coverage.

Errors Continue to Plague Government Health Site - Insurers and federal officials sifting through insurance applications under the health-care law have identified a raft of errors, including missing customers and inaccurate eligibility determinations that mean people may be enrolled in the wrong coverage. Thousands of insurance applicants from—at least one in five at the height of the problems by one estimate—have received inaccurate assignments to Medicaid or to the marketplace for private plans, or have received incorrect denials, people familiar with the matter said. Eligibility determinations are an early step in the application process, before consumers choose plans. In some cases described by a state official with knowledge of the matter, legal immigrants who aren't yet eligible for Medicaid in Illinois—it takes five years of residence to join the state-run programs for low-income people—were nevertheless told they would be enrolled. The risk that consumers could remain in limbo as the health law's coverage expansion begins in January has been a continual political threat to the Obama administration, which has addressed flaws—ranging from a malfunctioning website to the cancellation of health policies that don't meet the law's requirements—with a patchwork of last-minute fixes.

Why Obamacare Cannot “Insure” for Pre-Existing Conditions - Yves Smith - One of the biggest selling points for Obamacare is that it requires insurers to offer policies to people with so-called pre-existing conditions, as in known, fairly to extremely costly-to-treat ailments, like diabetes, HIV, and autoimmune diseases. Not surprisingly, two things have started happening. One is that the early evidence suggests that people with pre-existing conditions are signing up for the new plans in disproportionate numbers. For instance, the individuals determined to be eligible to enroll in federal exchanges through the end of November had a much lower proportion of people eligible for subsidies than anticipated. Those who had health issues would naturally be highly motivated to obtain coverage.  Second is that the insurers, par for the course, are finding clever ways to make the actual coverage offered to people with pre-existing conditions so minimal as to come as close as they can to covering them, apparently with the hope that they will go elsewhere. As the Washington Post reported earlier this weekSome plans sold on the online insurance exchanges, for instance, don’t cover key medications for HIV, or they require patients to pay as much as 50 percent of the cost per prescription in co-insurance — sometimes more than $1,000 a month…. “The easiest way [for insurers] to identify a core group of people that is going to cost you a lot of money is to look at the medicines they need and the easiest way to make your plan less appealing is to put limitations on these products,” [Marc] Boutin [executive vice president of the National Health Council] said.  The ugly reality is that, logically speaking, a known condition isn’t a matter of insurance but subsidy or socialization of costs. Readers in comments have raised this issue by saying these conditions aren’t “insurable risks”. Let’s unpack that.

Obamacare’s real promise: if you lose your health-care plan, you can get a new one - If you're one of the 149 million people who get health insurance through your employer, you can lose your plan if you get fired, or if the H.R. department decides to change plans, or if you have to move to a branch in another state. If you're one of the 51 million people who get Medicaid, you could lose your plan because your income rises and you're no longer eligible or because your state cut its Medicaid budget and made you ineligible. You could lose it because you moved from Minnesota, where childless adults making less than 75 percent of the poverty line are eligible, to Texas, where there's no coverage for childless adults.If you're one of the 15 million Americans who buys insurance on the individual market, you could lose your plan because your insurer decides to stop offering it or decides to jack up the price by 35 percent. And that's assuming you're one of the lucky people who weren't denied coverage based on preexisting conditions in the first place. Then, of course, there are the 50 million people who don't have a plan in the first place. The vast majority of them desperately want health-care coverage. But it turns out that just because you want a plan doesn't mean you can get one.

Health Care Prices Move to Center Stage - Once again, on Dec. 3, Elizabeth Rosenthal made eyes pop with her front-page article “As Hospital Prices Soar, a Single Stitch Tops $500.” The article is part of her series in The New York Times on the high prices of health care in the United States (see, for example, “American Way of Birth, Costliest in the World”).  As I noted in an earlier post, there were news reports more than a decade ago on the distress that high prices of health care can visit on Americans with either shallow health insurance or none. Furthermore, some colleagues and I in 2003 drew attention to the high prices of health care in the United States in “It’s the Prices, Stupid.” We pointed out that “higher health spending but lower use of health services adds up to much higher prices in the United States” than in any other member country of the Organization for Economic Cooperation and Development.  But a decade ago most Americans were still well insured by comprehensive coverage with low deductibles and coinsurance, so these stories affected only an easily overlooked minority of uninsured fellow citizens. Things have changed and continue to change.  With ever higher deductibles, coinsurance and exclusions from coverage, employers have been shifting more and more of the cost of employment-based health insurance into the household budgets of their employees. The latest move is a shift toward “private health insurance exchanges.” Under that arrangement, employers simply make a defined contribution toward their employees’ health insurance, with which the latter purchase coverage on a privately organized health insurance exchange similar to those under the Affordable Care Act.

Choosing A $2,000 Drug Over A $50 Alternative That Works Just As Well - The Washington Post reports on two drugs that are both equally effective in dealing with a serious problem afflicting the sight of elderly Americans, with the only difference being their price, and why doctors are more likely to prescribe the one that costs 40 times more:The two drugs have been declared equivalently miraculous. Tested side by side in six major trials, both prevent blindness in a common old-age affliction. Biologically, they are cousins. They’re even made by the same company.But one holds a clear price advantage.Avastin costs about $50 per injection.Lucentis costs about $2,000 per injection.Doctors choose the more expensive drug more than half a million times every year, a choice that costs the Medicare program, the largest single customer, an extra $1 billion or more annually.Spending that much may make little sense for a country burdened by ever- rising health bills, but as is often the case in American health care, there is a certain economic logic: Doctors and drugmakers profit when more-costly treatments are adopted.

US near bottom in efficiency of health care spending - A new study by researchers at the UCLA Fielding School of Public Health and McGill University in Montreal reveals that the United States health care system ranks 22nd out of 27 high-income nations when analyzed for its efficiency of turning dollars spent into extending lives. The study, which appears online Dec. 12 in the "First Look" section of the American Journal of Public Health, illuminates stark differences in countries' efficiency of spending on health care, and the U.S.'s inferior ranking reflects a high price paid and a low return on investment. For example, every additional hundred dollars spent on health care by the United States translated into a gain of less than half a month of life expectancy. In Germany, every additional hundred dollars spent translated into more than four months of increased life expectancy. The researchers also discovered significant gender disparities within countries. "Out of the 27 high-income nations we studied, the United States ranks 25th when it comes to reducing women's deaths," said Dr. Jody Heymann, senior author of the study and dean of the UCLA Fielding School of Public Health. "The country's efficiency of investments in reducing men's deaths is only slightl better, ranking 18th."

America’s Descent into Third World Status: Tropical Diseases Rise Among Poor -- Yves Smith -- To the extent that middle class and more affluent people think about poverty in America, they likely have blurry, partial images due to distance and lack of direct experience. Their remedies might include better education and training, higher minimum wages, more affordable housing. New Scientist thinks otherwise. Its headline for a blistering editorial: Want to fix US inequality? Begin with worming tablets. The New Scientist editorial tell President Obama that his checklist for combatting poverty – higher wages and labor bargaining rights, education, social security, and more growth – is incomplete: Something Obama could also have mentioned was buying worming tablets and other remedies for tropical diseases. This is no joke. Intestinal worms have traditionally been a huge drain on humanity, causing weakness and debilitation and perpetuating poverty. Nowadays such parasites are mainly a problem in Africa and Asia. But millions of the poorest people in the US also have worms – and they perpetuate poverty there, too. It isn’t just worms. A dozen chronic parasitic diseases that plague the tropical poor also plague people in the US …They include Chagas disease, a relative of Africa’s sleeping sickness, and dengue, which has lately been spreading within the US… Most of these diseases are easy to prevent and cure. They are linked to poor sanitation, lack of basic medical care and homes infested with vermin – all of which are associated with poverty. And poverty is growing: the percentage of US homes living on less than the World Bank’s threshold of $2 per person per day has doubled since 1996. Some 20 per cent of all households with children get by on that or less at least sometimes.

Can we avoid an antibiotic apocalypse? - What are the biggest future dangers faced by the western world? If asked that question, most people might mumble “terrorism”, “climate change”, “debt crisis” or “cybercrime”. But if Professor Dame Sally Davies, Chief Medical Officer for England, is correct, there is another terrifying issue looming over all of us: the growth of antibiotic resistance. In her recent book The Drugs Don’t Work, Davies explains that seven decades ago western doctors started using antimicrobials such as penicillin on a large scale to combat infections. Since then, we have all become accustomed to relying – unthinkingly – on these wonder drugs. But although they have transformed our lives, there is a catch. Since the drugs are so widely used – if not abused – the bacteria they fight are now mutating and becoming resistant. The drugs companies, meanwhile, are not creating new antimicrobial medicines that could beat the bugs. As a result, we are moving towards a world where, within a generation, the drugs simply may not work any more. Modern medicine could lose the ability to combat many illnesses or infections. This sounds so horrifying it seems hard to imagine, and most people (myself included) rarely ponder this issue at all. But the problem is not merely theoretical. Davies calculates that about 25,000 people a year are already dying from drug-resistant bacteria in Europe – and the toll is similar in the US. “That is almost the same number as die in road traffic accidents,”

The Black Death Is Back...?! --Not since the Middle Ages has the bubonic plagues taken so many lives in a year. Having wiped out 25 million people in Europe, appearances of the Black Death since have been rare but the Red Cross is reporting a new outbreak has killed more than 20 people on the island of Madagascar. Living standards in the nation have collapsed since 2009 (what else happened in 2009?) and the prevalence of rats has helped spread the disease easily. While China claims to have the bird flu under control (despite some rumors out of Hong Kong), the Red Cross warns there is a risk of a Black Death epidemic.

Death With Dignity vs. Death for Profit?: It's time for death with dignity in America. Scott Adams, the creator of the popular Dilbert cartoon, recently posted an open letter on his website, discussing the prolonged agony that his father was going through during his last days this planet. Adams writes in part, "I hope my father dies soon. And while I'm at it, I might want you to die a painful death too. I'm entirely serious on both counts." He continues, "My father, age 86, is on the final approach to the long dirt nap (to use his own phrase). His mind is 98% gone, and all he has left is hours or possibly months of hideous unpleasantness in a hospital bed. I'll spare you the details, but it's as close to a living Hell as you can get." Adams goes on to say that, "If my dad were a cat, we would have put him to sleep long ago. And not once would we have looked back and thought too soon...I'd like to proactively end his suffering and let him go out with some dignity. But my government says I can't make that decision. Neither can his doctors. So, for all practical purposes, the government is torturing my father until he dies." Adams is absolutely right.

Interactive Atlas Of The Leading Causes Of Premature Death - While some may think trading these manipulated capital markets has become a leading cause of death over the past year, that is not the case. At least not yet. Instead, the leading causes of early death are shown on the chart below compiled by Wired. It maps "the global cost of early mortality - some 1.7 billion years of potential human life forefited annually - sorted by cause of death."Not surprisingly, Wired notes that heart disease and stroke cause more than a quarter of all deaths. But since they hit mainly older people, the cost in years of life lost is relatively small. Curiously, one of the biggest net contributors to premature loss of life is Malaria, which is one of the biggest killers of children across the developing world. Also surprising: while not large (yet) in absolute terms, natural disasters are by far the fastest-growing contributor to the death toll. The good news: the big yellow block representing infectious diseases and birth problems, is showing a rapid decline. Which means that "we're making progress; deaths from disorders that could be avoided with basic medications, clean water and neo-natal care, are on the decline."Some additional perspectives are provided from the below two interactive maps by the Institute for Health Metrics and Evaluation, analyzing Disability Adjusted Life-Years (DALY) impact from various noted causes.

Farm Subsidies Rebuffed by Senate Democrats - An extension of U.S. agriculture subsidies to late January was rebuffed yesterday by Senate Democrats, who said they won’t pass any House plan for temporary funding before Congress breaks for the holidays. “We’re not going to do an extension,” Senate Agriculture Committee Chairwoman Debbie Stabenow, a Michigan Democrat, told reporters. “If the House leadership would just stay through next week, like the Senate is staying, we would actually be able to get” a new five-year farm-policy bill, she said. If Congress doesn’t act before year’s end, U.S. dairy support programs will revert to a 1949 statute that when fully implemented would double the wholesale price of milk.The Agriculture Department hasn’t said when it could implement the law, which could take months. Lawmakers are reluctant to head home for the holidays to headlines about milk prices of $7-per-gallon in the new year. Cuts to food stamps, along with changes to crop insurance programs and other farm aid, have been stumbling blocks as lawmakers seek to resolve differences in Senate and House versions of a reauthorization of agricultural programs. The main effect of an extension to the end of January would be to allay fears of milk prices rising after Jan. 1, when dairy is the first crop program set to revert to the 1949 policies form the underlying language of all subsequent farm bills.Under the law, the government would be required to stockpile milk until it reached $37.20 per hundred pounds, nearly double the current price of dairy futures traded in Chicago. Other commodities, including corn and wheat, would see their programs revert to archaic programs later in the year.

People Are Freaking Out About $8-a-Gallon Milk - It’s the end of the year, and Congress is fighting over a farm bill again, which can mean only one thing: ’tis the season for warnings that Americans could wake up in 2014 and suddenly be paying eight bucks for a gallon of milk. But while the prospect of milk doubling in price overnight makes for an attention-getting headline, it’s not what’s going to happen. First, a quick history lesson: the U.S. Department of Agriculture (USDA) is required to buy butter, cheese and powdered milk to set a floor for milk prices. It acts kind of like the Federal Reserve, except instead of setting interest rates, the agency’s actions impact what we pay for a gallon of milk. The formula was adjusted over the years to balance what farmers make with how much consumers pay, and today’s rate expires with the current farm-bill extension at the end of the year. If Congress does nothing, the status quo will revert back to the original 1949 law — which was based on a complex formula dating back to the pre–World War I era, when the earnings of rural farmers and city dwellers were much closer than they are today

Deformities, sickness and livestock deaths: the real cost of GM animal feed? -At first glance the frozen bundles could be mistaken for conventional joints of meat. But as Ib Pedersen, a Danish pig farmer, lifts them carefully out of the freezer it becomes apparent they are in fact whole piglets - some horribly deformed, with growths or other abnormalities, others stunted.This is the result, Pedersen claims, of feeding the animals a diet containing genetically modified (GM) ingredients. Or more specifically, he believes, feed made from GM soya and sprayed with the controversial herbicide glyphosate.  Pedersen, who produces 13,000 pigs a year and supplies Europe's largest pork company Danish Crown, says he became so alarmed at the apparent levels of deformity, sickness, deaths, and poor productivity he was witnessing in his animals that he decided to experiment by changing their diet from GM to non-GM feed.  The results, he says, were remarkable: "When using GM feed I saw symptoms of bloat, stomach ulcers, high rates of diarrhoea, pigs born with the deformities ... but when I switched [to non GM feed] these problems went away, some within a matter of days."  The farmer says that not only has the switch in diet improved the visible health of the pigs, it has made the farm more profitable, with less medicine use and higher productivity. "Less abortions, more piglets born in each litter, and breeding animals living longer." He also maintains that man hours have been reduced, with less cleaning needed and fewer complications with the animals.

USDA deregulated GM alfalfa with RoundUp killing monarch butterflies, bees, milkweed; pesticides linked to dangerous decline in UK turtle dove population - Unless regulators take action, one of the gifts in the lyrics to “Twelve Days of Christmas,” the turtle dove, may become extinct. The dove has experienced major population decline in England over the past 20 years, due in significant part to the destruction of turtle dove habitat and food sources from increasing herbicide use in English agriculture. The number of turtle dove breeding pairs in the UK has dropped to a record low of 14,000, making an 84% drop since 1995. Other species, such as Monarch butterflies and other pollinators around the world, are also experiencing similar loses of habitat and food sources through an increase in herbicide use. These increasing rates of population decline in wild species underscore the problem that chemical-intensive agriculture plays in the degradation of natural habitats. “The turtle dove is the fastest declining bird in the country [England] and within ten years we could lose this icon of the British countryside completely,” said a spokesman for the Royal Society for the Protection of Birds. Turtle doves in the United Kingdom are found in just a few areas of Southern England and migrate during the winter toward Africa. Turtle doves are obligate granivors, feeding predominantly on seeds of certain arable weeds form farm countryside, such as fumitory, clover and vetch. However, increased herbicide use in England has decimated vegetation (considered “weeds”) that turtle doves have traditionally eaten.

Water Used to Produce Ethanol in Nebraska --Do you notice any similarities between the two maps below? The top map shows us the corn production regions in Nebraska in 2012 (a drought year), the dark green areas having the highest production.  The red stars represent the ethanol plants in Nebraska.  The second map from year 2005 shows us the regions of Nebraska which irrigate most heavily using groundwater withdrawals. As you can easily see, the regions which irrigate most heavily, are the same as those that were most productive for corn in 2012.  Nebraska ranks as the third highest corn producing state, and it is also the state that is gifted with the most underground Ogallala Aquifer water. Seed corn companies prefer to use Nebraska’s irrigated corn acres for reliability during drought years and ethanol plants also like the reliability of corn production that Nebraska’s irrigated acres can provide. In 2008, 3.6 million acres in Nebraska were irrigated using center-pivots, and that number has surely grown since then. According to a 2011 article out of Columbia University: “In Ohio, because of sufficient rainfall, only 1% of the corn is irrigated while in Nebraska 72% of the crop is irrigated. The Baker Institute estimates that producing the corn to meet the ethanol mandate for 2015 will require 2.9 trillion gallons of water.”

It Would Take 4.4 Earths To Sustain A World Full Of Americans - It takes the planet 1.5 years to restore what humanity burns through in a year. The silver lining, the US is #1 in something once again - consumption. In fact, it would take 4.4 Earths to sustain the planet if everyone lived like Americans. Rather disappointingly, the USA is 56th in the world for alcohol consumption per capita (though we suspect that will rise).

Why Is the US Getting in the Way of International Efforts to Make Clean Water a Basic Human Right? - On 21 November 2013 the UN General Assembly’s Third Committee (The Committee) adopted a resolution on “The human right to safe drinking water and sanitation.” There, all UN member states agreed that the rights to water and sanitation are derived from the right to an adequate standard of living. As a result, these rights are now implicitly recognised as being part of International Covenant on Economic, Social and Cultural Rights (ICESCR), Convention on the Rights of the Child ( CRC) and the  Universal Declaration of Human Rights (UDHR). This means that for the very first time, all UN member States affirm that the rights to water and sanitation are legally binding in international law.  This is indeed a moment for all of us to celebrate.  Yet this agreement is marred by the reluctance of the United States to join all other nations in a universal agreement on the definition of these rights (as defined in a resolution of the UN Human Rights Council (UNHRC) adopted by consensus in September 2013).  Writing about this, an Amnesty International press release says: “At the time [of the unanimous adoption of the UNHRC resolution] the United States was the only country that disassociated itself from the definition of these rights and stated that it did not agree ‘with the expansive way this right has been articulated.’ However, it has not explained what aspects of this definition it does not accept.” The press release continues: “Such rights are only ‘expansive’ if one adopts a 19th century understanding of hygiene and of government duties to ensure the provision of public services.”

"Book burning" Harper govt destroys finest library in the world on freshwater aquatic and fisheries science - Last week the Department of Fisheries and Oceans, which is closing five of its seven libraries, allowed scientists, consultants and members of the public to scavenge through what remained of Eric Marshall Library belonging to the Freshwater Institute at the University of Manitoba. One woman showed up to pick up Christmas gifts for a son interested in environmental science. Other material went into dumpsters. Consultants walked home with piles of "grey material" such as 30-year-old reports on Arctic gas drilling. Nearly 40,000 books and papers were relocated to a federal library in Sidney, B.C. "It was a world class library with some of the finest environmental science and freshwater book collections in the world. It was certainly the best in Canada, but it's no more," said Burt Ayles, a 68-year-old retired research scientist and former regional director general for freshwaters in central Canada and the Arctic. Established in 1973, when foreign governments hailed Canada as a world leader in freshwater science and protection, the library housed tens of thousands of reports, maps, charts and books, including material dating back to the 1880s. "The loss of this library and its impact on fisheries and environmental science is equivalent to Rome destroying the Royal Library of Alexandria in Egypt. It's equal to that," said Ayles. At the time, Alexandria boasted the world's largest collection in the ancient world.

Special Report: In the land of the holy cow, fury over beef exports (Reuters) - Symbols of India's emergence as an economic powerhouse line the four-lane highway to Jaipur out of New Delhi: a factory owned by the world's biggest motorbike maker, glass towers housing global call centers, shopping malls for India's burgeoning middle class. One night in August here, an angry mob ran amok, burning trucks and government property and forcing traffic to halt and factories to shut. The rioters were incensed over an issue arguably as old as India itself: the eating of beef, which the country's majority Hindus have considered sacrilegious for at least a thousand years. Perhaps surprisingly in a country where so many people view cows as sacred, India could soon become the world's biggest beef exporter, according to the United States Department of Agriculture (USDA). Most, though not all, of the beef India exports is buffalo, an animal less venerated than the hump-backed indigenous Indian cow. But the trade, even in buffalo beef, still evokes revulsion among Hindu nationalists. The sharpest criticism comes from the Bharatiya Janata Party (BJP), the main opposition in parliament. Its candidate for prime minister in next year's elections, Narendra Modi, has slammed what he calls the government's "pink revolution," and its "secret agenda ... for export of beef."

Australia Well On Its Way To Hottest Year Ever - 2013 is well on its way to becoming the warmest calendar year on record in Australia. The country has just set a new record for the warmest spring ever. Mean temperatures for Australia’s spring (which occurs during the U.S.’s fall) were 1.57°C above the 1961-1990 average. September was especially hot, with an average temperature of 2.75°C or nearly 5°F above normal. October came in at 1.43°C above average, while November came closer to normal, at 0.52C above average. And in addition to being unusually warm, spring also came early. On August 31, the last day of winter, average temperatures reached 85.9°F. It was the warmest last day of winter recorded since Australia started collecting temperature data 104 years ago.To date, the year is 1.23°C above average and 0.18°C above the previous record year, 2005. Australia’s record-breaking spring follows a generally wet winter and a summer that was also the country’s hottest on record. Temperatures soared so high in January that the Australian Bureau of Meteorology added new colors to its temperature maps. Deep purple now represents temperatures in excess of 50°C, or 122°F. The new high end of the scale tops out at 129 °F.

Arctic Warming Drives More Extreme Summer Heat Waves, Droughts And Deluges, Study Finds - Global warming reduces the temperature difference between the equator and poles, which in turn has been linked to the observed northward shift in the jet stream. Via Climate Central.  A new study links the past decade’s “exceptional number of unprecedented summer extreme weather events” in the U.S. and Europe with the “record declines in both summer Arctic sea ice and snow cover on high-latitude land.” Researchers at the Chinese Academy of Sciences, along with Rutgers Prof. Jennifer Francis, make the case in a Nature Climate Change study, “Extreme summer weather in northern mid-latitudes linked to a vanishing cryosphere” (subs. req’d).  Scientists predicted a decade ago that Arctic ice loss would shift storm tracks and bring on worse western droughts of the kind we are now seeing. Recent studies find that Arctic sea ice loss may well usher changes in the jet stream that lead to more U.S. extreme weather events (see here and here). We’ve known for a long time that global warming melts highly reflective white ice and snow, which is replaced by the dark blue sea or dark land, both of which absorb far more sunlight and hence far more solar energy. That is one of the many sources of “polar amplification,” whereby the Arctic warms much faster than other parts of the globe. Now it seems increasingly clear that the amplified Arctic warming in turn amplifies extreme weather by shifting and weakening the jetstream (see video here). The new study notes that in the past three decades, Arctic sea ice extent during late summer has fallen some 8 percent per decade, while spring snow coverage in June has fallen some 18 percent percent per decade.

Arctic Ice Melt Tied To Heat Waves And Downpours In U.S., Europe And Elsewhere, Study Suggests (Reuters) -- A thaw of Arctic ice and snow is linked to worsening summer heatwaves and downpours thousands of miles south in Europe, the United States and other areas, underlying the scale of the threat posed by global warming, scientists said on Sunday. Their report, which was dismissed as inconclusive by some other experts, warned of increasingly extreme weather across "much of North America and Eurasia where billions of people will be affected."  The study is part of a drive to work out how climate change affects the frequency of extreme weather, from droughts to floods. Governments want to know the trends to plan everything from water supplies to what crops to plant. Writing in the journal Nature Climate Change, experts in China and the United States said they could not conclusively say the Arctic thaw caused more extreme weather, or vice versa. But they said they had found evidence of a relationship between the two. Rising temperatures over thawing snow on land and sea ice in the Arctic were changing atmospheric pressure and winds, the report said. The changes slowed the eastward movement of vast meandering weather systems and meant more time for extreme weather to develop - such as a heatwave in Russia in 2010, droughts in the United States and China in 2011 and 2012, or heavy summer rains that caused floods in Britain in 2012, the paper added."The study contributes to a growing body of evidence that ... the melting Arctic has wide-ranging implications for people living in the middle latitudes,"

Melting Arctic sea ice could be altering jet stream - The rapidly warming Arctic isn’t noteworthy only for its own sake. Changes there affect the rest of the planet in a number of ways. Recently, there has been a lot of interest in whether the dwindling Arctic summer sea ice could be weirding the weather in the mid-latitudes. There have been a number of recent summer extremes—Russia’s hellish summer in 2010, the drought in the US last summer, a very wet 2011 in Korea and Japan, plus a streak of soggy summers in the UK. There have been suggestions that lower summer sea ice in the Arctic could be gumming up the jet stream and contributing to these events, but some climate scientists aren’t so sure. A new study in Nature Climate Change brings more evidence to the table in support of the idea. Qiuhong Tang and Xuejun Zhang, of the Chinese Academy of Sciences, and Jennifer Francis, of Rutgers, decided to look for patterns of atmospheric change correlated with the loss of Arctic summer sea ice and the decline of early summer snow cover. Using reanalyses, which generate global datasets based on all the available measurements, they examined how the lower, middle, and upper troposphere responded to variations in sea ice and snow cover from 1979 (the start of the satellite era) to 2012. They found modest correlations with the behavior of high-level winds and the differences in atmospheric pressure that drive them, more so for sea ice than snow cover. Over most regions, the average position of the jet stream moved a little northward when summer sea ice was smaller, while the opposite was true for the western edges of continents. The high-level, west-to-east winds of the jet stream also slowed a bit. When the jet stream slows, it gets wigglier, with ponderous meanders extending north and south. Because the temperature difference across the jet stream is so large, these slow-moving excursions can lead to temperature extremes. The early loss of snow cover can exacerbate this, as it means soils can dry out earlier in the summer. Not only does that make a region susceptible to drought, but low soil moisture allows temperatures to rise higher.

The other climate problem: CO2 threatens marine life -- As scientists assess why global temperatures haven't climbed as rapidly as forecast by climate models, the theory that excess heat is being absorbed by deep ocean water has gained backing from a study by the International Programme on the State of the Oceans (IPSO)."We've got evidence that the oceans are warming, with temperature rises of up to 1.3 degrees Celsius in places like the Baltic. We've also seen increasing evidence that the deep waters, deeper than 700 meters, are also taking up heat," IPSO's   "The oceans are taking up about a third of the carbon dioxide we're producing at the moment. While this is slowing the rate of earth temperature rise, it is also changing the chemistry of the ocean in a very profound way."Carbon dioxide reacts with sea water to form carbonic acid. Gradually, this makes oceans more acidic.Sea water is already 26 percent more acidic than it was before the onset of the Industrial Revolution. According to the IPSO report, it could be 170 percent more acidic by 2100. Their experiments showed that increasing acidification decreases the amount of calcium carbonate in the sea water, making life very difficult for sea creatures that use it to form their skeletons or shells. This will affect coral, mussels, snails, sea urchins, starfish as well as fish and other organisms, Riebesell told DW. "Some of these species will simply not be able to compete with others in the ocean of the future," he added.

Shakhova: methane in atmosphere is increasing 3x faster than carbon dioxide - This methane had been held in place for thousands of years by a cap of frozen soil on the seabed. But now research at the University of Alaska in Fairbanks has found this methane is escaping into the atmosphere at faster and faster rates, adding to global warming in a feedback loop that accelerates the warming. The study concentrated on the East Siberian Arctic Shelf. Natalia Shakhova, lead author on the study, says this particular area makes up about 25% of the Arctic shelf. "Because the permafrost was thought to be stable and reliably preventing this methane escaping from the seabed deposits, this area has never been considered a source of methane to the atmosphere, never until very recently when we started investigating this area 10 years ago," she says.Roughly 17 million tons of methane are released into the environment annually from this shelf."Arctic tundra is thought to be the major source of methane, natural methane, in the northern hemisphere, so it’s kind of comparable to terrestrial sources," Shakhova says. "For hundreds of thousands of years ... the permafrost on top of the sediment has been serving as a cap, as a seal, preventing the escape." As the permafrost thaws, a phenomenon happening on land and under the sea, it becomes less efficient at containing greenhouse gases, like methane. And methane is a particularly nasty greenhouse gas, with one ton of methane packing the climate changing potential of at least 20 tons of carbon dioxide, Shakhova adds. "The concentration of methane in the atmosphere is increasing much faster than that of carbon dioxide," she says. "The last 200 years, the concentration of methane in the atmosphere increased about three times."

Experts say the IPCC underestimated future sea level rise - It looks like past IPCC predictions of sea level rise were too conservative; things are worse than we thought. That is the takeaway message from a new study out in Quaternary Science Reviews and from updates to the IPCC report itself. The new study, which is also discussed in depth on RealClimate, tries to determine what our sea levels will be in the future. What they found isn't pretty. Predicting of sea level rise is a challenging business. While we have good information about what has happened in the past, we still have trouble looking into the future. So, what do we know? Well it is clear that sea levels began to rise about 100 years ago. This rise coincided with increasing global temperatures. What causes sea level to rise? Really three things. First, water expands as it heats. Second, glaciers melt and water flows to the oceans. Third, the large ice caps on Greenland and Antarctica can melt and the liquid water enters the ocean; often the water transfer is added by calving at the ice fronts which result in icebergs that float into the ocean. In the past, much of the sea level rise was related to the first cause (thermal expansion). Now, however, more and more sea level rise is being caused by melting ice. But this is all the past. What we really want to know is, how much will sea level rise in the future?  Well the authors decided to ask the scientists themselves. What do they think sea level rise will be by 2100 and 2300 under different greenhouse gas scenarios? The authors found 360 sea-level experts through a literature survey. They then worked to find contact information for these scientists and finally, they sent a questionnaire. After receiving 90 expert judgments from 18 countries, the results were tallied. So, what do experts think?

Sea Level and Risk of Flooding Rising Rapidly in Mid-Atlantic - During the 20th century, sea levels along the highly populated U.S. Mid-Atlantic coastline between New York and Virginia rose faster than in any other century during the past 4,300 years, according to a new study. And as those sea levels continue to increase as a result of global warming and local land elevation changes, the risks of coastal flooding will dramatically escalate. The study, by geoscientists at Rutgers and Tufts Universities and published in the new journal “Earth’s Future,” took a comprehensive look at the history of sea level in the Mid-Atlantic, combining sediment records of prehistoric sea level with modern data, which includes readings from tide gauges and satellite instruments. The result is one of the most in-depth examinations of past, present, and future sea level rise of any region in the U.S. The study warns that regional planners will need to factor local rates of sea level rise when making decisions on building any long-lasting infrastructure, from water treatment facilities to Manhattan skyscrapers and Atlantic City casinos. According to the study, relative sea levels in the Mid-Atlantic region rose at about 0.10 inches per year during the 19th century, and that rate accelerated to 0.15 inches per year during the 20th century. That may not sound like much, but it is already enough to make a major difference when storms strike.

Why is Antarctic sea ice growing? - Recently NASA reported that this year’s maximum wintertime extent of Antarctic sea ice was the largest on record, even greater than the previous year’s record. This is understandably at odds with the public’s perception of how polar ice should respond to a warming climate, given the dramatic headlines of severe decline in Arctic summertime extent. But the “paradox of Antarctic sea ice” has been on climate scientists' minds for some time.  This winter, the maximum total Antarctic sea ice extent was reported to be 19.47 million square kilometres, which is 3.6% above the winter average calculated from 1981 to 2010. This continues a trend that is weakly positive and remains in stark contrast to the decline in Arctic summer sea ice extent (2013 was 18% below the mean from 1981-2010).Here are some of the leading hypotheses currently being explored through a combination of satellite remote sensing, fieldwork in Antarctica and numerical model simulations – to help explain the increasing trend in overall Antarctic sea ice coverage:

  • Increased westerly winds around the Southern Ocean, linked to changes in the large-scale atmospheric circulation related to ozone depletion, will see greater northward movement of sea ice, and hence extent, of Antarctic sea ice.
  • Increased precipitation, in the form of either rain or snow, will increase the density stratification between the upper and middle layers of the Southern Ocean. This might reduce the oceanic heat transfer from relatively warm waters at below the surface layer, and therefore enhancing conditions at the surface for sea ice.
  • Similarly, a freshening of the surface layers from this precipitation would also increase the local freezing point of sea ice formation.
  • Another potential source of cooling and freshening in the upper ocean around Antarctica is increased melting of Antarctic continental ice, through ocean/ice shelf interaction and iceberg decay.

For Environmental Concerns, The Ryan-Murray Budget Deal Is A Mixed Bag - Congress’ latest budget deal contains a number of environmental policy changes — most importantly a U.S.-Mexico compact on how to share fossil fuel reserves in the Gulf of Mexico. Among other things, the compromise struck by Sen. Patty Murray (D-WA) and Rep. Paul Ryan (R-WI) yesterday approves the U.S.-Mexico Transboundary Hydrocarbons Agreement. The pact lays down a framework for how the two countries — along with private American firms and Mexico’s state-owned petrochemical company Pemex — can cooperate in developing offshore oil and gas reservoirs that cross the maritime boundary between U.S and Mexican waters. Since Mexico’s legislature already approved the agreement back in April of 2012, and the Ryan-Murray deal gives the Secretary of the Interior permanent authority to implement it, the agreement should make new oil and gas exploration in the Gulf of Mexico considerably more likely. “This agreement will make nearly 1.5 million acres of the Outer Continental Shelf, currently affected by a moratorium under the Western Gap Treaty, immediately available for leasing,” said Tommy Beadureau, a senior Interior Department official, at a Senate hearing in October. It will “also make the entire transboundary region, which is currently subject to legal uncertainty in the absence of an agreement, more attractive to U.S.-qualified operators.” Interior’s Bureau of Ocean Energy Management estimates that the area contains as much as 172 million barrels of oil and 304 billion cubic feet of natural gas.

The Concern Industry - As far as I can see, about once a week some human somewhere on Earth says something interesting. That's what comes from having a World Wide Web and more than seven billion people! Today's interesting quote was published in Der Spiegel (Germany) and was part of an article called Climate Summit Trap: Capitalism's March toward Global Collapse. The article is by Harald Welzer, who I've never heard of. Harald has noticed that humans are not going to do anything about climate change. Never having read DOTE, he is seeking to understand why this is so. He does a creditable job. Anyway, here's the interesting quote.... the task [of global capitalism] then becomes to extract as much out of [the Earth's wealth] as possible, while we still can.In this sense, the alarmism of environmental activists and climate researchers actually adds fuel to the fire, because it calls attention to the fact that the party may soon be over.Perhaps this solves the puzzle of why "Earth Summits" and climate conferences to save the planet take place incessantly, even though none of these have ever lead to real change, let alone to a reversal of the trend.Oh, my! Go for it, Harald!It demonstrates the utter powerlessness of the intervention strategies which have been employed so far.It couldn't be otherwise, in fact, in a system organized around the division of labor.Any form of protest that doesn't interfere with the existing business models, and which is able to perform well in the economy of attention, quickly establishes its own economic segment. To put it cynically, such protest creates its own "concern industry," with its own experts and industry professionalization, its own career paths and PR divisions.

White House Triples Agency Renewable Energy Mandates - In an executive order released on 5 December, President Barack Obama has tripled the mandate for use of renewable sources of energy for federal agencies by 2020.   According to the executive order federal agencies will have to replace 20% of the electricity they use with renewable sources by 2020—up from a 2005 mandate of 7.5% by 2013. This includes all federal agencies both civilian and military. The new mandate is part of the Obama administration’s goal of reducing greenhouse-gas emissions 17% over 2005 levels by 2020.  While the order only applies to federal agencies, this represents a significant boost in the renewables mandate due to the fact that it affects some 500,000 buildings, 600,000 federally operated vehicles for agencies that spend on average $500 billion annually in goods and services.  “The federal government must lead by example” in fighting climate change and transitioning to a clean-energy economy, Obama wrote. The Environmental Defense Fund (EDF) welcomed the release of the executive order as a “good day for clean energy.”

Are Cheap Fossil Fuels Really a Such a Boon to the World’s Poor? A Reply to Bjørn Lomborg How can we make life better for the world’s poor? Environmentalists often tell us that one way would be to slow climate change by cutting fossil fuel use. They warn that the poorest people in the poorest countries are likely to bear the brunt of rising sea levels, droughts, and storms. Skeptical environmentalist Bjørn Lomborg seems to think otherwise. Writing recently in The New York Times, he argues that people who care about the world’s poor should work to lower the price of fossil fuels, not raise them. He points out that 3.5 million people around the world die from indoor air pollution caused when they burn wood, dung and other traditional fuels in open fires or leaky stoves to cook and heat their homes—more than die from outdoor air pollution. “There’s no question that burning fossil fuels is leading to a warmer climate and that addressing this problem is important,” he goes on, “but for many parts of the world, fossil fuels are still vital and will be for the next few decades, because they are the only means to lift people out of the smoke and darkness of energy poverty.” The first flaw in Lomborg’s argument is his disingenuous failure to mention that many of the world’s poorest countries already keep fossil fuel prices low with heavy subsidies. Indonesia, Pakistan, Egypt, Yemen, and Venezuela are just a few examples. Far from being a boon for the poor, a recent IMF report sees these subsidies as an unmitigated disaster. Part of the problem with fuel subsidies is that most of their benefit accrues to nonpoor households. According to IMF data, households in the top quintile of the income distribution, on average, get 61 percent of the benefit of gasoline subsidies, compared to just 3 percent for the poor. The imbalance is almost as great for subsidies to propane and diesel fuel. Although Lomborg’s article passes over third-world fuel subsidies in silence, if pressed, he might agree that they are bad policy. In that regard, his argument is a little more subtle than that of “affordable energy” advocates like the American Petroleum Institute who favor anything at all that keeps fuel prices low. In fact, elsewhere, Lomborg has written in favor of a modest carbon tax as one component of climate change policy for the developed world, with an emphasis on raising funds for clean energy research as much as on providing an incentive for conservation.

Large Companies Prepared to Pay Price on Carbon— More than two dozen of the nation’s biggest corporations, including the five major oil companies, are planning their future growth on the expectation that the government will force them to pay a price for carbon pollution as a way to control global warming.  A new report by the environmental data company CDP has found that at least 29 companies, some with close ties to Republicans, including ExxonMobil, Walmart and American Electric Power, are incorporating a price on carbon into their long-term financial plans.  Both supporters and opponents of action to fight global warming say the development is significant because businesses that chart a financial course to make money in a carbon-constrained future could be more inclined to support policies that address climate change.  But unlike the five big oil companies — ExxonMobil, ConocoPhillips, Chevron, BP and Shell, all major contributors to the Republican party — Koch Industries, a conglomerate that has played a major role in pushing Republicans away from action on climate change, is ramping up an already-aggressive campaign against climate policy — specifically against any tax or price on carbon. Owned by the billionaire brothers Charles and David Koch, the company includes oil refiners and the paper-goods company Georgia-Pacific.  The divide, between conservative groups that are fighting against government regulation and oil companies that are planning for it as a practical business decision, echoes a deeper rift in the party, as business-friendly establishment Republicans clash with the Tea Party.

More Than 350 U.S. Coal Plants Are No Longer Cost-Effective - Aging and inefficient plants, competing energy sources, and the looming reality of climate change are all catching up with the coal industry. According to a new report from the Union of Concerned Scientists, as much as 17 percent of coal-fired power in the United States is already uncompetitive, just compared to natural gas and using mid-range estimates. The report looked at the operating costs for current coal plants, which are older and have largely paid off their capital costs, up against natural gas plants that have also paid off their capital costs. That yielded 353 coal plants that are economically uncompetitive, a total of 59 gigawatts of total electricity-generating capacity. The operating costs in that calculation included all the necessary upgrades to bring the coal plants in line with pollution and carbon dioxide regulations, but even before considering those changes, 23.4 gigawatts worth of coal power is more expensive to operate than natural gas. That’s on top of another 288 units (for 41.2 gigawatts of capacity) already scheduled for retirement. Shutting down the 353 “ripe-for-retirement” plants along with the 288 already-scheduled plants could cut anywhere from 245 to 410 million tons of carbon dioxide emissions annually. That would eliminate 9.8 to 16.4 percent of the carbon pollution from the power sector as of 2010, assuming the electricity is replaced with renewable sources.

We are deluding ourselves: The apocalypse is coming — and technology can’t save us - Last week, Salon ran an article, “Thanks for killing the planet, boomers!,” where I argued that it’s wholly unrealistic to assume humanity will undertake the massive, world-changing, economy-disrupting policy solutions needed for us to even stand a chance of long-term survival. Given that our local political and economic systems are as fragile, stalled and polarized as they’ve been in most of American history, these predictions only seem more dire, and the problem only more intractable. Which is why I’m constantly amazed by the notion that our technology will somehow save us, what I’ve come to consider the deus ex machina defense. I’ve never considered myself much of an “environmentalist” Still, I was always receptive to the idea of global warming: I’m no climatologist, but serious scientists with academic and professional bona fides have been voicing their extreme, sober concerns for my entire life. But global warming (as it was called when I was a kid) seemed enormously far off, an abstraction, just one of many Big Problems that humanity would eventually be forced to confront. And even if the problem was unfathomably large, our technological solutions, our deus ex machinas, would themselves be unfathomably powerful.  Unfortunately, there are major problems with this line of thinking. First of all, our current climate projections, already enormously grim, “bake” a degree of deus ex machina into their models. Most mainstream climate models assume that the developed world will significantly slow its carbon emissions in the immediate future. Basically, by assuming that major economies will convert to renewable energy sources, and that this mass conversion will result in lower global emissions, these models force us to invent and implement renewable energy solutions just to keep pace with our models — and even then, they still usually predict atmospheric CO2 levels that eventually lead to global ecological apocalypse.

Radiation 36,000 times permissible level found in water at Fukushima plant  -- The operator of the disaster-hit Fukushima No. 1 Nuclear Power Plant said on Dec. 2 that it has detected radioactive materials that topped 36,000 times the permissible level in underground water extracted in the area.According to plant operator Tokyo Electric Power Co. (TEPCO), strontium-90 and other radioactive substances that emit beta rays were detected at a level of 1.1 million becquerels per liter in underground water pumped up from an observatory well on Nov. 28. The well is located at a sea bank east of the No. 2 reactor, about 40 meters from the ocean.  The amount of detected radioactive materials hit the highest level since Nov. 25, which marked 910,000 becquerels per liter of underground water. The national allowable emission level for strontium-90, a typical radioactive isotope that emits beta rays, is less than 30 becquerels per liter of water. TEPCO said radioactive levels in seawater within the harbor around the plant do not show any major change.It has been feared that highly contaminated water is leaking to the ground from a trench that stretches from the No. 2 reactor building to the sea bank. The radioactive isotope detected this time suggests the possibility of radioactive materials remaining outside the trench.

Record outdoor radiation level that ‘can kill in 20 min’ detected at Fukushima - Outdoor radiation levels have reached their highest at Japan’s Fukushima nuclear plant,warns the operator company.Radiation found in an area near a steel pipe that connects reactor buildings could kill an exposed person in 20 minutes,local media reported. The plant’s operator and the utility responsible for the clean-up Tokyo Electric Power Company (TEPCO) detected record radiation levels on a duct which connects reactor buildings and the 120 meter tall ventilation pipe located outside on Friday. TEPCO measured radiation at eight locations around the pipe with the highest estimated at two locations - 25 Sieverts per hour and about 15 Sieverts per hour, the company said. This is the highest level ever detected outside the reactor buildings, according to local broadcaster NHK. Earlier TEPCO said radiation levels of at least 10 Sieverts per hour were found on the pipe. The ventilation pipe used to conduct radioactive gasses after the nuclear disaster may still contain radioactive substances, TEPCO added.

Highest Radiation Level Ever, Lethal In 20 Minutes, Recorded Outside Fukushima Reactor -- With all the excitement about Japan's soaring stock market (if plunging wages), crashing non-digital currency (leading to soaring energy prices), recent passage of an arbitrary secrecy bill ("Designed by Kafka & Inspired By Hitler"), and ongoing territorial spat with China, it is almost as if the Abe administration is desperately doing everything in its power, including some of the most ridiculous decisions taken by a government in recent history, to hide some key development behind the scenes. Such as this one perhaps: NHK reported today that TEPCO said radiation levels are extremely high in an area near a ventilation pipe at the crippled Fukushima Daiichi nuclear power plant. TEPCO found radiation of 25 sieverts an hour on a duct, which connects reactor buildings and the 120-meter-tall ventilation pipe.Putting this number in context the estimated radiation level is the highest ever detected outside reactor buildings. People exposed to this level of radiation would die within 20 minutes.  The exhaust pipe in question was used to release radioactive gases following the outbreak of the accident 2 years ago.TEPCO says radioactive substances could remain inside the pipes. Given TEPCO's safety record, they could also leak outside of the pipes. And given the company's "credibility" the world would be sure to learn about this... anywhere between 2 and 3 years after the fact.

Japan to spend almost $1 billion on contaminated soil storage - Japan is planning to spend Y100 billion ($970 million) to create a special space to store the soil contaminated with radioactive water from Fukushima crippled nuclear power plant, according to a report released on Wednesday. Tens of thousands of tones of soil are waiting to be stored and the Japanese authorities have set aside money to buy 3 to 5 square kilometers of land close to the power plant. Japanese government plans to use land in three towns that are located close to the Fukushima plant and that are heavily-contaminated, according to the international press. The mayors of the towns — Futaba, Okuma and Naraha — along with the governor of Fukushima prefecture Yuhei Sato, are worried that the site could easily transform from temporary to a permanent one. No official from the environment ministry could be contacted for comment on the report. By August 2013, around 133,000 tones of contaminated soil have been collected from the area around the plant, with around 80 percent of them being collected from Fukushima Prefecture. This contaminated waste is currently stored at waste incineration plants, sewage treatment plants and agricultural and forestry facilities nationwide.

Former Chesapeake Energy CEO Aubrey McClendon Buys Fracking Wells In Ohio's Utica Shale --Steve Horn -  Former Chesapeake Energy CEO and Founder Aubrey McClendon is back in thehydraulic fracturing ("fracking") game in Ohio's Utica Shale in a big way, receiving a permit to frack five wells from the Ohio Department of Natural Resources on November 26. "The Ohio Department of Natural Resources awarded McClendon's new company, American Energy Utica LLC, five horizontal well permits November 26 that allows oil and gas exploration on the Jones property in Nottingham Township, Harrison County," a December 6, 2013, article appearing in The Business Journal explained. "In October, American Energy Utica announced it has raised $1.7 billion in capital to secure new leases in the Utica shale play."McClendon is the former CEO of fracking giant Chesapeake Energy and now the owner of American Energy Partners, whose office is located less than a mile away from Chesapeake's corporate headquarters.The $1.7 billion McClendon has received in capital investments for the purchase of 110,000 acres worth of Utica Shale land came from the Energy & Minerals Group, First Reserve Corporation, BlackRock Inc. and Magnetar Capital.McClendon — a central figure in Gregory Zuckerman's recent book "The Frackers" — is currently under investigation by the U.S. Securities and Exchange Commission. He left Chesapeake in January 2013 following a shareholder revolt over his controversial business practices. In departing, he was given a $35 million severance package, access to thecompany's private jets through 2016 and a 2.5% stake in every well Chesapeake fracks through June 2014 as part of the Founder's Well Participation Program.

West Virginia Landfills Will Now Accept Unlimited Amounts Of Often Radioactive Fracking Waste - A memo released earlier this year in West Virginia gives the state’s landfills the ability to accept unlimited amounts of fracking waste, the AP reports. The memo will create an exception for the state’s natural gas industry to longstanding laws on landfill waste, which stipulate that landfills can only take 10,000 or 30,000 tons of solid waste each month, depending on their classification. Now, fracking operations can send unlimited amounts of their solid waste — known as “drill cuttings” and composed of dirt, water, sand and chemicals — to landfills each month. This exception has environmentalists in the state concerned. The Marcellus shale formation, which sits under much of West Virginia, has been found to have a higher level of radioactivity than other formations — last year, nearly 1,000 trucks hauling Marcellus Shale waste to Pennsylvania landfills were stopped after setting off radioactivity alarms. But unlike Pennsylvania, where waste that is deemed too radioactive is sent to radioactive waste disposal sites out of state, West Virginia doesn’t require waste to be tested for radioactivity. Bill Hughes, chairman of the Wetzel County Solid Waste Authority in West Virginia, told the AP he thinks the state needs to look into the potential health risks of drill cuttings. “Landfills have never seen a ton of waste they don’t want to take,” Hughes said. “Our state just sort of trusts the garbage guys.”

Experts Eye Oil and Gas Industry as Quakes Shake Oklahoma - Even before a magnitude 4.5 quake on Saturday knocked objects off her walls and a stone from above her neighbor’s bay window, Ms. Sexton was on edge.  “People are fed up with the earthquakes,” she said. “Our kids are scared. We’re scared.”  Oklahoma has never been known as earthquake country, with a yearly average of about 50 tremors, almost all of them minor. But in the past three years, the state has had thousands of quakes. This year has been the most active, with more than 2,600 so far, including 87 last week.  While most have been too slight to be felt, some, like the quake on Saturday and a smaller one in November that cracked a bathroom wall in Ms. Sexton’s house, have been sensed over a wide area and caused damage. In 2011, a magnitude 5.6 quake — the biggest ever recorded in the state — injured two people and severely damaged more than a dozen homes, some beyond repair.  State officials say they are concerned, and residents accustomed to tornadoes and hail are now talking about buying earthquake insurance.  Just as unsettling in a state where more than 340,000 jobs are tied to the oil and gas industry is what scientists say may be causing many of the quakes: the widespread industry practice of disposing of billions of gallons of wastewater that is produced along with oil and gas, by injecting it under pressure into wells that reach permeable rock formations.  “Disposal wells pose the biggest risk,” said Austin Holland, a seismologist with the Oklahoma Geological Survey, who is studying the various clusters of quakes around the state.  Oklahoma has more than 4,000 disposal wells for waste from tens of thousands of oil and gas wells. “Could we be looking at some cumulative tipping point? Yes, that’s absolutely possible,” Dr. Holland said.

Man-Made Quakes - Video -

Fort Worth Shows Why So Many Towns Are Banning Fracking - Several cities and counties in the U.S. have instituted bans or moratoria on the oil and gas extraction technique of hydraulic fracturing, or fracking, in recent years and Fort Worth’s experience with urban fracking shows why.“Fort Worth has been fracked to capacity,” resident Don Young told DeSmog Blog. “There is no turning back. Some days the air is so bad you can’t see downtown.”Chesapeake Energy began offering $300 and a pizza party for owners of mineral rights in predominantly poor and working class African American neighborhoods in 2003 and encountered little resistance, DeSmog Blogreported. Now Fort Worth has around 2,000 wells. Residents have been sickened by vapors from drilling operations, found their neighborhoods suddenly ruined by noise and fumes, and had their water sucked up by drilling operations in the middle of severe drought. Five sites were found in 2011 to be emitting pollution above state limits, according to a study commissioned by the Fort Worth City Council, and most of the 388 sites studied released visible emissions. Right next door to Fort Worth, the Dallas city council is considering letting fracking start up in town with a vote likely to come next week, capping a three-year fight over the future of fracking in the city. Until recently, Dallas had rejected attempts to frack in town, but that stance seems to be over. Current debate is over the distance required between wells and homes or wells and other wells: 1,500 feet or 1,000.

Did Dallas Just Ban Fracking? - The Dallas City Council voted Wednesday to require any gas wells to be placed at least 1,500 feet from homes, a move that the gas industry says might as well be a ban on drilling. Combined with the fact that the council would still have to approve any permit for a drilling site, factoring in neighborhood impact, fracking opponents are calling the ordinance a victory as well. A two-thirds council vote would be needed to alter the setback requirement in particular cases. Fossil fuel companies have been trying drill on land leased in Dallas since 2007.  The fossil fuel industry site Energy In Depth quickly called Dallas’ ordinance a dishonest backdoor ban on fracking, noting that in Fort Worth, where the setback requirement is 600 feet, “development has safely occurred for many years.” But a look at Fort Worth residents’ experience with drilling shows why neighboring Dallas would want stricter requirements. Sickening vapors, ruined neighborhoods, and wells as close as 300 feet to homes are the legacy of Fort Worth’s lax approach to fracking regulation. Nearby Arlington, Texas allows fracking inside of city limits, and has attempted to mitigate negative effects on residents by building sound-dampening walls around operations. But much of the danger of fracking comes from what it does to air and water. There’s no evidence that even 1,500 feet is enough to prevent chemical leakage into drinking water. A 2012 Duke University study found that homes within one kilometer, or 3,280 feet, of hydraulic fracturing wells had six times the methane and 23 times the ethane of homes not near wells. And an Earthworks report included video of toxic chemicals like benzene escaping into the air at drilling sites.

US Towns Sued for Illegal Fracking Bans -- Fracking has allowed the US to massively boost its oil and gas production, yet whilst the technology has arguably saved the country’s economy, it has also divided the nation, between those who support the controversial drilling technique and those that oppose it. Several towns and cities around the US have voted to ban all fracking practices within their jurisdiction, and now the oil companies, angry at being denied access to buried shale reserves, have begun to file cases against these cities. This is beginning to raise the question as to whether or not local governments have the power to introduce laws that ban fracking. This week, the Colorado Oil and Gas Association (COGA) filed a lawsuit against two Colorado towns, Lafayette and Fort Collins, after both passed legislation to forbid the practice of fracking.  Laurie Kadrich, a city official from Fort Collins, told Bloomberg that “as a city, we have a responsibility to defend the voter-approved ordinance, so we’ll be looking into the contents of the lawsuit and we’ll respond appropriately.”

The Shale Oil Boom is More "Mirage" than "Miracle": Gail Tverberg -- Gail Tverberg, is a professional actuary who applies classic risk assessment procedures to global resources: studying issues such as oil & natural gas depletion, water shortages, climate change, etc. She is widely known in the Peak Cheap Oil space for her reports issued across energy websites over the years under the penname "GailTheActuary". In this week's podcast, Chris asks Gail to assess the merits of the shale oil "revolution".   Gail quickly begins discounting the underlying economics behind the shale model: We have to ask: At what price is the oil available? Is this shale oil available because prices are high and in fact, because interest rates are low, as well? Or is it available if it were cheap oil with interest rates at more normal levels? I think what we have is a very peculiar situation where it is available ,but it is available only because of this peculiar financial situation we are in right now with very high oil prices and very low interest rates. The shale oil plays are going to be probably much less than a 10-year flash in the pan. They are very dependent on a lot of different things, including low interest rates and the ability to keep borrowing - which could turn around very quickly. Lower oil prices would tend to do the same thing. But even if you hypothesize that we can keep the low interest rates and that the oil price will stay up there, under the best of circumstances, the Barnett data says they probably will not go for very long. Similar to many energy experts Chris has interviewed prior, Gail looks at the math and concludes that humans (especially those in the West) have been living on an energy subsidy that is beginning to run out. We have been living outside of our natural budget, and will be forced to live within what remains going forward. As a result, she expect great changes in store for the next several decades: socially, politically and lifestyle-wise. Click the play button below to listen to Chris's interview with Gail Tverberg (38m:07s): .

Drilling California: A Reality Check on the Monterey Shale - The March 2013 study from the University of Southern California suggested that the development of the Monterey shale could—by 2020—increase California’s Gross Domestic Product (GDP) by 14 percent, provide an additional 2.8 million jobs (a 10% increase), and provide $24.6 billion per year in additional tax revenue (also a 10% increase). This study was based on estimates that development of the Monterey shale could increase total California oil production as much as seven-fold. Given the unrealistic nature of the original EIA/INTEK Monterey shale estimates, such production growth estimates are unfounded. Moreover, an examination of USC’s oil production estimates reveals that they include unrealistic assumptions about the total production growth possible from the Monterey and the number of wells that would be required to increase production to the levels forecast. Hence the economic projections of the USC study must be viewed as extremely suspect. Environmental concerns with development of the Monterey shale are centered around hydraulic fracturing (fracking), the main completion technique used in other tight oil plays. Acidization completions, using hydrofluoric and hydrochloric acid, are also of concern. It is certain that hydraulic fracturing and acidization completions have already been used on the Monterey shale, yet an analysis of production data reveals little discernible effect of these techniques in terms of increased well productivity. Many oil and gas operators and energy analysts suggest that it is only a matter of time before "the code is cracked" and the Monterey produces at rates comparable to the Bakken and Eagle Ford. Owing to the fundamental geological differences between the Monterey and other tight oil plays, and in light of actual Monterey oil production data, this is likely wishful thinking. For all of these reasons, this analysis suggests that California should consider its economic and energy future in the absence of an oil production boom from the Monterey shale.

The U.S. energy independence story: Will anyone be punished if it turns out to be wrong? - Will anyone who is currently predicting U.S. energy independence be punished if the story turns out to be wrong? I ask because the story--and that's all it is right now--appears to be driving public policy and business planning practically worldwide. Often implied with that narrative is a corresponding abundance of oil globally. In fact, some are predicating worldwide abundance on a continuous rise in U.S. oil output. This is despite the fact that even many optimistic forecasts make such ideas seem foolish. The actual data for crude plus condensate (which is the definition of oil) show oil production in the rest of world declining almost as much as the United States has increased its production from 2005 onward. Worldwide crude volumes have barely nudged upward in the last eight years, just 2.7 percent versus 10 percent in the previous eight-year period, according to the U.S. Energy Information Administration. This is despite record oil prices and record investment! Now, a lot of people stand to get hurt by the energy independence/abundance story--which is, in effect, a forecast--if the story turns out to be wrong. This is because governments, businesses and households will not have prepared themselves for a negative surprise--all because they were assured that the United States and even the world had nothing to worry about when it comes to oil supplies.

U.K. taxpayers to pay for fracking pollution if companies go bust - Taxpayers will pay to clean up any pollution caused by fracking if the companies go bankrupt, after a proposal to make UK operators take out insurance against such damage was ruled out by the government. Energy companies including Centrica-backed Cuadrilla are poised to drill shale gas wells around the country after the Treasury published draft legislation on Tuesday for tax breaks for the industry. Hydraulic fracturing – or fracking – is the controversial technique that involves pumping sand, chemicals and water underground to extract shale gas trapped in rocks. Campaigners and a cross-party group of MPs argue that before operators are granted permits to frack, they should have to take out a bond to pay for potential pollution incidents. Without such a bond, campaigners argued, clean-up costs would have to be paid for with public money if a company went bust.But on Monday, the environment minister Dan Rogerson said that there was no case for an amendment bringing in such proposals to the draft water bill. He told MPs: "We believe that the existing regulatory framework is fit for purpose for the exploration and exploitation of onshore oil and gas activities. There are a great number of checks and controls available to us to ensure that operators comply with the requirements of their permits and deal with the wider pollution risks without adding to existing regulation."The government could not support the new clause, he said, adding that if fracking companies caused pollution they could be fined under existing regulations.

Oilprice Intelligence Report: Japan Burns with "Fire Ice" Momentum - Japan, desperate for new domestic energy sources, is where we now look for research and development that no one else has the patience for—like this week’s revival of talk about “fire ice”, otherwise known as methane hydrates.  After all, methane hydrates—if we are to believe the experts—could be more plentiful than all known reserves of natural gas, while one cubic foot of solid methane hydrate yields about 164 cubic feet of gas. However, there is some disagreement over the actual volume of commercially viable methane hydrate deposits. In March, Japan Oil, Gas & Metals National Corp successfully extracted the first gas from deposits of methane hydrate from the ocean, producing 120,000 cubic meters of gas in six days of testing in the Pacific Ocean, off central Japan. Last week, Japan stumbled upon another source of fire ice in the Sea of Japan, and now the game is on to predict when Japan will start producing commercial quantities of gas from methane hydrates. Those estimations range from two years to 15 years, so we don’t have much to go on. In a November report, the International Energy Agency (IEA) noted that the viability of methane hydrates as a source of gas will depend largely on technological advancements and climate change regulations—the latter because methane is a potent greenhouse gas when leaked into the atmosphere so extracting it requires great care. So, while there is talk of fire ice eventually sidelining shale gas due to the enormity of the resources, there are also some cautionary notes, both technologically and economically.

Trains From North Dakota Will Now Carry More Crude Oil Than Keystone XL Would - A top official at North Dakota’s Mineral Resources Department said Thursday that as much as 90 percent of the state’s crude will move by freight rail in 2014, just one day before announcing record oil production of almost 1 million barrels per day — or approximately 5 percent of total U.S. oil consumption. A million barrels a day is more than the capacity of the controversial Keystone XL pipeline, which would transport 830,000 barrels per day. The fact, according to Centre for Research on Globalization (CRG), has led some in the oil industry to believe that heavy crude oil derived from Canada’s tar sands will find a way to refineries regardless of whether Transcanada’s controversial Keystone XL pipeline is approved. “Even if President Obama rejects the pipeline, it might not matter much,” CRG said, noting that the recent crude-by-rail boom is good news for tar sands advocates. “Tar sands advocates are happy to promote the idea that continued development of the tar sands is inevitable because it implies that opposition to Keystone XL is futile and that Americans should therefore cash in on its jobs and construction expenditures before somebody else does.”

Ottawa to designate crude oil as highly dangerous - The federal government will, for the first time, designate crude oil a highly dangerous substance and introduce tougher safety and testing measures for shipping oil by rail, Transport Minister Lisa Raitt has told The Globe and Mail. The fundamental shift, in response to mounting concerns about crude safety, comes after a Globe investigation detailed how the oil that exploded in Lac-Mégantic, Que., last summer was far more dangerous than regulators and shippers considered. The investigation found that numerous warning signs about the volatility, corrosiveness and content of the crude were ignored before the disaster. Until now, the government considered crude flammable, but not highly explosive. However, massive fireballs erupted in Lac-Mégantic on July 6 after a train carrying 72 tankers of crude oil derailed, killing 47 people and levelling much of the downtown. It is the worst railway disaster in Canadian history.

Mexico Passes Oil Bill Seen Luring $20 Billion a Year - Mexico’s Congress approved a bill to end a 75-year state oil monopoly and generate as much as $20 billion in additional foreign investment a year.  The nation’s most significant economic reform since the North American Free Trade Agreement secured the required two-thirds majority in a 353-134 lower-house vote yesterday. The proposal must be ratified by state assemblies, the majority of which are controlled by the alliance backing the reform.   The bill will change Mexico’s charter to allow companies such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) to develop the largest unexplored crude area after the Arctic Circle. Supporters say the overhaul could propel Mexico into the top five crude exporting countries while opponents say it will funnel resource wealth to foreign investors. The peso gained.  “The reform will energize Mexico’s economy,” Carlos Capistran, chief Mexico economist at Bank of America Corp., said in a telephone interview yesterday. “Congress was able to pass a better-than-expected constitutional reform.”

Budget Deal Opens up Parts of Gulf of Mexico for Drilling - The emerging budget deal put together by Congressman Paul Ryan and Senator Patty Murray includes provisions that will open up vast new territories in the western Gulf of Mexico for oil and gas drilling. The bill, which will fund the government through the fall of 2015, approves the U.S.-Mexico Transboundary Hydrocarbons Agreement, originally signed between those two countries in 2012.   The agreement allows for the development of oil and gas reserves that cross national boundaries, and sets up a framework for their joint development. The deal would open up 1.5 million acres, an area that may hold 172 million barrels of oil and 304 billion cubic feet of natural gas, according to the Bureau of Ocean Energy Management (BOEM).  If the Ryan-Murray deal is approved and the treaty goes into effect, U.S. companies will be allowed to partner with Petróleos Mexicanos (Pemex), Mexico’s state-owned oil company. This would be a significant change, as Mexico’s constitution forbids private sector contracts. Mexico is also separately considering a larger overhaul of its energy sector, and on December 10 the Mexican Senate approved of legislation that would allow for production sharing agreements with private companies. The Transboundary Agreement included in the Ryan-Murray deal would only affect areas along the maritime border, known as the Western Gap.

Oil Demand This Year And Next Will Be Higher Than Previously Thought - Global demand for oil will be higher than projected for both this year and next, according to the latest from the International Energy Agency (IEA). The IEA’s monthly Oil Market Report for December now pegs oil demand around the world for 2013 at 91.2 million barrels per day (mb/d) — an increase of 130,000 barrels per day over last month’s. The latest report also increased projected demand for 2014 to 92.4 mb/d, which is up 240,000 barrels per day over November’s estimate.  Significantly, global oil supply in November reached 92.3 mb/d. It’s not clear if oil supply for this year as a whole will total at a similar level. And even if it did total that level in 2014, it would still be slightly outstripped by the IEA’s projected demand. That would mean tighter oil supplies and thus higher prices. Demand actually fell slightly below supply in 2012 — at 89.3 mb/d versus 89.4 mb/d, respectively — but it’s outrun supply pretty regularly over last few years, despite production booms, as rising living standards in China and other areas of the developing world have driven up consumption.

New cold war: Russia eyes chilly arctic in global energy play - President Vladimir Putin ordered Russia's military to increase its focus on the Arctic and finish plans by the end of the year to upgrade military bases in the resource-rich region where world powers jostle for control.Speaking to Defence Minister Sergei Shoigu, Putin praised the military's work in the Arctic, where Canada said on Monday it was claiming the North Pole as part of an broader claim on the region.The United States, Denmark and Norway are also pressing for control of what they consider their fair share of massive untapped oil and natural gas reserves."I request that you pay special attention to the deployment of infrastructure and military units in the Arctic," Putin said, speaking at a Defence Ministry board meeting."By the end of the year it is planned - and I expect it will be done ... the renewal of the Tiksi airfield and completion of construction work on the Severomorsk-1 airfield," he said in televised comments.Russia has already completed work on renovating an airfield on the Novosibirsk Islands, Putin said, which was abandoned in 1993. Earlier this year Moscow sent 10 warships and four icebreakers to the islands in a show of force.Underscoring Moscow's sensitivity over Arctic claims, Russia arrested 30 people on board a Greenpeace ship during a September protest against Russian offshore Arctic drilling. They now face charges carrying seven year jail sentences. Putin said earlier this week that Russia's military presence in the Arctic was needed to protect against potential threats from the United States.

Canada To Claim North Pole, And The Oil And Gas Beneath -  In the latest gambit in the high-stakes quest for the resource-rich, waterway-laden region — quickly becoming more strategic due to climate change — on Monday Canada’s Foreign Minister John Baird announced Canada’s intentions to lay claim to the North Pole.  While the process of navigating the UN’s diplomatic chambers is likely to take years, and many view Canada’s appeal as a long shot, Baird said the government is working with scientists on a future submission to the UN that argues that the outer limits of the country’s continental shelf include the pole. “We are determined to ensure that all Canadians benefit from the tremendous resources that are to be found in Canada’s Far North,” Baird explained at a news conference in Ottawa. The U.S. Geological Survey estimates the 18-million-square-mile region contains 30 percent of the world’s undiscovered natural gas and 15 percent of its oil — a fact lost on no one, especially not the leader of a country.

Iran Quits Nuclear Talks After US Expands Blacklist Sanctions  -"We are evaluating the situation and will make the appropriate response," is how Iran's lead negotiator Abbas Araqchi reacted after accusing Washington on Friday of going against the spirit of a landmark agreement reached last month by expanding its sanctions blacklist. As AFP reports, Iranian negotiators quit the implementation talks late on their fourth day Thursday after Washington blacklisted a dozen companies and individuals for evading US sanctions. US Secretary of State Kerry, ever the optimist we presume, said "we’re making progress, but I think we’re at a point in those talks where folks feel a need to consult, take a moment," but Araqchi's comments on State TV give them little room for compromise, America's move "is by no means constructive and we are seriously critical of it."

Saudi deportations gain momentum - Teodros Adhanom, the Ethiopian foreign minister, has turned to Twitter almost every night for the last three weeks to tersely report the number of his countrymen expelled from Saudi Arabia. “Last night arrivals from Saudi reached 100,620,” he wrote on Friday, describing a fraction of one of the largest deportations in recent Middle East history. Riyadh has said it wants to forcibly expel as many as 2m of the foreign workers, including hundreds of thousands of Ethiopians, Somalis, Indians, Pakistanis and Bangladeshis, who make up around a third of the country’s 30m population. At home, the exodus of illegal workers is being seen as the kingdom’s most radical labour market experiment yet. With one in four young Saudi males out of work, analysts applaud Riyadh’s determination to tackle the problem, but doubt the crackdown will achieve its objective, as Saudi nationals are unlikely to apply for menial jobs. Overseas, the deportation is causing friction between Riyadh and the east African and southeast Asian countries that traditionally have provided Saudi Arabia with the bulk of low-wage workers that for decades have fuelled its economy. Ethiopia, Yemen, Somalia and several other countries are struggling to absorb the thousands of unemployed young men now returning, with development officials worrying about the impact on remittances.

Chinese Coal Use to Hit 4.8 Billion Metric Tons Annually by 2020 - As the rest of the world moves away from using coal as an energy source due to its high emission of greenhouse gas, in China the use of coal, the country’s main energy source, is predicted to reach 4.8 billion metric tons per year by 2020, up from 3.5 billion tons in 2012. The prediction was made by China National Coal Association vice president Liang Jiakun, who stated that the country’s coal industry still has potential to grow, as it now accounts for more than 60 percent of the country’s primary energy resources. According to the International Energy Agency, China is the world's second largest oil consumer behind the United States, and the largest global energy consumer. Driving China’s relentless use of energy are demographic and economic considerations. China is the world's most populous country and has a rapidly growing economy, which has driven the country's high overall energy demand and the quest for securing energy resources. The International Monetary Fund estimates that China's real gross domestic product grew at an estimated 9.2 percent in 2011 and 7.8 percent in the first half of 2012, after registering an average growth rate of 10 percent between 2000 and 2011. According to the International Energy Agency, China is the world's second largest oil consumer behind the United States, and the largest global energy consumer. Driving China’s relentless use of energy are demographic and economic considerations. China is the world's most populous country and has a rapidly growing economy, which has driven the country's high overall energy demand and the quest for securing energy resources. The International Monetary Fund estimates that China's total energy consumption of 90 quadrillion British thermal units (Btu).

China's coal emissions responsible for 'quarter of a million premature deaths' - Emissions from coal plants in China were responsible for a quarter of a million premature deaths in 2011 and are damaging the health of hundreds of thousands of Chinese children, according to a new study.The study by a US air pollution expert, commissioned by Greenpeace, comes as many areas in northern and eastern China have been experiencing hazardous levels of air pollution in recent weeks. In some eastern cities including Shanghai, levels were off the index that tracks dangerous pollution, with schools closing and flights being cancelled or diverted. Sales of air purifiers and face masks have soared with many retailers selling out of stock as residents try to protect themselves from the poisonous smog. In Jiangsu and Zhejiang provinces visibility was reduced to less than 50 metres earlier this week and in the city of Nanjing a red alert for pollution was maintained for five consecutive days. The analysis traced the chemicals which are made airborne from burning coal and found a number of health damages were caused as a result. It estimates that coal burning in China was responsible for reducing the lives of 260,000 people in 2011. It also found that in the same year it led to 320,000 children and 61,000 adults suffering from asthma, 36,000 babies being born with low weight and was responsible for 340,000 hospital visits and 141 million days of sick leave.

Shanghai grinds to a halt as smog nears top of air pollution scale - Shanghai experienced one of its worst episodes of air pollution on Friday, with the air quality index reaching the "severe" level, the worst on a six-tier national rating system. The municipality's landmark buildings disappeared from the skyline in the morning as the official air quality index exceeded 400. By 8pm, the index had hit 484, almost reaching the maximum of 500, according to the website of the Shanghai Environmental Monitoring Centre. In the Pudong district, home to multinational businesses and financial services companies, the level of PM2.5 - fine particles smaller than 2.5 microns in diameter which pose the biggest health risk - exceeded 600 micrograms per cubic metre by 1pm. In Putuo district, the level exceeded 700 mcg per cubic metre. The World Health Organisation safe limit is 25 mcg per cubic metre. Overall air quality was considerably worse than the municipal government had anticipated on Thursday when the bad pollution began. It had forecast the index would be at 240 to 310 on Friday afternoon. With such a high concentration of air pollutants, the authorities warned even healthy people would show some serious health symptoms and be more vulnerable to disease. Children, the elderly and the sick were advised to remain at home, while others were told to reduce their outdoor activities as much as possible.

PHOTOS: Shanghai’s Unbelievable Pollution Problem Started The Week Badly, Ended Worse - For the seventh day this month, Shanghai officials have warned children and the elderly to stay inside in a city where 24 hours exposed to the off-the-charts pollution would have hazardous consequences to one’s health. Hundreds of flights and sporting events have been cancelled, while face masks and air purifiers sold out in stores. All week, the pollution level hovered at “heavily” and “severely” polluted, according to Shanghai’s Air Quality Index, at up to 31 times the recommended levels. Eerie photographs of Shanghai show a city in a yellow haze: Shanghai orders cars off roads after pollution soars beyond indexable levels |— Bloomberg  Officials have ordered vehicles off the road to curb air pollution, so far removing roughly 30 percent.  This image from the city’s official index shows PM2.5, a small harmful particle for human health, at a concentration that almost broke the scale China uses to measure air quality, a range from 0-500. A heat map from a Greenpeace analysis of NOAA data shows how the smog has traveled from coal-burning regions into the city. Orange shows the highest concentrations of sulfur dioxide (SO2) and the pollutant’s trajectory. The sources come from coal regions Jiangsu, Anhui, Shandong and Henan.

There Are Multiple Benefits To China’s Record-Breaking Smog, Claims Chinese State Broadcaster - This month’s record-breaking air pollution in Shanghai has cancelled hundreds of flights and sporting events, forced children and the elderly to remain inside for at least seven days and almost broke the scale China uses to measure air quality. But according to one journalist at CCTV, China’s national broadcaster, the smog isn’t all bad. In an opinion piece published Monday, a CCTV journalist argues that there are five benefits of China’s smog problem: it has made Chinese people more united, equal, clear-headed, humorous and knowledgeable. United because, as Forbes reports, all people in China are now united around this common problem (which affected 40 cities last week); equal because it affects both the rich and poor; clear-headed because China is now waking up to the dangers of pollution; humorous because the smog brings out so much sarcasm among China’s residents; and knowledgeable because it’s allowed the Chinese to understand pollution in a profound way.  “Our knowledge of meteorology, geography, physics, chemistry and history has grown [because of pollution] and the standard of our English has improved too,” the CCTV author writes. “Without this haze, would you know what PM2.5 was? Would you know that 60 years ago the haze claimed 12,000 lives in London? Would you even know the words “haze” and “smog”?”

China "Fixes" Pollution Problem... By Raising Danger Threshold -- If you don't like the frequency of your air-quality alerts, you don't have to keep them. That is the message that the Chinese government has made loud and clear as Bloomberg reports, Shanghai's environmental authority took decisive action to address the pollution - it cynically adjusted the threshold for "alerts" to ensure there won't be so many. In a move remininscent of Japan's raising of the "safe" radioactive threshold level, China has apparently decided - rather than accept responsibility for the disaster - to avoid it by making the "safe" pollution level over 50% more polluted (up from 75 to 115 micrograms per cubic meter) - almost 5 times the WHO's "safe" level of 25 micrograms. Via Bloomberg, As the smog that has choked Shanghai for much of the last week reached hazardous levels, the city’s environmental authority took decisive action to address the frequent air-quality alerts: It adjusted standards downward to ensure that there won’t be so many. It was a cynical move, surely made to protect the bureau’s image in the face of unrelenting pollution that only seems to grow worse, despite government promises to address it. At this advanced stage in China’s development, nobody in the country (or elsewhere) -- not even the loyal state news media -- seems to believe that the problem is solvable, at least not any time soon. Even worse, nobody -- not the state and certainly not the growing number of middle-class consumers (and car buyers) -- seems ready to take responsibility for the mess.

What China's Energy Trajectory Says about Climate Change - The Chinese government said it was facing the difficult task of keeping its economy thriving while respecting the environment at the same time. With the International Energy Agency warning of an unstable future, the world's climate outlook may hinge on the development of major Asian economies. "Climate change is already a serious threat to food, water, ecological and energy security, and to people's lives and property," a report from the Chinese government said. "The mission to deal with climate change is very arduous, but knowledge in society and ability to do this are weak across the board."  China in September surpassed the United States to become the largest oil importer in the world, according to the U.S. Energy Information Administration. In a country profile, the EIA said the Chinese government has put a priority on developing a natural gas and renewable energy based power sector, though it still leads the world in terms of coal consumption. Last week, Beijing said it installed 7.9 gigawatts of wind power, 3.6 gigawatts of solar and experienced similar strides in nuclear energy and hydroelectric power this year. Combined, the 36 gigawatts of renewable energy added to the Chinese grid during the first 10 months of the year were twice what were installed last year. Addressing pollution is one of China's top priorities. Last week, however, states of emergency were declared to cope with the smog. But the problem isn't China's alone. Though natural gas accounts for the bulk of the energy mix in Southeast Asia, the IEA's chief economist Fatih Birol warned the region's economy was moving from green to black because of the abundance of cheap coal.

A Significant Warning on Reform Roadblocks in China - The extensive reform blueprint the Communist Party released last month has unleashed a sense of optimism about Beijing’s ability to steer the country away from the potholes that have brought other fast-growing economies to a halt.But at least one high-profile government adviser is worried that the road ahead is still strewn with major roadblocks.Wu Jinglian, a major intellectual force behind China’s economic reforms since the 1980s and someone described as “the conscience of China’s economic circles”, said in a widely distributed interview (in Chinese) broadcast on Chinese Central Television on Thursday evening that he was “worried that vested interests are the biggest obstacle to reform and a market economy.”  Wu is a senior researcher at the State Council’s highly influential Development Research Center—and therefore someone who reflects the thinking of many reformers in the Chinese leadership. While concern about vested interests undermining much need economic reforms is not new, the fact that a figure such as Wu is flagging them as an impediment on CCTV is significant. The comments come as the Chinese leadership appears to be preparing to act on its reform promises. According to Wu, however, carrying out those promises is likely to be difficult.

China Steps Toward Market-Based Interest Rates - China took another long-expected step toward interest-rate liberalization on Sunday, giving banks the freedom to issue large-denomination negotiable certificates of deposit. The interest rate on the new instruments will be determined by the market, unlike ordinary bank deposits, which are subject to an interest-rate cap in China. Initially they will be available to fund managers and participants in the interbank market, but not issued directly to individuals or nonfinancial enterprises. Banks will be allowed to issue the new instruments beginning Monday, the People's Bank of China said in a statement on its website. The minimum amount for a single CD is to be 50 million yuan ($8.2 million), according to the statement. They can also be traded on the secondary market. China's road to financial liberalization follows a path taken by other countries. The next logical step is to make CDs available to the public, offering higher interest rates to individual savers than they would get from an ordinary deposit. The move is the latest step toward a fully market-based system of interest rates. China scrapped controls on interest rates for most loans in July, but deposit rates are still subject to a ceiling.

China’s Hot Money Headache - China reported strong export numbers on Sunday, in part due to demand from Western nations ahead of the holiday season. Some observers think another factor could be at play: Companies overstating the value of exports as a way to circumvent rules that restrict the flow of capital into the country.  Such over-invoicing of exports occurred about a year ago, leading to a crackdown by authorities. A 12.7% on-year jump in the value of exports in November and recent data that shows a rise in the use of the yuan currency for trade financing has some analysts worried the practice is back in vogue.  “The accelerating export growth might be mainly a result of an improved global economy,”  “But we are concerned that a rising (yuan) and rising bond yields could once again entice capital inflows via over-reporting of exports.”  Generally higher interest rates in China than elsewhere in Asia creates a powerful incentive to borrow money abroad and invest it onshore. Rates are expected to trend higher as China’s central bank squeezes liquidity to rein in credit growth amid fears of rising debt levels. Government bond yields came close to record levels at the end of November, and capital-hungry banks have started to offer more for short-term financing. The average yield on structured “wealth management products” issued by banks is as high as 6.4%. By comparison, ordinary deposits in Hong Kong pay 0.7%, according to the International Deposit Rates Exchange.With that kind of differential, it’s not surprising that companies have found plenty of ways to move money into China, often under the guise of paying for export shipments. “Trade is still a major channel to bring in hot money,”

First China Default Seen as Record $427 Billion Debt Due - Chinese company debt twice the size of Ireland’s economy will come due in 2014, spurring concern the nation is on the cusp of its first corporate bond default. A record 2.6 trillion yuan ($427 billion) of interest and principal on securities issued by non-financial companies must be repaid next year, 19 percent more than this year and the most since China International Capital Corp. began compiling the data in 2008. Ten-year AAA corporate bond yields surged 89 basis points since Dec. 31 to 6.18 percent, touching a record 6.23 percent on Nov. 27. That compares with a 70 basis-point rise to 2.68 percent for similar-rated notes globally. People’s Bank of China Governor Zhou Xiaochuan’s signal the central bank will act to prevent excessive leverage has contributed to the surge in borrowing costs and forced many firms to delay financing plans. Rising interest rates may cause a “partial debt crisis to explode,” the official China Securities Journal said in a Nov. 26 editorial. “The probability of default will get much higher in 2014 as maturing debt reaches a record,” said Shi Lei, the Beijing-based head of fixed-income research at Ping An Securities Co., a unit of the nation’s second-biggest insurance company. “The central bank’s policy of controlling leverage, which may last a long time, will crowd out companies with bad credit profiles and, ultimately, help restructure the economy.”

South Koreans Expand Air Defense Zone In Challenge To China - The ongoing client in the seas and skies in the Western Pacific took a new turn when South Korea announced an expansion of its own air defense zone:Defying both China and Japan, South Korea announced on Sunday that it was expanding its air patrol zone for the first time in 62 years to include airspace over the East China Sea that is also claimed by Beijing and Tokyo. South Korea’s expanded “air defense identification zone” was the latest sign of a broadening discord among the Northeast Asian neighbors, who are already locked in territorial and historical disputes. With South Korea’s newly expanded zone, the air defense zones of all three countries now overlap over a submerged reef called Ieodo in South Korea and Suyan Rock in China. The reef is controlled by South Korea, which maintains a maritime research station there, but China also claims it. The seabed around the reef is believed to be rich in natural gas and minerals deposits. The South Korean move came two weeks after China stoked regional tensions by unilaterally expanding its own air patrol zone to partly overlap with South Korea’s and include airspace over the reef. The expanded Chinese air control zone also covers a set of East China Sea islands, called Diaoyu in Chinese and Senkaku in Japanese, which are at the heart of a territorial feud between Japan and China.

Japan Inc sees BOJ easing further as sales-tax hike looms (Reuters) - Almost two-thirds of Japanese firms expect the Bank of Japan will increase its stimulus in the first six months of 2014, a Reuters poll showed, underscoring the pressure on the central bank to remain the engine of growth under Abenomics. The results of the monthly Reuters Corporate Survey also showed broad support for the toughest economic policy decision Prime Minister Shinzo Abe is likely to face in the year ahead - pushing ahead with a further sales-tax increase to 10 percent. Financial markets are speculating whether the BOJ will launch a second round of quantitative easing next year after economic growth slowed sharply in the third quarter and inflation - albeit at a five-year high - remains well short of the central bank's target. Businesses are also looking to additional BOJ stimulus to help the economy withstand an already approved sales-tax increase in April. Abe and others have argued that higher taxes are needed to rein in Japan's huge public debt even at the risk of slowing the economy in the short term. "It will be an adrenaline shot to counter the negative impact of the sales tax hike,"

Firm Machinery Orders a Welcome Sign for Abenomics - Japanese machinery orders ticked up in October, a sign that business investment is holding firm and could take on a greater role in driving economic growth toward the end of the year. Core orders rose 0.6% in October from the month before, in line with forecasts. That came after a 2.1% decline in September. The gain is a positive sign that firms putting money into equipment and facilities will continue to support Japan’s economic recovery, despite earlier data suggesting such investment might be waning. The data come at a critical time for Prime Minister Shinzo Abe’s economic program. “Abenomics” notched impressive accomplishments in the first half of the year, but recent data have suggested growth momentum is waning. The current country’s current account has recorded a deficit in back-to-back months for the first time since the data series began in 1996. The stock market also has seen its rapid gains ease as the yen – which began falling sharply a year ago when it became Mr. Abe would be elected – has more or less stabilized.

Forget the Fed, prepare for Tokyo ‘taper’ - If (or when) America’s central bank finally embarks on its taper, how will this affect markets? Or the central bank itself? That is a question investors and analysts are frantically debating now, as the next US Federal Reserve decision looms. But this intellectual exercise is one that investors might do well to ponder on the other side of the world, too. The Fed is not the only bank to have embarked on extraordinary monetary policy experiments in recent years; the Bank of Japan has recently conducted policies that make the Fed’s experiments look almost tame and have had a big impact on Asian markets. Thus far, nobody in Japan is yet actively discussing when the BoJ might embark on an exit. On the contrary, the BoJ has pledged to keep policy ultra-loose for a long time, as part of Abenomics. But the question of future strategy should not be ignored, however distant it may seem. For as the monetary experiments have become more extreme, they have created distortions which could be as difficult to unwind as in America, if not more so. And that not only creates future economic risks, but rising political challenges too. The visible piece of the equation has been a flurry of asset purchases by the central bank, to pump liquidity into the system; Iwata and Samikawa project, for example, that by the end of 2014 the BoJ will hold Y190,000bn of Japanese government bonds, double the level in 2012. This has made the BoJ the biggest single buyer of JGBs and caused the entire monetary base to double in a mere two years. But what is less noticed is a shift in the maturity profile: because the BoJ has been buying long and super-long instruments, the maturity of its holdings has risen from less than three years before Abenomics, to around seven years today.

Japan Posts Slower Growth, Surprise Current-Account Deficit - Japan’s growth slowed more than initially estimated in the third quarter and the current account unexpectedly fell into deficit in October, highlighting headwinds for Abenomics. Gross domestic product expanded an annualized 1.1 percent from the previous quarter, a revision from 1.9 percent, the Cabinet Office said today in Tokyo. The shortfall in the broadest gauge of trade was 128 billion yen ($1.2 billion), the Finance Ministry said. Only four of 23 economists surveyed by Bloomberg News forecast a deficit.Weaker-than-estimated business spending contributed to the revision to the GDP figures, indicating that Japan Inc. is yet to be convinced that Abenomics will trigger a prolonged economic revival. Prime Minister Shinzo Abe said in an interview last week that he wants a “virtuous cycle,” where growth propels corporate profits, employers raise compensation and workers spend more. Business spending was unchanged in the third quarter from the previous period, down from a preliminary estimate of 0.2 percent growth. A smaller contribution from inventories also played a role in the GDP growth revision, according to the Cabinet Office.

Japan May Soon Start Losing Wealth -- Japan may still be the world’s largest creditor nation, but it is likely to starting losing some of its wealth within the next couple of years, as its broadest trade measure lurches closer to its first annual deficit in more than 30 years. The nation’s current account balance, the broadest measure of trade with the rest of the world, posted a second monthly deficit on a seasonally adjusted basis in October of ¥59.3 billion ($576 million), government figures showed Monday. That’s the first back-to-back shortfall under the current data series that started in 1996.On a nominal basis, the current account also logged its first deficit since January, its fifth shortfall since the watershed month of March 2011, when the earthquake and tsunami rocked Japan’s economy and caused changes to Japan’s energy usage through the Fukushima nuclear accident. Japan has posted a current account surplus every year since 1981, on the back of its strong exports and overseas investment income. While the monthly figures so far this year suggest the current account will stay in the black in 2013, economists see a trend of regular deficits becoming clearer over the next couple of years.

Japan growth forecasts cut for second month on weak capex, exports - Economists cut Japan's economic growth forecast for the second straight month, a Reuters poll showed, as a slowdown in capital expenditure and lacklustre export demand weighs on the outlook for the current fiscal year. The economists stuck with their view that Japan's growth will slow further next fiscal year due to a planned increase in the sales tax in April. The biggest downside risks to this scenario are a longer-than-expected downturn in consumer spending after an increase in the sales tax, the poll showed, as well as if overseas economies unexpectedly weaken. The chance of these risks materialising is not that high, but the Bank of Japan would likely bear the burden of responding to these risks by further expanding its balance sheet, according to the poll. "The biggest risk to growth is obviously that spending stays weaker for longer following the consumption tax hike," "For inflation, the main risks are probably to the downside, as inflationary pressure might be lower than expected once the impact of the weak exchange rate fades."

Bank of Japan Vows to Stick with Easy Money Policy - The Bank of Japan will keep its highly expansionary monetary policy in place until inflation hits and stabilises at its 2 per cent target, the central bank’s governor said on Thursday, adding it would take more easing measures if price rises flagged. “We intend to achieve the 2 per cent inflation target and maintain that in a stable manner,” Haruhiko Kuroda told the Financial Times, suggesting ultra-easy money could remain “It’s not good just to touch on 2 per cent inflation and then go down to 1 per cent or less than 1 per cent.”in place well beyond the two-year timeframe the BoJ has given itself to reach the goal.  Since his appointment by Mr Abe this spring, Mr Kuroda has committed the BoJ to buying some Y50tn of Japanese government bonds a year – a far more aggressive policy than his predecessors’ and enough to double the country’s monetary base by the end of next year.Yet sceptics have noted that much of the inflation generated has been the result of a steep fall in the value of the yen, which has pushed up the cost of imports, most notably oil and gas. Mr Kuroda, a former finance ministry official, reiterated his support for tighter fiscal policy to rein in Japan’s huge government debt, which is approaching two and a half years’ economic output. He reiterated his support for a planned doubling of the national sales tax, to 10 per cent by 2015, and said further tax rises or spending cuts would be needed to meet a goal of eliminating the deficit, minus interest payments, by 2020.

The TPP Stall: More Abenomics Doubts? -- When Japan agreed to join talks for a pan-Pacific free-trade bloc earlier this year, U.S. officials hailed the move as a sign that Prime Minister Shinzo Abe was serious about making tough political decisions to reform his country’s economy. But with a crucial round of talks for the Trans-Pacific Partnership initiative ending Tuesday in Singapore without the significant breakthrough American negotiators were seeking, some of the initial optimism has faded.  The necessary follow-through hasn’t gone as far or as fast as Abe enthusiasts may have hoped for just a few months ago. Add TPP to the growing list of items creating skepticism about Mr. Abe’s ambitious economic restructuring program. On Tuesday, a key tax panel in Mr. Abe’s ruling Liberal Democratic Party decided to shelve, for now, one of his proposals to offer lower corporate taxes in special economic zones he has been promoting. In the eyes of the Americans, Mr. Abe appears to have flinched at the last minute. They say the Japanese leader caved in to the farm lobby, instead of wrestling concessions from them for the good of moving forward economic reforms. Some analysts say Japan simply didn’t have time to make the necessary concessions, having joined the talks a year or more after some of the other key participants. “Japan entered the talks with much work to do on market access issues, especially in the agriculture sector.” Japanese officials tell a different story. For them, the main stumbling block lies in the U.S.: The diminished political base of President Barack Obama has made it difficult for the U.S. to offer bold proposals to push through the TPP negotiations or obtain any agreement between its 12 members through Congress.

Wikileaks exposes secret, controversial Trans-Pacific Partnership negotiations - Global intellectual property (IP) legislation continues to be negotiated behind closed doors this week in Singapore where discussions are underway on a secretive international trade treaty that could have far-reaching effects on Internet services, copyright law and civil liberties. The Trans-Pacific Partnership (TPP) agreement aims to enhance trade and investments, promote innovation and help economic growth among 12 trans-Pacific countries: the U.S., Canada, Japan, Mexico, New Zealand, Australia, Brunei, Chile, Malaysia, Peru, Singapore and Vietnam.The negotiations, however, are covered in secrecy. Anyone not closely connected to the talks is being kept in the dark about the exact proposals being discussed. The Australian government, for instance, refused to give the Senate access to the secret text of the draft treaty being negotiated in a final round of talks in Singapore, the Sydney Morning Herald reported Monday. But texts of purported drafts of the treaty have been leaked to the public, most recently on Monday by Wikileaks, which published two documents said to show the state of negotiations after talks held in Salt Lake City from Nov. 19 to 24.  One of the documents shows that the U.S. exerted “great pressure to close as many subjects” as possible during the meet. The chief U.S. negotiator, whose name was redacted from the document by Wikileaks, has met with all 12 countries saying they were not progressing according to plan. However, that’s because of a lack of substantial progress by the U.S., according to one of the countries, which was not identified in the document.

The Latest Never Ending Adventures in Corporatism Via the TPP -  Wikileaks has published more secret Trans-Pacific Partnership Agreement documents, revealing more and more how the United States represents large corporations and not the citizens of the nation.  The Huffington Post published a large front page story is on the Trans-Pacific Partnership trade treaty.  Seems Obama is hell bent on making sure large multinational pharmaceutical companies maintain a monopoly on prescription drugs and their prices.  Another intent is to override international as well as national law by supplanting current laws and courts via the TPP trade treaty terms.  The Obama administration is insisting on mandating new intellectual property rules in the treaty that would grant pharmaceutical companies long-term monopolies on new medications. As a result, companies can charge high prices without regard to competition from generic providers.  The same article exposes just an astounding development in the TPP, a private international court which would then supersede current international law, all under the guise of tradeOne of the most controversial provisions in the talks includes new corporate empowerment language insisted upon by the U.S. government, which would allow foreign companies to challenge laws or regulations in a privately run international court. Even within the confines of yet another bad trade deal, the United States stands alone as the bad guy negotiator.  This is quite a feat considering trade agreements are written by and for multinational corporations in the first place.  There is even a chart exposing how the United States stands alone in their demands for what is included in the TPP. In fact, a leaked chart detailing countries’ positions last month on the most contentious issues shows that the United States stands alone among TPP countries on 1 out of every 4 controversial issues. In each of these contentious areas, all other TPP countries that have taken a position have rejected U.S. demands. If adding issues in which the U.S. position is shared by just one or two of the 11 other negotiating partners, more than 40% of the unresolved issues constitute unpopular demands made by the United States, often at the behest of corporate interests.

The Top 5 myths about the TPP -- With the latest round of Trans Pacific Partnership (TPP) negotiations wrapping up in Singapore earlier this week, people are finally starting to pay attention. After four years, negotiators were hoping to conclude the massive trade agreement in early December. Their missed deadline has resulted in increased coverage and a whole host of misinformation. Below are five key myths to ignore:

  • 1. The missed deadline signals serious trouble. None of the major negotiators, stakeholders, or political players who have been involved in the last couple of months expected that the TPP would be wrapped up in 2013 given that Trade Promotion Authority has not been renewed and the limited time left on the Congressional calendar this year will be spent considering the Murray/Ryan budget agreement.
  • 2. Trade Promotion Authority (TPA) / “fast-track authority” is dead in the water
  • 3. The TPP is being negotiated in secret - Though I’m sure the USTR would prefer that it remain private, the fact is this information is out there and available to anyone with a computer.
  • 4. Wikileaks is playing a decisive role in the process. Wikileaks gleefully released a draft chapter of the Intellectual Property negotiating text in mid-November and ever since then all corners of the internet have hailed their efforts to bring transparency to this process.  However, these issues would remain whether or not the public was aware of them and Wikileaks does no one any favor by releasing incomplete details about incomplete chapters that are part of an incomplete agreement.
  • 5. The TPP is just another corporate care package that will cost American jobs.  This argument only holds water among those who never took Econ 101 or work for a national union.

US and Japan differences stall Pacific Rim trade deal - Deeply rooted differences between the US and Japan over Tokyo’s determination to continue protecting its markets for beef, rice and other “sacred” agricultural products are becoming a barrier to sealing a 12-country Pacific Rim trade pact. Japan joined the negotiations towards a Trans-Pacific Partnership in July that will cover almost 40 per cent of the global economy. Other countries praised what appeared to be Tokyo’s initial “aggressive” approach towards reaching a deal. The view among many other countries is that Shinzo Abe, the Japanese prime minister, is eager to use the TPP to help push through structural reforms at home. But negotiations between the US and Japan during four days of ministerial meetings in Singapore that concluded on Tuesday failed to find a solution on how to treat agricultural and other products. Michael Froman, the US trade representative, told reporters after the meetings ended, that not enough progress had been made by Japan. Tokyo’s offers, he said, had not yet lived up to the “high ambition” of the TPP, pointing to a 2011 declaration in Honolulu in which US President Barack Obama and other leaders called for the wholesale elimination of tariffs. “We are hopeful that Japan is able to come to the table prepared to achieve the kind of outcome that is expected as part of TPP,” Mr Froman said. “Resolving the US-Japan market access questions will be critical to How Japan and the US resolve their negotiations over market access is crucial. While the 12 ministers involved in this week’s negotiations in Singapore reported “substantial progress” in a closing statement on Tuesday, that may matter little if the US and Japan cannot find agreement. The TPP hinges on a balance between what its participants hope will be ambitious “21st-century” rules on things such as intellectual property rights and more traditional issues of market access. For many of the countries involved, the question is what they are willing to compromise on intellectual property, investment and other rules in return for access to the US and Japanese markets.

Will Opposition in the US and Overseas Derail the Toxic TransPacific Partnership? - Yves Smith - Given the extreme measures the Obama Administration has gone to to keep the pending trade deal known as the TransPacific Partnership under wraps, it’s hard to be certain where things stand. Public Citizen has been relentless in publicizing leaks in combination with detailed analysis that show that this pact is not about trade, but about setting up a pro-corporate regime that would strengthen intellectual property laws (including drug patents) while allowing for “investor” panels to impose fines on governments for environmental, labor, and financial regulations that might dent their profits. Weaker versions of this sort of provision has led to a claim against Australia by Philip Morris for plain cigarette packaging and one against Quebec for imposing a moratorium on fracking. Each sought multi hundred million dollar damages. So images what a Brave New World with even more opportunities for investors to challenge national laws would look like. Even with the veil of secrecy, enough damaging information has come public to lead to a large number of House Democrats and even some House Republicans to voice concerns about the pact and threaten to deny so-called fast-track authority. Mind you, the degree of opposition in Congress is high enough to be fatal; 18 of 21 ranking full committee members are opposed. Since then, Wikikeaks has has two rounds of substantial leaks of actual draft text from the key chapter on intellectual property, with notes as to where various countries stand on and suggested revisions. Amusingly, the supporters had embarked on a renewed effort to try to push the deal over the finish line on the eve of the opening of the last round of negotiations. But my sources on the Hill weren’t convinced. As one staffer wrote, “Hard to know what is going on, I suspect that the international agreement is falling apart and the US elements are trying to restart momentum by introducing fast track in Congress.”

House And Senate Near Deal To Green-Light Trade Pact -- A sweeping trade agreement between the United States and a dozen Pacific nations could be approved by Congress as early as next week, a move that would signal a major victory for the special interests and corporations backing the deal.  House and Senate negotiators are closing in on a deal to "fast-track" the Trans-Pacific Partnership, according to congressional aides who spoke to The New York Times.  Approval of trade promotion authority for the TPP would effectively insulate the trade agreement from legislative obstacles in Congress, like filibusters and poison-pill amendments. Granting fast-track status to potential U.S. trade agreements has become standard practice in recent years.  Aides told the Times that lawmakers were aiming to have a deal together by the end of the legislative session in two weeks, although they were skeptical that any final approval would be voted on before the New Year.  Outside of Washington, the TPP enjoys well-funded backing from a wide swath of corporations seeking cheaper access to markets overseas. The pharmaceutical, agriculture and technology industries would all likely benefit greatly if the TPP were approved.  But U.S. companies aren't the only ones pressing lawmakers to fast-track the TPP. On Monday, the Embassy of Canada, a party to the TPP, will host a reception "in honor of the Trans Pacific Partnership." This, despite the fact that the deal is far from done. Opponents of the TPP have urged Congress to reject the fast-track plan, noting that the TPP has been negotiated almost entirely behind closed doors. There are also concerns that the TPP's tariff and export agreements could hurt the U.S. manufacturing sector.

TPP - Krugman - I’ve been getting a fair bit of correspondence wondering why I haven’t written about the negotiations for a Trans Pacific Partnership, which many of my correspondents and commenters regard as something both immense and sinister. The answer is that I’ve been having a hard time figuring out why this deal is especially important. The usual rhetoric — from supporters and opponents alike — stresses the size of the economies involved: hundreds of millions of people! 40 percent of global output! But that tells you nothing much. After all, the Iceland-China free trade agreement created a free trade zone with 1.36 billion people!!! But only 300,000 of those people live in Iceland, and nobody considers the agreement a big deal. The big talk about TPP isn’t that silly. But my starting point for things like this is that most conventional barriers to trade — tariffs, import quotas, and so on — are already quite low, so that it’s hard to get big effects out of lowering them still further. The deal currently being negotiated involves only 12 countries, several of which already have free trade agreements with each other. It’s roughly, though not exactly, the TPP11 scenario analyzed by Petri et al (pdf). They’re pro-TPP, and in general pro-liberalization, yet even so they can’t get big estimates of gains from that scenario — only around 0.1 percent of GDP. And that’s with a model that includes a lot of non-standard effects.

Paul Krugman and TPP - Dean Baker -- I've got to take some issue with my friend Paul Krugman over his blogpost pronouncing the Trans-Pacific Partnership (TPP) no big deal. As a trade question he is undoubtedly right. However it is a misunderstanding to see the TPP as being about trade. This is a deal that focuses on changes in regulatory structures to lock in pro-corporate rules. Using a "trade" agreement provides a mechanism to lock in rules that it would be difficult, if not impossible, to get through the normal political process. To take a couple of examples, our drug patent policy (that's patent protection, as in protectionism) is a seething cesspool of corruption. It increases the amount that we pay for drugs by an order of magnitude and leads to endless tales of corruption.  Anyhow, the U.S. and European drug companies face a serious threat in the developing world. If these countries don't enforce patents in the same way as we do, then the drugs that sell for hundreds or thousands of dollars per prescription in the U.S. may sell for $5 or $10 per prescription in the developing world.  The drug companies would like to bring these producers into line and impose high prices everywhere. For another example, our gas industry has been pursuing fracking at an ambitious clip with little regard for its environmental impact.  I can see no justification for allowing the process in ways that let the gas companies pollute people's drinking water and ruin their farmland. In the Bush years the industry arranged a special exemption to the Clean Water Drinking Act so that they do not have to disclose the chemicals used in the fracking process. (They claim their mixes are industrial secrets.) If the industry got similar wording in the TPP it would both lead to open fields for fracking in the other signatories and also make the U.S. law more difficult to reverse.

Is Krugman Running on Brand Fumes? (TransPacific Partnership Edition) - Yves Smith - It may seem a bit de trop to take on a Paul Krugman blog posts yet again, but the reason for focusing on his post yesterday on the TransPacific Partnership is less for its substance and more as a political zeitgeist indicator.  The distressing part about the role Krugman has chosen to play is that he too often throws his good name behind dubious Team Dem initiatives and orthodox economic thinking. Lesser figures, as in mere working journalists and commentators who advance various interests among the political and policy elites (think Ezra Klein or Andrew Ross Sorkin) take care to have enough substantive, independent-looking work so as to lend credence to their defenses of an increasingly corrupt status quo.  Krugman, of course, as a Nobel prize winner, operates in a completely different league. His credibility rests on his economics chops. He can thus rely on his established brand more heavily than lesser figures. But even for someone like Krugman, there are limits on how far your authority will take you.  Krugman’s blog post on the TPP was of the “move on, nothing to see here” sort: “… I’ve been having a hard time figuring out why this deal is especially important….I don’t want to be too dismissive. But so far, I haven’t seen anything to justify the hype, positive or negative.”  Now one might charitably assume that Krugman hasn’t chosen (again) to carry water for the Administration, that he really hasn’t bothered checking what Joe Stiglitz, Dean Baker, the Electronic Freedom Foundation have said about the regulations-gutting and egregious intellectual property strengthening elements of this proposed deal, and that he also missed the two sets of Wikileaks releases.  But the intriguing bit is that irrespective of your view on the genesis of the Krugman piece, it landed like a lead balloon with his readers. As a Congressional staffer said by email: “His commenters are eating him alive.” And that’s not an exaggeration. Of 60 comments on the post as of this hour, not a single one supported Krugman’s position.

Why TPP Counts - Paul Krugman yesterday: I’ve been getting a fair bit of correspondence wondering why I haven’t written about the negotiations for a Trans Pacific Partnership, which many of my correspondents and commenters regard as something both immense and sinister. The answer is that I’ve been having a hard time figuring out why this deal is especially important. … The big talk about TPP isn’t that silly. But my starting point for things like this is that most conventional barriers to trade — tariffs, import quotas, and so on — are already quite low, so that it’s hard to get big effects out of lowering them still further.  The answer to why TPP counts is sort-of buried in Paul’s argument about why it doesn’t. He’s absolutely right that TPP doesn’t do much to liberalize trade. But the dirty secret about most trade negotiations today is that they aren’t really about “conventional barriers to trade” any more. ‘Non-tariff barriers,’ which get most of the attention in trade talks these days are a euphemism for differing national approaches to regulation. ‘Eliminating’ these non-tariff barriers involves regulatory changes that are often (a) highly politically controversial, and (b) devoid of obvious trade liberalization payoffs. Trade agreements also provide an opportunity for various business interest groups to get provisions that have nothing to do with trade onto the negotiation bandwagon.  One excellent example of this is the obscure seeming question of data exclusivity (I owe nearly everything I know on this topic to Gabriel Michael who is working on this and other intellectual property issues for his Ph.D. dissertation, while doing great data visualization work on TPP in his spare time). There are no obvious trade benefits to data exclusivity. Yet this hasn’t stopped Senator Orrin Hatch from effectively threatening the deal if the US doesn’t shove it down the throats of other states.

TPP and IP, A Brief Note -  Krugman - Dean Baker takes me to task over the Trans Pacific trade deal, arguing that it’s not really about trade — that the important (and harmful) stuff involves regulation and intellectual property rights.  I’m sympathetic to this argument; this was true, for example, of DR-CAFTA, the free trade agreement with Central America, which ended up being largely about pharma patents. Is TPP equally bad? I’ll do some homework and get back to you.

U.S. Trade Rep: Bali Deal Shows WTO’s Potential -- Nations of the 159-member World Trade Organization passed the first multilateral pact in the global trade body’s 18-year history over the weekend. Negotiators meeting in Bali portrayed the deal—largely aimed at cutting red tape in customs procedures worldwide—as a landmark accord to revive the flagging Doha round of trade talks and restore legitimacy to the WTOas a rules-making body. However, some trade experts say the deal delivers less than advertised. U.S. Trade Representative  Michael Froman says it’s a good deal that demonstrates the WTO’s potential to broker future agreements. In an interview with The Wall Street Journal’s Ben Otto, he addressed several criticisms. Edited excerpts:

In Taiwan, Export Figures Show Impact of Offshore Manufacturing - Taiwan’s exports have long been considered a bellwether of global demand due to the island’s prominence in the electronics supply chain. But the recent divergence in export-related indicators has left some investors puzzled. Export orders, a harbinger of actual exports a month or two down the line, have been rising modestly since July, in a range of 0.5%-3.2%. That trend is in sync with purchasing managers indexes that have shown manufacturing growing for four straight months and which rose in November at their fastest pace since March 2012.Actual exports, however, have been in negative territory after falling 1.5% on-year in October and 7.0% in September. That could change in November: Though the country’s finance minister said last week that exports likely fell for a third straight month in November, economists surveyed by The Wall Street Journal forecast a median gain of 2.3%. The data is due out later Monday. The US$10 billion-US$15 billion gap between the value of actual exports and export orders could be explained in part by Taiwanese output produced abroad. Export orders, and to a certain extent the PMI, take into account overseas production, while actual exports only count domestic production. According to Taiwan’s Ministry of Economic Affairs, about 52.9% of the island’s export orders in October were for goods produced and shipped outside Taiwan. That’s up from 47% five years ago.

India's money supply up an annual 14.5 per cent in two weeks to November 29 - India's M3 money supply rose an annualised 14.5 percent in the two weeks to November 29, faster than 12.6 per cent a year earlier, the Reserve Bank of India said on Wednesday. Money supply was 91.46 trillion rupees as of November 29, compared with 90.74 trillion rupees on November 15, the central bank data showed. The central bank said reserve money rose 9.4 per cent year-on-year in the week to December 6, faster than 4.0 per cent a year earlier.

Your RBI regime change - And on silent feet they… moved towards price stability with CPI inflation as the new nominal anchor. The RBI’s report on how to revise and strengthen its monetary policy framework to make it more “transparent and predictable” may play a very large role in the regime change underway at the Reserve Bank of India. Admittedly, the report isn’t out until later in the month but considering the useful Stanley Fischer news hook, it seems rude not to mention Rajan’s potential to also labour to reduce the powers of the office he holds, for the institution’s sake. Particularly when the institution and the country it resides in still lack a whole lot of maturity. From Nomura’s Sonal Varma and Aman Mohunta: India’s monetary policy framework has been evolving over the past few decades, consistent with the openness of the economy and with the development of financial markets. In April 1999 the Reserve Bank of India (RBI) introduced the liquidity adjustment facility (LAF) operating through the repo and the reverse repo rate, resulting in dual policy rates. In 2011, the weighted average overnight call money rate was recognized as the operating target of monetary policy and the repo rate was made the sole policy rate. However, the RBI‟s liquidity tightening measures – in response to exchange rate depreciation in mid-2013 – made the marginal standing facility (MSF) rate the effective policy rate, diluting the role of the repo rate since then (Figure 1).

Brazilian Central Banker Says Not to Fear the Fed Taper - Brazilian Central Bank Governor Alexandre Tombini has a message for the world — Federal Reserve tapering is good and governments that do their homework shouldn’t fear it. Of course, he thinks Brasília’s homework is already done, while critics say the country is bound for a credit downgrade. In scheduled testimony before a Brazilian Senate committee Tuesday, Mr. Tombini re-iterated his view that “Brazil is ready to make the global transition without any trouble.” The central banker was referring to the expected reversal of the Fed’s easy money policies used to jump start growth in the U.S. and Europe. Among other things, “easy money” fueled capital flows to emerging countries such as Brazil, in Brazil’s case leading to an unwanted strengthened of the currency, the Brazilian real, which damaged exports. Earlier this year, however, when Fed Chairman Ben Bernanke hinted that the easy-money policy was about to end, the real went into a tailspin that stopped only when Brazil’s central bank launched a program of daily market interventions. In Mr. Tombini’s view, the fact that the Brazilian real floats freely against the dollar–despite central bank interventions–“is the first line of defense” against potential ripple effects in currency markets from Fed tapering, which could come as early as this month.

Violent mass looting engulfs Argentina amid police strike, 10 dead - At least ten people were killed and hundreds others injured as chaos gripped Argentina amid a police strike demanding pay rises. Mobs have taken over the streets, looting shops and robbing homes, local media reported. Officers across the country refused to go on patrol in 19 out of 23 Argentinean provinces. Overnight on Monday, four people – including a 35-year-old police officer – were killed in the province of Chaco. The officer died while protecting a supermarket in the provincial capital of Resistencia. Two other fatalities occurred in the province of Jujuy in the towns of San Pedro and Perico. Videos and photos from the scenes show smashed shop windows and looters attempting to carry various products - including appliances and luxury goods such as jewelry. Federal police, border patrol officers, and other security forces have been deployed to locations where looting is taking place. Fearing mobs, many citizens have armed themselves. The violence initially broke out last week in Cordoba, located 700 kilometers north of the capital of Buenos Aires. It came amid a police strike in which officers demanded pay raises to keep up with the country’s 25 percent annual inflation. A police rally led to lootings in the area, leaving two dead and hundreds injured.

Ukraine's currency seen close to collapse - As the charts here show, Ukraine’s hard currency reserves have fallen so dramatically that the national currency, the hryvnia, is now hanging in the air like a cartoon character that ran off a cliff, but hasn’t yet noticed it is supposed to fall. And things are about to get worse. As the demonstrations in Kyiv and other cities go into their second week, the population has started buying up dollars in anticipation of a devaluation. The hryvnia/dollar rate has already slipped from UAH8.14/USD1 to UAH8.29/USD1 and there are reports that the banks (hotly denied by them) have started to limit the availability of the dollar. A crash looks very close. Ukraine badly needs several billion dollars – and very soon. Ukrainian President Viktor Yanukovych was in Moscow on December 6, reportedly asking for a $12bn loan to tide the country over. If this or money from any other sources like the International Monetary Fund is not forthcoming, then the currency’s slide could start as soon as this week and be shortly followed by runs on the banks.

Russia Backs Off Ukraine Union After Lenin Statue Falls - Russia cast doubt that Ukraine may soon join its customs bloc, a plan that has sparked the ex-Soviet republic’s biggest protests in almost a decade and fueled calls for President Viktor Yanukovych to resign. Riot police and stick-wielding protesters squared off in central Kiev a day after a group of youths tore down a statue of Vladimir Lenin in the biggest rallies since the 2004 Orange Revolution yesterday. Angry over Yanukovych’s snub of an EU pact in favor of bolstering Russian ties, activists have vowed to stay until the government quits, while Russia said that joining its rival customs union could take years. “The situation in Ukraine is too explosive right now and the president understands that,” Sergei Markov, a political adviser to Russian President Vladimir Putin’s staff and vice rector of the Plekhanov Russian University of Economics, said by phone from Moscow. “Putin believes that time is on his side and Russia will benefit in the end.”

Rob Parenteau: How to Exit Austerity, Without Exiting the Euro - Yves here. This is an important post by Rob Parenteau which outlines a viable plan for subject nations austerity-afflicted Eurozone countries with reasonably-well-functioning tax bureaucracies to escape their downspiral. I fear the biggest obstacle is not the legal and economic viability of this idea, but that, in a variant of Stockholm syndrome, the leadership and elites of many of the periphery countries have come to believe that they must soldier on with economic mortification despite ample evidence that it is a failed program:  The failure of this neoliberal experiment is now all too obvious. Greece, for example, has traveled an economic trajectory over the last half decade that in many respects rivals that of the US in the Great Depression. While the immediate response of policymakers to such a failed live experiment might be to exit the euro, the short run costs of doing so can be very high. The sharp declines in newly introduced currencies on foreign exchange markets would be likely to sharply raise the cost of imported goods, and foreign investors would likely go on strike, at least until the currency had hit bottom. In the case of Greece, with fuel, food, and medicine making up a large share of the import bill, further economic disruption and destabilization would likely result from a choice to exit the eurozone. Exiting the euro does not appear to be an option – at least not one without a large risk of introducing further turmoil.The task then becomes to thread the policy needle – namely, to exit austerity, without exiting the euro. The following simple proposal introduces an alternative financing mechanism, along with safeguards to minimize the risk of abuse of this mechanism, which may accomplish this threading of the needle.

3 million Greeks unable to afford health insurance - Over 25 per cent of Greeks can’t afford health care, putting children and pregnant women in danger, Doctors of the World medical aid group said. "We are very worried by the number of people who have lost access to social insurance," Anna Maili, the head of the organization, told journalists. Among the risks, the group names the lack of vaccination: the cost of immunization over a child's first six years is between 1,400 and 1,800 euros. "Over the last nine months we examined 10,633 children of whom 6,580 had to be vaccinated," Maili said. “Every day we see 2 or 3 year-olds who haven’t been vaccinated,” she added. The cuts to health spending were implemented in 2010 in return for the joint EU-IMF bailout, and results were quick to follow. Between 2008 and 2011, the number of stillborn babies increased by 21 per cent, Doctors of the World said.

French Industrial Output Drops Unexpectedly - French industrial output dropped unexpectedly in October for the second month in a row, data from national statistics bureau Insee showed Tuesday, providing a further indication of a weak start to the final quarter of 2013 in the euro zone.  Industrial production in the currency bloc's second largest economy fell 0.3% in October from September, when it also fell 0.3%, Insee said. Analysts polled by Dow Jones Newswires had expected a 0.2% rise in October. The October decline confirms a steady shrinking of output in industry. Over the three months through October, industrial production was 0.6% below the previous three months, Insee said. The disappointment comes after separate data showed Monday that German industrial production dropped 1.2% in October from the previous month.

Spain's debt hits new record high - Spain's public debt climbed to 954.9 billion euros ($1.3 trillion) in the third quarter, equivalent to a new record high of 93.4 percent of gross domestic product, the central bank said. Public debt rose 16.73 percent compared to the third quarter of last year, according to Bank of Spain figures released Friday. The central government's debt rose the fastest, climbing 19.53 percent compared to the third quarter of 2012 to 831.3 billion euros (some $1.13 trillion), or 81.3 percent of GDP. The debt of Spain's regions totaled 197 billion euros (some $270 billion) in the third quarter, up 17 percent from the July-September period of last year. Municipal government debt, meanwhile, came in at 41.8 billion euros (some $57.2 billion), down 4.65 percent from the previous year. Spain's debt-to-GDP ratio has skyrocketed in recent years amid a severe economic crisis triggered in part by the bursting of a long-building property bubble.

Italy's 'pitchfork protests,' in fourth day, spread to Rome - Italy's "pitchfork" protests spread to Rome on Thursday when hundreds of students clashed with police and threw firecrackers outside a university where government ministers were attending a conference. Truckers, small businessmen, the unemployed, students and low-paid workers have staged four days of rallies in cities from Turin in the north to Sicily in the south in the name of the "pitchfork" movement, originally a loosely organized group of farmers from Sicily. "There are millions of us and we are growing by the hour. This government has to go," said Danilo Calvani, a farmer who has emerged as one of the leader of the protests. Interior Minister Angelino Alfano told parliament the unrest could "lead to a spiral of rebellion against national and European institutions." The protests are fuelled by falling incomes, unemployment above 12 percent and at a record 41 percent among people below 25, and graft and scandals among politicians widely seen as serving their own rather than the country's interests.

Everything must have a reason, even banks - Another good snippet from the BIS quarterly review that’s worth highlighting comes in the observation that banks are losing their raison d’etre due to the erosion of their funding advantages versus non-banks. Which means they’re increasingly resembling listless entities devoid of purpose in a capital shadowland that’s not willing to let them move onto another more deathly plane. From the survey: The erosion of banks’ funding advantage limits their effectiveness as intermediaries. There are indications that euro area banks, for instance, passed on some of their relatively high borrowing costs. The average interest rate on euro area bank loans stalled at levels above 3% over the past three years, in spite of falling policy rates. The composition of corporate financing shifted towards market funding as a result. A comparison between issuance volumes of corporate debt and those of syndicated loans suggests that bond markets in Europe have recently outpaced banks in the provision of funding: more than 50% of cumulative funding raised by euro area corporates since early 2011 was met in securities markets rather than through syndicated loans. Moreover, banks in the euro area provided no new direct lending in the aggregate, and the stock of corporate loans fell a cumulative 15% during this period. Markets thus eclipsed banks as a source of new credit to euro area corporates. In the United States, syndicated lending kept pace with corporate debt issuance, leaving the share of market funding unchanged near 33%. This is an important point. It means even if banks are provided with all the funding they need to keep ticking over, there’s still going to be cheaper and more competitive capital elsewhere to compete with them. That is, you can provide the banks with the cheap liquidity they need, but you can’t necessarily contain the liquidity in the banking sector in such a way that it guarantees a competitive funding advantage.

EU Wrangling: Berlin Plays It Safe on Banking Union -- If there's one notion at the core of the planned European banking union, it's that of playing it safe. The union has been designed to ensure that the financial markets will become more stable and that shareholders and creditors will be held more liable than taxpayers. And it is meant to ensure that Europe will be better armed if the European Central Bank comes across unexpected holes in balance sheets when it conducts stress tests this spring on the euro zone's 130 largest banks. But when German Finance Minister Wolfgang Schäuble of the conservative Christian Democratic Union (CDU) party appeared before journalists just before midnight in Brussels on Tuesday, it became clear that things, once again, are anything but secure. Schäuble negotiated for close to 14 hours with his counterparts in Europe over the banking union, which many champions of the European Union believe is as epochal an event as the launch of the euro.  In the end, though, the issue was delayed until Dec. 18, when the finance ministers will meet again just before the regularly planned EU summit. "We're on the way towards achieving this," Schäuble told reporters, but the "political decision" can only be made in the coming weeks. By then, it is highly likely that he will be installed again as finance minister in the new German government, to consist of a coalition of the Christian Democrats and the center-left Social Democratic Party. Still, it remains uncertain whether he will be able to present the banking union as some kind of gift marking the start of his new term in office by the end of the year.

Does Basel III encourage banking fragmentation in Europe? - I had not considered this point before: Basel III and related regulation generally work against building scale. Larger capital charges based on size, leverage and complexity, and a bias toward ringfenced subsidiaries, may make for a safer global banking system, but applied across euro area countries, and in the absence of a strong banking union, they constitute a recipe for less efficiency and greater fragmentation. It is an excellent piece by Gene Frieda (FT gated), here is more, on the consequences of an imperfect banking union: Banks will continue to hold primarily national assets and their size will be constrained by their resident deposit bases. Any reconvergence of funding costs comes not as a function of greater confidence, but from the forced reimposition of national financing constraints. Loan pricing, on the other hand, will remain highly differentiated amid elevated periphery default risk, as highly indebted economies will be unable to grow their way out of a debt trap. A complete banking union would remove these national financing constraints and promote a greater flow of credit to viable entities. This will lead to strong deflationary pressures and indeed you will note that private loan growth in the eurozone remains negative, a sign the crisis is not over.  And then there is this: Finally, given the lack of common fiscal backstops for the banking sector, the ECB’s independence is compromised. Indeed, without a credible backstop, supervisory responsibilities cannot be separated, giving rise to conflicts between monetary policy and financial stability objectives. I would add that a full and perfect banking union probably is politically impossible, not just by a small amount but by a long mile.  Berlin/Brussels cannot guarantee a country’s banks without also guaranteeing the sovereign as well, either directly or indirectly.

PREs, VSPs and the ECB: a response to Paul Krugman - In a response to one of our recent posts on Peter Praet’s speech, Paul Krugman argued that there was indeed a fight inside the ECB between the PRE (pretty reasonable economists) and the VSP (very serious people).  We disagree. Our understanding of what is going on at the ECB is different and somewhat more troubling. We think these categories are not relevant because there isn’t an actual debate between PREs and VSPs but rather a common defensive stance in support of a defunct monetary policy doctrine. This is probably a stretch but what is clear is that there isn’t at the ECB a culture of economic debate, of disagreements and dissent as much as there is at the Federal Reserve. This is problematic because by pretending to be consensual, governing council members are impeding an intellectual process that is very necessary in difficult times. As a result, this is creating a profound intellectual drag that undermines new thinking about the crisis, about monetary policy and about the monetary union precisely at a moment where disagreements are part and parcel of a necessary process to come to grips with the situation at hands.Instead, the ECB prefers to paint itself into an academic and policy corner by referring constantly to a fragile doctrine. If anything the discussion about publishing the minutes of the governing council meetings (which was meant to be closed by the end of the year and on which a decision has been postponed) is likely to exacerbate this state of affairs even more by pushing Governing Council members to be more cautious about their communication even inside the secrecy of the Governing Council rather than embrace their respective viewpoints and differences.

IMF admits it underestimated the fiscal multiplier: Speaking at the EU’s Economic and Social Committee, IMF Managing Director Christine Lagarde said on Tuesday that the IMF made a mistake on Greece and Portugal, and that these countries should have had been given more time to reduce their deficits, reports portuguese Público. Specifically Lagarde said that, for lack of studies, the IMF had estimated the fiscal multiplier at 1 or below when in reality it proved to be about 1.7.

Britain’s negotiating hand in Europe has never been as strong before - The case for British exit from the EU is diminishing. It is no longer self-evident that this country must withdraw from the EU Treaty structures to ensure self-rule and to safeguard our democracy. Events are moving very fast in Europe, overtaking the debate in Britain. Advocates of the historic nation states - L'Europe des Patries - are gaining ground across the Continent. Superstate romantics are on the back foot almost everywhere. The Hegelians are hated. "The time of an 'ever closer union' in every possible policy area is behind us," says the Dutch government. Its review of EU powers calls for swathes of policy, from social security to water management, to be left "more or less entirely to member states". The Dutch are carefully shadowing the British, as well they might given that Geert Wilder's Freedom Party is leading the polls with calls to "control our borders, our economy, our currency". The cities of Rotterdam and The Hague have vowed openly to breach EU law on social security rights for Balkan migrants. Over the past few months the eurosceptic floodgates have burst. French support for the EU Project has dropped from 60pc to 41pc since mid-2012, according to the Pew Foundation. This is in part the result of austerity overkill and double-dip recession, now threatening triple-dip, but also because the Franco-German partnership that has steered Europe for 60 years has finally broken down. It has become too unequal to defend fundamental French interests.

By George, Britain’s Austerity Experiment Didn’t Work! -George Osborne, the patron saint of austerity enthusiasts on both sides of the Atlantic, was in the House of Commons on Thursday, reveling in the fact that the U.K.’s economy is finally growing again, and claiming that “Britain’s economic plan is working.”  For Britons who have been laboring through more than five years of recession, or near recession, that is welcome news. By some measures, the U.K. has been through a worse slump than the one it experienced during the Great Depression, and now, at last, it appears to be over. Recent figures from the Office for National Statistics show that the economy has expanded for three quarters in a row, with manufacturing, services, and construction all sharing in the growth. Small wonder that Osborne was smiling and taking the credit.  It’s a clever political line, and it appears to be having an impact. The rebound in the economy, which caught by surprise most forecasters, including those at the Office for Budget Responsibility, has transformed the political situation at Westminster and given the Conservative-Liberal coalition, which has been lagging badly in the opinion polls, new hope of winning reëlection in May 2015.  But from an economic perspective, Osborne’s argument is hogwash. His effort to cure the patient by subjecting it to the equivalent of leeching—big cuts in government spending and higher taxes—a return to pre-Keynesian policies watched closely the world over, failed abysmally. Imposed at a time when the U.K.’s economy was recovering from the financial crisis of 2008-09, it subjected his countrymen and countrywomen to three more years of slump-like conditions, and it produced a dearth of public-sector and private-sector investment that will hobble Britain for years to come. It even failed to meet its own targets of drastically reducing the budget deficit and bringing down Britain’s over-all debt burden.

NYT Gets Almost Everything About UK Austerity Wrong -- Dean Baker --People who follow economic data know that quarterly growth numbers are highly erratic. Unfortunately the NYT seemed unaware of the volatility of quarterly data as it touted a strong third quarter growth number as evidence of the success of austerity in the UK. It contrasted this number to a weak growth figure in Japan, which it implied meant the failure of stimulus there. Of course this claim is absurd on its face. Japan will almost certainly have far stronger growth over the calendar year than the UK, and even more so on a per capita basis. To take a slightly different measure, according to the OECD, Japan's employment to population ratio is rose by 1.1 percentage point from the third quarter of 2012 to the third quarter of 2013. This would be equivalent to an increase in employment of 2.8 million in the United States. By contrast, the employment to population ratio in the UK increased by just 0.2 percentage points from the second quarter of 2012 to the second quarter of 2013 (the most recent data available). The piece includes numerous other inaccuracies, at one point telling readers:"With an even greater dependence on its financial sector than the United States — but neither the shale gas boom nor a reserve currency to help fuel a recovery." Actually the UK does have a reserve currency, as hundreds of billions of dollars worth of pounds are held as reserves by central banks around the world.

Global House Price Index Surges To Record High -- With home prices in the UK driving people to live in boxes and Bob Shiller worried about the US, Bloomberg's Niraj Shah notes that the Knight Frank global house price index has risen to a record. The index, now 4% above the previous high in Q3 2008 is led by China and Emerging Nations (with Europe weakest) as investor speculation amid central bank liquidity fuels yet another bubble (that no one could see coming again). Global house prices are gaining traction. Values rose an annual 4.6 percent in the third quarter compared with 1.7 percent in the same period in 2012, and the index is 12.7 percent above its financial-crisis low in 2009. Prices in more than 69 percent of the countries tracked by the index grew in the year through September, compared with 55 percent two years ago. The Knight Frank index incorporates house prices in 53 countries. Prices in China rose the most, gaining 21.6 percent. Emerging economies made up the rest of the top five, with Taiwan, Indonesia, Turkey and Brazil recording price growth of more than 10 percent. The U.S., the biggest housing market, grew an annual 11.2 percent. The only countries outside Europe to experience declines were Japan, South Korea and New Zealand. Dubai recorded the largest growth rate for a city with 28.5 percent.

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