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

Saturday, August 31, 2013

week ending Aug 31

US Fed balance sheet shrinks in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week on lower holdings of mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet liabilities, which are a broad gauge of its lending to the financial system, stood at $3.602 trillion on Aug. 28, down from $3.603 trillion on Aug. 21. The Fed's holdings of Treasuries edged up to $2.024 trillion as of Wednesday, up from $2.012 trillion the previous week. But the Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) fell to $1.291 trillion from $1.303 trillion a week ago. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $65.713 billion, which was unchanged from the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $21 million a day during the week, compared with $22 million a day the previous week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks August 29, 2013

Vince Reinhart Summarizes The Perils Of The Fed's Nine Month QE Winddown - With no keynote speaker at the Federal Reserve Bank of Kansas City’s Jackson Hole Economic Symposium, there was no opportunity for Fed officials to send signals about their policy intent. However, while it’s unlikely that the papers discussed did much to change opinions of the FOMC participants, as Morgan Stanley's Vince Reinhart notes, there were themes discussed that may reflect committee members’ views regarding how tapering should proceed: all signs are still that the Fed will start the process of trimming its asset purchases at its meeting on September 17-18. Further, we wouldn’t be surprised if they initially trim just Treasury purchases. So it seems the primary dealers will get what they expect and the market (ever-hopeful of its bad-news-is-good-news meme) will be disappointed.

Fed Officials Rebuff Coordination Calls as QE Taper Looms -- Federal Reserve officials rebuffed international calls to take the threat of fallout in emerging markets into account when tapering U.S. monetary stimulus. The risk that the Fed’s trimming of bond buying will hurt economies from India to Turkey by sparking an exodus of cash and higher borrowing costs was a dominant theme at the annual meeting of central bankers and economists in Jackson Hole, Wyoming, that ended Aug. 24. An index of emerging-market stocks last week fell 2.7 percent, the steepest in two months, compared with a 0.5 percent gain in the Standard & Poor’s 500 Index. Such selloffs aren’t an issue for Fed officials who said their sole focus is the U.S. economy as they consider when to start reining in $85 billion of monthly asset purchases that have swelled the central bank’s balance sheet to $3.65 trillion. Even as the Fed officials advised emerging markets to protect themselves, they were pressed by the International Monetary Fund and Mexican central banker Agustin Carstens to spell out their intentions better in the interest of safeguarding global growth. “You have to remember that we are a legal creature of Congress and that we only have a mandate to concern ourselves with the interest of the United States,” Dennis Lockhart, president of the Atlanta Fed, told Bloomberg Television’s Michael McKee. “Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”

Richmond Fed’s Lacker: Stronger Job Growth Signals Time to Scale Back Bond-Buying— Federal Reserve Bank of Richmond President Jeffrey Lacker, a consistent opponent of the central bank’s bond-buying, said Thursday that a stronger job market should allow policy makers to start winding down the program soon. “When we originated the program we said that we were going to continue with the program of purchases until we’d seen a significant improvement in the outlook for labor market conditions,” Mr. Lacker said following a speech at Christopher Newport University. “I think a good case can be made that that condition has been met.” The unemployment rate was 7.4% in July, down from 7.8% in September when the latest round of bond purchases was announced. Mr. Lacker’s comments come as the Fed weighs the next steps for its $85 billion-a-month program ahead of its Sept. 17-18 meeting. The bond purchases are meant to boost the economy by holding down interest rates. The central bank in May started signaling that it could begin reducing its bond purchases some time this year, causing Treasury yields and mortgage rates to rise. Higher interest rates can restrain the economy. Officials appear to hold a range of views on when and how much to scale back. The Richmond Fed president has consistently opposed the unorthodox measures to boost the economy, saying the effects are only transient and the long-term consequences uncertain.

NABE Survey: Economists Don’t Expect Fed To Slow Bond Buying in Sept. - Most economists say the Federal Reserve won’t begin scaling back its bond-buying program until later in the fall or early next year, according to a National Association for Business Economics survey released Monday.The economists appear to be more cautious in their outlook than Wall Street banks and even some Fed officials that have looked to the central bank’s September 17-18 meeting as a point to begin easing the pace of bond purchases, currently at $85 billion a month. Only 10% of 220 economists polled expect the wind down to start before the end of September. The survey found 39% expect the first tapering of purchases in the final three months of 2013 with the remainder saying the Fed will hold off at least until 2014. The response is surprising, said Jay Bryson, global economist at Wells Fargo Securities and one of the survey’s authors. He said it’s possible that some economists anticipate the Fed will announce its intention next month but not actually reduce the level of purchases until the fourth quarter. Economists were asked which quarter the Fed likely to begin winding down its asset purchase program.The survey was taken between July 18 and August 5, shortly after interest rates jumped in the wake of Fed Chairman Ben Bernanke announcing a pullback could come later this year. That may have weighed on economists’ minds. In mid-July, Mr. Bernanke told lawmakers that recent rise in interest rates is “unwelcome”.

Did Fed’s Forward Guidance Backfire? Paper Says Probably.—The Federal Reserve believes that providing clear guidance about the likely future course of its policies make them more effective in boosting the economy, while helping to tamp down on market volatility and uncertainty. That may not be so, said a paper presented here Saturday by Jean-Pierre Landau of Princeton University at the research conference hosted by the Federal Reserve Bank of Kansas City. Over the last year, the Fed has been buying $85 billion a month of bonds in an effort to lower long-term interest rates, hoping that will spur growth and lower unemployment. Fed officials have been warning for months since May that they could start scaling back the program if the economy continues to improve as they expect. The problem for the Fed is that as its policy makers have tried to prepare markets for this shift, they’ve generated considerable market volatility, in part driving up bond yields and boosting borrowing costs. There’s been considerable debate about why it’s happened, and whether the development could create new headwinds for the economy, or whether it’s simply a market that’s moving to reflect an improved economic outlook. Mr. Landau lays a lot of the blame for the bond-market turbulence on the Fed itself. The paper notes that current Fed guidance on the policy outlook eliminates the cost of leverage, and creates “strong incentives” to increase and even overextend investment exposures. In turn, “this makes financial intermediaries very sensitive to ‘news,’” whatever that may be, he wrote. In this case, the catalyst for the market tumult is the Fed’s statements about possibly scaling back the bond program this year. Once that view was conveyed to markets, it drove a big shift in market positions, to a degree that was very surprising to many observers.

Can the Fed's proposed overnight facility reduce pressure on the repo markets? - Repo rates in the US have seen sharp declines this year and are currently at levels not seen since 2011.There are several reasons for this decline:
1. Excessive liquidity in the financial system (induced by the Fed) is chasing "secured deposits". Reverse repo provides a way to deposit funds with a bank, but receive collateral in return in order to mitigate counterparty risk.
2. With the Fed buying up the exact same collateral sought by these reverse repo "depositors", the collateral pool is more limited.
3. Recent bank regulation proposals (see post) are also beginning to discourage banks from building large repo books with clients.
4. More recently, a wave of short-sellers pushed repo rates even lower by looking to borrow and short increasing amounts of treasuries and agency MBS.
In light of these developments, market participants are quite supportive of the Fed's proposed "full-allotment overnight reverse repurchase agreement facility" (discussed here) as a method to overcome some of the challenges. The Fed's new facility will likely be executed via a triparty repo that will not allow the Fed's securities to be used as collateral elsewhere (no "re-lending" of securities). Unfortunately it may be a while before this facility is in place, since it will effectively sweep liquidity out of the system, reducing bank reserves. And it is unlikely that the Fed will want to reduce reserves via this program while increasing reserves via the securities purchases. That means the tightness in the repo market (low repo rates) may persist for some time, as cash rich market participants look for safe places to park their money.

Will this be the ZLB/repo/collateral-scarcity solution we’ve been waiting for? -- If implemented, it has the potential to alter the way future monetary policy is conducted; change the fundamental structure of short-term lending markets; alleviate the collateral scarcity in these markets and others; reinforce the push for simpler bank capital regulation; and approximate a Fed backstop for big swaths of US money markets. Or it could be no big deal. According to the little-noticed second paragraph in the FOMC minutes to the July meeting, Simon Potter of the New York Fed discussed with the committee a possible addition to the Fed’s set of tools for tightening policy when the time comes — a “fixed-rate, full-allotment overnight reverse repurchase agreement facility”. Hang around, it’s more exciting than it sounds. What follows is a discussion of what it could mean but, first, credit where due: Carolyn Cui of the Wall Street Journal did spot the paragraph, offering a nice general overview. The finance blogosphere’s Chief Repo Watcher, Scott Skyrm, has a more detailed analysis, and see also the excellent David Schawel. Here we try to offer a simple and comprehensive Q&A, though it does require some familiarity with how repo markets work and with the Fed’s interest on reserves policy.

Fed’s Jackson Hole Participants to QE-Exit Whacked Emerging Economies: Drop Dead - The latest Fed confab at Jackson Hole is demonstrating that central bankers were so keen to avoid taking much blame for the global financial crisis that they also failed to learn critical lessons from it. That lapse in turn is directly related to the present emerging markets upheaval that has the potential to morph into something worse. In case you managed to miss it, the prospect of the end of QE is leading investors to rearrange their portfolios in a fundamental way. One of the most widely-followed sayings among traders is “Don’t fight the Fed.” Having the central bank that runs the world’s reserve currency on the verge of ending its extraordinary bond market interventions and indicating that it expects later to enter a conventional tightening cycle is a fundamental change in stance. This shift is particularly important for risky investments, such as those in emerging economies, since the Fed’s super accommodative posture fueled a global carry trade. As Ambrose Evans-Pritchard wrote last week: India’s rupee and Turkey’s lira both crashed to record lows on Thursday following the US Federal Reserve releasing minutes which signalled a wind-down of quantitative easing as soon as next month….A string of countries have been burning foreign reserves to defend exchange rates, with holdings down 8pc in Ecuador, 6pc in Kazakhstan and Kuwait, and 5.5pc in Indonesia in July alone. Turkey’s reserves have dropped 15pc this year… Fears of Fed tightening have pushed borrowing costs worldwide to levels that could threaten global recovery. Yields on 10-year bonds jumped 47 basis points to 12.29pc in Brazil on Thursday, 33 points to 9.72pc in Turkey, and 12 points to 8.4pc in South Africa…

Blogs review: Takeaways from Jackson Hole: Although Jackson Hole was relatively calmer this year in the absence of market moving speeches, it featured a number of provocative research papers. Robert Hall suggested that the tradition of regarding high unemployment as a disequilibrium may rest on a misunderstanding. Arvind Krishnamurthy argued that the portfolio balance channel of QE works largely through narrow channels contrary to what the Fed thinks. And Helene Rey argued that the global financial cycle transforms the monetary policy trilemma into a “dilemma”. In this review, I focus on the first two contributions. Robert Hall writes that the tradition of regarding high unemployment as a disequilibrium that gradually rectifies itself by price-wage adjustment may rest on a misunderstanding of the mechanism of high unemployment. Robin Harding writes that the meat of Hall’s paper is about why inflation did not fall much after the crisis despite high levels of unemployment. This has been a surprise during the last few years: unemployment has not driven down wages in a way that led to deflation. The standard explanation is that yes, all that slack in the economy should have led to falling prices, but workers will not let wages fall and inflation is anchored to central bank targets.

The crisis is over. The challenges for central bankers are only beginning.: The crisis, which started in subprime U.S. mortgages six years ago, engulfed banks on both sides of the Atlantic, brought the worst recession in generations and drove several European countries to the brink of bankruptcy, is for practical purposes over. It is over in no small part because the central bankers flooded the world with trillions of dollars and insinuated themselves into countless markets, taking once-unthinkable steps to steer the financial system from the abyss. The question now for the global economy, and the men and women who guide it, is this: What have you wrought? The central bankers’ years of activism have been more successful at getting the financial markets on track than generating a true economic recovery in the United States and most western nations.Their institutions, which prize their independence from politics, have found themselves more intertwined with elected leaders than ever. And there are growing signs that the unwinding of the banks’ trillions of dollars in interventions could be every bit as dangerous and volatile as the conditions that led them to take the actions in the first place. The mere hint that the Fed will slow the rate at which it injects new money into the system by buying bonds has driven a torrential sell-off of all sorts of assets this summer, driving U.S. interest rates up a full percentage point and prompting even bigger financial convulsions in emerging nations like India and Brazil.

Why Wall Street Wants Larry Summers (and Why the Rest of Us Should Not) - On the surface the debate about the Chairmanship of the Federal Reserve is about the merits of the two leading candidates, Lawrence Summers and Janet Yellen. But looks can be deceiving. President Obama leans toward Summers not on the merits but because the Wall Street bankers want him. Summers is one of the boys, and the bankers know that Summers will do their bidding, at the expense of everybody else. Obama has declared that the two candidates’ attitudes to inflation and unemployment are his main concern, entirely glossing over the fact that the Fed oversees and regulates the US banking system. Our recent near-death experience under Alan Greenspan’s anti-regulation Fed chairmanship, aided and abetted by the deregulation pushed by Summers, should cause the President to think hard about banking regulation. Yet Obama and his tight-knit circle of advisors, almost all of whom are from Wall Street, are apparently too beholden to Wall Street to contemplate any serious regulation of an industry that continues to be out of control.

PCE Price Index Update: The Core Measure Remains Well Below the Fed Target -- The August Personal Income and Outlays report for July was published today by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate of 1.39% is an increase from last month's adjusted 1.32%. The Core PCE index of 1.20% is fractionally lower than last month's adjusted 1.23%. With last month's release, the PCE Price Index was subjected to comprehensive revisions. The impact of the post 1985 revisions on the PCE price index has been substantial and, I would suggest, beneficial to the FOMC (see the footnote below). As I pointed out last month, the general disinflationary trend in core PCE (the blue line in the charts below) must be troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator has consistently moved in the wrong direction since early 2012 and has been flatlining in recent months. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 12 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.

Low Inflation Complicated Fed’s September Decision - Inflation remained subdued in July, a key report Friday showed, a factor likely to weigh on Federal Reserveofficials as they contemplate reducing the pace of their bond purchases next month. Both overall prices and core prices (excluding food and energy) rose a tepid 0.1% in July from a month earlier, a slower pace than in June, according to the Fed’s preferred inflation gauge, the Commerce Department‘s price index for personal consumption expenditures. From a year earlier, overall prices rose 1.4% while core prices rose just 1.2%. The year-over-year increase in core prices has remained at 1.2% for four consecutive months now. That’s well below the Fed’s target of 2% inflation. Overall prices have gradually risen year-over-year since April, but also are still below the Fed’s target. Rising prices often signal that the economy is strengthening, indicating that companies have more leverage to charge more for their products and services, and Americans have more money to spend. The Fed has been looking for signs of higher inflation as it considers scaling back its $85 billion-a-month bond-buying program, perhaps as early as its Sept. 17-18 meeting. There are some signs that prices have been slowly rising in recent months after stagnating earlier in the year. However, inflation still remains very soft by historical standards. Central bank officials in favor of maintaining the Fed’s current level of purchases point to the tame inflation measures as evidence that the economy is still too weak for the Fed to rein in stimulus.

Popping the "Bubble" Bubble - Without a doubt, QE has been an incredible boon for financial markets. Backed by QE3, the SP500 stock index has risen by more than 12% year to date. Yet in spite of this increase in the stock market, overall real economic conditions remain relatively stagnant. Year over year inflation as measured by the core PCE price index ticks in at only 1.2% YoY, and last quarter's real GDP grew by only 1.4% YoY. This disconnect is a bit unsettling, because it suggests that bullishness in the stock market has failed to translate into broader growth. On this basis, some commentators, such as Frances Coppola, have argued that quantitative easing does nothing for the broader economy and worsens economic inequalities. But this concern can be reduced to an even simpler question: Has recent stock market growth just been a bubble? There are a few reasons why this question is important. First, people make a lot of noise over the financial instability hypothesis that monetary policy is just fueling speculative excess. So for the sake of practical monetary policy, it matters if signs of a bubble are appearing. Second, if it can be shown that we are not in a bubble, and that recent financial market movements are based on fundamentals, this means that monetary policy is passing through to the economy. It's not just some scheme to enrich the wealthy. Moreover, the tools that we develop to analyze this issue can help us determine in the future if certain monetary policies are passing through to the economy. Third, analyzing this issue leads to some more insights on how finance and macro can work together. While I am sympathetic with Scott that finance should be kept out of theories of money, given that financial indicators function so well as forecasts, it would be a shame to not use as much data from the financial markets as possible.

The Macroeconomics of Sisyphus - Simon Wren-Lewis is deeply annoyed at the IMF, and understandably so. How can you publish a paper about fiscal adjustment that explicitly takes no account of monetary policy, and claim that it has any relevance to current problems? In normal times, the central bank can offset fiscal contraction by cutting interest rates. Since late 2008, however, the interest rates the Fed can control have been limited by the zero lower bound. This means that there is no offset to the negative effects of fiscal consolidation — which means that this is not the time to be doing such consolidation, which should wait until we emerge from this condition. We’re in a St. Augustine economy: Grant me chastity and continence, but not yet. This isn’t complicated, and it isn’t new — it’s what we’ve been saying for almost 5 years. There are arguments one can make on the other side, although the two main ones — expansionary austerity and the supposed existence of a red line on debt at 90 percent of GDP — have imploded. Still, I guess a paper offering a new argument for front-loaded austerity might be worth reading. But to put out a paper in 2013 that simply ignores the whole issue bespeaks a level of, well, denseness that leaves one breathless.

Q2 GDP Revised up to 2.5%, Weekly Initial Unemployment Claims decline to 331,000 - From the BEA:Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. ... In the advance estimate, the increase in real GDP was 1.7 percent. The upward revision to the percent change in real GDP primarily reflected an upward revision to exports, a downward revision to imports, and an upward revision to private inventory investment that were partly offset by a downward revision to state and local government spending.

Fed may Still Have to Revise Down its Growth Forecasts - Boosted by better net exports and greater inventory accumulation, Q2 US GDP was revised higher to 2.5% from 1.7%.  This, coupled with a decline in weekly jobless claims, has kept the dollar bid.  The data and the seemingly less imminence of strike on Syria have lifted US interest rates.  The US economy has regained some momentum after being hit with several shocks starting with the Super Storm Sandy in Q4 12 and the fiscal morass at the start of the year, that included, among other things, the end of the payroll saving holiday.   The economy had nearly ground to a halt in Q4 12, expanding at annualized pace of about 0.1%.   While economic activity counts in the absolute sense, it is also important relative to expectations.  The key expectations, in terms of policy, are not those of investors, but the Federal Reserve.  The upward revision to Q2 growth is not sufficient to meet the Fed's 2013 expectations.  Consider that in H1 the US economy expanded by roughly 1.8% at an annualized pace.  The Fed's forecast is for 2.3%-2.6% for the year.  To achieve this, the US economy needs to grow by 2.8%-3.5% in H2, which seems unlikely. The market consensus, according to Bloomberg, is for the growth in H2 to be around 2.4%-2.5%.  

GDP Q2 Second Estimate Beats Expectations at 2.5% - The Second Estimate for Q2 GDP rose better-than-expected to 2.5 percent. Investing.com had forecast 2.2 percent and Briefing.com expected 2.1 percent. The upside surprise was largely the result of changes in the Net Exports (Exports minus Imports) component.Here is an excerpt from the Bureau of Economic Analysis news release:Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.5 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent. The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 1.7 percent. With this second estimate for the second quarter, the increase in exports was larger than previously estimated, and the increase in imports was smaller than previously estimated. The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the second quarter primarily reflected upturns in exports and in nonresidential fixed investment and a smaller decrease in federal government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

Second-Quarter G.D.P. Revised Sharply Higher - — The U.S. economy accelerated sharply in the second quarter thanks to a surge in exports, bolstering the case for the Federal Reserve to wind down a major economic stimulus program. U.S. gross domestic product grew at a 2.5 percent annual rate in the April-June period, according to revised estimates released by the Commerce Department. That was more than double the pace clocked in the prior three months. The reports could boost confidence that the economy is turning a corner, shaking off the government austerity enacted earlier in the year when Washington hiked tax rates and slashed the federal budget. "We are likely now moving past the peak of fiscal drag and, as we do, improving underlying private demand should support a pickup in GDP growth," The government had initially estimated that GDP expanded at a 1.7 percent rate in the second quarter. But recent data showed that exports climbed during the period at their fastest pace in more than two years. Economists polled by Reuters had forecast the economy growing at a 2.2 percent pace. Many economists expect the economy will accelerate further in the second half of the year as austerity measures begin to weigh less on national output. That drag was evident in the second quarter, when spending contracted at all levels of government. Indeed, Thursday's data showed the economic drag from spending cuts was greater in the second quarter than initially estimated. Still, the data could make officials at the U.S. central bank more confident in their plan to begin reducing monthly bond purchases later this year. "The upward revision today does help cement the decision to start tapering,"

"Visualizing GDP: The Consumer Remains Key -  The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself:The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, nonresidential fixed investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.  My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has usually been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 1.21 of the 2.52 real GDP, although that's down from 1.54 in Q1. In the latest release Gross private domestic investment made an even larger contribution to the percent change, 1.48, up from 0.71 last quarter. Net exports of goods and services was revised upward to no contribution, a major improvement over the -0.81 drag in the Advance Estimate.Here is a look at the contribution changes between over the past four quarters. The difference between the two rightmost columns was addressed in the GDP summary quoted above.

Highlights from the Second-Quarter GDP Revisions - The economy grew at a 2.5% annual rate in the second quarter, the Commerce Department said Thursday in its second snapshot of that period. Here are highlights from this morning’s report.

  • Stronger economy: The headline number is the big story here. The 2.5% growth rate is far higher than the government’s initial reading of 1.7% and economists’ expectations of 2.2%. This was the fastest pace of growth since the third quarter of 2012, when the economy grew at a 2.8% pace. It’s also more than double the rate of first-quarter growth. What’s more, the revision reflected stronger underlying demand in the economy, rather than simply a build-up in inventories (which were revised higher). The government’s estimate of second-quarter real final sales rose to 1.9% from an initially estimated 1.3%.
  • Higher exports: The main factor behind the revision was stronger sales abroad. Exports rose at an 8.6% annual rate in the spring, not the 5.4% rate that was initially reported. That could be a sign that the global economy is slightly sturdier heading into the second half of the year, which could boost U.S. manufacturers. With the new numbers, net exports went from being a so-called “drag” on GDP to neutral.
  • Government spending weaker: Government spending cuts continue to weigh on the economy. Overall government spending fell 0.9% in the spring instead of the initially reported 0.4%. The downward revision reflected weaker spending by all levels of government.
  • Corporate profits up: Corporate profits rose 2.6% in the second quarter from the previous three months, after falling 0.6% in the first quarter. This puts companies–already sitting on hefty cash piles–in an even stronger position to hire and invest. The question is whether companies see enough encouraging signs in the U.S. and global economies to take that leap. So far, the pace of hiring has been steady but subpar, reflecting caution among businesses.

2013Q2: Faster GDP Growth - Messages from the external and government sectors The second release of the 2013Q2 NIPA figures [0] suggests faster (2.5 ppts. versus the initially estimated 1.7 ppts.), albeit still modest growth. However, would be a mistake to conclude that fiscal drag is unimportant. Now consider the fact that in fact the government spending (all levels) on goods and services declined even more than first estimated. With these revised figures, all levels of government continue to subtract from overall growth (in a mechanical sense) – although not as much in the two previous quarters. The external sector shifted from a contribution -0.81 ppts to zero, thus accounting (once again in a mechanical sense) for the entire increase in estimated growth. The revisions in exports and imports are shown in Figures 5 and 6. Lower imports contribute to current quarter growth, in an accounting sense. However, they can also signal slower GDP growth going forward, insofar as the marginal propensity to import is positive. One might also look to cues from certain types of imports. Capital goods are sensitive to expectations of future demand, so the fact that capital goods imports are flat is a bit troubling. Growth in capital goods exports (blue line) is encouraging, if only because of the low expectations for rest-of-world demand. Returning to the government sector, it’s important to recall government spending on goods and services doesn’t summarize the entire effect of spending cuts. Transfers have also been reduced. Figure 8 illustrates the drag coming from a reduction in government expenditures (spending, transfers) relative to GDP.

Q2 2013 GDP Revised Upward to 2.5% on the June Trade Deficit Shrink - Q2 2013 real GDP was revised significantly upward to 2.5% from the 1.7% originally reported   The revision gain was almost all a reduction in the trade deficit as we predicted earlier.  The shrink in the trade deficit alone added 0.8 percentage points to Q2 GDP, a welcome change.  Unfortunately this is a fluke.  The U.S. trade deficit will continue to grow and assuredly depress the next quarter Gross Domestic Product. As a reminder, GDP is made up of:  Y = C + I + G + (X-M) where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*.The below table shows the percentage point spread breakdown from Q1 to Q2 GDP major components.  GDP percentage point component contributions are calculated individually. The next table shows the revisions and spread between the major components of Q2 GDP.   As we can see the trade deficit figures were significantly revised. Consumer spending, C in our GDP equation, shows less growth than Q1 and didn't change between revisions.  In terms of percentage changes, real consumer spending increased 1.8% in Q2 in comparison to a 2.3% increase in Q1.  The breakdown in consumer spending shows services adding a 0.48 percentage point contribution and goods giving a 0.73 percentage point contribution to PCE.  Durable goods consumer spending contributed 0.45 percentage points to personal consumption expenditures.  Below is a percentage change graph in real consumer spending going back to 2000.  Hey, this isn't a good thing, but health care spending added 0.29 percentage points to real GDP.Graphed below is PCE with the quarterly annualized percentage change breakdown of durable goods (red or bright red), nondurable goods (blue) versus services (maroon).

Revised Q2 GDP Surges To 2.5% On Trade Boost Even As Consumption And Fixed Investment Deteriorate -- On the surface, the just printed revised Q2 GDP number was great: following a preliminary print of 1.7%, the just revised number of 2.5% (beating expectations of 2.2%), up from 1.1% in Q1, should make everyone happy (well not the market which desperately need bad news to go higher). However, as usual, the real news is underneath the surface, which is where we find that both real components of GDP growth, Personal Consumption and Fixed Investment were actually revised lower from the preliminary print. Specifically, Personal Consumption as a contributor of the 2.5% final number was revised from 1.22% to 1.21% (well below the average Personal Consumption number since 2010 of 1.58%), while Fixed Investment was revised from 0.93% to 0.90%. So where did the 0.8% upside come from? It came entire from net trade, which contributed precisely 0.8%. Imports were revised from detracting 1.51% from GDP to just -1.11%, while exports added not 0.71% as previously expected but 1.11%, thus changing the net trade contribution from -0.80% to 0.00%. The remaining two components, Inventories and Government Consumption, were a wash, with one adding 0.2% while the other subtracted 0.1% from the preliminary number.

Five Takeaways from GDP Revisions - The U.S. economy grew at a 2.5% annual rate in the second quarter of the year, the Commerce Department said Thursday, an upgrade from the 1.7% rate the government initially estimated. Economists are still digesting today’s report, but here are five initial takeaways.

  • Old news, but good news: Thursday’s upgrade was largely expected—economists have known a big revision was coming since the first week of August, when the government released better-than-expected trade data from June. But it’s worth stepping back to look at the bigger picture: Back in July, before the preliminary figures were released, economists predicted a growth rate of below 1% in the second quarter, which would have represented a slowdown from the already-weak start of the year. Instead, the economy has accelerated for two quarters in a row, and posted its first reading above 2% since the middle of last year.
  • Good news for jobs: One of the recent mysteries of the economy has been the apparent disconnect between the job market—which has been recovering steadily—and overall economic growth, which seemed to be sputtering. That kind of disparity can’t continue indefinitely, and economists have been trying to figure out which set of numbers were telling the true story. Thursday’s revisions suggest the jobs figures had it right.
  • Government drag worsens: The preliminary report issued last month offered a glimmer of hope from state and local governments, which increased spending for just the second time since 2009. Not anymore. The revisions indicate state and local governments actually cut spending at a 0.5% rate, although that still represents a modest improvement from earlier in the year. Meanwhile, federal spending fell even faster than initially thought.
  • New measure shows some volatility: Last month’s preliminary figures got extra attention because they were the first to incorporate the Commerce Department’s new methodology for calculating gross domestic product. Most notably, the government now counts intellectual property as a component of GDP. Thursday’s report suggests government economists are still working out how to track the new measure in real time; they now say “intellectual property products” shrank at a 0.9% rate in the second quarter, down from an initial estimate of a 3.8% gain.
  • Don’t expect a repeat in the third quarter: The faster-than-expected growth rate in the second quarter puts the economy on firmer footing heading into the second half of the year. But most economists now expect slower growth in the third quarter, and Thursday’s report gives little reason to think they’re wrong. Businesses built up inventories more than expected—which could mean they expect more sales later in the year, but also means they won’t need to produce as much to restock shelves.

Still Waiting for Takeoff...Atlanta Fed's macroblog - On Thursday, we got a revised look at the economy’s growth rate in the second quarter. While the 2.5 percent annualized rate was a significant upward revision from the preliminary estimate, it comes off a mere 1.1 percent growth rate in the first quarter. That combines for a subpar first-half growth rate of 1.8 percent. OK, it’s growth, but not as strong as one would expect for a U.S. expansion and clearly a disappointment to the many forecasters who had once (again) expected this to be the year the U.S. economy shakes itself out of the doldrums.Now, we’re not blind optimists when it comes to the record of economic forecasts. We know well that the evidence says you shouldn’t get overly confident in your favorite economists’ prediction. Most visions of the economy’s future have proven to be blurry at best.Still, we at the Atlanta Fed want to know how to best interpret this upward revision to the second-quarter growth estimate and how it affects our president’s baseline forecast “for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014.” What we can say about the report is that the revised second-quarter growth estimate is a decided improvement from the first quarter and a modest bump up from the recent four-quarter growth trend (1.6 percent). And there are some positive indicators within the GDP components. For example, real exports posted a strong turnaround last quarter, presumably benefiting from Europe’s emerging from its recession. And the negative influence of government spending cuts, while still evident in the data, was much smaller than during the previous two quarters.  Oh, and business investment spending improved between the first and second quarters.

Real GDP Per Capita: Another Perspective on the Economy -  Earlier today we learned that the Second Estimate for Q2 2013 real GDP came in at 2.5 percent, up from 1.7 percent in the Advance Estimate. Let's now review the latest numbers on a per-capita basis. For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in today's dollar for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale. I've drawn an exponential regression through the data using the Excel GROWTH() function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 11.2% below the regression trend. The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 22 quarters beyond its Q4 2007 peak, real GDP per capita has finally set a new all-time high, 0.14 percent above the 2007 previous all-time. Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent off the most recent peak across time, with recessions highlighted. The underlying calculation is to show peaks at 0% on the right axis. The callouts shows the percent off real GDP per-capita at significant troughs as well as the current reading for this metric at 0%, since its at an all-time high.

The Big Four Economic Indicators: Personal Income less Transfer Payments - I've now updated this commentary to include today's release of the July Real Personal Income less Transfer Payments. As the adjacent thumbnail illustrates, final months of 2012 saw some 2013 income pulled forward as a tax-management strategy, which accounts for the atypical peak and subsequent trough in this series. However, we now have enough data points to see the general trend since early 2012 despite the anomaly. PI less TP has been growing at an excruciatingly slow pace. In July Personal Income rose only 0.1%. If we exclude Transfer Payments (Social Security, Unemployment Compensation, Medicare, Medicaid, etc.), it rose 0.08%. If we adjust for inflation using the PCE Price Index, the month-over-month change is a negative 0.01% and a mere 1.8% year-over-year. The chart and table below illustrate the performance of the Big Four and simple average of the four since the end of the Great Recession. The data points show the percent cumulative percent change from a zero starting point for June 2009. The latest data points are for the 49th month. In addition to the four indicators, I've included an average of the four, which, as we can see, was influenced by the anomaly in the Personal Income data points, which reflect 2012 year-end income increases, at the expense of early 2013, as a tax management strategy.

After the crash, the comeback - FT.com: “The United States is on the threshold of a long-term economic boom, one that could rival the 1950s and 1960s era of industrial dominance,” Morris declares. “We can rebuild our middle classes, provide reasonable safety nets and healthcare, shore up our sagging infrastructure, and get our national debt under control,” he adds, arguing that the shale gas boom has already created 1.7 million new jobs, and this figure should double by 2020, with another 1 million or so jobs in manufacturing too. If this industrial renaissance manages to raise the growth rate by 1 per cent above current forecasts in the next decade, then debt to GDP will be nearer 60 per cent in 2020, not over 80 per cent as economists fear. The type of apocalyptic visions that are being bandied about in Washington – and which could inspire more political gridlock this autumn – may simply be wrong. Now, to some observers, these suggestions will undoubtedly look hopelessly Pollyanna-ish if not naive; indeed, when this ebook quietly emerged earlier this summer, I must admit that I blinked. After all, with growth in the US currently stuck around the 2 per cent range, real wages essentially stagnant and unemployment remaining uncomfortably high, a boom in middle-class jobs still seems like a pipe dream. And, to be fair to Morris, his sunny vision does contain caveats. America, he suggests, could mess up its recovery if energy companies are complacent about environmental threats or insist on exporting liquefied natural gas in a way that drives up energy prices (and thus makes American industry less competitive); so too if bureaucrats make the healthcare problems worse or fail to implement any infrastructure spending.

Why the US Economy Won’t Fully Recover - The Wall Street Journal (WSJ) has produced two excellent reports shining a light on why the US economy will continue to struggle and won’t produce a full-fledged recovery. In the first of these reports, the WSJ looks at average real US wages, which have fallen since 2009 and are erroding the purchasing power of consumers, denting consumption expenditure: Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation’s economic growth. All told, Patrick Newport, an economist at IHS Global Insight, expects real wage growth of only 1% by the end of 2014. That is “good news for employers,” he said, “not-so-good news for workers.”Consumers remain the biggest driver of the U.S. economy, but without more money coming in, it will be difficult for them to spur robust growth. The second report examines the ageing of the US population, which will shrink the relative size of the working-aged population, reducing potential growth of GDP and incomes in the process: New research by two economists, Richard Burkhauser of Cornell Universityand Jeff Larrimore of Congress’s Joint Committee on Taxation, suggests things may get even worse in coming years—thanks to two basic population trends. After supporting the economy during their peak earning years, America’s Baby Boomers are starting to retire, which will mean higher numbers of lower-income older individuals. Second, the researchers argue, relatively high-earning whites are over time being replaced by minority workers, especially Hispanics, who tend to make less money.

The Taper Versus The Crazy -   Krugman - Joe Weisenthal is right: Wall Street is paying too much attention to the “taper”, the prospect of a slowing of Fed asset purchases, and not enough attention to the looming game of debt-ceiling chicken.My guess is that the market reaction to the taper mainly reflects belief that it signals a general tightening bias by the Fed. If it becomes clear that it doesn’t, things should calm down. But then there’s the political crisis.If you haven’t been reading the political blogs much — say, Greg Sargent — you may not have a sense of just how dire the political environment is. But here’s the situation. You have a Republican base that truly believes that guaranteed health insurance is the work of the devil. Meanwhile, there’s a Republican majority in the House that owes its position not to broad popular support — Democrats actually got more votes in 2012 — but to a district map that concentrates Democrats in a minority of districts, which in turn means that most Rs are more afraid of Tea Party challengers than outraged independents.And the debt ceiling looms, with many ideologues assuring the base that Obama can be bullied into gutting his main achievement, which he won’t.Everyone seems to assume that this will be worked out somehow, but nobody has even a halfway plausible story about how this will be done. Default looks like a real risk.

Mobilization and Money - I’m nearly finished with a very long book that may well be the best illustration of the basic principles of Modern Money Theory available. The book is “A Call To Arms,” by Maury Klein. It is an historical account of the U.S. mobilization as it prepared for, and engaged in, war with Germany and Japan. What is striking about the story—and the monumental effort to quickly build, virtually from scratch, the largest and most sophisticated war machine ever to exist on the planet—is that there is nary a peep of concern or argument about how this enormous task would be paid for. All of the anguish and struggle had not to do with finding enough “money” to pay for things, but rather with finding enough things to buy—and enough skilled labor to properly marshal it all together. In the end, virtually every real resource available in the continental U.S.—oil, gas, steel, aluminum, rubber, copper, sugar, tin, and man-hours of labor—was purchased by the Federal government to build the Army, Navy, Air Force and Marine Corps that ultimately defeated the Axis powers. The scale of the sovereign spending is almost beyond comprehension—especially given the fact that, at the starting gate, the U.S. economy was still decimated and impoverished by the Great Depression. At the finish line, however—VJ day, September 2, 1945—the U.S. had become the most powerful, efficient, and equitable economic power the world had ever seen. So how did it all get paid for? And even more important, how did we travel from that VJ day of economic triumph to our sorry state of today, where we think we are so “broke” we can’t even afford to hire enough fire-fighters and equipment to put out the forest-fires raging in our western states?

Why the Fed is a marginal player in US debt - Over the past few years some quarters of the financial commentariat have taken to describing the Federal Reserve’s asset purchases as the monetisation of US national debt, something which has given rise to all sorts of misguided fears about inflation and much else. While the Fed certainly have been purchasing extensive amounts of government debt in the secondary markets it is perhaps misleading to assume that these markets would not otherwise be buoyant without such intervention. Bill Mitchell, an Australian macroeconomist and one of the founding fathers of Modern Monetary Theory (MMT) posted an interesting piece on this the the other day where he broke down who really holds the bulk of US national debt. The results were somewhat surprising. Collectively, it turns out, official US government holdings (the Fed and other state bodies) have in percentage terms decreased since the 2008 crisis while private holdings, inclusive of foreign holdings, have gone up. For the purpose of further clarity, the graph below shows the data set out in a slightly different way to Mitchell’s. Where he included foreign holdings as a component of private holdings, they have now been separated:The chart is compiled using the US Treasury’s Financial Management Services’ (FMS) Ownership of Foreign Securities data and takes Fed/Other Government to include Federal Reserve and other Federal government accounts; state and local holdings; and state and local pension holdings. This reflects the amount held in total by the US government and central bank.

The Five Worst Reasons Why the National Debt Should Matter To You: Part One, High Debt Levels and Jobs I came across a post from the “Fix the Debt” campaign last month called “The Top Five Worst Reasons Why the National Debt Should Matter to You.” It’s a post full of debt/deficit lies that cry out for correction. That’s what I’ll provide in this series. 1. High debt levels = fewer jobs and lower wages. In times of fiscal and economic uncertainty, consumers and businesses reduce investment and delay projects because investment is costly to reverse. Higher government borrowing can also drive up interest rates once the economy recovers, reducing the access and affordability of funds for consumers and businesses to borrow and invest in new ventures and ideas. This can hold back the economy, resulting in fewer jobs and lower wages down the road. What’s with the colloquial use of the ‘equals sign’ in this statement? Is the “Fix the Debt” campaign trying to say that there’s an identity between high debt levels and fewer jobs/lower wages? Is it trying to say that fewer jobs/lower wages cause high debt? Are they trying to say that there’s mutual causation between the two over time? Addressing “truth” first, it’s not! There’s plenty of evidence (See Part Two) refuting the idea that high public debt levels cause fewer jobs and lower wages in nations like the United States that use a non-convertible fiat currency, a floating exchange rate, and have no debts in currencies they do not issue.

The Five Worst Reasons Why the National Debt Should Matter To You: Part Four, Three REAL Reasons - This is the concluding post in a four part series on the “Top” reasons why the national debt should matter. In Part One, I considered “Fix the Debt’s” claim that high levels of debt cause high unemployment and argued that this is a false claim. In Part Two, I followed with a review of the historical record from 1930 to the present and showed that it refutes this claim throughout this period, and that there is not even one Administration where the evidence doesn’t contradict “Fix the Debt’s” theory. In Part Three I showed that the other four reasons advanced by “Fix the Debt” also had very little going for them. In this part, I’ll give reasons why the national debt does matter, and why we should fix it without breaking America, or causing people to suffer. There are at least three “top” reasons for fixing the debt, even though the debt hysterians are wrong when they claim it’s a financial problem that will cause high unemployment.

  • – First, The interest on the debt predominantly goes to wealthy individuals, large corporations, and foreign nations, who buy US debt instruments, because they are a risk-free investment, a parking place for their funds where they can earn interest.
  • – Second, the existence of a large national debt is a political problem, best illustrated by the activities of the “Fix the Debt” campaign and the other Peterson-funded groups forming his political network.  No matter how beneficial a bill promises to be, it has to pass the meaningless test of a 10 year CBO deficit/debt projection assuring its deficit neutrality.
  • – The third top reason for paying off the debt is one of rapid education of the public. Americans need to understand that our fiat currency system gives us the policy space to solve our problems because, unlike households and every other type of currency user, the Federal Government doesn’t have to worry about not being able to afford to deficit spend up to the point of full employment.

Treasury Secretary to Congress: U.S. to Hit Debt Ceiling in October -  Come mid-October, the U.S. government will no longer be legally allowed to issue more debt, according to a letter written by Treasury Secretary Jack Lew to Congressional leaders earlier today. That’s when the Treasury will exhaust the so-called “extraordinary measures” it has undertaken to avoid going over the Congressionally imposed limit on total federal debt of $16.7 trillion set in a budget deal in May. The limit on federal borrowing is a holdover from a time when Congress would individually approve each new issuance of debt. As the financing needs of the federal government became increasingly complex during the 1930s, it decided to move towards an aggregate limit on debt, allowing the Treasury Department more freedom to decide on the timing and nature of debt issuance as long as it remained below the congressionally-mandated debt ceiling.There is, of course, a redundant quality to all of this. Because Congress controls both spending and taxation, it can control the total level of debt without needing to set a debt limit at all. And in recent years, the existence of the debt ceiling has become an issue of global consequence, as congressional Republicans have used the threat of not raising it as bargaining tool to extract concessions on spending cuts from President Obama and Democrats.

Look out: Here comes the debt limit — In a letter to congressional leadership, Treasury Secretary Jack Lew said the U.S. government would hit its debt limit sooner than expected. Lew wrote Monday that the U.S. government will reach the limit of its borrowing ability in mid-October and urged Congress to reach a budget deal to raise the $16.7 trillion borrowing limit. Lew’s concern set a more specific deadline for congressional action, demanding a vote to increase the debt ceiling to avert a financial crisis.Based on our latest estimates, extraordinary measures are projected to be exhausted in the middle of October. At that point, the United States will have reached the limit of its borrowing authority, and Treasury would be left to fund the government with only the cash we have on hand on any given day. The cash balance at that time is currently forcasted to be approximately $50 billion. Echoing a speech he gave  to the Commonwealth Club of California last week, Lew said, “Congress should act as soon as possible to meet its reponsibility to the nation and to remove the threat of default.”

Debt Limit to Hit Sooner Than Expected -- Treasury Secretary Jack Lew informed Congress today that the government could run out of funds as soon as the middle of October. According to the letter, once the United States government exhausts its “extraordinary measures” the U.S. Treasury will have $50 billion in cash on hand to pay its bills. Some speculate that policymakers may tie together the debt ceiling debate and tax reform as an opportunity to create a “Grand Bargain.” Doing so may pose its own risks, as tax reform could quickly become a discussion about more tax revenues, as Senate Leader Harry Reid (D-NV) has suggested, instead of increasing economic growth and creating jobs.Congress extended the debt ceiling for three months at the beginning of the year, and the debt ceiling hit its limit of $16.699 trillion in May. Without action, the Treasury may lack funds to keep the governemnt running.

The Debt Ceiling Will Be Here Sooner Than We Thought - I’m just back from dual vacations, and I’m tempted to turn right back around. Upon returning home this afternoon, I saw this note from Treasury Sec’y Jack Lew telling Rep John Boehner that contrary to the buzz that we’d hit the ceiling in late-Oct, early-Nov, we’re on track to hit it in sooner than that, in mid-October. Since it would be deeply unhealthy to jump into this mishegoss with both feet right away, I’ll share a few initial impressions of what I see going on and get back with more details in coming days.

  • –They’ll probably avoid a government shutdown by passing a very short patch, freezing spending levels where they are for this year (they’ve only got something like nine working days in Sept—I know, nice work if you can get it).  That shouldn’t ruffle too many feathers and just sets the table for the big fight in October.
  • –I wish I could see a way out of this ridiculous debt ceiling fight.  Why ridiculous?  Because remember, the money that the government needs to borrow in excess of the current debt ceiling is money they’ve already agreed to spend.  They’re pickin’ their teeth at the end of the meal they ordered and ate, talkin’ tough about how they’re not going to pay for it.

Obama Officials Said Divided on Fiscal Debate Strategy - Facing a sixth fiscal showdown with congressional Republicans, President Barack Obama’s economic and political advisers are divided over how far to push in pursuit of a deal on the budget and the nation’s debt limit, according to two people familiar with the discussions. The debate centers on how comprehensive an agreement the White House should seek to end the automatic, across-the-board spending cuts known as sequestration, which is set to slash $109 billion from projected defense and domestic discretionary spending in 2014.Obama’s economic advisers, including the new Office of Management and Budget Director Sylvia Mathews Burwell and National Economic Council Director Gene Sperling, are at odds with his political team, including senior adviser Dan Pfeiffer, and deputy chief of staff Rob Nabors, according to the people, who asked for anonymity to talk about internal deliberations. The economic team is pushing to explore a deal that replaces sequestration with targeted cuts and spending increases, according to the people. The political aides argue that the bigger the agreement the more likely it is to collapse, the people said. Republican leaders and White House officials have said they are determined to avoid a shutdown of the federal government or risking a default by refusing to raise the debt ceiling. While Obama has said he won’t negotiate on the debt ceiling, the budget fight with Republicans may get intertwined with the need later this year to raise the government’s $16.7 trillion debt ceiling.

Lew: Obama not negotiating over debt limit - Treasury Secretary Jack Lew challenged Congress on Tuesday to raise the debt limit—telling CNBC that President Barack Obama will not negotiate over the issue. "What we need in our economy is some certainty. We don't need another self-inflicted wound," Lew said in a "Squawk Box" interview. "Congress should come back and they should act."  He added, "We don't need another crisis at the last minute" because it causes uncertainty in the financial markets.  On Monday, the Obama administration warned Congress that the U.S. could run out of money to pay its bills around mid-October. In a letter to House Speaker John Boehner, R-Ohio, Lew urged lawmakers to swiftly raise the limit on federal government borrowing. The government has been bumping up against its $16.7 trillion debt ceiling since May.  The president is "not going to be negotiating over the debt limit," Lew told CNBC. "Congress has already authorized funding, committed us to make expenditures. We're now in a place where the only question is, will we pay the bills that the United States has incurred?" Answering his own question, Lew stressed there can be no question about that.

#cliffgate Officially Begins Next Tuesday - There will be only 9 legislative days before fiscal 2014 starts on October 1. Approximately 15 calendar (but no more than 10 legislative) days later, the Treasury says the government will not have the cash it needs to pay all its bills. At that point either the federal debt ceiling will have to be raised so the government may borrow more or a technical or actual default will occur. The start of the fiscal year has been known for since 1974 when it was changed by the Congressional Budget Act. But the deadline by which the debt ceiling needs to be raised is always a moving target. The latest estimate came yesterday when the Treasury released a letter saying it would have only $50 billion in cash by the middle of October and will be very close to the point at which all bills cannot be paid. The Treasury's letter only indicates that #cliffgate won't be settled quickly. In the current political environment, when Republicans disagree with Republicans almost as much as they disagree with Democrats, House Democrats are less inclined than ever before to supply the votes House Republicans need to pass legislation, the White House insists it won't negotiate on the debt ceiling and tax and entitlement reform are years away, it's simply not credible to expect that the differences over fiscal 2014 funding and a debt ceiling increase will be settled in 25 days. It would be all-but-impossible to do that even if the White House and Congress were controlled by the same political party and that party had a filibuster-proof majority in the Senate.

Boehner On Debt Ceiling: 'Whale Of A Fight' - Business Insider: House Speaker John Boehner predicted a "whale of a fight" over raising the nation's debt ceiling this fall, despite Treasury Secretary Jack Lew's assertions that President Barack Obama wouldn't negotiate on the point before a mid-October deadline. Boehner visited Idaho on Monday, where he spoke at a fundraiser for Rep. Mike Simpson. He told the crowd there that the Republican-controlled House of Representatives would only agree to lift the debt ceiling without significant cuts and changes to Social Security, Medicaid, Medicare, farm programs and government pensions. “Now, it’s time to deal with the mandatory side,” Boehner said to applause, according to the Idaho Statesman. “I’ve made it clear that we’re not going to increase the debt limit without cuts and reforms that are greater than the increase in the debt limit. “The president doesn’t think this is fair, thinks I’m being difficult to deal with. But I’ll say this: It may be unfair but what I’m trying to do here is to leverage the political process to produce more change than what it would produce if left to its own devices. We’re going to have a whale of a fight." Boehner's comments could be significant, in that they exhibit the "Boehner rule" proclamation that he adopted during 2011 talks. The "Boehner rule" requires spending cuts and/or reforms equal to or greater than the amount of the debt-limit increase.

How Washington Will Use the Coming Budget Wars To Duck Hard Choices - Treasury Secretary Jack Lew has notified Congress that the U.S. government will reach the limits of its ability to borrow in mid-October.  Lew’s letter sounds the opening notes of the overture to this fall’s fiscal grand opera. Between October 1 and the end of the calendar year, President Obama and Congress will battle over the debt limit, fiscal 2014 spending, and a fistful of expiring tax provisions. A dwindling few see this depressing confluence of fiscal deadlines as an opportunity to reach the long-awaited Grand Bargain. But in reality it is just the opposite, an excuse to avoid the tough choices of tax and entitlement reform. After all, it is easier for Washington to battle over self-made, short-term crises than resolve structural tax and spending challenges.If you are a Republican, it is easier to demand that the Affordable Care Act be defunded than to back tough, specific cuts to Medicare. If you are Democrat, it is easier to rail against the inequities of the sequester than kill government programs that don’t work. And if you are a politician of either party, it is much easier to embrace the vague concept of tax reform than to cut specific popular tax preferences.

News Flash: The CBO Isn't Stupid - Paul Krugman -- Brad DeLong gets very annoyed at Robert Murphy, who ridicules him for not taking into account the effect of low investment on potential output. Brad notes that Murphy apparently hasn’t done the math, which indicates that even the sustained shortfall we’ve had since 2008 (mainly in residential investment) should not have had a major effect. But it’s actually much worse than even Brad seems to realize. The potential output series he’s using comes from the Congressional Budget Office, which describes its method (pdf):CBO’s estimate of potential output is based on the framework of a textbook model of long-term economic growth, the Solow growth model. The model attributes the growth of real GDP to the growth of labor (hours worked), capital (an index of capital services emanating from the stock of productive assets), and technological progress (total factor productivity). CBO estimates trends —that is, removes the cyclical changes—in the labor and productivity components by using a variant of a relationship known as Okun’s law. (In principle, other “detrending” methods could be used to extract the trends in those inputs.) So the CBO already takes into account the effect of a smaller capital stock on potential output. That’s part of the reason CBO’s projections of future potential have in fact been marked down since the crisis began.

How to Invent a Misleading Statistic - The Washington Post's David A. Fahrenthold hyped the size of the federal government out of context, presenting an excellent example of how to construct a misleading statistic. Writing on the size of the federal workforce, Fahrenhold claims: Measured another way -- not in dollars, but in people -- the government has about 4.1 million employees today, military and civilian. That's more than the populations of 24 states. Wow, 24 states. That's almost half the country. Clearly the federal behemoth has grown too big. Other ways he could have phrased this statement include:That's less than the population of the Riverside-San Bernardino-Ontario, CA Metropolitan Statistical Area. Or:That's less than half the audience that viewed America's Got Talent last week.

The 47% is Now 43% and Falling -- Remember the 47%? Well, my colleagues at the Tax Policy Center just updated the numbers. For 2013, they estimate that the fraction of Americans not paying any federal income tax is down to 43%. Why? Because the economy is recovering and tax cut stimulus has ebbed. A decade from now, they predict, it will be 34%.  Bob Williams, the Sol Price Fellow at the Urban Institute, explains the number in this video. Key point: the 43% may not pay any federal income tax, but that doesn’t mean they don’t pay taxes:

Videos - Cash Hoarders Devastate Economy: The wealthiest Americans are sitting on trillions of dollars in cash. They aren't reinvesting, they aren't giving workers a raise, and they aren't spending. Ring of Fire host Mike Papantonio talks about how this affects our economy with Richard Eskow, a senior fellow at the Campaign for America's Future.

The Danger of an All-Powerful Federal Reserve - WSJ.com: Interest rates make the headlines, but the Federal Reserve's most important role is going to be the gargantuan systemic financial regulator. The really big question is whether and how the Fed will pursue a "macroprudential" policy. This is the emerging notion that central banks should intensively monitor the whole financial system and actively intervene in a broad range of markets toward a wide range of goals including financial and economic stability. For example, the Fed is urged to spot developing "bubbles," "speculative excesses" and "overheated" markets, and then stop them—as Fed Governor Sarah Bloom Raskin explained in a speech last month, by "restraining financial institutions from excessively extending credit." How? "Some of the significant regulatory tools for addressing asset bubbles—both those in widespread use and those on the frontier of regulatory thought—are capital regulation, liquidity regulation, regulation of margins and haircuts in securities funding transactions, and restrictions on credit underwriting." This is not traditional regulation—stable, predictable rules that financial institutions live by to reduce the chance and severity of financial crises. It is active, discretionary micromanagement of the whole financial system. A firm's managers may follow all the rules but still be told how to conduct their business, whenever the Fed thinks the firm's customers are contributing to booms or busts the Fed disapproves of.

Federal Reserve Employees Afraid To Speak Put Financial System At Risk -- Regulators overseeing the nation’s largest financial institutions are distrustful of their bosses, afraid to speak out, and feeling isolated, according to a confidential survey this year of Federal Reserve employees. The findings from the April survey of roughly 400 employees, presented to Fed staff during multiple meetings in June and July and obtained by The Huffington Post, show a workforce that is demoralized, and an institution where teamwork is nonexistent, innovation and creativity are discouraged and employees feel underutilized. The shaky morale is a legacy of Alan Greenspan’s 19-year term as Fed chairman. From 1987 to 2006, the Greenspan Fed pushed for a hands-off approach by regulators, who then found themselves blamed for the financial crisis that led to the most punishing economic downturn since the Great Depression. “Supervisors during the Greenspan years were beaten down pretty regularly,” An overwhelming majority of Fed regulators are proud to work at the central bank and believe in its mission of supervising the financial system and ensuring stability. They also trust and have good relationships with their immediate supervisors. But most say that top leaders are failing the organization, in part by not communicating honestly, and that employees are in the wrong jobs, or are poorly managed.

Bond Binge Expanding Leverage Toward Crisis Peak - Company debt loads in the U.S. are approaching the highest level since the aftermath of the financial crisis as borrowing to finance mergers and shareholder payouts exceeds earnings growth. Debt levels have increased faster than cash flow for six straight quarters, boosting the obligations of investment-grade companies in the second quarter to 2.09 times earnings before interest, taxes, depreciation and amortization, according to JPMorgan Chase & Co. That’s up from 2.07 times in the first three months of 2013 and compares with 2.13 in the third quarter of 2009, when it peaked after the deepest recession since the Great Depression. Businesses from Apple to Comcast have tapped credit markets this year to take advantage of the lowest borrowing costs on record before the Federal Reserve decides to pull back on measures intended to boost an economy that’s forecast to expand this year at the slowest pace since 2009. The leverage trend can’t be sustained, JPMorgan analysts led by Eric Beinstein wrote last week in a report, and a combination of rising rates and high cash balances may curtail issuance. Investment-grade companies have issued $739 billion of bonds in the U.S. this year, according to data compiled by Bloomberg. That’s a faster pace than in the same period of 2012, when a record $1.12 trillion of securities were issued by borrowers ranked Baa3 or higher by Moody’s Investors Service or at least BBB- by Standard & Poor’s.

Junk Debt Exceeds $2 Trillion in Central Bank Repression -- It took three decades for the amount of speculative-grade debt to reach $1 trillion. It took about seven years to reach $2 trillion as investors sought relief from the financial repression brought on by near-zero interest rates. The market for dollar-denominated junk-rated debt has expanded more than eightfold since the end of 1997 from $243 billion, according to Morgan Stanley. That compares with a quadrupling of the investment-grade market to $4.2 trillion as tracked by the Bank of America Merrill Lynch U.S. Corporate Index. While Federal Reserve policies have pushed investors toward riskier investments to generate high yields, allowing even the neediest companies that might otherwise default to access capital markets, concern is rising that missed payments may soar when benchmark rates begin to increase. Martin Feldstein, a past president of the National Bureau of Economic Research, said last week that low rates should be allowed to rise because they’re driving investors into risky behavior. “The growth in the market, and volume of supply is less important than quality of issuance,” Adam Richmond, a credit strategist at Morgan Stanley in New York, said in a telephone interview. “When we see a heavy volume of lower-quality deals, that’s when you need to worry a little bit.”

Nearly 40% of the Top Paid CEOs Bombed at Their Jobs - The Institute for Policy Studies has released a no holes barred report on CEO pay, culture.  Even the study title screams outrage, Executive Excess 2013: Bailed Out, Booted, and Busted.  Every year there is a list of the top 25 highest paid CEOs and over the past 20 years this list has included 500 executives.  Of those 500 who made the Wall Street Journal's top 25 highest paid Chief Executive Officer list, a whopping 38% were utter failures at their jobs.  That's millions and sometimes billions in compensation for being a complete incompetent and worse.  The report has three categories for overpaid CEOs who have failed:   the booted, the bailed out and the busted. Those CEOs were forced out, saved by taxpayer bail outs and those who ran companies guilty of outright fraud and theft.  Included in this list are those who simply ran their companies into the ground.  From the report:

  1. The Bailed Out: CEOs whose firms either ceased to exist or received taxpayer bailouts after the 2008 financial crash held 22 percent of the slots in our sample. Richard Fuld of Lehman Brothers enjoyed one of Corporate America’s largest 25 paychecks for eight consecutive years — until his firm went belly up in 2008.
  2. The Booted: Not counting those on the bailed out list, another 8 percent of our sample was made up of CEOs who wound up losing their jobs involuntarily. Despite their poor performance, the “booted” CEOs jumped out the escape hatch with golden parachutes valued at $48 million on average.
  3. The Busted: CEOs who led corporations that ended up paying significant fraud related fines or settlements comprised an additional 8 percent of the sample. One CEO, Jerald Fishman of Analog Devices, had to pay a penalty out of his own pocket for back-dating his stock option grant for personal gain. The other companies shelled out payments that totaled over $100 million per firm.

40% of top-paid CEOs busted, bailed out or booted, study says - A new report from the Institute for Policy Studies points to a weak link between performance and pay among some of the highest-paid CEOs of American companies, and urges the U.S. government to push through laws that would bring chief executive pay under closer scrutiny. The report, titled "Executive Excess 2013," found that since the 2008 financial crisis, 40 per cent of the highest-paid CEOs in the U.S. had been either "bailed out, booted, or busted" – that is, worked for companies bailed out by taxpayers, had been fired or had been arrested for illegal activities. “We think the study really undercuts this whole idea of pay for performance,” said Sarah Anderson, co-author of the Executive Excess Report, said in an interview from Washington, D.C."We have a corporate culture that really encourages risky behaviour that is dangerous for both shareholders and taxpayers. I think it’s widely acknowledged that the executive CEO compensation structure for Wall Street bankers was a factor that got us into this crisis," she told CBC News. The breakdown:

  • About 22 per cent of U.S. companies with the highest-paid CEOs received taxpayer bailouts after the 2008 financial crash.
  • Eight per cent of highly paid CEOs were fired for poor performance but received golden parachutes valued, on average, at $48 million US.
  • Another eight per cent of highly paid CEOs ran afoul of the law and paid fraud-related fines or settlements.

Everything You Need to Know About the Justification for CEO Pay in One Graphic

Anyway You Slice It Corporate Profits Bigger Share of Economic Pie - The BEA released corporate profits for Q2 2013 along with GDP. Corporate profits after tax increased 2.6% from Q1 2014 to $1,830.4 billion. Corporate profits after tax are also up 5.8% from a year ago. Corporate profits as a percentage of GDP are at an all time high and after tax profit margins per unit are also soaring to the stratosphere. Corporate profits after tax just hit a record high as a percentage of GDP, while wages are at their lows as a percentage of nominal gross domestic product. Workers are clearly getting less and less of the American economic pie, while corporate profits continue to soar. To illustrate how bad this is, the below graph shows wages and salaries as a percentage of GDP in red, scale on the right, against corporate profits as a percentage of GDP, in blue, scale on the left. This is just terrible for America and American workers. Corporate profits per unit also set a record. That's not due to increased prices and because this is profits per unit, it's not an incredible in sales volume. Nope, corporations are making out like bandits because they are squeezing workers and also cashing in on very low interest rates. The BEA reports corporate profits in a variety of ways and it seems whatever one's focus and political predilections are implies which number they use. Below are some of the other ways of viewing corporate profits, but anyway ya slice it, corporations are simply getting more of the American pie while workers go without. Corporate profits with inventory valuation and capital consumption adjustments, after tax, increased 4.2% from last quarter to $1,680.2 billion and are up 7.1% from one year ago.

Vital Signs: Profits Are Outpacing GDP Growth - Corporations continue to rake in the cash. Aftertax profits increased 2.6% in the second quarter from the first quarter, said the Commerce Department Thursday. Compared to a year ago, profits are up 5.8% while nominal gross domestic product increased just 3.1%. Companies are still not able to boost their selling prices by much. But one reason earnings are increasing despite only so-so economic growth is because businesses are making more money out of each unit sold. Aftertax profit margin economywide increased to a record 12.4% last quarter. Corporations are holding the line on labor and other costs like interest expense.

Looking at the Consumption rate of Capital Income - Theoretically, capital income, especially in the form of retained earnings by corporations and some capital gains would be used for saving and investment in the means of production, while labor income is used for consumption of finished goods and services from production. However, a portion of capital income is used for consumption, when the incentives and extra liquidity are there.What is the percentage of capital income that is used for consumption of finished goods and services? And is it helpful to know? Here is the graph I put together showing the changes in the consumption rate of capital income since 1953…The consumption rate of capital income reached 40% in the 1960s and then fell to almost 0% during the 1980 recession. Why the dramatic drop? And if we look to 2013, we see that the rate is making a comeback. What could be going on here? Well, as I inputted decades of data using dozens of sheets of paper, patterns appear. One clear pattern is the effect of tax rates. In the following graph I show the effective tax rates for capital income and for labor income. These are the effective tax rates used to determine the data in graph #1 along with the national income account numbers. (source for effective tax rates on capital income.) (source for national income account data.)

Libor Rate-Probe Spotlight Shines on Executives - WSJ.com: Three days after Tokyo-based trader Tom Hayes was fired by Citigroup Inc. C +0.33%for trying to manipulate benchmark rates, he shot off a letter to one of the bank's human-resources executives. "My actions were entirely consistent with those of others at senior levels" in Citigroup Japan, he wrote on Sept. 9, 2010, and "the senior management at [Citigroup Japan] were aware of my actions." Regulators in the U.S. and U.K. are probing up to a dozen banks, including Citigroup, in connection with alleged efforts to manipulate the London interbank offered rate, or Libor, in order to benefit their trading positions. Among other things, they want to know whether senior executives knew of, or participated in, illegal activity. Mr. Hayes's letter is now in the hands of investigators in the U.K.'s Serious Fraud Office, and the former trader has been cooperating for months with their investigation, according to a person familiar with the matter.  Mr. Hayes has been charged by prosecutors in both the U.S. and U.K. with trying to manipulate rates, cast as the central figure in what prosecutors say was a corrupt ring of traders and brokers. Several former Citigroup employees said in interviews that Mr. Hayes and his boss had sought help in their rate-rigging attempts from two senior Citigroup executives—and that they sometimes got it. For his alleged manipulation scheme to work, Mr. Hayes needed other Citigroup employees to alter interest rates the bank reported to the organizations that calculated Libor and its Japanese counterpart, the former employees said. Brian Mccappin, who was running Citigroup's Japanese investment bank when the alleged manipulation took place, made some of those requests on Mr. Hayes's behalf, the former employees said. On other occasions, Mr. Hayes's boss, Chris Cecere, called on Andrew Morton, the London-based head of Citigroup's interest-rates trading business, for help, these people said. Mr. Morton sometimes telephoned a Tokyo employee involved in submitting the rate information and asked him to follow instructions from Messrs. Hayes and Cecere, former employees said.

Larry Summers and the Secret "End-Game" Memo - Greg Palast : When a little birdie dropped the End Game memo through my window, its content was so explosive, so sick and plain evil, I just couldn't believe it. The Memo confirmed every conspiracy freak’s fantasy:  that in the late 1990s, the top US Treasury officials secretly conspired with a small cabal of banker big-shots to rip apart financial regulation across the planet.  When you see 26.3% unemployment in Spain, desperation and hunger in Greece, riots in Indonesia and Detroit in bankruptcy, go back to this End Game memo, the genesis of the blood and tears. The Treasury official playing the bankers’ secret End Game was Larry Summers.  Today, Summers is Barack Obama’s leading choice for Chairman of the US Federal Reserve, the world’s central bank.  If the confidential memo is authentic, then Summers shouldn’t be serving on the Fed, he should be serving hard time in some dungeon reserved for the criminally insane of the finance world. The memo is authentic. It begins with Summers’ flunky, Timothy Geithner, reminding his boss to call the then most powerful CEOs on the planet and get them to order their lobbyist armies to march: “As we enter the end-game of the WTO financial services negotiations, I believe it would be a good idea for you to touch base with the CEOs….” To avoid Summers having to call his office to get the phone numbers (which, under US law, would have to appear on public logs), Geithner listed their private lines. And here they are:

Is the US Government the Managing Committee of the Pirate Banks? -- Greg Palast at Vice exposes the way that Larry Summers, Tim Geithner and others in the Treasury Department conspired with JP Morgan and other pirate investment banks not only to destroy Glass-Steagall in the US but throughout the world, removing the difference between commercial banks. and investment banks. Basically, they used US financial muscle to leverage the world into letting banks play poker with your money and forcing regulators to treat toxic bad loans as ‘assets’. It is not normal for moving money around, often in very shady and unsafe ways, to account for a fifth of the profits of the S&P companies,more than high tech, which actually makes something. Only a few decades ago, that sector was 10% of profits. In essence a small number of corrupt investment bankers (not all are) gained control of the Dept of the Treasury and then used it to ‘deregulate’ the whole world. In layman’s language, deregulating banks means firing the guards and unlocking the vaults.Palast notes that Argentina, Greece and Spain are among the victims of this ploy, not to mention The millions of Americans who lost their mortgages in 2008 and after. Deregulation fundamentalism in banking had already contributed to the 1997 meltdown in East Asia, where unregulated currency transfers were allowed and speculators just bounced billions around the world, leading to Thailand’s and then others’ vast currency depreciation. Malaysia refused the arbitrageurs and so weathered the storm well. Palast explains why Obama never moved against Wall Street and is even considering the sleazy Larry Summers to head the Federal Reserve.

The “Grave Threat” Hearing You’ve Never Heard About - One day after terrorists set off a bomb at the Boston Marathon leaving a tragic trail of senseless human suffering, the U.S. House of Representatives held a scheduled hearing to debate another form of terrorism – the kind of economic terrorism that gripped the United States from 2008 to 2010 and lingers today in the form of 46 million Americans living in poverty, mass underemployment, stagnating wages, a shaky housing market, tepid GDP growth and ballooning national debt. The House was debating the “grave threat” to the Nation posed by the too-big-to-fail banks. You likely didn’t hear about the hearing because the media was focused on the Boston Marathon and its more easily understood, visually shocking form of terrorism.  “…Section 121 allows the Federal Reserve, in consultation with F-SOC [Financial Stability Oversight Council], not the FDIC, to require large firms to sell assets. However, it imposes a high hurdle on the requirement. We must find, and the F-SOC must agree – two-thirds of the F-SOC must agree – that the institution poses a ‘grave threat,’ not just any threat, a ‘grave threat,’ to financial stability. And, we are required by statute to consider a variety of alternatives first, including restrictions on growth, restrictions on activities, conditions on operations, many other things as precursors to the sale of assets. The sale of assets is the last on the list.” The Chairman of the Committee, Congressman Patrick McHenry (R-NC), asked Alvarez if the regulators had yet defined the term “grave threat.” Alvarez responded: “No we have not.”

We’re All Still Hostages to the Big Banks - — NEARLY five years after the bankruptcy of Lehman Brothers touched off a global financial crisis, we are no safer. Huge, complex and opaque banks continue to take enormous risks that endanger the economy. From Washington to Berlin, banking lobbyists have blocked essential reforms at every turn. Their efforts at obfuscation and influence-buying are no surprise. What’s shameful is how easily our leaders have caved in, and how quickly the lessons of the crisis have been forgotten. We will never have a safe and healthy global financial system until banks are forced to rely much more on money from their owners and shareholders to finance their loans and investments. Forget all the jargon, and just focus on this simple rule. Mindful, perhaps, of the coming five-year anniversary, regulators have recently taken some actions along these lines. In June, a committee of global banking regulators based in Basel, Switzerland, proposed changes to how banks calculate their leverage ratios, a measure of how much borrowed money they can use to conduct their business. Last month, federal regulators proposed going somewhat beyond the internationally agreed minimum known as Basel III, which is being phased in. Last Monday, President Obama scolded regulators for dragging their feet on implementing Dodd-Frank, the gargantuan 2010 law that was supposed to prevent another crisis but in fact punted on most of the tough decisions. Don’t let the flurry of activity confuse you. The regulations being proposed offer little to celebrate.

Zero Prosecutions of Elite Banksters is too many Prosecutions for the Wall Street Journal By William K. Black - Unintentional self-parody was the result to a coordinated effort by the systemically dangerous institutions’ (SDIs) press flacks to gin up outrage that the Department of Justice (DOJ) would have the audacity to sue the SDIs’ for their manifold violations of the law.  The Wall Street Journal recalled one of its former opinion page pundits to active duty as a shill for the Street.   George Melloan’s August 25 column warned:“If dubious prosecutions continue to mount, they could backfire on the regulatory agencies and further diminish sinking public confidence in government. Ask the folks at the IRS.” Given the fact that there are zero prosecutions of any of the elite bankers whose frauds drove the crisis the phrase “if dubious prosecutions continue to mount” is surreal.  Melloan’s IRS reference is a threat aimed at the banking regulators.  If they ever emerge from their torpor and begin make criminal referrals and demand that DOJ prosecute the banksters Melloan is threatening to reprise the kneecapping that that Republicans members of Congress inflicted on the IRS at Senate hearings in 1997.  Senator Roth (R. Del.) staged the hearing quite brilliantly as a series of alleged “horror stories” often told by alleged IRS “whistleblowers”

Banks, economists and politicians: just follow the money - There is one simple and straightforward measure that would go a long way to avoiding another global financial crisis, and that is to substantially increase the proportion of bank equity that banks are obliged to hold. This point is put forcibly, and in plain language, in a recent book by Admati and Hellwig: The Bankers New Clothes. (Here is a short NYT piece by Admati.) Admati and Hellwig suggest the proportion of the balance sheet that is backed by equity should be something like 25%, and other estimates for the optimal amount of bank equity come up with similar numbers. The numbers that regulators are intending to impose post-crisis are tiny in comparison.  Why are banks so reluctant to raise more equity capital? One reason is tax breaks that make finance using borrowing cheaper. But non-financial companies, that also have a choice between raising equity and borrowing to finance investment, typically use much more equity capital and less borrowing. If things go wrong, you can reduce dividends, but you still have to pay interest, so companies limit the amount of borrowing they do to reduce the risk of bankruptcy. But large banks are famously too big to fail. So someone else takes care of the bankruptcy risk - you and me. We effectively guarantee the borrowing that banks do. (If this is not clear, read chapter 9 of the book here.  The authors make a nice analogy with a rich aunt who offers to always guarantee your mortgage.)

Commercial Banks As Creators of "Money" - Paul Krugman -- Thank you, Matthew Klein! In the course of critiquing Robert Hall’s paper for Jackson Hole, he mentions and links to another half-century-old paper by James Tobin, Commercial Banks as Creators of “Money” (pdf), that I had forgotten about, and is even more precisely on point than the Tobin-Brainard piece I’ve been citing.  All the points I’ve been trying to make about the non-specialness of banks are there. In particular, the discussion on pp. 412-413 of why the mechanics of lending don’t matter — yes, commercial banks, unlike other financial intermediaries, can make a loan simply by crediting the borrower with new deposits, but there’s no guarantee that the funds stay there — refutes, in one fell swoop, a lot of the nonsense one hears about how said mechanics of bank lending change everything about the role banks play in the economy. Banks are just another kind of financial intermediary, and the size of the banking sector — and hence the quantity of outside money — is determined by the same kinds of considerations that determine the size of, say, the mutual fund industry.

Banks and macroeconomic models - There has been a recrudescence of blogospheric argument on the nature of commercial banks, whether they are best considered “financial intermediaries” not unlike mutual funds or insurance companies, or whether they are something different, in particular, whether their ability to issue liabilities that are near-perfect substitutes for base money renders them special in macroeconomically important ways. See e.g. Cullen Roche, Winterspeak, Ramanan, and Paul Krugman. If banks are mere intermediaries between savers and borrowers, it may be reasonable to abstract them out of macroeconomic models and simply focus on the preferences of borrowers and savers and the price mechanism (interest rates) that ultimately reconcile those preferences, perhaps with “frictions”. If banks are special, if they have institutional characteristics that affect the macroeconomy in ways not captured by the stylized preferences of borrowers and savers, then it may be important to model the dynamics of the banking system explicitly. Paul Krugman says banks are not special, most recently citing James Tobin’s famous paper on Commercial Banks As Creators of Money:I want to unpack this just a bit. First, please don’t misunderstand the argument. Tobin’s, and by extension Krugman’s, point is not the facile argument sometimes made, that loans don’t meaningfully create deposits because a bank needs to fund the loan when the deposit created by a loan is spent or transferred. That is true of an individual bank, but not of the banking system as a whole, the object to which Tobin correctly devotes his attention. It is an entirely uncontroversial fact that when the banking system net-increases its lending it creates new deposits, regardless of whether an individual lender’s balance sheet expands permanently or ephemerally.

Banks are special because the medium of exchange is special - Banks can create the medium of exchange "at the stroke of a pen", and lend it out for a monthly fee. But a talented artist can create valuable drawings at the stroke of a pen, and lend those drawings out for a monthly fee to those who want to hang them on their walls. If the medium of exchange is not special, or macroeconomically important, then banks are no more special or macroeconomically important than that talented artist. Ask yourself these two questions:

  • 1. Is the medium of exchange a special good, that is unlike all other goods, in a way that is macroeconomically important?
  • 2. Are commercial banks special firms, that are unlike other firms, and unlike other financial intermediaries, in a way that is macroeconomically important?

I think those two questions are very closely related. It would be hard to answer "no" to the first and "yes" to the second. That's because: Banks are financial intermediaries whose liabilities are used as media of exchange. If the medium of exchange is not a special good, and not a macroeconomically important good, then banks cannot be special or macroeconomically important either. Banks would be no more special or macroeconomically important than mutual funds.

Hyper-Endogeneity - Some people believe in endogenous money. They believe we live in a monetary system is which money is generated and extinguished as part of the ordinary flow of everyday economic activity. The endogenous money picture is in some considerable tension with the idea that the monetary system is controlled by the government. The alternative exogenous money picture holds that the issuance and destruction of money is a task reserved for government alone, and that the total amount of money present in the economy is therefore a government policy choice. We can achieve a happy medium between the endogenous money and exogenous money pictures by viewing things this way: Due to a combination of deliberate policy choices and historical contingencies, societies have chosen to institute complex monetary and credit systems in which the generation of the most commonly used means of exchange is primarily a market-driven phenomenon, but one that is heavily regulated and supplemented by government agencies that also issue their own forms of money.  So there is truth in each picture, and it is a mistake to adopt either extreme.  One of those extremes is a view that I have sometimes called “hyper-endogeneity.” Hyper-endogenists systematically exaggerate the role of commercial bank money in our existing monetary system, treating the banks as possessing certain powers that are actually reserved to the federal government alone.  Hyper-endogenists view banks as, in effect, operating their own fiat printing presses. They claim commercial banks manufacture money cost-free “from thin air” and therefore reap seigniorage profits from the exercise.  I tried to point out the errors of hyper-endogeneity in my essay “Do Banks Create Money from Thin Air.”  But since it was a long essay, let me recapitulate the main points as briefly as possible here.

JPMorgan woes deepen as US demands $6bn penalty - FT.com -- US authorities are demanding JPMorgan Chase pay more than $6bn to settle allegations it mis-sold securities to government-backed mortgage companies in the run-up to the financial crisis, according to people familiar with the discussions.  The bank is resisting the payment, which would be its single biggest penalty in a catalogue of expensive run-ins with US authorities and one of the largest post-crisis settlements by any bank, these people said.  It dwarfs the amount that JPMorgan is expected to pay to settle regulatory action over its “London whale” trading scandal and exceeds the penalties for its alleged manipulation of commodities markets. The Federal Housing Finance Agency, a government regulator, sued JPMorgan and 17 other banks in 2011. It said the bank falsely claimed that loans backing $33bn of mortgage-backed securities complied with underwriting guidelines and that it “significantly overstated the ability of the borrowers to repay their mortgage loans”. The securities were sold to Fannie Mae and Freddie Mac, which guarantee US home loans and also buy securities for their own investment portfolio. As borrowers began to default in 2007, the value of the securities fell sharply. The FHFA is suing the banks in its role as regulator of Fannie and Freddie. Although JPMorgan is refusing to pay the amount requested by the government, it expects to settle for billions of dollars, according to people familiar with the situation. The mounting potential price tag was partly responsible for a warning by the bank this month that its total legal bill could exceed cash put aside to cover it by $6.8bn.

FHFA Said to Seek $6 Billion Minimum in JPMorgan Talks - A U.S. housing regulator is seeking at least $6 billion from JPMorgan Chase to settle civil claims the bank sold bad mortgage bonds to government-backed finance companies Fannie Mae and Freddie Mac (FMCC), according to a person briefed on the matter.  JPMorgan, the biggest U.S. bank by assets, is fighting the Federal Housing Finance Agency’s latest request, said the person, who asked not to be identified because the talks are private. The lawsuit is scheduled to go to trial in June, according to a filing in federal court in Manhattan.The FHFA sued JPMorgan and 17 other banks over faulty mortgage bonds two years ago in an effort to recoup some of the losses taxpayers were forced to cover when the government took over the failing mortgage finance companies in 2008. Fannie Mae and Freddie Mac, which are regulated by FHFA, have taken $187.5 billion in federal aid since then.

U.S. Bank Legal Bills Exceed $100 Billion - The six biggest U.S. banks, led by JPMorgan Chase & Co. (JPM) and Bank of America Corp., have piled up $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years. That’s the amount allotted to lawyers and litigation, as well as for settling claims about shoddy mortgages and foreclosures, according to data compiled by Bloomberg. The sum, equivalent to spending $51 million a day, is enough to erase everything the banks earned for 2012. The mounting bills have vexed bankers who are counting on expense cuts to make up for slow revenue growth and make room for higher payouts. About 40 percent of the legal and litigation outlays arose since January 2012, and banks are warning the tally may surge as regulators, prosecutors and investors press new claims. The prospect is clouding outlooks for stock prices, and by some estimates the damage could last another decade. “They’ve crossed the point of no return when it comes to the effects that these expenses are going to have on earnings,”

Survey: Banking industry’s reputation is nearly as bad as that of Congress; BofA ranks last -- In the annals of image problems, the banking industry ranks right up there .... er, down there ... in the company of Congress, with a high-profile survey ranking Bank of America Corp. at the bottom of the heap. Five years after the financial crisis, the Reputation Institute survey said banking has a worse reputation than Big Pharma, news outlets, oil companies and telecommunications firms -- though not so bad as Congress. The most highly regarded industries were transport, consumer products, industrial products, food manufacturing and computers. The consulting firm's survey, published in American Banker Magazine, asked customers and non-customers what they thought of 30 financial-services firms with major retail operations, and broke out responses from both types of respondent. Asking customers about their own banking firms often provoked positive responses, the survey found, just as many Americans will tell you they loathe Congress but rather like their own congressional representatives. Nearly half the banks in the survey enjoy a solid reputation with their customers, which the Reputation Institute defined as a rating of 70 or better on a scale of 100. San Francisco's Union Bank, a subsidiary of Japan's Mitsubishi UFJ Financial Group, topped the list at 78.2. Many other financial companies performed moderately well with customers, leaving only three -- HSBC, Wells Fargo and Bank of America -- with scores below 60, indicating a "weak or vulnerable position," according to the survey.

Markets must force banks, like petulant toddlers, to grow up - FT.com: Like monstrous toddlers, the world’s banks have stumbled from manic exuberance, destroying all they touch with clumsy glee, to petulant refusal to get off the floor. As any parent will tell you, round-the-clock supervision of toddlers is impossible and clearing up the mess is no fun. How can we force banking to grow up? The problem is that governments – rightly, given the present set-up – regard certain banks as too big or too interconnected to fail. From that single flaw springs all our troubles. Banks find it cheap to raise money as debt rather than as equity. That makes them fragile: any highly leveraged company flirts with bankruptcy. In a more respectable industry (such as pornography or tobacco), that risk would encourage use of equity, a more resilient source of funds. But, with the government acting as backstop, who cares? Regulators, then, craft rules to oblige banks to use enough equity capital. These rules do not work. Complex risk-weightings have failed; again and again, banks have collapsed despite meeting regulatory requirements. With hindsight, simpler rules gave better warning of trouble, as the Bank of England’s Andrew Haldane has shown. But they would soon be exploited. There is much to be said for the idea that banks should just use much more equity. But while the costs of using equity in place of debt are often exaggerated, they are not zero. And, even with a large equity cushion, the perverse incentives of “too big to fail” will assert themselves: bankers will find new ways to snuggle up with bankruptcy. Fragility is not the only problem. Banking is pro-cyclical, fuelling booms and deepening slumps. Stressed institutions find it hard to raise capital, because new investors know they would stand behind debt holders in the queue to be repaid. Unable to raise equity, banks are reluctant to lend. The solution is obvious: we need to return to a market-based system of banking regulation – one in which banks will not be bailed out. In a market-based system, they would need to reassure backers they were acting like grown-ups – a process likely to be more robust than ticking regulatory boxes. The problem is that nobody believes a regulator could allow a big bank to fail.

US banks earn record $42.2B in 2nd quarter: — U.S. banks earned more from April through June than during any quarter on record, aided by a steep drop in losses from bad loans. The Federal Deposit Insurance Corp. says the banking industry earned $42.2 billion in the second quarter, up 23 percent from the second quarter of 2012. About 54 percent of U.S. banks reported improved earnings from a year earlier. Banks' losses on loans tumbled 30.7 percent from a year earlier to $14.2 billion, the lowest in six years. And bank lending increased 1 percent from the first quarter. Greater lending helps boost consumer and business spending, leading to more jobs and faster economic growth. Still, the report shows that the largest banks continue to drive the industry's profits while smaller institutions have struggled. Banks with assets exceeding $10 billion make up only 1.5 percent of U.S. banks. Yet they accounted for about 82 percent of the industry's earnings in the April-June quarter. Those banks include Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Most have recovered with help from federal bailout money and record-low borrowing rates.

FDIC reports $42.2 Billion Earnings for Insured Institutions, Fewer Problem banks, Residential REO Declines in Q2 - The FDIC reported FDIC-Insured Institutions Earned $42.2 Billion in the Second Quarter of 2013 Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $42.2 billion in the second quarter of 2013, a $7.8 billion (22.6 percent) increase from the $34.4 billion in profits that the industry reported a year earlier. This is the 16th consecutive quarter that earnings have registered a year-over-year increase. Increased noninterest income, lower noninterest expenses, and reduced provisions for loan losses accounted for the increase in earnings from a year ago.  The FDIC reported the number of problem banks declined:  The number of problem banks continued to decline. The number of banks on the FDIC's "Problem List" declined from 612 to 553 during the quarter. The number of "problem" banks is down nearly 40 percent from the recent high of 888 institutions at the end of first quarter 2011. Twelve FDIC-insured institutions failed in the second quarter of 2013, up from four failures in the first quarter. Thus far in 2013, there have been 20 failures, compared to 40 during the same period in 2012.This graph shows the dollar value of Residential REO for FDIC insured institutions. Note: The FDIC reports the dollar value and not the total number of REOs. he dollar value of 1-4 family residential Real Estate Owned (REOs, foreclosure houses) declined from $7.89 billion in Q1 to $6.98 Billion in Q2. This is the lowest level of REOs since Q4 2007.  The dollar value of FDIC insured REO peaked at $14.8 Billion in Q3 2010.

Unofficial Problem Bank list declines to 714 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.Here is the unofficial problem bank list for August 23, 2013.  Changes and comments from surferdude808:  This week all we got was two bank closures from the FDIC as they did not release second quarter industry results or its enforcement actions through July. The closings and one other removal lower the count of the Unofficial Problem Bank List to 714 institutions with assets of $253.1 billion. A year ago, the list held 898 institutions with assets of $346.7 billion.Next week, we anticipate the FDIC will release its enforcement actions through July and the aggregate Official Problem Bank figures as of June. CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The list peaked at 1,002 institutions on June 10, 2011, and is now down to 714.

Regulators Ease Mortgage Rules - Federal regulators retreated from a proposal that would have toughened rules for the mortgage securities market, a defeat for advocates of tighter standards and a victory for the housing lobby. Six regulators—including the Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission—on Wednesday issued new proposed rules that would require banks and other issuers of mortgage-backed securities to retain 5% of the credit risk of the bonds on their books, as mandated by the 2010 Dodd-Frank financial-overhaul law.However, the proposal carries an exemption so broad it wouldn't apply to securities containing most mortgages made under today's stricter lending standards, which are of relatively low risk. Rather, the rule would apply to the types of higher-risk loans that were popular before the 2008 financial crisis. The rule effectively sets boundaries for what kind of loans might be offered, and on what terms, once lending standards relax. Had the rule been in effect last year, at least 98% of loans would have been covered by the exemption, according to Mark Zandi, chief economist at Moody's Analytics. The decision by regulators represented a major concession to the real-estate industry and consumer groups that had worried the 5% requirement would hurt the housing recovery by limiting credit.

Regulatory Apparatus To Provide Full Employment For Chroniclers of Future Bailouts, as Useless Mortgage Origination Rules Introduced - David Dayen - There’s no way to possibly count the various ways in which Dodd-Frank rules have been watered down, even from their already waterlogged original intent. The problem is that the plain legislative language often doesn’t match the reality of what the regulators produce. This is exactly the case with the “qualified residential mortgage,” or QRM, rule. To make this completely confusing, there already is a qualified mortgage (QM) rule promulgated by the CFPB, which actually retained at least some, though not all, of its teeth. The QRM rule was in the hands of six different financial regulators, and it was supposed to create “risk retention,” where the originator of the loan would have to hold a 5% stake in the loan on its own books, disabling them from distributing the entire risk. Only “qualified residential mortgages” would escape the risk retention requirements. After the proposed rulemaking, it appears that the QRM will deliver risk retention in name only. Six regulators—including the Federal Reserve, Federal Deposit Insurance Corp. and Securities and Exchange Commission—on Wednesday issued new proposed rules that would require banks and other issuers of mortgage-backed securities to retain 5% of the credit risk of the bonds on their books, as mandated by the 2010 Dodd-Frank financial-overhaul law.However, the proposal carries an exemption so broad it wouldn’t apply to securities containing most mortgages made under today’s stricter lending standards, which are of relatively low risk. Rather, the rule would apply to the types of higher-risk loans that were popular before the 2008 financial crisis. The rule effectively sets boundaries for what kind of loans might be offered, and on what terms, once lending standards relax. Had the rule been in effect last year, at least 98% of loans would have been covered by the exemption, according to Mark Zandi, chief economist at Moody’s Analytics.

Regulators Repeat Exactly What They Did During the Last Housing Boom - The Dodd-Frank Act was supposed to require securitizers to retain 5 percent of the credit risk of the mortgage-backed securities that they issued, in order to reduce the risk of a repeat of the last housing bubble. Today, the federal financial regulators said, “Whatever,” and ignored that requirement. In particular, they created an exemption that would have covered at least 98 percent of all mortgages issued last year.Why? Because“adding additional layers of regulation would have contracted credit for first time home buyers and borrowers without large down payments, and prevented private capital from entering the market.” That’s according to the head of the Mortgage Bankers Association. This is the exact same argument that was made in favor of deregulation during the two decades prior to the last financial crisis, without the slightest hint of irony. It’s further proof that everyone has either forgotten that the financial crisis happened or is pretending that it didn’t happen because, well, maybe it won’t happen again? Even leaving aside the specific merits of this decision, the worrying thing is that the intellectual, regulatory, and political climate seems to be basically the same as it was in 2004: no one wants to to anything that might be construed as hurting the economy, and no one wants to offend the housing industry.

Lawler: Regulators “Caving” on QRM - From housing economist Tom Lawler: Six federal agencies on Wednesday issued a notice revising a proposed rule requiring sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule the agencies issued in 2011 to implement the risk retention requirement in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) .  After intense lobbying and political pressure, the agencies have reluctantly agreed “to define QRMs to have the same meaning as the term qualified mortgages as defined by the Consumer Financial Protection Bureau.” The agencies also changed its original proposal that risk-retention requirements would be based on the par value of securities issued and included a “premium recapture provision; the new proposal has risk retention based on “fair value measurements without a premium capture provision.”  The “Dodd-Frank Act” had, among other things, two “definitions” of mortgages: “qualified mortgages,” to be defined by the CFPB and focusing on a borrower’s “ability to pay;” and “qualified residential mortgages,” to be defined by six regulatory agencies, focusing on mortgages with underwriting and product features related to the probability of default. A “qualified mortgage” would give lenders something of a “safe harbor” against future litigation, while a “qualified residential mortgage” would be exempt from risk-retention requirements associated with issuing mortgage-backed securities. If the current proposal is finalized as is, then the risk-retention requirement for private-label RMBS, which was very explicitly designed to better align the interests of issuers/originators and investors, will effectively be gone.  That may not be bad, in that it was not clear if a 5% risk-retention requirement would really alter behavior. However, risk retention was a clear INTENT of legislators in Dodd-Frank, and real-estate and mortgage lobbyists have effectively eliminated it for the vast bulk of mortgages that will be originated.

LPS: Mortgage Delinquency Rate decreases in July - According to the First Look report for July to be released today by Lender Processing Services (LPS), the percent of loans delinquent decreased in July compared to June, and declined about 9% year-over-year. Also the percent of loans in the foreclosure process declined further in July and were down 31% over the last year. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.41% from 6.68% in June. Note: Some of the decrease in short term delinquencies in July is seasonal.   The normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 2.82% in July from 2.93% in June.   The number of delinquent properties, but not in foreclosure, is down 327,000 properties, and the number of properties in the foreclosure process is down 636,000 properties year-over-year. LPS will release the complete mortgage monitor for July in early September.

Freddie Mac: Mortgage Serious Delinquency rate declined in July, Lowest since April 2009 -- Freddie Mac reported that the Single-Family serious delinquency rate declined in July to 2.70% from 2.79% in June. Freddie's rate is down from 3.42% in July 2012, and this is the lowest level since April 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  These are mortgage loans that are "three monthly payments or more past due or in foreclosure".   Very few seriously delinquent loans cure with the owner making up back payments - most of the reduction in the serious delinquency rate is from foreclosures, short sales, and modifications.  I'm frequently asked when the distressed sales will be back to normal levels, and that will happen when the percent of seriously delinquent loans (and in foreclosure) is back to normal.Although this indicates some progress, the "normal" serious delinquency rate is under 1%.   At the recent rate of improvement, the serious delinquency rate will not be under 1% until 2016 or so.  Therefore I expect a fairly high level of distressed sales for 2 to 3 more years (mostly in judicial states).

Fannie Mae: Mortgage Serious Delinquency rate declined in July, Lowest since December 2008 - Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in July to 2.70% from 2.77% in June. The serious delinquency rate is down from 3.50% in July 2012, and this is the lowest level since December 2008. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.Earlier Freddie Mac reported that the Single-Family serious delinquency rate declined in July to 2.70% from 2.79% in June. Freddie's rate is down from 3.42% in July 2012, and this is the lowest level since April 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.. Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure". The Fannie Mae serious delinquency rate has fallen 0.8 percentage points over the last year, and at that pace the serious delinquency rate will be under 1% in just under 2 years. Note: The "normal" serious delinquency rate is under 1%.

The Foolish Push to Scrap Fannie Mae and Freddie Mac -- It appears that Washington is finally getting around to grappling with the largest unresolved question left over from America's housing meltdown: What's to become of the government-backed mortgage giants, Fannie Mae and Freddie Mac? Their fate has been in limbo since the federal government bailed them out and put them in conservatorship in 2008. Now, however, the two government-sponsored enterprises (GSEs) are reaping enormous profits as housing markets rebound. This has gotten lawmakers' attention. House Republicans have introduced a typically radical bill that would eliminate Fannie and Freddie altogether.  A bipartisan Senate proposal would wind down Fannie and Freddie over five years and replace them with a similar functioning institution that charges a fee to insure loans in the event of catastrophic losses.  And President Obama weighed in recently as well, saying it's time to end Fannie and Freddie “as we know them.” Shuttering the GSEs completely, as both bills call for, makes little sense. The idea that you can completely dismantle a housing finance infrastructure that is the foundation of an $11 trillion market is a fantasy the likes of which is only found in Washington. The likely outcome would be chaos, as banks and investors try to reconfigure trillions of dollars in mortgages they have sold into secondary markets with the help of Fannie and Freddie. Replacing the GSEs with some kind of similar institution would likely cost billions of dollars – making it one of the most expensive rebranding exercises in history.

Second Biggest US Landlord, Owner of 20,000 Homes, Terminates 15% of Staff Following Loss - American Homes 4 Rent, the 2nd biggest landlord following Blackrock shed 15% of staff following a second quarter loss. Please consider American Homes 4 Rent Said to Fire Employees After Loss. American Homes 4 Rent (AMH) yesterday fired a group of workers, with a focus on acquisition and construction staff, after the housing landlord reported a fiscal second-quarter loss, according to a person with knowledge of the terminations. The company, owner of almost 20,000 single-family homes, has cut about 15 percent of its workforce this year, including an earlier round of terminations before its initial public offering last month, said the person, who asked not to be identified because the information is private. The Malibu, California-based company, which raised $705.9 million in the IPO, had a net loss of $14 million, or 15 cents a share, on revenue of $18.1 million in the quarter ended June 30, according to a statement this week.  Single-family landlords have struggled to turn a profit while acquiring homes faster than they can fill them with tenants. Hedge funds, private-equity firms and real estate investment trusts have raised more than $18 billion to purchase more than 100,000 rental houses in the past two years. American Homes 4 Rent, founded by B. Wayne Hughes, is the largest single-family landlord after Blackstone Group LP’s Invitation Homes, which has spent more than $5 billion on 32,000 homes.The landlord is slowing its property purchases, with plans to spend as much as $100 million a month on 800 to 1,000 additional homes, Corrigan, the company’s chief operating officer, said on an Aug. 21 earnings conference call.

MBA: Mortgage Refinance Applications down, Purchase Applications Up in Recent Survey - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey Mortgage applications decreased 2.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 23, 2013. ... The Refinance Index decreased 5 percent from the previous week. The Refinance Index has fallen 64.2 percent from its recent peak the week of May 3, 2013. The seasonally adjusted Purchase Index increased 2 percent from one week earlier...The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.80 percent, the highest rate since April 2011, from 4.68 percent, with points decreasing to 0.41 from 0.42 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. Refinance activity has fallen sharply, decreasing in 14 of the last 16 weeks. This index is down 64.2% over the last 16 weeks. The last time the index declined this far was in late 2010 and early 2011 when mortgage increased sharply with the Ten Year Treasury rising from 2.5% to 3.5%. We've seen a similar increase over the last few months with the Ten Year Treasury yield up from 1.6% to over 2.7% today. The second graph shows the MBA mortgage purchase index. The purchase index has increased for the last two weeks, and three of the last four. The 4-week average of the purchase index has generally been trending up over the last year (but down over the couple of months), and the 4-week average of the purchase index is up about 6.7% from a year ago.

Weekly Update: Existing Home Inventory is up 21.4% year-to-date on Aug 26th - Here is another weekly update on housing inventory: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly in 2013.  There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.The Realtor (NAR) data is monthly and released with a lag (the most recent data was for July).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data). In 2010 (blue), inventory increased more than the normal seasonal pattern, and finished the year up 7%. However in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

LPS: House Price Index increased 1.2% in June, Up 8.4% year-over-year -- Notes: The timing of different house prices indexes can be a little confusing. LPS uses June closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted.  From LPS: LPS Home Price Index Report: U.S. Home Prices Up 1.2 Percent for the Month; Up 8.4 Percent Year-Over-Year Lender Processing Services ... today released its latest LPS Home Price Index (HPI) report, based on June 2013 residential real estate transactions. The LPS HPI combines the company’s extensive property and loan-level databases to produce a repeat sales analysis of home prices as of their transaction dates every month for each of more than 18,500 U.S. ZIP codes. The LPS HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales. The LPS HPI is off 15.2% from the peak in June 2006. Note: The press release has data for the 20 largest states, and 40 MSAs. LPS shows prices off 46.6% from the peak in Las Vegas, 37.6% off from the peak in Riverside-San Bernardino, CA (Inland Empire), and at new peaks in Austin, Dallas, Denver and Houston!

U.S. Home Prices Rise Strong 12.1% in June - U.S. home prices rose 12.1 percent in June from a year earlier, nearly matching a seven-year high. But month-over-month price gains slowed in most markets, a sign that higher mortgage rates may weigh on the housing recovery. The Standard &Poor’s/Case-Shiller 20-city home price index slowed only marginally from May’s year-over-year gain of 12.2 percent, the fastest since March 2006. And all 20 cities posted gains from the previous month and compared with a year ago, according to the report released Tuesday. Home prices in Las Vegas soared 24.9 percent from a year earlier to lead all cities. Purchases by investors have helped drive that increase. Other cities hit hard by the housing bust also posted stunning gains in the past year. Prices have jumped 24.5 percent in San Francisco and nearly 20 percent in both Los Angeles and Phoenix. Still, 14 of the 20 cities posted smaller gains in June compared with May. That’s unusual considering June is the middle of the summer buying season. And in cities less affected by the housing crisis, gains have been more modest. Prices in New York and Cleveland are about 3 percent higher than a year earlier. Prices rose 5.7 percent in Washington, D.C. and 6.7 percent in Boston.

Case-Shiller: Comp 20 House Prices increased 12.1% year-over-year in June - S&P/Case-Shiller released the monthly Home Price Indices for June ("June" is a 3 month average of April, May and June prices). This release includes prices for 20 individual cities, two composite indices (for 10 cities and 20 cities) and the Q2 National index. From S&P: Home Prices Continue Climbing in June 2013 According to the S&P/Case-Shiller Home Price Indices Data through June 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1Home Price Indices ... showed that prices continue to increase. The National Index grew 7.1% in the second quarter and 10.1% over the last four quarters. The 10-City and 20-City Composites posted returns of 2.2% for June and 11.9% and 12.1% over 12 months. All 20 cities posted gains on a monthly and annual basis. However, in only six cities were prices rising faster this month than last, compared to ten in May. Dallas and Denver reached new all-time highs as they did last month, with returns of +1.7% each in June. ...All 20 cities showed positive monthly returns for at least the third consecutive month. Six cities – Charlotte, Cleveland, Las Vegas, Minneapolis, New York and Tampa – showed acceleration. Atlanta took the lead with a return of 3.4% as San Francisco dropped to +2.7% in June from +4.3% in May. New York posted a gain of 2.1%, its highest since July 2002. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 24.1% from the peak, and up 1.1% in June (SA). The Composite 10 is up 15.1% from the post bubble low set in Jan 2012 (SA). The Composite 20 index is off 23.4% from the peak, and up 0.9% (SA) in June. The Composite 20 is up 15.7% from the post-bubble low set in Jan 2012 (SA). The second graph shows the Year over year change in both indices.

Case-Shiller Shows Home Prices Cooled Slightly in June 2013 - The June 2013 S&P Case Shiller home price index shows a 12.1% price increase from a year ago for over 20 metropolitan housing markets and a 11.9% change for the top 10 housing markets from June 2012.  This is a slightly lower annual increase than last month  The national quarterly index increased 10.1% for the year.  Not seasonally adjusted home prices are now comparable to April 2004 levels and the return to the housing bubble price levels is happening rapidly   Graphed below is the yearly percent change in the composite-10 and composite-20 Case-Shiller Indices, not seasonally adjusted. Below are all of the composite-20 index cities yearly price percentage change, using the seasonally adjusted data.  San Francisco and Las Vegas are on fire as both have increased more than 24% in a year.  San Francisco has jumped a whopping 47% from it's March 2009 low and the entire area has become absolutely insane.  The average home price in Silicon valley is a cool million and rents are so exploitive, even six figure salaries cannot afford them.  Overall the return to the the housing bubble has been clearly re-established as home prices are soaring out of reach again for most Americans.S&P also produces a third national index.   S&P is using the not seasonally adjusted national index when they report Q2 2013 home values are up 7.1% from Q1 2013, although the seasonally adjusted change is 2.3% between quarters.   Below is the national index, not seasonally adjusted (blue), which are used as the headline numbers, against the seasonally adjusted one (maroon). Below is the quarterly national index percent change from a year ago, now at 10.1%.   The national index also shows soaring prices and a return to not affordable housing.

June Case Shiller Misses, Y/Y Growth Posts First Slowdown Since December 2011 - While Case Shiller is about as backward looking an indicator as they come (June housing data when it is almost September is pretty much completely useless), today's release showed yet another miss relative to expectations, with the 20 City Composite posting a monthly increase of 0.89%, missing expectations of 1% (for the second month in a row), was the third consecutive month of a slowing growth, and the lowest sequential growth since November 2012.  Just as notable, the Y/Y increase of 12.0% saw the first annual slowdown since December 2011 when the annual pace of increase ramped from -4.0% to a peak of 12.2% in May. Naturally, to anyone not stuck in an ivory tower, the ongoing slowdown in the housing market due to soaring rates is perfectly expected. The only question is if and when the key marginal buyer - the all cash investor - moves aside, what will happen to the underlying data series then, and just how big will the plunge back to trendline ex-Bernanke cheap credit and REO-to-Rent subsidized funding be.

Rising Mortgage Rates Did Not Affect June Case-Shiller Data - The Washington Post seems to have made it a goal to get everything possible about the housing market wrong. Its article today on the Case-Shiller June price index attributed the slower price growth in part to higher interest rates. This makes no sense.  The Case-Shiller index is an average of three months data. The June release is based on the price of houses that were closed in April, May, and June. Since there is typically 6-8 weeks between when a contract is signed and when a sale is completed these houses would have come under contract in the period from February to May. This is a period before there was any real rise in interest rates.  Interest rates first exceeded their winter levels at the end of May and then increased more in June and July. We will first begin to see a limited impact of higher interest rates in the Case Shilller index in the July data and the impact of the rise will not be fully apparent until the October index is released.

Comment on House Prices: Real Prices, Price-to-Rent Ratio, Cities - Two key points:

  • • The Case-Shiller index released this morning was for June, and it is actually a 3 month of average prices in April, May and June. I think price increases have slowed recently based on agent reports (a combination of a little more inventory and higher mortgage rates), but this slowdown in price increases will not show up for several months in the Case-Shiller index because of the reporting lag and because of the three month average. I expect to see smaller year-over-year price increases going forward and some significant deceleration towards the end of the year. 
  • • It appears the Case-Shiller index is currently overstating price increases for most homeowners, both because of the handling of distressed sales and the weighting of some coastal areas.

I also think it is important to look at prices in real terms (inflation adjusted). Case-Shiller, CoreLogic and others report nominal house prices. As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation. The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2013), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through June) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q4 2003 levels (and also back up to Q4 2008), and the Case-Shiller Composite 20 Index (SA) is back to April 2004 levels, and the CoreLogic index (NSA) is back to August 2004. Real House Prices The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q4 2000 levels, the Composite 20 index is back to November 2001, and the CoreLogic index back to March 2002. In real terms, house prices are back to early '00s levels.

Zillow: Case-Shiller House Price Index expected to show 12.5% year-over-year increase in July - The Case-Shiller house price indexes for June were released yesterday. Zillow has started forecasting Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close. Note: Zillow makes a strong argument that the Case-Shiller index is currently overstating national house price appreciation. Another 12% Hike Predicted for July Case-Shiller Indices The Case-Shiller data for June (2013 Q2) came out [yesterday] and, based on this information and the July 2013 Zillow Home Value Index (released last week), we predict that next month’s Case-Shiller data (July 2013) will show that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]), as well as the 10-City Composite Home Price Index (NSA) increased 12.5 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from June to July will be 1.0 percent for the 20-City Composite and 1.2 percent for the 10-City Composite Home Price Indices (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for June will not be released until Tuesday, September 24.  ... As home value appreciation is beginning to moderate, the Case-Shiller indices will continue to show an inflated sense of national home value appreciation. First signs of a slowdown in monthly appreciation are present, although these slowdowns are fairly timid. The Case-Shiller indices are biased toward the large, coastal metros currently seeing enormous home value gains, and they include foreclosure resales. The inclusion of foreclosure resales disproportionately boosts the index when these properties sell again for much higher prices — not just because of market improvements, but also because the sales are no longer distressed. In contrast, the ZHVI does not include foreclosure resales and shows home values for July 2013 up 6 percent from year-ago levels.  Further details on our forecast of home values can be found here, and more on Zillow’s full July 2013 report can be found here.

Lawler: Measuring Changes in Home Prices is Difficult! - From housing economist Tom Lawler:  Below is a table showing the latest YOY % changes in various entities’ home price indexes for the metro areas covered in today’s Case Shiller home price report, as well as “national” HPIs. The YOY changes are for the period ended in June, with Case-Shiller, FHFA expanded, and Zillow effectively being quarterly averages; CoreLogic a weighted 3-month moving average; and LPS and FNC being “June.” Zillow does not include foreclosure resales in constructing its HVI, while LPS’ HPI “reflects” non-distressed sales, as it “takes into account” price discounts for REO and short sales. FNC’s RPI is a “hedonic” price index, as is (pretty much) Zillow’s HVI. CoreLogic produces HPIs for all of the metro areas below, but only releases to the public the ones shown below. Note that in some cases (e.g., NY), Case-Shiller’s “metro area” definition differs from the other entities (it is broader). The biggest “outliers” are the “hedonic” home price indexes, which attempt to take into account the characteristics of homes sold. The method used to construct a “national” HPI from state/regional HPIs can have a material impact.FNC’s RPI for many metro areas seem “most strange” – the RPIs for DC and Portland showed virtually no change from a year ago, which just doesn’t seem right. And FNC’s “national” (100 metro area) RPI gain of 3.7% over the last year seems way too low. Even if all of the metro/regional/state HPIs from these entities “matched up,” the various entities’ “national” HPIs would show different growth rates. Case-Shiller constructs a “national” HPI from Census division HPIs with weights based on each division’s share of the market value of the housing stock from Census 2000. FHFA constructs a “national” HPI using weights based on state shares of the housing stock in units using the latest available ACS data. CoreLogic does not “build up” a national HPI from regional HPIs, but instead aggregates all transactions across the county. Zillow’s HVI is a “median” home-value measure, I believe using all homes for which it has a “Zestimate.” I’m not rightly sure how LPS or FNC construct their “national” HPIs.

Bob Shiller Warns "None Of This Is Real; The Housing Market Has Become Very Speculative" -- With the Case-Shiller 20-City index up double-digits for the 4th straight month, Bob Shiller has some choice words for the CNBC interviewers about the 'housing recovery'. "Housing is a market with momentum," he notes, "and right now, the momentum is up;" but he adds that while house prices are 'recovering', he remains much less sanguine about this recent move. But it is once he has explained the potential concerns that may weigh on the housing market that Shiller comes into his own as he explains "none of this is real, the housing market has gotten very speculative." Housing goes through "big cycles," he chides, noting that California "has gone up and down like a roller-coaster for decades but doesn't get anywhere... that's what these markets have become."  Perfectly summarizing the current situation, Shiller concludes, "for the long-term buyer, the fact that [prices] are going up now doesn't mean anything for where it will when you sell."  Must see clip as Shiller scoffs at the current sentiment, the resurgence of 'flipping', and that the housing market is "driven by irrational exuberance."

Rising Interest Rates and the Fate of the Housing Market -- As the above chart indicates, the rate for 30-year mortgages has been rising substantially since May — with the last week in June showing one of the largest one-week increases in more than 30 years. Interest rates have a direct effect on home affordability, of course: The higher the interest rate, the higher the monthly payment for any given home price. So why haven’t sharp rate increases slowed the real estate market recovery? Here are a few reasons:

  • The Case-Schiller housing index is actually a three-month rolling average. So the June report released yesterday actually includes the months of April and May, before the bulk of the rate increases occurred. Furthermore, since the most extreme rate increases have occurred only recently, they may actually be encouraging buyers to get into the market, as they hope to avoid further increases down the road.
  • More home buyers are using all cash. A recent analysis by economists at Goldman Sachs says that 50% of all homes purchased so far in 2013 have been financed without a mortgage, up from 20% before the housing crash. It’s not entirely clear who these cash buyers are, though Nick Timiraos of the Wall Street Journal suggests they’re some combination of “investors, foreign buyers, and wealthy homeowners that don’t want to go through the hassle of getting a mortgage before closing on a sale.”
  • Rising rates may signal an improving economy: Economic observers are split over the cause for rising interest rates. Some blame recent hints by the Federal Reserve that it will pull back its stimulus efforts, while others thinks it’s due to increased inflation expectations. A third group argues that it’s simply the result of an improving economy. A stronger economy will often result in higher interest rates, which is why over the long run, higher interest rates don’t correlate strongly with lower housing prices.

Nearly half of homes are purchased in cash -- More Americans are buying homes in all-cash deals, according to several recent studies. But real- estate experts say this increase may not be a good sign for the health of the housing market. All-cash purchases accounted for 40% of all sales of residential property in July 2013, up from 35% during the previous month and 31% in July 2012, according to data from real-estate data firm RealtyTrac released Thursday. That’s the second highest rate since the survey began in January 2011 – second only to 53% in March 2012. Another report by Goldman Sachs last week was even more strongly in the cash-is-king camp, estimating that cash sales now accounted for 57% of all residential home sales versus 19% in 2005. Walt Molony, a spokesman for the National Association of Realtors, says that the association’s estimates of the share of the market made up by all-cash buyers are lower than the others, at 31% in July, but that they’re still at an all-time high. ALSO SEE: Housing is Achilles heel of the economy The cities with the biggest month-over-month jumps in the number of all-cash sales, according to RealtyTrac included Dallas (up 82%), St. Louis (up 66%), Los Angeles (up 32%), plus Seattle and Phoenix (an increase of 21%, respectively). This helped boost overall sales of U.S. residential properties, which sold at an annualized pace of 5.5 million in July 2013, a 4% increase from the previous month and a rise of 11% from a year ago.

New Home Prices -- Here are two graphs I haven't updated for about a year.  As part of the new home sales report, the Census Bureau reported the number of homes sold by price and the average and median prices. From the Census Bureau: "The median sales price of new houses sold in July 2013 was $257,200; the average sales price was $322,700." The following graph shows the median and average new home prices.During the bust, the builders had to build smaller and less expensive homes to compete with all the distressed sales. With fewer foreclosures now, it appears the builders are moving to slightly higher price points. The second graph shows the percent of new home sales by price. At the peak of the housing bubble, almost 40% of new homes were sold for more than $300K - and over 20% were sold for over $400K. The percent of home over $300K declined to 20% in January 2009. Now it has rebounded to around 38%. And less than 12% were under $150K.

Quick Note on July New Homes Sales: It Is a Big Deal -  The Census Bureau reported a 13.4 percent drop in new home sales in July. This could be a really big deal. House prices had been rising rapidly in many parts of the country and there was a real basis for concern about bubbles in many markets. While these bubbles were not driving the national economy, as they had been in the years 2002-2007, there was a real risk that many homebuyers would again buy into seriously over-valued markets and face large losses on their homes. It appears that the interest rate hikes in May-June curbed the enthusiasm of investors for real estate, thereby taking the air out of the bubble. The reason why the July new home sales data is important information on this point is that it is giving us data on contracts signed in July. Most other data sources are about sales which reflect contracts that were typically signed 6-8 weeks earlier. The July data sales data strongly reinforce realtor accounts of a weakening market in the last two months.

NAR: Pending Home Sales index declined 1.3% in July -- From the NAR: July Pending Home Sales Slip -The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 1.3 percent to 109.5 in July from 110.9 in June, but is 6.7 percent above July 2012 when it was 102.6; the data reflect contracts but not closings. Pending sales have stayed above year-ago levels for the past 27 months. ... The PHSI in the Northeast fell 6.5 percent to 81.5 in July but is 3.3 percent higher than a year ago. In the Midwest the index slipped 1.0 percent to 113.2 in July but is 14.5 percent above July 2012. Pending home sales in the South rose 2.6 percent to an index of 121.5 in July and are 7.7 percent higher than a year ago. The index in the West fell 4.9 percent in July to 108.6, and is 0.4 percent below July 2012. Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in August and September. Note: It appears some buyers pushed to close in July because of rising mortgage rates (People who signed contracts in May probably locked in mortgage rates, and they wanted to close before the lock expired). So I expect closed sales in August to decline more than the pending home sales index would indicate.

Pending Home Sales Decline for Second Month in a Row - The National Association of Realtors Pending Home Sales declined by -1.3% in July.  This is the second month in a row where pending home sales have declined as June dropped by -0.4%  Pending home sales have increased 6.7% from a year ago.  Pending home sales are also back to November 2006 housing bubble year levels. The above graph shows pending home sales are showing a monthly decline after an incredible run up.  May's PHS increased by 5.8% for example.  Pending home sales have still increased annually for last 27 months in a row, so this appears not to be a plunge, but a potential leveling off of the dramatic monthly increases. The PHSI are contracts which have not yet closed and why pending home sales are considered a future housing indicator. The PHSI represents future actual sales, about 45 to 60 days from signing. From the NAR: NAR's Pending Home Sales Index (PHSI) is released during the first week of each month. It is designed to be a leading indicator of housing activity. The index measures housing contract activity. It is based on signed real estate contracts for existing single-family homes, condos and co-ops. A signed contract is not counted as a sale until the transaction closes. Modeling for the PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. Here are the regional pending home sales from the NAR report:

NAR Finally Admits Rising Rates Crippling Housing -Pending home sales missed expectations for the first time in 3 months, falling 1.26% MoM (vs a 0.0% expectation). This forward-looking measure of housing based on actual contract signings suggests that all the anecdotal evidence of an artificial echo-boom in real estate coming to an end. With the West down 4.9% and Northeast down 6.5% MoM (the biggest 3-month drop in 3 years), even the much-vaunted fair-and-balanced National Association of Realtors are forced to admit that "higher mortgage interest rates and rising home prices are impacting monthly contract activity." Whocouldanode?

Vital Signs: Buyers Can’t Buy What’s Not for Sale  - Pending home sales dropped 1.3% in July, says the National Association of Realtors. A sign that higher mortgage rates are cutting into demand? Yes, but that’s not the whole story. The NAR notes that tight supplies are holding down sales. The trade group reported last week that the supply of existing homes for sale at the end of July would last 5.1 months at the current sales pace. While that’s not the tightest supply on record, it’s well below the inventory available in recent years. (Similarly, the supply of new homes for sale stood at just 5.2 months in July.) Economists at UBS Securities agree an insufficient number of homes for sale is another reason limiting sales of both new and existing homes. Maury Harris, UBS economist, says, “ One restraining factor on inventories is that there still are many homes that are “under-water”, which naturally makes owners less willing to sell.” In UBS’s view, if the drop in sales reflected mainly weaker demand, then home prices would not be rising as fast as they have been.

U.S. July Consumer Spending Up 0.1%, Income Rises 0.1% - WSJ.com: Americans spent more cautiously in July as income growth slowed, signaling a potential risk for the economic recovery in the second half of the year. Personal spending, which measures how much Americans spend on items from gasoline to cars, rose a mild 0.1% in July from a month earlier, the Commerce Department said Friday. That comes after a strong June when spending rose an upwardly revised 0.6%. Personal income rose 0.1%, a lower rate than June's unrevised 0.3% increase and the slowest since April. Economists had forecast spending would rise 0.3% and incomes would increase 0.2% in July. The report is a worrying sign that Americans may be trimming their expenses after stronger spending gains earlier in the year, though not necessarily curtailing it altogether. Consumer spending is a major driver of growth in the U.S. economy and represents more than two-thirds of economic demand. For the second quarter, it helped boost economic growth—the U.S. grew at a 2.5% annualized pace, which was stronger than previously thought, and advanced in part by spending by consumers and businesses, the Commerce Department said earlier this week.

Personal Income increased 0.1% in July, Spending increased 0.1% - The BEA released the Personal Income and Outlays report for July:Personal income increased $14.1 billion, or 0.1 percent, ... in July, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $16.3 billion, or 0.1 percent. ... Real PCE -- PCE adjusted to remove price changes -- increased less than 0.1 percent in July, compared with an increase of 0.2 percent in June. ... The price index for PCE increased 0.1 percent in July, compared with an increase of 0.4 percent in June. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent. Core PCE increased at a 2.6% annual rate in July, but only a 1.2% annual rate in Q2. The following graph shows real Personal Consumption Expenditures (PCE) through July (2009 dollars). The dashed red lines are the quarterly levels for real PCE. This is a slow start to Q3. On inflation, the PCE price index increased at a 1.1% annual rate in July, and core PCE prices increased only at a 0.9% annual rate.

Income & Spending Growth Slows In July - Today’s personal spending and income update for July is a mixed bag. There’s no smoking gun here per se, but the numbers for July certainly don't look impressive either. The best you can say is that sluggish growth prevails and that the trend is holding up with enough strength to keep the economy out of the ditch. That’s old news, of course, but the recent changes for these crucial data sets leave minimal room for comfort should the economy suffer an unexpected shock. On the bright side, the economy overall still looks relatively resilient, or so it appears based on yesterday's substantial upward revision in Q2 GDP growth to 2.5% from 1.7%. Nonetheless, when you factor in today's news on consumer spending and income, it’s still hard to imagine that the US is poised to break free of its moderate-growth track any time soon. That, at least, is the message in the latest monthly comparisons for disposable personal income (DPI) and personal consumption expenditures (PCE). As the first chart shows, growth was slow last month on both counts. DPI increased 0.2% in July vs. the previous month, matching June’s weak pace, but PCE’s slim 0.1% rise was the slowest since April’s 0.2% decline.

Personal Income, Spending Miss; Employee Compensation Plunges - On the surface, today's Personal Income and Savings data was not pretty: with Incomes and Spending both rising at 0.1% in July, both missed the expected growth rate of 0.2% and 0.3% respectively. This also meant that the US consumer's savings rate was unchanged at 4.4% in the month, and the downtrend from recent highs continues as more and more of the savings buffer has to be depleted.  But it was once again below the headlines that the truly ugly data lay. A quick look at the components of income showed something very disturbing. After holding relatively firm for the past five months (excluding the violent swings surrounding the 2012 year end accelerated bonus payouts), compensation of employees - the core component of personal income - tumbled by $21.9 billion. This was the biggest monthly slide since May 2012, and as the chart below shows, the downtrend in sequential wage growth has now resulted in a sequential decline in wages.

Personal Consumption Weak In July 2013 - Positive news on Real Personal Consumption Expenditure (PCE) and Real Disposable Personal Income (DPI) were mixed. The headline non-inflation adjusted value PCE and DPI improved. But there is little good news in this data for those looking for economic expansion (consumer did not consume).

  • The market looks at current values (not real inflation adjusted) and was expecting a PCE (expenditures) rise of 0.3% to 0.4% (versus 0.1% actual), and a rise in DPI (income) of -0.1% to +0.1% (versus 0.2% actual). In other words the market was expecting better data for expenditures, and worse data for income.
  • The monthly fluctuations are confusing. Looking at the 3 month trend rate of growth,  Real expenditures are unchanged while Real income is down marginally.
  • Real Personal Income is up 0.8% year-over-year, and real personal expenditures are up 1.7% year-over-year. The gap between income and expenditures closed moderately this month.
  • this data is very noisy and as usual includes backward revision (detailed below) making real time analysis problematic – and the backward revisions this month are moderate.

Cooler Spending in U.S. Signals Slow Start for Quarter: Economy - Consumer spending cooled in July as income growth slowed, indicating the world’s largest economy was off to a slow start in the third quarter. Purchases rose 0.1 percent after a 0.6 percent June gain that was larger than previously estimated, according to Commerce Department data issued today in Washington. Other reports showed business activity picked up this month and consumer sentiment declined less than projected from July’s six-year high. Gains in incomes are barely keeping pace with inflation, a sign employment will need to pick up for the expansion to strengthen. At the same time, rising home values are helping bolster household purchases of appliances and automobiles even in the face of rising mortgage rates, prompting Ford Motor Co. (F) to project sales this month will be the strongest since 2007.

The Grim News on Real Disposable Income Per Capita - Earlier today I posted my latest Big Four update which included today's release of the July data Real Personal Income Less Transfer Payments. Now let's take a closer look at a rather different calculation of incomes: "Real" Disposable Personal Income Per Capita.The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. This indicator has been significantly disrupted by the bizarre but not unexpected oscillation caused by 2012 year-end tax strategies in expectation of tax hikes in 2013. The July nominal 0.11% month-over-month and 1.45% year-over-year numbers have us approximately back to the trend we saw near the end of last year prior to the forward pull of income and subsequent plunge to manage expected tax increases. However, when we adjust for inflation, the real MoM change of 0.02% required that second decimal place to register above zero. The real YoY is miserable 0.06%.  The BEA uses the average dollar value in 2009 for inflation adjustment. But the 2009 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Nominal disposable income is up 53.6% since then. But the real purchasing power of those dollars is up only 17.7%. Let's take one more look at real DPI per capita, this time focusing on the year-over-year percent change since the beginning of this monthly series in 1959. I've highlighted the value for the months when recessions start to help us evaluate the recession risk for the current level.

Vital Signs: Saving Rate Is Slipping - Weak income growth is forcing many consumers to choose between maintaining a current lifestyle or saving more for the future. So far in 2013, households are choosing to spend now and save less. According to Commerce Department data, consumers had been socking away between 5% and 6.5% of their aftertax income in 2011 and 2012. (Income brought forward into December 2012 for tax reasons caused the rate to spike at the end of last year.) But the saving rate has fallen this year, holding at 4.4% in July. One reason that some households are saving less is that they are reaping in new wealth from rising equity and home values. But many households have little financial cushion should a job loss or emergency expense occur.

Consumer Confidence Comes in Above Expectations -The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through August 15. The 81.5 reading is above the 79.0 forecast by Investing.com and 0.5 points above the July upwardly adjusted 81.0 (previously reported at 80.3). The index is now fractionally off its five-and-a-half year interim high set in June. Or, to put it another way, the index is 9.1 points below the December 2007 level, which the NBER declared as the start of the Great Recession.Here is an excerpt from the Conference Board report. "Consumer Confidence increased slightly in August, a result of improving short-term expectations. Consumers were moderately more upbeat about business, job and earning prospects. In fact, income expectations, which had declined sharply earlier this year with the payroll tax hike, have rebounded to their highest level in two and a half years. Consumers' assessment of current business and labor market conditions, on the other hand, was somewhat less favorable than last month."  Consumers' assessment of current conditions moderately declined. Those stating business conditions are "good" decreased to 18.4 percent from 20.8 percent, while those stating business conditions are "bad" was virtually unchanged at 24.8 percent. Consumers' appraisal of the labor market was mixed. Those claiming jobs are "plentiful" decreased to 11.4 percent from 12.3 percent, while those claiming jobs are "hard to get" declined to 33.0 percent from 35.2 percent. Consumers' outlook for the labor market remained upbeat. Those anticipating more jobs in the months ahead increased to 17.6 percent from 16.7 percent, while those anticipating fewer jobs edged down to 17.3 percent from 17.7 percent. The proportion of consumers expecting their incomes to increase improved to 17.4 percent from 15.7 percent. Those expecting a decrease declined slightly to 13.5 percent from 13.7 percent.   [press release]

Consumer Sentiment Rises More than Expected - U.S. consumer sentiment rebounded at the end of August by more than economists had expected, according to data released Friday. The Thomson-Reuters/University of Michigan final August consumer-sentiment index increased to 82.1 from a preliminary reading of 80.0 in the month but still down from 85.1 at the end of July–which had been the highest reading since before the recession, according to an economist who has seen the numbers. Economists surveyed by Dow Jones Newswires expected the end-August index to edge slightly higher to 80.5. The current conditions index increased to 95.2 at the end of this month from 91.0 early in August. The expectations index edged up to 73.7 from 72.9. The better sentiment reading at the end of August offers hope that consumer spending is performing better this month than it did in July. According to Commerce Department data out earlier Friday, consumer spending rose just 0.1% in July, less than the 0.3% increase expected. Within the Michigan survey, inflation expectations were mixed. The one-year inflation expectations reading for the end of August fell to 3.0% from a preliminary 3.1% reading. Inflation expectations covering the next five to 10 years rose to 2.9% from 2.8%.

Final August Consumer Sentiment at 82.1 -- The final Reuters / University of Michigan consumer sentiment index for August was at 82.1, down from the July reading of 85.1, but up from the preliminary August reading of 80.0. This was above the consensus forecast of 80.0. Sentiment has generally been improving following the recession - with plenty of ups and downs - and one big spike down when Congress threatened to "not pay the bills" in 2011. Unfortunately Congress is once again threatening to "not pay the bills" and that might impact sentiment (and consumer spending) late in September or in October.

Michigan Consumer Sentiment Beats Forecast But Remains Below Last Month’s Level - The University of Michigan Consumer Sentiment final number for August came in at 82.1. Today's number is above the Investing.com forecast of 80.5 and an improvement over the August preliminary 80.0, but it is still three points off the July final of 85.1. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now 4 percent below the average reading (arithmetic mean) and 2 percent above the geometric mean. The current index level is at the 38th percentile of the 428 monthly data points in this series. The Michigan average since its inception is 85.2. During non-recessionary years the average is 87.6. The average during the five recessions is 69.3. So the latest sentiment number puts us 12.8 points above the average recession mindset and 5.5 points below the non-recession average. It's important to understand that this indicator is somewhat volatile with a 3.1 point absolute average monthly change. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

Vital Signs: A Good Omen For Jobless Rate - Consumers think the labor market is improving this month and that could move the Federal Reserve closer to tapering its bond-buying program. According to the Conference Board’s consumer survey out Tuesday, 11.4% of consumers describe jobs as “plentiful” this month, versus 33.0% who say they are “hard to get.” The difference between the two—called the labor differential by economists—stands at -21.6%, the best reading since 2008. Improvement in the differential usually signals improvement in the unemployment rate. The August reading suggests this month’s jobless rate—scheduled to be reported on September 6—should hold steady at 7.4% or slip lower. Unemployment will be a major—but not the only—factor in the Fed’s decision to slow its pace of bond purchases. If the labor differential does portend a drop in the August joblessness, the decline provides one argument for tapering when Fed officials meet later in September.

The Big Confidence Gap Splitting the U.S. Middle Class - It’s always been true that those who are better off have a more sanguine view of the economy. In the last year, though, that gap has become especially glaring. For households with income of more than $50,000 a year, confidence is up to the levels of 2007. For those below that, it’s not even close. Take a look at the chart below, which charts the Conference Board’s Consumer Confidence Index by income group since 2006. Three things are worth pointing out here. One is that median household income in the U.S. has hovered a little above $50,000 ($52,100 now) for several years, so just about half of households end up below the $50,000 mark. The second is the surge in confidence among those in the upper half in the last year. For that group, the index now stands at 110.7, above where it was in 2007.* The third point to notice is that those who have recovered least are not those at the bottom. It’s those in the lower part of the middle class. Look carefully at the green line, marking households that earn $35,000 to $50,000 a year. They’ve actually beome more pessimistic since 2011.

August consumer inflation rate probably +0.1% - As a corollary of the theme to my reporting that the Oil choke collar is an important factor in the economy, for the last few months I have been using the change in the price of a gallon of gas to forecast that month's CPI in advance. My point has been, that all you really need to know about inflation is the price of gasoline. So far each prediction has turned out to be within 0.1% of the actual number.  Yesterday the E.I.A. reported for the final week of August (next Monday will be September), so we can already estimate the inflation rate. My method is to take the change in the price of a gallon of gas and divide by ten, then add 0.1% to 0.2% to account for core inflation, or else divide by 16 to be more conservative, to arrive at the non-seasonally adjusted inflation rate.  In July the price of a gallon of gas was $3.59.1. This month it was $3.57.4. That is a -0.5% decline. Dividing by 10 gives us -0.05%, and adding 0.1% to 0.2% gives us +0.05% to +0.15%. Dividing by 16 gives us a -0.3% decline, and adding 0.1% to 0.2% gives us +0.07% to +1.7%.  The seasonal adjustment for August last year was -0.045%. This gives us a final seasonally adjusted inflation rate that rounds to +0.1% +/-0.1%.  That will replace last August's +0.5% inflation rate, so that the YoY inflation rate will be +1.6%. This inflation rate is subdued enough to suggest that real YoY wages have probably increased slightly in August.

Weekly Gasoline Update: Prices Unchanged - It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, the average for both Regular and Premium are unchanged. Regular and Premium are 23 cents and 21 cents, respectively, off their interim highs in late February.  According to GasBuddy.com, Hawaii and Alaska are averaging above $4.00 per gallon, unchanged from last week. No states are reporting average prices in the 3.90-4.00 range.

Major Surge Is Unlikely for Prices of U.S. Gas - With all the saber-rattling surrounding Syria and the spike in oil prices over the last week, gasoline prices rose by 2 cents a gallon for a second day in a row on Friday as motorists began to fill up their tanks for the Labor Day weekend. But energy experts say that a major jump is unlikely for the 29.2 million Americans whom AAA expects to travel 50 miles or more on the road this weekend — up from 28 million last year — despite the summer of unrest across the Middle East and North Africa.  In fact, Americans will pay considerably less for gasoline than they did last Labor Day weekend, when refinery shutdowns and Hurricane Isaac, which hit the coast of the Gulf of Mexico, heightened fears of gasoline shortages. “Gasoline prices are going to be surprisingly temperate,” said Tom Kloza, chief oil analyst at GasBuddy.com. “In California drivers will be spending 30 to 40 cents less than last Labor Day weekend for a gallon of regular and much of the rest of the country will be between 5 and 15 cents lower than last year.”

Vehicle Sales: Another strong month in August - Note: The automakers will report August vehicle sales on Wednesday, Sept 4th.   According the Bureau of Economic Analysis (BEA), light vehicle sales in July were at a 15.7 million rate, on a seasonally adjusted annual rate (SAAR) basis.  It looks like August sales will be in the same range. Here are a few forecasts: From Kelley Blue Book: Crossovers, Pickup Trucks Lift August Sales Nearly 14 Percent, According To Kelley Blue BookIn August, new light-vehicle sales, including fleet, are expected to hit 1,460,000 units, up 13.6 percent from August 2012 and up 11.0 percent from July 2013.The seasonally adjusted annual rate (SAAR) for August 2013 is estimated to be 15.6 million, up from 14.5 million in August 2012 and down from 15.8 million in July 2013.  Press Release: J.D. Power and LMC Automotive Report: August New-Vehicle Sales Reach Highest Level in Seven Years With consistency in the fleet environment, total light-vehicle sales in August 2013 are also expected to increase by 12 percent from August 2012 to 1,495,400. Fleet sales are expected to account for 15 percent of total sales, with volume of 225,000 units. PIN and LMC data show total sales reaching a 16 million unit SAAR in August, which is the highest since November 2007, From TrueCar: August 2013 New Car Sales Expected to Be Up 14.4 Percent According to TrueCar; August 2013 SAAR at 15.75M, Highest August SAAR since 2007For August 2013, new light vehicle sales in the U.S. (including fleet) is expected to be 1,464,214 units, up 14.4 percent from August 2012 and up 11.8% percent from July 2013 (on an unadjusted basis).

Congress, Public Waking Up To Trans-Pacific Partnership Threat - Members of Congress are starting to pay attention to the upcoming, secretly-negotiated Trans-Pacific Partnership (TPP) “trade” agreement that isn’t really about trade. And the public is also becoming aware that this runaway job-loss express train is coming straight at us. The TPP agreement is being negotiated — in secret, even from Congress — between representatives of governments and giant, multinational corporations. (Government negotiators are not prevented from seeking lucrative corporate jobs if negotiations are completed in favor of the those corporations.) Groups representing the interests of labor, environmental, consumer, human rights or other stakeholders in democracy are not at the negotiating table. And, not surprisingly, it appears that the agreement will promote the interests of giant, multinational corporations over the interests of labor, environmental, consumer, human rights or other stakeholders in democracy. Negotiated in secret, what we know about the treaty comes from leaks. Only a few of the “chapters” of the agreement are actually about “trade” at all. The rest are about the “rights” of corporations and investors. Negotiated just as the worldwide democracy uprising threatens to reign in corporate interests, the agreement will limit governments’ ability to write banking regulations, energy policy, food safety standards and even government purchasing decisions. It will allow corporations and investors to sue governments for lost profits if the governments try to make and enforce environmental, labor and other laws.

Durable-Goods Orders Drop 7.3% - Orders for long-lasting manufactured goods tumbled in July as demand for aircraft fell and business spending weakened, sparking concerns about third-quarter growth. The 7.3% monthly decline in orders for big-ticket items such as cars, furniture and appliances built to last three years or more—to a seasonally adjusted $226.6 billion—exceeded the 4% drop anticipated by economists. Outside of the volatile transportation category, durable-goods orders were still relatively weak for the month, declining 0.6%, the Commerce Department said Monday. July's decline was the first in four months. In June, total orders rose 3.9%, but were up only 0.1% excluding transportation. Businesses and consumers typically make big-ticket purchases when they are confident about the economy. The decline suggests potential weakness ahead, despite expectations for a stronger second half of the year. A key gauge of business spending—nondefense capital goods orders, excluding aircraft—fell 3.3% in July after rising for five straight months. "Such activity points to a defensive mentality on capital spending, doing only what is necessary to maintain the current level of growth but not operating with the type of aggressive entrepreneurial mentality that often underlies strong periods of U.S. economic performance,"

July Durable Goods Orders Come in Below Expectations - The August Advance Report on July Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders:New orders for manufactured durable goods in July decreased $17.8 billion or 7.3 percent to $226.6 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases and followed a 3.9 percent June increase. Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders decreased 6.7 percent.  Transportation equipment, also down following three consecutive monthly increases, led the decrease, $16.7 billion or 19.4 percent to $69.7 billion. This was led by nondefense aircraft and parts, which decreased $14.5 billion. Download full PDF The latest new orders number at -7.3% percent was well below the Investing.com forecast of -4.0 percent. Year-over-year new orders are down 0.3% percent.If we exclude transportation, "core" durable goods were a less negative -0.6 percent and up 5.9 percent YoY. Investing.com was looking for a 0.5% MoM increase. If we exclude both transportation and defense, durable goods were up 0.8 percent MoM and up 8.9 percent YoY. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders. .

Durable-goods orders fall larger-than-expected 7.3% in July - -- Orders for airplanes, computers and other durable goods, a key indicator of future economic growth, dropped more than expected last month in a bad sign for the strength of the vital manufacturing sector. The Commerce Department said Monday that orders were down 7.3% in July from the previous month, the first drop since March and the biggest falloff since August 2012. Orders had been up a revised 3.9% in June. Analysts had projected a 4% drop for last month. Many economists have been projecting that the nation's economic recovery would pick up steam in the second half of the year. Monday's data raise doubts about that. "The growth bulls will have to begin rethinking their second-half acceleration story after the latest durable goods report," said Steven Ricchiuto, chief economist at Mizuho Securities. July's drop was fueled by a sharp decline in orders for civilian aircraft and parts, down 52.3%. Orders for computers and related products also posted a major drop, down 19.9% in July from the previous month. Transportation equipment orders can be particularly volatile month to month, driven in large part by business at Boeing Co. The company received just 90 new orders for jetliners in July, down from 287 the previous month. Excluding transportation, durable goods orders fell 0.6% in July after a 0.1% increase the previous month. Orders for non-defense capital goods, excluding aircraft, which is an important sign of business investment, were down 3.3% in July, the first drop since a 4.8% decline in February.

Durable Goods Crater On Plunge In Airplane, Manufacturing And Computer Orders: Biggest Miss Since August 2012 - And so that the great CapEx spending surge is delayed once more: supposedly to H3 2013 this time. Moments ago the Commerce Department reported the latest Durable Goods numbers which were a total disaster: the headline print plunged by 7.3% on expectations of a -4.0% decline driven by a drop in Airplane orders (to be expected following last month's noted bumper Paris Air show spike as Boeing reported only 90 new plane orders compared to 273 in June). Well, airplanes orders did indeed slide by 52.3%, but it was weakness in Transportation (-19.4%) and Computer (-19.9%) orders as well as Manufacturing (-9.8%) that took the market by surprise. This was the biggest miss to expectations since August 2012.

July Business Investment Drops While Interest Rates Rise - Are rising interest rates starting to curtail business spending? A key measure of business investment, non-defense capital goods orders excluding aircraft, fell in July after five consecutive monthly increases. One month doesn’t make a trend, but the fall coincides with interest rates jumping. The yield on the 10-year Treasury note topped 2.5% in late June after remaining well below that level for more than a year. Rising interest rates can make it more expensive for businesses to finance large purchases. Non-defense capital goods outside of aircraft fell 3.3% in July, the Commerce Department said Monday. It was the first drop since February. The category represents investment in the building blocks of businesses, items such as machinery and computers. A similar drop occurred in July for another big-ticket item, new homes. Sales of new homes fell 13.7% last month after a strong run up much of year. Economists said increasing mortgage rates were at least partly to blame.

Vital Signs: Despite July Drop, Capital Goods Orders Are Holding Up -A plunge in aircraft orders triggered the larger-than-expected 7.3% drop July durable goods. New orders for nondefense, nonaircraft capital goods also looked weak, falling 3.3% last month. But the longer-run trend in capex orders—a leading indicator for business spending—still looks healthy. The three-month moving average, which smooths out swings in big-ticket orders, has reversed its decline in the summer of 2012 and grew in the first half of 2013. Further gains in capex demand, however, may be held back by rising interest rates. Just as higher mortgage rates may stop some households from buying a home, higher corporate borrowing costs may cause companies to rethink some capital projects.

Durable Goods Orders Plunge 7.3%, Nondefense New Orders for Capital Goods Plunge 15.4%; This the Plunge that Accelerates? -- US treasuries rallied a bit again today, with the 10-Year yield down 12 basis points in two days to 2.80% in the wake of a huge plunge in durable goods orders as reported by the commerce department.  New orders for manufactured durable goods in July decreased $17.8 billion or 7.3 percent to $226.6 billion Transportation equipment, down following three consecutive monthly increases, led the decrease, $16.7 billion or 19.4 percent to $69.7 billion. This was led by nondefense aircraft and parts, which decreased $14.5 billion. Shipments of manufactured durable goods in July, down three of the last four months, decreased $0.8 billion or 0.3 percent to $228.8 billion. This followed a 0.1 percent June decrease. Computers and electronic products, also down three of the last four months, drove the decrease, $0.9 billion or 3.2 percent to $26.6 billion. This followed a 1.1 percent June increase. Inventories of manufactured durable goods in July, up three of the last four months, increased $1.3 billion or 0.4 percent to $379.1 billion. Nondefense new orders for capital goods in July decreased $14.2 billion or 15.4 percent to $78.0 billion. Shipments decreased $1.0 billion or 1.4 percent to $73.6 billion. Unfilled orders increased $4.4 billion or 0.7 percent to $610.2 billion. Inventories increased $0.6 billion or 0.3 percent to $171.3 billion.Is this the plunge that accelerates or is another bounce coming? Given the plunge in new housing and the rise in mortgage rates, I suggest this plunge is likely going to accelerate to the downside.

Durable-Goods Drop Imperils Outlook for U.S. GDP Pickup - Orders for durable goods dropped in July by the most in almost a year, calling into question the strength of the projected pickup in U.S. growth.  Bookings for goods meant to last at least three years fell 7.3 percent, the first decrease in four months and the biggest since August 2012, the Commerce Department said today in Washington. The retreat was broad-based, with demand excluding the volatile transportation category unexpectedly falling.The figures signal business investment was off to a slow start in the third quarter just as housing, a mainstay of the expansion, shows signs of cooling. Demand for military gear also declined last month, highlighting the risk that federal budget cuts will continue to slow the world’s biggest economy in the second half of the year. The median forecast of 77 economists surveyed by Bloomberg called for a 4 percent drop in U.S. orders for durable goods. Estimates ranged from a drop of 8.2 percent to a 3 percent gain. Bookings rose 3.9 percent in June. The median reflected a projected slump in demand for commercial aircraft that reflected previously released figures from Boeing Co. (BA) The Chicago-based plane maker had said it received orders for 90 aircraft in July, down from 287 the previous month.

The ’’Real’’ Goods on the Latest Durable Goods Data - Earlier today I posted an update on the August Advance Report on July Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation.Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer an alternate historical context in which to evaluate the standard reports on the nominal monthly data. Here is the first chart, repeated this time ex Transportation, the series usually referred to as "core" durable goods. Now we'll leave Transportation in the series and exclude Defense orders. And now we'll exclude both Transportation and Defense for a better look at a more concentrated "core" durable goods orders. Here is the chart that I believe gives the most accurate view of what Consumer Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real (inflation-adjusted) core series (ex transportation and defense) per capita helps us filter out the noise of volatility to see the big picture.

Dallas Fed: "Texas Manufacturing Posts Slower Growth" in August - From the Dallas Fed: Texas Manufacturing Posts Slower Growth Texas factory activity increased but at a slower pace in August, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained positive but fell from 11.4 to 7.3. Other measures of current manufacturing activity also indicated slower growth in August. The new orders index was positive for the fourth month in a row, although it moved down from 10.8 to 5.4. The shipments index also posted a fourth consecutive positive reading but slipped 6 points to 11.4. The capacity utilization index fell from 12.2 to 4.6. Perceptions of broader business conditions improved again in August, with the general business activity and company outlook indexes posting their third consecutive positive readings. The general business activity index edged up from 4.4 to 5.0, and the company outlook index rose from 4.5 to 7.3. Labor market indicators reflected an increase in hiring but sharply reduced workweeks. The employment index rose 2 points to 11.2, its highest reading in a year. Twenty percent of firms reported hiring new workers compared with 8 percent reporting layoffs. The hours worked index fell 11 points to -9.9, its lowest reading in nearly four years.

Richmond Fed Manufacturing: A Strong Improvement -- The Fifth District includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia. The Federal Reserve Bank of Richmond is the region's connection to nation's Central Bank.The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components.Today the manufacturing composite soared back into expansion with an 25 point increase to 14 from last month's -11. Investing.com had forecast continuing but slower contraction at -7. Because of the highly volatile nature of this index, I like to include a 3-month moving average to facilitate the identification of trends, now at 3.7, in modest expansion.Here's an interesting bit of trivia for this indicator: The August 25 point increase is the second largest one-month change in the history of the series, the largest being a 27 point increase (from -6 to 21) in January 1998. Here is a snapshot of the complete Richmond Fed Manufacturing Composite series.

Chicago PMI Prints As Expected, Employment Component Drops To Four Month Low - The headline Chicago PMI, as leaked by the subscribers when it was released at 9:52 am, came just as expected at 53.0. And once again the story, if any, was in the components, with New Orders rising from 53.9 and Inventories finally increasing from 37.7 to 45, however this was offset by a decline in Employment from 56.6 to 54.9, a 4 month low. Perhaps the most notable line from the release is that some respondents reported "supply chain disruptions" - one wonders how much this is due to the recent and ongoing drubbing in emerging markets. The full component breakdown:

  • Business Activity at 53.0 vs est. 53
  • Forecast range 51 - 55 from 53 economists surveyed
  • Prices Paid rose to 65.2 vs 63.6 last month
  • New Orders rose to 57.2 vs 53.9 last month
  • Employment fell to 54.9 vs 56.6 last month
  • Inventory rose to 45 vs 37.7 last month
  • Supplier Deliveries fell to 50.8 vs 51.0 last month
  • Production fell to 53 vs 53.6 last month
  • Order Backlogs rose to 46.5 vs 42.9 last month

Workers don't share in companies' productivity gains - Companies are on a tear in terms of productivity and profits, but they aren't sharing much of the gains with their workers. The gap between hourly compensation and productivity is the highest it's been since just after World War II. This divergence is one of the major drivers of the nation's growing income inequality.  A bigger share of what businesses in the U.S. are producing is going to the owners of the firms and the people who lent money to the firm, and a smaller share is going to workers," said Gary Burtless, senior fellow in economic studies at The Brookings Institution.  Productivity, which measures the goods and services generated per hour worked, rose by 80.4% between 1973 and 2011, compared to a 10.7% growth in median hourly compensation, according to the left-leaning Economic Policy Institute, which crunched the numbers last year.

Productivity Rose 7.7% Post-Great Recession; Workers Have Seen None of It - David Dayen - I’ve said this before in other venues, but this really is the chart that explains modern America:It’s the famous wage/productivity chart, showing the cleavage around 1973 and the far greater discrepancy after the 1980s recession. Basically we’ve been living with the consequences of this wage/productivity gap ever since.  And I tend to think it explains every single economic challenge that we face. It clearly stands in for inequality, as all the wealth accumulated from the productivity gains does go somewhere, mainly into the hands of a rentier class. The over-financialization of the economy sprouted as a way to manage and divert these productivity gains after they didn’t flow to labor, in addition to demanding that these gains not get plowed back into wages. Flat wages play a part in ever-expanding credit bubbles, in the low savings rate and the easy enticement of get-rich quick schemes or simply desperate borrowing to maintain standards of living. It’s why QE is more and more meaningless to a larger and larger class of wage-flatlined Americans. It defines the middle-class squeeze, the two-income trap, the inadequacy of retirement resources and the flow of so much of that system into the waiting arms of the financial services industry. Therefore, I find the Economic Policy Institute’s report this past week (a few days old in Internet time, but it’s important) on a decade of flat wages from before and after the Great Recession to be at once essential reading and also rather incomplete, because it’s just another chapter in what is now a forty-year story, with no sign of abatement. Larry Mishel and Heidi Shierholz are right to say that “an economy that does not provide shared prosperity is, by definition, a poorly performing one.” And so we’ve had a poorly performing economy for nearly half a century.

Applications for U.S. Unemployment Aid Fall to 331K - The number of Americans seeking unemployment benefits remained near the lowest level in more than five years last week, a sign that companies are cutting few jobs.The Labor Department says weekly applications for benefits fell 6,000 to a seasonally adjusted 331,000. The four week average, a less volatile measure, inched up 750 to 331,250 after reaching a 5½-year low the previous week. Applications for unemployment benefits reflect layoffs. At the depths of the recession in March 2009, they numbered 670,000. The average has fallen 10 percent this year. Though employers are cutting few jobs, most have yet to start hiring aggressively. Employers have added an average of 192,000 jobs a month since January. That’s enough to gradually lower the unemployment rate, which fell to 7.4 percent in July.

Weekly Jobless Claims Down Slightly, But Four-Week Average Nudges Up - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 331,000 new claims number was a 6,000 decrease from the previous week's 337,000 (an upward revision from 336,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the trend, rose by 750 to 331,500. Here is the opening of the official statement from the Department of Labor:In the week ending August 24, the advance figure for seasonally adjusted initial claims was 331,000, a decrease of 6,000 from the previous week's revised figure of 337,000. The 4-week moving average was 331,250, an increase of 750 from the previous week's unrevised average of 330,500. The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending August 17, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending August 17 was 2,989,000, a decrease of 14,000 from the preceding week's revised level of 3,003,000. The 4-week moving average was 2,996,250, an increase of 9,500 from the preceding week's revised average of 2,986,750. Today's seasonally adjusted number came in slightly below the Investing.com forecast of 332K. Here is a close look at the data over the past few years (with a callout for the past year), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

Stagnant Wages Crimping Economic Growth - Americans are spending enough to keep the economy rolling, but don't expect them to splurge unless their paychecks start to grow. Four years into the economic recovery, U.S. workers' pay still isn't even keeping up with inflation. The average hourly pay for a nongovernment, non-supervisory worker, adjusted for price increases, declined to $8.77 last month from $8.85 at the end of the recession in June 2009, Labor Department data show. Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation's economic growth. Economists blame three factors: Economic growth remains sluggish, advancing at a seasonally adjusted annual pace of less than 2% for three straight quarters—below the prerecession average of 3.5%. With demand for labor low, prices not rising fast and 11.5 million unemployed searching for work, employers aren't under pressure to raise wages to retain or attract workers. Businesses are changing how they manage payrolls. Economists said that, in the past, companies cut wages when the economy struggled and raised them amid expansions. But in the past three recessions since 1986—and especially the 2007-2009 downturn—companies minimized wage cuts and instead let workers go to keep remaining workers happy.  Globalization continues to pressure wages. Thanks to new technologies, Americans are increasingly competing with workers world-wide. "The upshot: Even though rising home prices and stock values are making some people optimistic, many workers can't push for higher pay—crimping their spending and potentially the recovery.

Slow Wage Growth Just One More Sign of How Big a Problem the Profit-Biased Recovery Is - A last, possibly peevish sidenote--while we’re often accused (correctly!) of being pretty gloomy on the economic picture for most American families, we’re also often accused (incorrectly!) of feeding a sense of fatalism by not providing potential solutions or highlighting what could be changed. We’ve got some solutions here, and, we should note that there is a glimmer of good news in Larry and Heidi’s analysis: we are a rich country that gets richer just about every year. Look at the productivity trends (check out Table 1) in their piece--in 2012 productivity was nearly 8 percent higher than it was at the start of the Great Recession! The problem is insuring that these potential income gains actually are broadly shared—and this is mostly a political problem. Political problems are bad (trust us, we know), but they’re better than genuine economic problems. To put it another way, it’s better to be arguing over how to fairly split up a big pile of money than to have no big pile of money to split up.

Wage Stagnation and Market Outcomes - A new paper from the Economic Policy Institute provides both diagnosis and prescription of what is arguably the fundamental problem of the United States economy in recent years: wage stagnation.  I’ll briefly describe the findings, but given that these trends have persisted for a long time, it’s more important to think about solutions, particularly ones that go beyond conventional wisdom. From the report:Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution. In other words, the vast majority of wage earners have already experienced a lost decade, one where real wages were either flat or in decline.  This lost decade for wages comes on the heels of decades of inadequate wage growth. For virtually the entire period since 1979 (with the one exception being the strong wage growth of the late 1990s), wage growth for most workers has been weak. The median worker saw an increase of just 5 percent between 1979 and 2012, despite productivity growth of 74.5 percent — while the 20th percentile worker saw wage erosion of 0.4 percent and the 80th percentile worker saw wage growth of just 17.5 percent. As the chart below shows, it’s not only real wages that have lagged far behind productivity (or barely outpaced inflation), it’s average compensation (wages plus benefits) as well. The chart shows indexes of two related compensation measures plotted against productivity growth. After growing a bit in the early 2000s, they’re both about where they were 10 years ago.

Median wages and employment to population ratio - From colleague New Deal Democrat at the Bondadd blog comes this comment and clarification regarding the reporting from this post at Angry Bear: While the data is correct, the conclusion drawn by most of your readers probably is not. The Sentier paper does not show a decline in wages, salaries, earnings, compensation, or paychecks, because they did not measure for that (something i have confirmed with them directly). Those have stagnated for a decade, but actually rose during the recession, declined about 3% after, and have steadied or slightly risen in the last year, mainly due to the effects of $3+ gasoline flowing through the economy. I’ve written about it, but if you don’t want to believe me, how about this paper by the Economic Policy Institutue published just this past week: http://www.epi.org/publication/a-decade-of-flat-wages-the-key-barrier-to-shared-prosperity-and-a-rising-middle-class/The Sentier data is taken from the Household Survey, which includes both retirees of all ages and the unemployed. The typical retiree takes a 50% haircut in income, and Boomers are retiring at the rate of 10,000 a day. According to the Sentier paper, the typical unemployed household has suffered a 17% loss of income, from nearly the median in 2009 to well beneath it now. In other words, about half of the households with unemployed fell from above the 2009 median income to below it. That, plus retirements, accounts for almost all of the reported differences between stagnant median wages and greatly declining household income. In short, it is another manifestation of the employment to population ratio.

American Incomes Face Tough Slog Over Next Few Decades -- American paychecks have taken a beating over the last decade.After peaking at $56,648 in February 2002, the typical income of an American household—the median level of wages, stock-market returns and other earnings, or the point at which half earn more, and half earn less—slumped before nearly matching its peak in January 2008, one month into the Great Recession, when adjusted for inflation, according to an analysis of government data by thingSentier Research. When the economy nosedived, incomes tumbled. Now, for the past two years, incomes have barely budged after bottoming out between $51,000 and $52,000—8% below their peak. As the WSJ pointed out today, workers’ wages—just their paychecks, not other income—have been flat since the end of the recession in June 2009 thanks to a lethargic economy, businesses restraining pay and globalization. That is muffling consumer spending and holding back the recovery. But new research by two economists suggests it may get even worse in coming years—thanks to two basic population trends. After supporting the economy during their peak earning years, America’s Baby Boomers are starting to retire, which will mean higher numbers of lower-income older individuals. Second, the researchers argue, relatively high-earning whites are over time being replaced by minority workers, especially Hispanics, who tend to make less money. Burkhauser and Larrimore project these two factors will reduce growth in median incomes by about 0.5% per year through 2030.

Teen employment hits record lows, suggesting lost generation — For the fourth consecutive summer, teen employment has stayed anchored around record lows, prompting experts to fear that a generation of youth is likely to be economically stunted with lower earnings and opportunities in years ahead. The trend is all the more striking given that the overall unemployment rate has steadily dropped, to 7.4 percent in August. And employers in recent months have been collectively adding almost 200,000 new jobs a month. It led to hopes that this would be the summer when teen employment improved. In 1999, slightly more than 52 percent of teens 16 to 19 worked a summer job. By this year, that number had plunged to about 32.25 percent over June and July. It means that slightly more than three in 10 teens actually worked a summer job, out of a universe of roughly 16.8 million U.S. teens. “We have never had anything this low in our lives. This is a Great Depression for teens, and no time in history have we encountered anything like that,” Summer is traditionally the peak period of employment for teens as they are off from school and get their first brush with employment and the responsibilities that come with it. Falling teen employment, however, is just as striking in the 12-month numbers over the past decade.

Ignoring Cheap Ways to Boost Middle-Class Living Standards - David Autor and David Dorn had an op-ed in the NYT this weekend, outlining their case that technology has been the primary headwind for middle-class living standards over the past generation. We tend to have a different view; we think that the cumulative effect of economic policy decisions made over this time-span has been the real barrier to decent growth in middle-class living standards. The first question lots of people have upon hearing this dispute is “does it actually matter?” Autor and Dorn accept (and document) just how rough a go it has been for middle-wage/middle-income workers and clearly accept that the rise in inequality that has seen rewards flow away from the middle-class is a problem that needs to be rectified. Who cares why they think it happened if they’re on-board with attempts to fix it?The answer to this is simple and important: the diagnosis matters because it implies a prescription. In Autor and Dorn’s NYT piece, the only real policy solution they nod to is boosting the share of workers with higher education, noting that “the payoff for college and professional degrees has soared.” And if one believes that technology is boosting demand for high-skill workers and that’s why middle-wage jobs are suffering, this policy solution does make sense. But in fact, the payoff to a college degree has actually been pretty flat for more than a decade now. Wages for those with an advanced degree have done better, but this group is just over 10 percent of the workforce—which is a key reason why Autor and Dorn note that boosting the share of workers with college or advanced degrees can’t be a “comprehensive solution to our labor market problems.”

Full Time, Part Time, Good Jobs, Bad - The term “part-time jobs” is beginning to make Americans anxious. Many workers currently in such jobs would strongly prefer — and in many cases desperately need — more hours of employment to pay their bills. Policy makers worried about implementation of the Affordable Care Act point to features that could make part-time employment more attractive for both employers and workers. The anxiety is somewhat misdirected. While full-time jobs generally pay better, offer more benefits, and promise more room for advancement than part-time jobs, the quality of a job is not necessarily determined by the average weekly hours put into it. Many women choose to work fewer than 40 hours a week not because they prefer leisure to labor, but because they make family care a priority over earned income. Some men now reduce their hours of paid employment or drop out of the labor force for the same reason.Last month, about 8.3 million workers were in part-time jobs for “economic reasons” (primarily not being able to find full-time work)  while 19.1 million offered “non-economic reasons” as an explanation (not a very accurate label, since it includes factors like a lack of affordable child care or of a partner willing to share care responsibility).Both sets of workers might prefer different circumstances, and many women experience lower lifetime income as a result of their choices. But part-time employment itself is not the problem.

‘The Great Shift’: Americans Not Working - Looking at these two charts together is a quick way to become demoralized about the American economy: Yes, the unemployment rate has fallen. But almost the entire reason it has fallen is the drop in the number of people in the labor force — either working or actively looking. As Binyamin Appelbaum has noted, the share of adult Americans with jobs is essentially unchanged over the last three years. In a brief new report from Express Employment Professionals, a staffing firm, the company’s chief executive, Bob Funk, refers to the problem as “the great shift.” This shift long predates the recent financial crisis, too. The labor force participation rate peaked more than a decade ago.  If the decline stemmed largely from an aging work force, it would be much less worrisome. But the initial wave of baby-boomer retirements plays only a small role in the drop; the labor force participation rate has fallen almost as sharply for people aged 25 to 54 as it has for the overall adult population.

Here’s where middle-class jobs are vanishing the fastest - There are a few broad trends in the U.S. economy getting lots of attention lately. The job market appears to be increasingly polarized, with high-paid and low-paid occupations growing quickly, while middle-class jobs are disappearing. And on top of that, median wages have stagnated over the past decade. This is worth exploring a bit more in chart form. Catherine Mulbrandon of Visualizing Economics has created a graph looking at the industries where job growth has been fastest between 2000 and 2011, breaking it down by income: That’s one way to see the labor market getting increasingly polarized over the past decade, as industries with low average pay grow significantly and mid-range industries wither — mainly driven by the steep decline in U.S. manufacturing. We can also focus specifically on the recession and its aftermath. Mark Thoma points to research from Joshua Lerner of the Oregon Office of Economic Analysis, looking at specific occupations rather than broad industries. Here the trend is even more pronounced (click to enlarge):

Stuck Working Part-Time? Blame the Economy - More than four years after the recession ended, nearly a fifth of American workers are part-timers, well above normal levels. More than 8 million people are working part-time because they can’t find full-time jobs. That’s given rise to fears of deep, structural shifts in the U.S. labor market due to technology, globalization or perhaps the new health care law, which will require companies to provide health insurance to full-time employees. But a new paper from the Federal Reserve Bank of San Francisco argues there’s a simpler explanation for the rise of part-time work: the weak economy. Part-time employment is generally a mirror-image of the overall economy. When times are good, people pick up more hours, and more of them qualify as full-timers, which the Labor Department typically defines as anyone working 35 hours or more. When the economy sours, more people end up working part-time.The rise in part-time work during the latest recession wasn’t out of step with past downturns. At the height of the recession, about 20% of workers were part-timers, up from about 17% when the recession began. That’s worse than during the milder recessions of the 1990s and early 2000s, but actually a somewhat lower peak than in the severe recession of the 1980s. What has been different this time around is the pace of recovery. The share of Americans working part-time has fallen since the recession ended in June 2009, but only very slowly. In recent months, it has even edged back up, though it’s too soon to say whether the uptick has been a real trend or a statistical oddity.

Who Are the Long-Term Unemployed? - It's been over four years since the recovery officially began, but there are still over four million people who are long-term unemployed. That's four million people who can't find work even after looking for six months or more -- four million people who can't even get companies to look at their resumes anymore.  But just who are the long-term unemployed? Well, that's the question Josh Mitchell of the Urban Institute looked at, and the answer is at once reassuring and terrifying. It turns out the long-term unemployed aren't much different from the other unemployed -- with two exceptions. They're just as educated (if not more so). And they're pretty much the same racially. But they're older. And they're unemployed, because they lost their last job -- and no, that's not as tautological as it sounds. Let's go to the charts. Now, as you can see from the 2012 numbers below, the long-term unemployed are actually more educated than either the newly unemployed, who have been looking for work for 5 weeks or fewer, or discouraged workers, who have given up looking but still want work. Of course, some of the newly unemployed will eventually end as long-term unemployed themselves -- but not all, or most, of them. We would still expect some difference here if too little education is why companies shun the long-term unemployed. And there isn't one.

For Laid-Off Older Workers, Age Bias Is Pervasive - Most of the 15 men and women meeting at the library in this prosperous suburb were middle-aged or older, people who had worked all their lives, but lost jobs in the recession and its aftermath and have not been able to get back to where they were. Many of them worry that they never will, in part because of discrimination by employers against older workers. On the statistical surface, boomers seem better off than other age groups. According to the Bureau of Labor Statistics, the unemployment rate for workers 55 to 64 (the category that best matches boomers, who range from 48 to 67) was 5.4 percent in July, compared with 7.4 percent for the general population. But almost every other number from the bureau makes it clear that while the economy may be improving, a substantial number of older workers who lost jobs — even those lucky enough to be re-employed — are still suffering. Two-thirds in that age group who found work again are making less than they did in their previous job; their median salary loss is 18 percent compared with a 6.7 percent drop for 20- to 24-year-olds. The re-employment rate for 55- to 64-year-olds is 47 percent and 24 percent for those over 65, compared with 62 percent for 20- to 54-year-olds. And finding another job takes far longer: 46 weeks for boomers, compared with 20 weeks for 16- to 24-year-olds. Nor are those who believe age discrimination was a factor likely to have much luck in court. In 2009, just as the economy was hitting rock-bottom, the Supreme Court issued a ruling that toughened the standard for proving bias.

Long-Term Unemployed Baby Boomers in 2013 -According to a study by the Government Accountability Office released last year, workers 55 and older have experienced consistently longer periods of unemployment than younger workers, as employers seek cheaper labor and look to skirt potentially higher health care costs. Whenever we hear media pundits, bloggers, radio hosts, lobbyists and politicians complain that too many people are using government programs (SNAP, disability, TANF, etc.) to survive on, and saying that there are "plenty" of jobs to be had, it can really make one's blood boil. These people always use a few anecdotal stories (that may or may not be true) to make their arguments for cutting taxes for the rich, rather than using non-partisan data and research to explain why so many people need government programs to live on. Especially ever since the job market has morphed over the past 30 years with the offshoring of good-paying manufacturing and tech jobs, while simultaneously, having such explosive growth in the low-paying service, fast-food and retail industries. Instead, these media pundits, bloggers, radio hosts, lobbyists and politicians use misleading, false, and skewed (politically or ideologically motivated) reports and studies from "think tanks" that are pushing the interests of big business, and NOT the interests of every day American workers. The pro-business think tanks, pro-business lobbying groups and pro-business media outlets outright lies to the voters, tricking them into voting against their own best interests. They like to use the word "freedom" in place of the word "greed". It's despicable that they use faux patriotism to hide their true anti-worker agenda. It's a shame that many who dodged the draft (politicians, CEOs, media pundits, etc.), are now in power and oppresses the true heroes who actually served their country.

Helping the unemployed move might not help them find a job: Do we need to encourage people to move in order to get the economy going and unemployment down? In a recent list of 14 conservative-friendly ways to get the unemployed back to work (covered by Wonkblog here), Michael R. Strain of AEI proposes we “offer UI-funded relocation subsidies for the long-term unemployed.” Elsewhere he writes that “an employment program should include a relocation subsidy to help the long-term unemployed move from high-unemployment areas to low-unemployment areas.” This proposal could be helpful to people, although the specifics do matter. Back in 2010, the Hamilton Project proposed a mobility bank to make mobility loans, where “loans from the proposed mobility bank could not be discharged in bankruptcy court.” Getting the government into the business of making bankruptcy-exempt loans to people in desperate situations strikes me as problematic. But besides the specifics, what does this policy say about the situation our country currently faces? One thing to note about a recession is that economic activity is decreased across all markets. It usually isn’t a matter of the normal churn of some places doing well and others poorly.

Perceiving Job Insecurity - A study in the Journal of Occupational & Environmental Medicine finds evidence linking perceived job insecurity in the Great Recession to poor health outcomes, even among workers who remain employed. The authors find that insecure workers--those that believe they are at risk of being laid off--are more likely to report poor self-rated health, symptoms of depression, and anxiety attacks. Sad, but not hugely surprising. I originally intended to point to this study as yet more evidence of the harmful consequences of prolonged high unemployment. I intended, in particular, to write about how the anxiety and poor health consequences associated with the fear of losing a job must fall especially hard on people with low income. Most of us are pretty aware of the unemployment rate in the U.S.--7.4% as of July 2013. But for people who do have a job, the more relevant statistic for their financial decision-making (and apparently also for their health) is the probability that they (and members of their household) will keep their job. How can we get at people's perceived job insecurity? One way is to ask them. The Michigan Survey of Consumers asks survey participants, "During the next 5 years, what do you think the chances are that you (or your husband/wife) will lose a job that you wanted to keep?" Broken down by income tercile, here is a graph of the mean responses. What initially surprised me the most is that the lowest income tercile has the lowest perceived job insecurity. In 2012, on average, people in the lowest income tercile reported a 17% chance of job loss, while people in the middle and upper terciles reported 19% and 20% chances, respectively.

New Census Numbers Show Recession’s Effect on Families - The portion of American households made up of married couples with children under 18 fell to 20 percent from 40 percent from 1970 to 2012, the Census Bureau said Tuesday as it detailed other fundamental changes in family life.  The share of people living alone, meanwhile, rose 10 percentage points, to 27 percent. The analysis also found that the recession profoundly affected American families from 2005 to 2011, resulting in a 15 percent decline in homeownership among households with children and a 33 percent increase in households where at least one parent was unemployed.  The recession also saw more mothers enter the work force and an increasing dependence on food stamps. The number of households with an unemployed parent soared by 148 percent in Nevada and by more than 50 percent in California, Colorado, Connecticut, Florida, Hawaii, New Jersey and North Carolina in those years.  . “Even after the recession officially ended in 2009, these measures remained worse than before it began.” The severity of the decline often depended on whether the parents were married. Nine percent of married families were living below the poverty line and receiving food stamps. The proportion among single-mother households was four times greater.

‘Almost every group is worse off now than it was four years ago’ - While the mainstream media continues to marvel at America’s economic comeback, (Bloomberg:  “America Resilient Five Years After Great Recession”), the data are considerably less cheerful. Like this Sentier Research analysis (see above chart and enlarge) of pre-tax income data — meaning earnings from work, Social Security, interest, dividends, cash welfare, retirement pensions, unemployment compensation, veterans’ benefits — from  the Census Bureau:

    • 1. Real median annual household income, while recovering somewhat from the low-point reached in August 2011, has fallen by 4.4% since the “economic recovery” began in June 2009.
    • 2. Adding this post-recession decline to the 1.8% drop that occurred during the recession leaves median annual household income now 6.1% below the December 2007 level.
    • 3. Real median annual household income declined during the officially-defined recession from $55,480 in December 2007 to $54,478 in June 2009. During the “economic recovery” — as the unemployment rate and the duration of unemployment remained high — median annual household income continued its decline, reaching a low point of $50,722 in August 2011. As of June 2013 median household income had recovered somewhat to $52,098.
    • 4. Compared to January 2000, the beginning point for our monthly statistical series, median annual household income is now lower by 7.2 percent.

Sentier’s Gordon Green: “Based on our data, almost every group is worse off now than it was four years ago, with the exception of households with householders 65 to 74 years old.”

The black-white economic gap hasn’t budged in 50 years - My colleague Michael A.Fletcher published a big piece Wednesday noting that the United States hasn’t made much progress in closing the economic chasm between blacks and whites since the March on Washington 50 years ago. “Even as racial barriers have been toppled and the nation has grown wealthier and better educated,” Fletcher writes, “the economic disparities separating blacks and whites remain as wide as they were when marchers assembled on the Mall in 1963.” It’s an excellent story, worth reading in full. It’s also worth charting.

  • 1) The black unemployment rate has consistently been twice as high as the white unemployment rate for 50 years: A recent report from the Economic Policy Institute (EPI) notes that this gap hasn’t closed at all since 1963. Back then, the unemployment rate was 5 percent for whites and 10.9 percent for blacks. Today, it’s 6.6 percent for whites and 12.6 percent for blacks.
  • 2) For the past 50 years, black unemployment has been well above recession levels: “Indeed,” notes EPI, “black America is nearly always facing an employment situation that would be labeled a particularly severe recession if it characterized the entire labor force. From 1963 to 2012, the … annual black unemployment rate averaged 11.6 percent. This was… higher than the average annual national unemployment rate during the recessions in this period — 6.7 percent.”
  • 3) The gap in household income between blacks and whites hasn’t narrowed in the last 50 years:

You Will Definitely Believe How Racist This Daily Caller Article Is: We’ve seen a lot of racist nonsense in our time, but this contribution from the Daily Caller and Major General US Army Jerry Curry Retired Thank Goodness is truly special, a diamond-encrusted nuclear butt plug of are-you-even-serious-dude that makes us wonder if Jerry Curry, who served semi-prominently under Carter, Reagan, and Bush Sr., is feeling okay. Because holy. fucking. shit:  The question is can [black] families and communities ever be reconstituted again, and do we have a sufficient number of black leaders who can and are able to shoulder the vision and burdens of a Martin Luther King, Jr.? Can Jesse Jackson or Al Sharpton do it? If the answer is no, and I believe it is, then America’s white leadership will have to get rid of them and select their replacements. Why don’t I suggest that Black Democrats select the replacements? Because Black Democrats are fine for house work, but not for doing heavy lifting. Name one that has put forward a meaningful call to action with a plan to restore the black family and community.

Wal-Mart’s newest scheme to ruin the middle class - Almost 30 years ago, as the U.S. was bleeding jobs, Walmart launched a “Buy America” program and started hanging “Made in America” signs in its 750 stores. It was a marketing success, cementing the retailer’s popularity in the country’s struggling, blue-collar heartland. A few years later, NBC’s Dateline revealed the program to be a sham. Dateline found that Walmart’s sourcing was in fact rapidly shifting to Asia. This year, the company announced that it would purchase an additional $50 billion worth of domestic goods over the next decade. This sounds pretty substantial, but in fact it’s just a more sophisticated and media savvy version of Walmart’s hollow 1980s Buy America campaign. For starters, $50 billion over a decade may sound huge at first, but measured against Walmart’s galactic size, it’s not. An additional $5 billion a year amounts to only 1.5 percent of what Walmart currently spends on inventory.Worse, very little of this small increase in spending on American-made goods will actually result in new U.S. production and jobs. Most of the projected increase will simply be a byproduct of Walmart’s continued takeover of the grocery industry. Most grocery products sold in the U.S. are produced here. As Walmart expands its share of U.S. grocery sales — it now captures 25 percent, up from 6 percent in 1998 — it will buy more U.S. foods. But this doesn’t mean new jobs, because other grocers are losing market share and buying less. What it does mean is lower wages. As I reported earlier this year, Walmart’s growing control of the grocery sector is pushing down wages throughout food production.

This Week in Poverty: '90 Percent of Workers Aren’t Getting Bupkis' - One of the obstacles to addressing poverty in this country is that too many people think of low-income people as different, flawed or less than, which often leads not only to a lack of empathy but to outright blame. However, a new report from the Economic Policy Institute (EPI) shows just how much Americans across the economic spectrum have in common when it comes to stagnating wages.“The bottom 99 percent may be a bit of an exaggeration but it’s not much,”  “In an era when the only people moving ahead are those with an advanced degree—and that’s just 12 percent of the workforce—we shouldn’t partition off people at the low end as if they are totally distinct.”The report demonstrates that during the recession and its aftermath, from 2007 to 2012, wages fell for the entire bottom 70 percent of workers despite productivity growth of 7.7 percent. “From 2000 to 2007, productivity increased by a robust 16 percent but a worker at the fiftieth percentile saw a wage growth of just 2.6 percent, a worker at the twentieth percentile saw a wage increase of 1 percent and the eightieth percentile saw a wage growth of 4.6 percent. Indeed, over the past ten years, wages were stagnant or declined for the bottom 70 percent. “And even the wages of the worker at the eightieth percentile rose only 1.7 percent over the past ten years—that’s less than 0.2 percent annually, which in economic terms is zero, ” said Mishel. “Bascially, somewhere between 80 and 90 percent of workers in the last decade aren’t getting bupkis, as my grandmother used to say.”

Low-wage Workers Are Older Than You Think: 88 Percent of Workers Who Would Benefit From a Higher Minimum Wage Are Older Than 20, One Third Are Over 40 - It is a common myth that very low-wage workers—workers who would see a raise if the minimum wage were increased—are mostly teenagers. The reality is that raising the federal minimum wage to $10.10 per hour would primarily benefit older workers. 88 percent of workers who would be affected by raising the minimum wage are at least 20 years old, and a third of them are at least 40 years old.When describing who would see a raise if the minimum wage were increased, it is important to look at everyone who earns between the current minimum wage and the proposed new one, as well as workers earning just above the new minimum wage (who would likely also see a small pay increase as employers move to preserve internal wage ladders). The typical worker who would be affected by an increase in the minimum wage to $10.10 per hour by 2015 looks nothing like the part-time, teen stereotype: She is in her early thirties, works full-time, and may have a family to support. Our analysis of workers who would benefit from an increase in the minimum wage shows:

  • The average age of affected workers is 35 years old;
  • 88 percent of all affected workers are at least 20 years old;
  • 35.5 percent are at least 40 years old;
  • 56 percent are women;
  • 28 percent have children;
  • 55 percent work full-time (35 hours per week or more);
  • 44 percent have at least some college experience.

Working Poor Have Dimming Faith In Economic Mobility, Policymakers, Survey Finds - America's working poor value the work they do and have high hopes for their children's futures -- even though most believe it's now easier to fall out of the middle class than to rise into it, according to a new survey produced by Oxfam America.. The polling of low-wage workers, conducted by Hart Research Associates, found that nearly six in ten either scrape by each month or fail to meet their basic needs, and more than half have relied on public assistance in order to make ends meet. Nearly 80 percent said they don't have the savings they would need to provide for their families during three months without income. Nearly all low-wage workers polled said performing their jobs well means a lot to them, and four out of five said it's important that their children someday graduate from college. But despite their optimism for their children, most were in agreement on the underpinnings of the U.S. economy: America tends to be a downwardly mobile society, and the country's policies are skewed more to the benefit of the rich than to the poor, they said. "The prospects for low-wage workers are worsening rather than improving, resulting in widespread pessimism about economic mobility in America," Oxfam said in its report. "They express disbelief that the government is on their side, and think that Congress is biased in favor of wealthy people."

Fast Food Strike Planned for Thursday Expected to Impact 35 Cities - A growing movement among fast food workers to demand higher wages is expected to gain momentum this Thursday as strikes and protests against the country’s biggest restaurant chains spread to the South and the West Coast. Low-wage workers at fast food restaurants like McDonald’s and retailers such as Macy’s are gearing up for a nationwide strike just before Labor Day weekend. The striking workers are demanding the right to unionize and at least $15 an hour in pay, more than double the current national minimum wage of $7.25. Organizers say Thursday’s strikes could touch as many as 35 cities. “These companies that own these fast food restaurants, they make way too much money off the backs of the employees,” says Dearius Merritt, a 24-year-old worker at Church’s Chicken in Memphis who earns $13 an hour and plans to take part in his first strike Thursday. “I’m in the store every day with these workers that make $7.25…If I’m 30 years old and this is what I have to do to survive, then I deserve a living wage off of it.”

Fast-Food Strikes Set for Cities Nationwide - Fast-food customers in search of burgers and fries might run into striking workers instead. Organizers say thousands of fast-food workers are set to stage walkouts in dozens of cities around the country Thursday, part of a push to get chains such as McDonald’s, Taco Bell and Wendy’s to pay workers higher wages. It’s expected be the largest nationwide strike by fast-food workers, according to organizers. The biggest effort so far was over the summer when about 2,200 of the nation’s millions of fast-food workers staged a one-day strike in seven cities. Thursday’s planned walkouts follow a series of strikes that began last November in New York City, then spread to cities including Chicago, Detroit and Seattle. Workers say they want $15 an hour, which would be about $31,000 a year for full-time employees. That’s more than double the federal minimum wage, which many fast food workers make, of $7.25 an hour, or $15,000 a year.

Fast-Food Strikes Expand Across U.S. to 50 Cities -  Protests that began in New York last year are spreading to cities including Boston, Chicago, Denver, San Diego and Indianapolis, according to the Service Employees International Union, which is advising the strikers. About 200 workers showed up at the two-story Rock N Roll McDonald’s store in Chicago’s River North neighborhood this morning chanting: “Hey hey, ho ho, poverty wages gotta go!” The non-union workers are demanding the right to organize and wages of $15 an hour, more than double the federal minimum of $7.25. They now make $9 an hour on average, according to the Bureau of Labor Statistics. By simultaneously targeting the largest chains, including Yum! Brand Inc.’s Taco Bell and KFC, Subway and Burger King Worldwide Inc. (BKW), organizers want to force a sector-wide response. “What the workers are trying to do is hold the corporations accountable,” said Mary Kay Henry, SEIU president. If the minimum wage were raised to $10.50, fast-food restaurants would see about 2.7 percent higher costs, according to a letter signed by economists in July in support of raising the federal minimum wage. The eateries could absorb those cost increases by raising menu prices and by allowing low-wage workers to get more of the business’s revenue, it said.

In New Wave of Walkouts, Fast-Food Strikers Gain Momentum -  As a wave of one-day walkouts by fast-food workers gains momentum in a push for a $15 hourly wage, the movement has been notable both for the prominence of young faces and for the audacity of their demand. On Thursday, the protests involved workers at nearly 1,000 restaurants in more than 50 cities, organizers said, spreading to areas of the South and West including Atlanta, Los Angeles, Memphis, and Raleigh, N.C. The Service Employees International Union has provided financial support to the one-day walkouts since they began a month ago at restaurants of McDonald’s, Burger King and other chains in seven cities. Many and perhaps most of the workers have been in their 20s. Jake Rosenfeld, a sociology professor and labor expert at the University of Washington, said the strikes could elevate the union movement’s standing among younger workers who have grown up in an era when unions have steadily lost membership and power. But even with the attention the strikes have drawn, the big question remains whether the walkouts can achieve any traction on the main demand — the wage increase to $15 an hour in an industry in which many of the 2.3 million fast food workers earn the federal minimum of $7.25 an hour.

National fast food strike hits dozens of cities — MSNBC: Fast food workers staged a nationwide strike across dozens of American cities on Thursday morning, demanding a $15 per hour wage and the right to form a union. The strike, which is believed to be the largest in the industry’s history, included work stoppages in regions of the country which had never seen concentrated fast food labor activism before. Roughly 50 cities are affected by the strikes. Cities that have struck before and are striking again include New York, Chicago, St.Louis, Seattle, and Detroit. But far more cities are experiencing their first strike ever, including cities from Hartford, Conn., to Dallas, Texas, and Berkeley, Calif. Growing national news coverage and social media buzz helped to fuel the strikes, according to workers and organizers. “I’ve been watching the news, and I saw that a lot of fast food workers were organizing over the country,” said Willietta Dukes, a Burger King employee in Durham, North Carolina. “And I felt like it was high time that I be heard.” Thursday’s fast food strike is the first to occur in Durham. In a statement Thursday afternoon, McDonald’s said that strikers were not characteristic of all their workers and that its stores would remain open.

Fast Food Companies Probably Can Afford to Pay Workers More - The issue of fast-food worker pay has been in the news a lot lately, after McDonalds published a much-maligned sample budget for its low-income workers that more or less proved how impossible it is for a minimum-wage worker to support himself, let alone a family. This story was followed by a now-debunked report from the Huffington Post that argued that McDonalds could double its restaurant workers’ pay by simply raising the price of a Big Mac by 68 cents. Henry Blodget of Business Insider took the argument further, writing that McDonalds profits are so healthy it could afford to raise wages without raising prices — and still remain profitable. As Ryan Chittum of the Columbia Journalism Review points out, this ignores the fact that most McDonalds employees work for franchises, rather than the parent company, and that these franchises have a much lower profit margin than their corporate parent.  Much of this goes to show the danger of trying to extrapolate larger points from anecdotal and incomplete information. The fact is, franchise financial data is private, and even if McDonalds and its franchises are wildly profitable, it may not say that much about the overall health of the restaurant industry. But looking at aggregate data from Sageworks — a private company financial data analytics firm — shows that private fast-food firms are doing quite well these days, and that they’re not sharing their profits with workers. According to Sageworks data:

  • Profit margins for privately-held fast food companies are 4.6%, up from 2.1% in 2009
  • Revenues over the past year are up 12.1% over the past year, following a 8.4% increases the previous year
  • The percentage of revenue spent on payroll has decreased from 23.5% to 22.9%

The Audacity of the Fight for Higher Wages -- I was struck Thursday by the juxtaposition of two stories in the news (two and half, really). First, the banks had another banner quarter in terms of profits, up $42 billion, or 23 percent from last year.  A classic case of it takes money to make money.At the other end of the economy were the striking fast-food workers, calling for an increase in their pay to $15 an hour (the average for these workers is around $9, up from $8.66 in 2009). I also noted — this is the half-a-report I mentioned above — that in the upward revision to second-quarter gross domestic product that came out on Thursday, corporate profits were  again up near record highs as a share of national income while compensation fell again and is now at the lowest share it has been since 1955. And yet, what I mostly heard about this was about the audacity and the economic illiteracy of the strikers.  Don’t they realize that it’s still a tough economy?  Don’t they get that their employers are not the big corporations but the franchisees who can’t afford to pay more?  Don’t they get that the increase will just have to be passed on in prices?  Don’t get me wrong. These are good questions. They have answers, and the commentators should know and offer them, as I will in a moment.  Neither do I begrudge any sector its profitability; that’s what capitalism is all about, right? But let’s face it. Something’s broken here in an economy that serves up low wages to significant numbers of adults whose families depend on their earnings (the typical worker earning between the minimum wage and $10 an hour earns half of his or her family’s income; 88 percent are adults).  And something’s broken when the media and economic pundits seem to devote a lot more energy to explaining why companies can’t pay living wages than considering what to do about it.

Low-wage Workers Are Older Than You Think - It is a common myth that very low-wage workers—workers who would see a raise if the minimum wage were increased—are mostly teenagers. The reality is that raising the federal minimum wage to $10.10 per hour would primarily benefit older workers. 88 percent of workers who would be affected by raising the minimum wage are at least 20 years old, and a third of them are at least 40 years old. When describing who would see a raise if the minimum wage were increased, it is important to look at everyone who earns between the current minimum wage and the proposed new one, as well as workers earning just above the new minimum wage (who would likely also see a small pay increase as employers move to preserve internal wage ladders). The typical worker who would be affected by an increase in the minimum wage to $10.10 per hour by 2015 looks nothing like the part-time, teen stereotype: She is in her early thirties, works full-time, and may have a family to support. Our analysis of workers who would benefit from an increase in the minimum wage shows:

  • The average age of affected workers is 35 years old;
  • 88 percent of all affected workers are at least 20 years old;
  • 35.5 percent are at least 40 years old;
  • 56 percent are women;
  • 28 percent have children;
  • 55 percent work full-time (35 hours per week or more);
  • 44 percent have at least some college experience.

There is a class warfare and the workers are not winning - The Politics of Envy – that old chestnut from the neo-liberals – is bandied around every time there is any insinuation that the capitalist system produces distributional outcomes that are not remotely proportional to the effort put into production. Whenever governments challenge the distributional outcomes – for example, propose increasing taxes on the higher income recipients (note I don’t use the word “earners”) there is hell to cry and the defense put up always appeals to the old tags – “socialist class warriors undermining incentive”, “envy”, etc. In the 1980s, when privatisation formed the first wave of the neo-liberal onslaught, we all apparently became “capitalists” or “shareholders”. We were told that it was dinosauric to think in terms of the old class categories – labour and capital. That was just so “yesterday” and we should just get over it and realise that we all had a stake in a system where reduced regulation and oversight would produce unimaginable wealth, even if the first manifestations of this new “incentivised” economy channelled increasing shares of real income to the highest percentiles in the distribution. No worries, “trickle-down” would spread the largesse. We know better now – and increasingly the recognition, exemplified in 2006 by Warren Buffett’s suggestion that “There’s class warfare, all right … but it’s my class, the rich class, that’s making war, and we’re winning” (Source), is that class is alive and well and in prosecuting their demands for higher shares of real income, the elites have not only caused the crisis but are now, in recovery, reinstating the dynamics that will lead to the next crisis. The big changes in policy structures that have to be made to avoid another global crisis are not even remotely on the radar.

Number of the Week: Unionization Rates on the Decline - 11.3%

: The share of U.S. workers who were union members in 2012. For many Americans, Labor Day has come to be more about end-of-summer barbeques than union rallies. But this year unions are back in the news, with fast-food workers across the country walking off the job to demand better pay amid broader concerns over slow wage growth.Unions have a lot of ground to make up. In 1983, the first year for which comprehensive national data are available, 20% of American wage and salary workers were union members. That figure has fallen nearly every year since, hitting an all-time low of 11.3% last year. There were 14.4 million union members in the U.S. last year, 3.4 million fewer than in 1983, even as the total workforce has grown by 3.9 million. (Another 1.6 million workers are covered by union contracts but aren’t union members; in all, 12.5% of workers were represented by unions in 2012.)Union membership has been buffeted by a range of forces. The manufacturing sector, long a redoubt of organized labor, has been in a prolonged decline, at least in terms of employment. And within manufacturing, union membership has fallen below 10% from nearly 15% a decade ago, due in part to a shift of factory activity to less union-friendly “right-to-work”states. (16.6% of workers in Michigan are unionized, for example, compared to 3.3% in South Carolina.)

Monday Map: Combined State and Local Sales Tax Rates -- This week's Monday Map shows the state sales tax rate, plus the average local rate, for each state as of July 1, 2013. This data comes from a new sales tax report coming out this Wednesday which will include each state’s minimum, maximum, and average local sales tax rates, as well as each state sales tax rate. Click here for the study (link will go live on the morning of August 28).Tennessee has the highest average combined rate at 9.44%, and is followed closely by Arkansas (9.18%) and Louisiana (8.89%). On the other end of the spectrum are states with no sales taxes: Oregon, Delaware, and New Hampshire. All maps and other graphics may be published and re-posted with credit to the Tax Foundation.

The geography of success -- Weak U.S. economic growth continues to be discouraging. But it's worth taking a look at a few places where things going well for America.There has been a remarkable resurgence in U.S. oil production over the last few years, with levels now back up to where they were in 1992, though still 28% below the peak reached in 1970.Interestingly, two states-- Texas and North Dakota-- account for more than 100% of the increase in U.S. production since 2009. While some other states, such as Oklahoma, New Mexico, and Colorado saw modest gains, declines in production from the Gulf of Mexico, Alaska and California were bigger than the combined gains from the states outside of Texas and North Dakota.  It's also interesting, and in my opinion not entirely a coincidence, that it is the region in a central swath through the middle of the United States that has been most successful in terms of connecting workers with jobs.Texas and North Dakota accounted for only 8% of all U.S. jobs in 2009, but between them produced 18% of the increase in employment between 2009 and 2013. And the energy boom in these states has clearly benefited their neighbors as well. For example, on a visit to St. Cloud Minnesota last year, I was told that many of the local carpenters and plumbers were commuting to perform work in North Dakota. Two years ago, I proposed that supply-side policies could be key for future U.S. economic growth. The response of many people was that our economic problem was one of inadequate demand for workers and products rather than inability to produce more on the supply side. But I think the record of the last two years has shown that I was right.

Unemployment Rate Falls in Most Cities, But Pockets of Weakness Remain = Unemployment has fallen in nine of every ten U.S. cities over the past year, but the jobless rate remains staggeringly high in some pockets of the country struggling to boost their economies. The unemployment rate was lower in July from a year earlier in 320 of 372 metropolitan areas, the Labor Department said Wednesday . The rate increased in just 38 areas. Still, 41 metro areas had jobless rates above 10%, on a non-seasonally-adjusted basis, well above the U.S. rate of 7.7% in July. (Seasonally adjusted, the July unemployment rate was 7.4%, the lowest level since 2008.) Wide swaths of the Southwest have jobless rates above the national average. Yuma, Ariz., had the highest rate in the country at 34.5%. San Bernardino, Calif., led areas with more than 1 million residents, with a rate of 11.0%. But the region had some good news. Las Vegas matched Seattle for the largest year-over-year decline, 2.2 percentage points. Still, the unemployment rate in Las Vegas stood at 9.7% in July, compared with Seattle’s 5.8%. Growth in the technology, service and manufacturing industries has allowed Seattle to add more jobs than nearly any other part of the country.

The Leveraged Buyout Of America - Ellen Brown - Giant bank holding companies now own airports, toll roads, and ports; control power plants; and store and hoard vast quantities of commodities of all sorts. They are systematically buying up or gaining control of the essential lifelines of the economy. How have they pulled this off, and where have they gotten the money? In an illuminating series of articles on Seeking Alpha titled “Repoed!”, Colin Lokey argues that  the investment arms of large Wall Street banks are using their “excess” deposits – the excess of deposits over loans – as collateral for borrowing in the repo market. Repos, or “repurchase agreements,” are used to raise short-term capital. Securities are sold to investors overnight and repurchased the next day, usually day after day. The deposit-to-loan gap for all US banks is now about $2 trillion, and nearly half of this gap is in Bank of America, JP Morgan Chase, and Wells Fargo alone. It seems that the largest banks are using the majority of their deposits (along with the Federal Reserve’s quantitative easing dollars) not to back loans to individuals and businesses but to borrow for their own trading. Buying assets with borrowed money is called a “leveraged buyout.” The banks are leveraging our money to buy up ports, airports, toll roads, power, and massive stores of commodities.

$100-million Detroit blight removal project - The city of Detroit got a boost of cash to help its curb appeal. The United States Treasury gave the Michigan State Housing Development authority permission to ear-mark $100-million for a blight elimination program. The money will be used to demolish some of the more than 78,000 homes that sit empty in Detroit. "You've got to remove blight in order to begin new growth. The same thing's true in a forest and it is a true in a neighborhood, and the removal of this blight is part of the strength of this neighborhood," said Michigan Senator Carl Levin. Governor Snyder also attended Monday's kick-off. The money comes from a federal fund created to help states hit hard by the housing crisis.

California legislators urge speedy inquiry into prison sterilizations - Legislators today fast-tracked an audit into why doctors under contract with the state sterilized nearly 150 female prison inmates from 2006 to 2010 without the required authorizations. During a hearing at the State Capitol, members of the Joint Legislative Audit Committee unanimously approved the investigation into female sterilization and asked the California State Auditor’s office to make the review its highest priority. Assemblywomen of the California Legislative Women’s Caucus requested the audit in response to an investigation by The Center for Investigative Reporting that found that nearly 250 inmates had received tubal ligations since 1997. The women were signed up for the surgery while they were pregnant and housed at either the California Institution for Women in Corona or Valley State Prison for Women in Chowchilla, which is now a men’s prison. Former inmates and prisoner advocates maintain that prison medical staff coerced the women, targeting those deemed likely to return to prison in the future. Tubal ligations have been restricted since 1994 to instances of medical necessity – and only when authorized by top state corrections officials. But a former medical official told CIR that prison medical staff considered the rule unfair and looked for ways around it.

Jerry Brown seeks $315M to avoid mass release of prisoners -- Under court order to reduce California's prison population by nearly 10,000 inmates by the end of the year, Gov. Jerry Brown asked the Legislature this afternoon to authorize about $315 million to avoid a mass release. Legislation proposed by the Democratic governor would ease overcrowding in the short term and and "make thoughtful changes over the longer term," Brown said. "This is the sensible, prudent way to proceed."The bill would allow the state to lease more private prison space and send more prisoners to out of state facilities.The bill's prospects are far from certain. Steinberg, D-Sacramento, has suggested the state should put more emphasis on mental health and drug treatment programs than on expanding jail capacity.

Another failed drug-test experiment - Remember Florida Gov. Rick Scott's (R) idea of mandating drug tests for welfare applicants? The idea was to save Florida taxpayers' money by forcing drug users to withdraw from the public-assistance system. The results, however, were a fiasco -- only about 2 percent of applicants tested positive, and Florida lost money when it was forced to reimburse everyone else for the cost of the drug test, plus pay for staff and administrative costs for the program. Making matters worse, the courts rejected the law, forcing its demise. Naturally, after seeing Rick Scott's experiment fail, other Republican officials elsewhere were eager to follow Florida's example of intrusive, big-government conservatism. Take Utah, for example. Utah has spent more than $30,000 to screen welfare applicants for drug use since a new law went into effect a year ago, but only 12 people have tested positive, state figures show. The preliminary data from August 2012 through July 2013 indicates the state spent almost $6,000 to give 4,730 applicants a written test. After 466 showed a likelihood of drug use, they were given drug tests at a total cost of more than $25,000, according to the Utah Department of Workforce Services, which administers welfare benefits and the tests. Henry Decker added, "[T]he Beehive State spent more than 30 grand to weed out 0.25 percent of those seeking benefits."

North Carolina cops threaten to arrest charity groups for feeding the homeless - Charity groups in Raleigh, North Carolina are criticizing local police over what they call a sudden enforcement of a local ordinance prohibiting them from feeding the homeless. “No representative from the Raleigh Police Department was willing to tell us which ordinance we were breaking, or why, after six years and countless friendly and cooperative encounters with the Department, they are now preventing us from feeding hungry people,” Hollowell wrote on the group’s website. “When I asked the officer why, he said that he was not going to debate me. ‘I am just telling you what is. Now you pass out that food, you will go to jail.’”

Sequestration Nation: Back To School With Budget Cuts -- As children begin to head back to school for the 2013-2014 school year, many could find larger class sizes, less staff, and fewer upgrades to things like computers or textbooks when they arrive. That’s because the coming school year will be the first in which sequestration will make itself felt in all of the public school districts across the country. The first schools to feel the impact were those on or near military bases and Native American reservations who receive Impact Aid to make up for lower tax revenues. Head Start programs also had to start reducing the number of slots available to low-income preschoolers. But now cuts to all federal funding for education, including money that goes to special education, programs for English language learners, low-income students, teachers’ professional development, and many others will start to hit. “Literally every program that runs through the Department of Education is being cut by 5 percent,” Mark Egan, associate director for government relations with the National Education Association, told ThinkProgress. In February, the White House estimated that Title I funding that goes to schools with large populations of low-income students would be eliminated for more than 2,700 and cut off support to 1.2 million disadvantaged students. Special education support cuts were predicted to eliminate more than 7,200 teachers and aides. The schools that receive the most federal funding tend to “have higher poverty and a greater number of children in need,” Egan added.

Faced With Budget Cuts, 99.5 Percent Of Teachers Spend Their Own Money On Supplies - As public schools enter a new year with even steeper budget cuts, nearly every single teacher in America is spending her own money to cover basic classroom supplies. A survey highlighted by Marketplace Morning Report Wednesday found that 99.5 percent of teachers paid an average of $485 last year to stock their classrooms.City, state, and federal budgets have steadily shrunk school funds since the recession began, which in turn has prompted schools to slash supply budgets. Even as they see their own paychecks cut, teachers are making up the difference, buying books and even furniture for their classrooms. To make matters worse, students at the hardest hit schools often cannot afford their own basic supplies. One guidance counselor interviewed by Marketplace even buys clothing for obviously needy students. He is not alone; many teachers buy paper and pens for students who can’t afford them. School supplies are hardly the only resources sacrificed. In Chicago, 3,000 staff members have been laid off, and 54 schools were shuttered in an attempt to balance the school district’s budget this year.Schools are also suffering huge hits to federal funding due to sequestration, forcing them to fire thousands of staffers, increase class sizes, and even reduce services for some low-income and special needs students.

Child Hunger So Common That Three-Quarters Of Teachers Have Hungry Students - Three-quarters of America’s teachers have students who routinely show up to school hungry and half say hunger is a serious problem in their classrooms, according to No Kid Hungry’s annual educator survey. The numbers represent a significant jump from last summer, when about three in five teachers surveyed routinely taught hungry kids.The report also notes that free- and reduced-price breakfast programs are hugely under-enrolled. Twenty-one million kids eat school lunch, but just 11 million eat school breakfast. Previous research has shown that child hunger has a profound impact on educational achievement. Closing the school breakfast gap by just half would produce over 3 million kids with higher test scores and over 800,000 more high school graduates. Hungry kids are at far greater risk of emotional and psychological problems that undermine their education, are far more likely to drop out of high school, and struggle to keep up with the cognitive development of their adequately-fed peers.  Yet Congressional Republicans have proposed cuts to the federal food stamps program that would exacerbate the hungry student problem. The initial $20.5 billion in cuts was predicted to boot 210,000 children from school meals programs that are tied to the Supplemental Nutrition Assistance Program (SNAP), and the House GOP now plans to cut closer to $40 billion from the program after returning from summer recess.

Chicago School Budget Approved Unanimously, Taps Reserves To Plug $1 Billion Gap (Reuters) - The Chicago Board of Education on Wednesday unanimously approved a $6.6 billion fiscal 2014 budget for the Chicago Public Schools, tapping budget reserves to cover 70 percent of a $1 billion deficit. The budget gap for the nation's third largest public school system was driven by a steep climb in pension payments that will rise to $613 million in this budget year from $208 million in fiscal 2013. The big rise is largely due to the expiration of a three-year partial pension funding holiday the Illinois Legislature approved in 2010. The city-run district also blamed the deficit on flat or declining revenue and contractual salary increases. It plugged the gap this year mostly by draining nearly $700 million in budget reserves. The budget also cut spending by $112 million and increased the property tax levy to the maximum rate allowed by state law. Chicago Public School CEO Barbara Byrd-Bennett said the district can't cut its way out of its fiscal crisis. "We need meaningful pension reform that can generate significant savings and prevent devastating future cuts to our schools," Byrd-Bennett said in a statement.

College Costs Surge 500% in U.S. Since 1985: Chart of the Day - The cost of higher education has surged more than 500 percent since 1985, illustrating why there have been renewed calls for change from both political parties.  The CHART OF THE DAY shows that tuition expenses have increased 538 percent in the 28-year period, compared with a 286 percent jump in medical costs and a 121 percent gain in the consumer price index. The ballooning charges have generated swelling demand for educational loans while threatening to make college unaffordable for domestic and international students. The “skyrocketing” increases exacerbate income inequality by depriving those of less means of the schooling they need to advance and may also derail the “prestige and status” of U.S. higher education, said Michelle Cooper, president of the Washington-based Institute for Higher Education Policy. While U.S. schools have remained competitive globally in the face of declining state subsidies and rising tuition costs, it’s fair to ask whether students are getting what they pay for, she said.

Nope, No Inflation Here! - Once again we ask (rhetorically of course), just what is it that the-powers-that-be mean when they discuss "inflation"? As we noted a year ago, while the "ZIRP is the answer to all" solution has led to a rise in the price of almost everything that matters (and doesn't for that matter); one 'cost' stands out among the others (whether under Bernanke or Greenspan) - in the past 3 decades there has been no other cost that comes even remotely close to matching the near hyperinflationary surge in college tuition and costs. As to who foots the bill? It is all those young men and women who are indoctrinated day in and day out by every possible legacy media, whose sole interest is also to perpetuate the status quo, that the only way to succeed in this world is through untenable debt. Of course, it is packaged differently: study, get a loan, get a job and pay off the loan..  Sadly, this is no longer the case in the New Normal where one is lucky to get a part-time job paying minimum wage, let alone one which allows the repayment of debt principal (this ignores the possibility of interest rates actually rising at some point in the future).

Four years in college and decades in debt—is it worth it? - With college graduates struggling to find full-time employment, future students should consider alternatives to a four-year college degree, said a former secretary of education. "Fifty percent of our college graduates are ether unemployed or underemployed," William Bennett, who was education secretary under President Reagan, told CNBC's "Closing Bell." "It used to be almost automatic that the advice would be, 'Go to college.' Now I think people have to pause and consider very carefully," he said, adding that there are other ways to achieve success. A two-year degree can be a less expensive and more effective path for some, and open online courses can provide marketable skills for much less than college, he said. Student loan debt is currently estimated at $1.2 trillion.

Chinese Students Bolster U.S. College Budgets - Washington Monthly’s annual college issue usually has some fascinating material, and this year is no exception. One example is an article by Paul Stephens on the sharp rise in foreign students on American campuses (to more than 764,000, an increase of roughly 200,000 in less than six years, he says, citing data from the Institute of International Education and the State Department). Many are from wealthy overseas families paying full tuition — and helping to bolster college budgets.  Where are the students coming from? By this reckoning, the bulk of the net increase — more than 160,000 of the 200,000 — has come from China.  chart: Washington Monthly State Department statistics on F-1 student visas issued to applicants from four selected nations. Mr. Stephens writes:While administrators promote the diversity and global perspectives these new students bring to campus, it’s clear that such high-minded goals are not the only motivation for enrolling large numbers of foreign students. With state spending on higher education declining sharply over the last five years — it’s down an average of 28 percent nationwide — out-of-state and international students who pay full tuition (and sometimes even additional tuition) have kept these institutions in the black. As state assemblies have cut back, the people of China have picked up the tab.

College Ranking Models - Cathy O’Neil - Last week Obama began to make threats regarding a new college ranking system and its connection to federal funding. Here’s an excerpt of what he was talking about, from this WSJ article: The president called for rating colleges before the 2015 school year on measures such as affordability and graduation rates—”metrics like how much debt does the average student leave with, how easy is it to pay off, how many students graduate on time, how well do those graduates do in the workforce,”  Interesting! This means that Obama is wading directly into the field of modeling. He’s probably sick of the standard college ranking system, put out by US News & World Reports. I kind of don’t blame him, since that model is flawed and largely gamed. In fact, I made a case for open sourcing that model recently just so that people would look into it and lose faith in its magical properties. On the other hand, what Obama is focusing on seems narrow. Here’s what he supposedly wants to do with that model (again from the WSJ article): Once a rating system is in place, Mr. Obama will ask Congress to allocate federal financial aid based on the scores by 2018. Students at top-performing colleges could receive larger federal grants and more affordable student loans. “It is time to stop subsidizing schools that are not producing good results,” he said. I’d like to make a few comments on this overall plan. The short version is that he’s suggesting something that will have strong, mostly negative effects, and that won’t solve his problem of college affordability.

Obama’s New Education Proposal: Change, or Changed Subject? - Obama on Monday and Tuesday was Darth Vader; today, he's being feted in the New York Times for his ostentatiously progressive-sounding new plan to help the student demographic. From the Times editorial board this morning: President Obama has been accused of promoting small-ball ideas in his second term, but the proposal he unveiled on Thursday is a big one: using sharp federal pressure to make college more affordable, potentially opening the gates of higher education to more families scared off by rising tuitions. While there are questions to be answered about his plan, his approach – tying federal student aid to the value of individual colleges – is a bold and important way to leverage the government's power and get Washington off the sidelines.The Times should have looked more closely at the fine print of Obama's proposal, which in theory would create a government rating system that would tie student aid to performance (by both students and universities). The key number in it is a date. This is from Time: Obama will also ask Congress to tie those ratings to federal student aid by 2018. . .One friend on the Hill laughingly called it "complete bullshit" and stressed the loose time frame, noting that we won’t even know what the rating system looks like until 2015, and then nothing actually happens until 2018. Which, conveniently, is two years after the President leaves office.

President Obama takes on the student debt bomb; meanwhile, the Gainful Employment Rule saga enters a 5th year - Prospects do not look good for President Obama’s vastly ambitious initiative (not yet really a plan) to take on growing college debt. Consider that the U.S. Department of Education (DOE) is going into its fifth year, and counting, of efforts to regulate just one higher education sector, for-profit schools, to stop those with the worst record of imposing unmanageable debt from continuing to live on a federal dole.  After a big setback in a legal challenge by the industry last year to a new Gainful Employment Rule, DOE has recently resumed its efforts, with a second round of negotiated rulemaking set to begin in September.   The for-profit industry itself has argued for an expansion of regulatory scope to all colleges, presumably not because that would lead to quicker controls on for-profit schools' own operations.  The Obama administration may have lost necessary focus.  It should be taking on worst things first rather than subjecting even the most efficient, debt-free sectors of higher education to expensive new regulation.

Pinching Pensions to Keep Wall Street Fat and Happy - The debate over public pensions shows clearly the contempt that the elites have for ordinary workers. While elites routinely preach the sanctity of contract when it works to benefit the rich and powerful, they are happy to treat the contracts that provide workers with pensions as worthless scraps of paper. We see this attitude on display currently in the Detroit bankruptcy proceedings. It is even more clearly on display in efforts by Chicago Mayor Rahm Emanuel to default on the city's pension obligations. The basic story in both cases is that the contracts that workers had labored under are being laughed at by the elites because they find it inconvenient to carry through with the terms. In the case of Detroit, public sector workers face the loss of much of their pension as a result of the city's effort to declare bankruptcy. These workers could be forgiven for laboring under the illusion that they would see the pensions for which they worked. These obligations were actually guaranteed under the state's constitution. But Detroit's emergency manager, Kevin Orr, thinks a constitutional guarantee is just a joke that you tell people to trick them into working.

Private lobbyists get public pensions in 20 states - As a lobbyist in New York's statehouse, Stephen Acquario is doing pretty well. He pulls down $204,000 a year, more than the governor makes, gets a Ford Explorer as his company car and is afforded another special perk: Even though he's not a government employee, he is entitled to a full state pension. He's among hundreds of lobbyists in at least 20 states who get public pensions because they represent associations of counties, cities and school boards, an Associated Press review found. Legislatures granted them access decades ago on the premise that they serve governments and the public. In many cases, such access also includes state health care benefits. But several states have started to question whether these organizations should qualify for such benefits, since they are private entities in most respects: They face no public oversight of their activities, can pay their top executives private-sector salaries and sometimes lobby for positions in conflict with taxpayers. New Jersey and Illinois are among the states considering legislation that would end their inclusion.

Michigan Medicaid Expansion Backed By GOP Governor Passes In Key Vote - Michigan is poised to expand Medicaid to about 470,000 residents in the next several years under President Barack Obama's health care reform law following a state Senate vote Tuesday. Michigan Gov. Rick Snyder, one of nine Republican governors to endorse the Medicaid expansion, has aggressively pursued the policy since February. All 12 Michigan Senate Democrats joined with eight of the chamber's 26 Republicans to achieve a majority -- and overcame a bold move to block the bill by one staunch conservative opponent -- in the Senate Tuesday, setting up final action on the measure early next month. Assuming Michigan moves forward with its "Healthy Michigan" plan, 24 states and the District of Columbia will add a projected 9 million low-income people to their Medicaid rolls in 2014. The remaining states -- all but one led by Republican governors -- won't make these health benefits available under the Obamacare law, leaving an estimated 3.4 million people uncovered. "It's about helping 470,000 Michiganders have a better life," Snyder said at a press conference following the Senate vote Tuesday evening. "We all know someone that falls in that category: hardworking people but lower-income people that couldn't afford health insurance," he said. "This isn't about the Affordable Care Act. This is about one element that we control in Michigan that can make a difference in peoples' lives."

Missouri’s Poorest Residents Won’t Benefit From Obamacare - Though the insurance exchange is supposed to bring down costs for people without job-sponsored coverage, it won’t help Hattey and an estimated 226,525 other uninsured Missourians. They make too little to qualify for government subsidies. Yes, too little. In a twist that wasn’t intended by the authors of the federal Affordable Care Act, most of Missouri’s poorest, working-age residents — those under age 65 and below the poverty line of $11,490 for an individual and $15,510 for a couple — aren’t eligible for government help. They can’t get free or low-cost health coverage through Medicaid. Nor can they get federal tax credits to help pay for private insurance. They fall in a coverage gap. The tax subsidies that will be available through the exchange are intended to make private coverage affordable for people who make between the poverty level and four times that amount. Under the Affordable Care Act, those making less than 138 percent of poverty — or about $32,500 for a family of four — were supposed to be covered by an expansion of Medicaid, the public insurance program for the poor. But the U.S. Supreme Court ruled that the Medicaid expansion was optional for states. Missouri — and 26 other states — turned it down. As a result, a big swath of the uninsured will stay that way when new coverage options kick in Jan. 1.

Chart of the day: Medicare spending growth slowdown: From recent analysis by Michael Levine and Melinda Buntin of the CBO:...To try to identify the causes of that slowdown, we performed a series of descriptive and statistical analyses based on a diverse array of data sources. However, those analyses did not yield an explanation for most of the slowdown in spending growth. Fully 75% of the 3.2 percentage point difference between 2000-2005 and 2007-2012 per beneficiary spending growth cannot be explained by payment rate changes, beneficiary demand due to age and health status, Part A only enrollment, prescription drug use, the financial crisis and economic downturn, supplemental coverage. Needless to say, this is a big and important mystery.

Maybe They'll Never Figure It Out - Paul Krugman  - Kathleen Geier points to some polling I’d missed: 39 percent of Americans agree that the government should stay out of Medicare, while only 46 percent disagree; the rest aren’t sure. She also points to the Suzanne Mettler work showing that many beneficiaries of Social Security and Medicare believe that they have never benefited from a government program. This at least suggests that many voters will never realize that the regulated, subsidized health exchanges that have become a vital part of their security are in fact the very same Obamacare they were taught to hate and fear.

Huh? Repeal the PPACA to Help Hispanics and African-Americans ? ? ? Crooks and Liars carries a conversation by Repub Senator Ted Cruz on CNN. Senator Ted Cruz of Texas is making it his crusade to repeal the PPACA so as not to cause harm to the most vulnerable of America who potentially are losing their jobs, the Hispanics and African-Americans and singe moms. To real the PPACA do so, he is asking the House to pass a budget which specifically funds everything the government needs with the exception of funding for the PPACA. Factcheck.org has debunked the lost job claim here: GOP’s ‘Job-Killing’ Whopper, Again and previously. There is no basis for Senator Cruz’s claim for lost jobs due to the PPACA. As we’ve said before (a few times), experts project that the law will cause a small loss of low-wage jobs — and also some gains in better-paid jobs in the health care and insurance industries. It’s also expected that more workers will decide to retire earlier, or work fewer hours, when they no longer need employer-sponsored insurance and can obtain it on their own with help from federal subsidies. But that just means fewer people willing to work — and it will free up jobs for those who want them. If anything, that could reduce the jobless rate. Maybe Senator Cruz is implying employers will cut hours to less than 30 per week? Our own Spencer England has done a couple of posts on the topic of cutting hours to less than 30 hours. It just is not happening as the critics and naysayers are claiming.

ObamaCare’s architects reap windfall as Washington lobbyists - ObamaCare has become big business for an elite network of Washington lobbyists and consultants who helped shape the law from the inside. More than 30 former administration officials, lawmakers and congressional staffers who worked on the healthcare law have set up shop on K Street since 2010. . Major lobbying firms such as Fierce, Isakowitz & Blalock, The Glover Park Group, Alston & Bird, BGR Group and Akin Gump can all boast an ObamaCare insider on their lobbying roster — putting them in a prime position to land coveted clients. Veterans of the healthcare push are now lobbying for corporate giants such as Delta Airlines, UPS, BP America and Coca-Cola, and for healthcare companies including GlaxoSmithKline, UnitedHealth Group and the Blue Cross Blue Shield Association.

Republicans’ “Market-Oriented” Health Care Reforms Won’t Work, Part 1 - This has been a week of Republicans saying they have actual ideas for replacing Obamacare, rather than just repealing it. The centerpiece has been an article by Karl Rove in the Wall Street Journal (paywalled) detailing all the swell ideas Republicans have. In addition, a non-blogger friend points me to an earlier analysis based ultimately on a group called Docs 4 Patient Care that sounds essentially identical to Rove’s article. Before I get back to Rove, let’s talk first about the  earlier analysis, which highlights two supposed alternatives: selling alternatives across state lines, thereby increasing competition in the health insurance market; and tort reform. These sound like great ideas in theory, but in practice both are deeply flawed. Today I’ll take on selling insurance across state lines, while my next post will go on to tort reform and beyond.

Health care and education are messed up for the same reason - Health care and education pose the same basic threat to the economy: How do you keep costs down for a product when consumers can’t say “no”?  Saying “no,” after all, is how consumers typically restrain costs. If Sony wants to charge you too much for a television, you can walk out. You might want a television, but you don’t actually need one. That gives you the upper hand. When push comes to shove, producers need to meet the demands of consumers. But you can’t walk out on medical care for your spouse or education for your child. In the case of medical care, your spouse might die. In the case of college, you’re just throwing away your kid’s future (or so goes the conventional wisdom). Consequently, medical care and higher education are the two purchases that families will mortgage everything to make. They need to find a way to say “yes.” In these markets, when push comes to shove, consumers meet the demands of producers. The result, in both cases, is similar: skyrocketing costs for a product of uncertain quality. As the Brookings Institution’s Isabel Sawhill writes: “We spend twice as much per capita than most other countries on health care and don’t get better outcomes as a result. We also spend twice as much per full-time equivalent student on higher education than other OECD countries, and 38 percent more on elementary and secondary education with disappointing results.”

The Central Challenge in U.S. Health Policy - --“Health Care Costs Climb Moderately, Survey Says” read the headline in The New York Times last week. It appears that health insurance premiums for job-based family coverage rose “only” 4 percent between 2012 and 2013, although still twice as fast as did wages.. The survey in question is the Kaiser Family Foundation’s annual survey of employment-based health insurance, widely viewed as a gold mine for anyone seeking information on that part of the American health system. The full report is easily accessible, or readers may prefer to read just the summary or browse through the fine group of charts the foundation provides. Here is a telling chart from that pack.  The premiums shown in this chart are in current dollars, meaning they are not adjusted for inflation. They do not reflect a common benefit package. Furthermore, they are only averages that differ substantially from the experiences of individual companies.

How to Charge $546 for Six Liters of Saltwater - It is one of the most common components of emergency medicine: an intravenous bag of sterile saltwater. Luckily for anyone who has ever needed an IV bag to replenish lost fluids or to receive medication, it is also one of the least expensive. The average manufacturer’s price, according to government data, has fluctuated in recent years from 44 cents to $1. Yet there is nothing either cheap or simple about its ultimate cost, as I learned when I tried to trace the commercial path of IV bags from the factory to the veins of more than 100 patients struck by a May 2012 outbreak of food poisoning in upstate New York. Some of the patients’ bills would later include markups of 100 to 200 times the manufacturer’s price, not counting separate charges for “IV administration.” And on other bills, a bundled charge for “IV therapy” was almost 1,000 times the official cost of the solution. It is no secret that medical care in the United States is overpriced. But as the tale of the humble IV bag shows all too clearly, it is secrecy that helps keep prices high: hidden in the underbrush of transactions among multiple buyers and sellers, and in the hieroglyphics of hospital bills. At every step from manufacturer to patient, there are confidential deals among the major players, including drug companies, purchasing organizations and distributors, and insurers. These deals so obscure prices and profits that even participants cannot say what the simplest component of care actually costs, let alone what it should cost.

Golden Rice: Lifesaver? -- ONE bright morning this month, 400 protesters smashed down the high fences surrounding a field in the Bicol region of the Philippines and uprooted the genetically modified rice plants growing inside. Had the plants survived long enough to flower, they would have betrayed a distinctly yellow tint in the otherwise white part of the grain. That is because the rice is endowed with a gene from corn and another from a bacterium, making it the only variety in existence to produce beta carotene, the source of vitamin A. Its developers call it “Golden Rice.”  The concerns voiced by the participants in the Aug. 8 act of vandalism — that Golden Rice could pose unforeseen risks to human health and the environment, that it would ultimately profit big agrochemical companies — are a familiar refrain in the long-running controversy over the merits of genetically engineered crops. And they have motivated similar attacks on trials of other genetically modified crops in recent years: grapes designed to fight off a deadly virus in France, wheat designed to have a lower glycemic index in Australia, sugar beets in Oregon designed to tolerate a herbicide, to name a few. But Golden Rice, which appeared on the cover of Time Magazine in 2000 before it was quite ready for prime time, is unlike any of the genetically engineered crops in wide use today, designed to either withstand herbicides sold by Monsanto and other chemical companies or resist insect attacks, with benefits for farmers but not directly for consumers.

Soybean, Corn, And Wheat Prices Are Surging - Just two weeks ago, agriculture commodity-watchers were celebrating: “we are in for an exceptionally good year, perhaps one of the best in the last four or five years in terms of crop production,” as prices for corn, wheat and soybeans were falling amid global relief of the escalating inflation of food prices. So much for that... as SocGen notes, prices will be at or above current levels as hot, dry weather threatens U.S. Midwest crops. In addition, a shift in Chinese policy (following corruption concerns) is having a positive impact on price. Sure enough, Corn, Wheat (impacted by Brazil's frosts cutting forecast by 26%), and Soybean prices are screaming higher today as crops appear to be "decidely not in good shape." Corn is having its biggest gain since July 2012, Soybeans up most since 2010 and limit-up, and Wheat up its most since June 2012.

Water Woes: Vast US Aquifer Is Being Tapped Out - Nearly 70 percent of the groundwater stored in parts of the United States' High Plains Aquifer — a vast underground reservoir that stretches through eight states, from South Dakota to Texas, and supplies 30 percent of the nation's irrigated groundwater — could be used up within 50 years, unless current water use is reduced, a new study finds. Researchers from Kansas State University in Manhattan, Kan., conducted a four-year study of a portion of the High Plains Aquifer, called the Ogallala Aquifer, which provides the most agriculturally important irrigation in the state of Kansas, and is a key source of drinking water for the region. If current irrigation trends continue unabated, 69 percent of the available groundwater will be drained in the next five decades, the researchers said in a study published online today (Aug. 26) in the journal Proceedings of the National Academy of Sciences."I think it's generally understood that the groundwater levels are going down and that at some point in the future groundwater pumping rates are going to have to decrease,"  Using current trends in water usage as a guide, the researchers estimate that 3 percent of the aquifer's water was used up by 1960; 30 percent of the aquifer's water was drained by 2010; and a whopping 69 percent of the reservoir will likely be tapped by 2060. It would take an average of 500 to 1,300 years to completely refill the High Plains Aquifer, Steward added.

Peak Water in the American West -- It is no surprise, of course, that the western United States is dry. The entire history of the West can be told (and has been, in great books like Cadillac Desert [Reisner] and Rivers of Empire [Worster] and The Great Thirst [Hundley]) in large part through the story of the hydrology of the West, the role of the federal and state governments in developing water infrastructure, the evidence of droughts and floods on the land, and the politics of water allocations and use. But the story of water in the West is also being told, every day, in the growing crisis facing communities, watersheds, ecosystems, and economies. This isn’t a crisis of for tomorrow. It is a crisis today. What is, perhaps, a surprise, is that it has taken this long for the entire crazy quilt of western water management and use to finally unravel. But it is now unraveling. In the past few years, we’ve seen bits and pieces of the puzzle: a well, and then two wells, and then a town goes dry. A farmer has to shift from water-intensive crops to something else, or let land go fallow. Vast man-made reservoirs start to go dry. Groundwater levels plummet, yet the response is to try to drill new and deeper wells and pump harder, or build another dam, or move water from an ever-more-distant river basin. Competition between industry and farming increases. And politicians run back to old, tired, half-solutions rather than face up to the fact that we live in a changed and changing world.

Why Big, Intense Wildfires Are the New Normal The large wildfire burning in and around Yosemite National Park has already consumed more than 184,000 acres, and shows no signs of slowing down. The blaze, which has been dubbed “Rim Fire,” is now the largest fire in the Sierra Nevada mountain range and one of the largest in California’s history. The Rim Fire is one of more than 30 blazes currently churning across the West. And a combination of higher temperatures, untamed underbrush, less rain, and more developments in the region means that the number and intensity of wildfires is likely to increase in the coming years, says Don Wuebbles, a professor of Atmospheric Sciences at the University of Illinois.“This probably is the new normal,” he says. “If we look at how the climate has changed over the past 50 years—with warmer temperatures increasing beyond what we used to see in the early part of the 20th century, and changes in precipitation—fires will continue to happen and get worse and worse,” says Wuebbles, who co-authored a draft federal report linking climate change to an increase in severe weather trends. The numbers certainly back him up: Wildfires are roaring through twice as many acres per year on average in the U.S. than they were 40 years ago, U.S. Forest Service Chief Tom Tidwell told the Senate in June.

Vicious Cycle: Extreme Climate Events Release 11 Billion Tons Of CO2 Into The Air Every Year -- A major new study in Nature, “Climate extremes and the carbon cycle” (subs. req’d), points to yet another significant carbon cycle feedback ignored by climate models. The news release sums up the key finding of this 18-author paper: Researchers “have discovered that terrestrial ecosystems absorb approximately 11 billion tons less carbon dioxide every year as the result of the extreme climate events than they could if the events did not occur. That is equivalent to approximately a third of global CO2 emissions per year.” Measurements indicate, for instance, that the brutal 2003 European heat wave “had a much greater impact on the carbon balance than had previously been assumed.” We’re already seeing a rise in extreme weather in North America. Last year, Munich Re, a top reinsurer, found a “climate-change footprint” in the rapid rise of North American extreme weather catastrophes: “Climate­-driven changes are already evident over the last few decades for severe thunderstorms, for heavy precipitation and flash flood­ing, for hurricane activity, and for heatwave, drought and wild­-fire dynamics in parts of North America.”The new Nature study found that one type of extreme weather event is worse than the others: Periods of extreme drought in particular reduce the amount of carbon absorbed by forests, meadows and agricultural land significantly. “We have found that it is not extremes of heat that cause the most problems for the carbon balance, but drought,” …. Drought can not only cause immediate damage to trees; it can also make them less resistant to pests and fire. It is also the case that a forest recovers much more slowly from fire or storm damage than other ecosystems do.

Ocean Acidification May Amplify Global Warming This Century Up To 0.9°F - Ocean acidification may speed up total warming this century as much as 0.9°F, a new study finds. This amplifying feedback is not to be found in the forthcoming climate report from the Intergovernmental Panel on Climate Change (IPCC) — one more reason it provides an instantly out of date lowball estimate of future warming.  The oceans are now acidifying 10 times faster today than 55 million years ago when a mass extinction of marine species occurred. We are risking a marine biological meltdown “by end of century.” But unrestricted carbon pollution doesn’t merely threaten to wipe out coral reefs, oysters, salmon, and other ocean species we rely on. Researchers find “Global warming amplified by reduced sulphur fluxes as a result of ocean acidification,” in a new Nature Climate Change study (subs. req’d).As an accompanying news article in Nature explains:Atmospheric sulphur, most of which comes from the sea, is a check against global warming. Phytoplankton — photosynthetic microbes that drift in sunlit water — produces a compound called dimethylsulphide (DMS). Some of this enters the atmosphere and reacts to make sulphuric acid, which clumps into aerosols, or microscopic airborne particles. Aerosols seed the formation of clouds, which help cool the Earth by reflecting sunlight….. As more CO2 enters the atmosphere, some dissolves in seawater, forming carbonic acid. This is decreasing the pH of the oceans, which is already down by 0.1 pH units on pre-industrial times, and could be down by another 0.5 in some places by 2100. And studies using ‘mesocosms’ — enclosed volumes of seawater — show that seawater with a lower pH produces less DMS. On a global scale, a fall in DMS emissions due to acidification could have a major effect on climate, creating a positive-feedback loop and enhancing warming.

Canyon longer than Grand Canyon found buried under Greenland ice sheet -  The hidden canyon is up to half a mile deep, six miles wide and stretches for 466 miles beneath the country’s giant ice sheet. It is thought to have been carved out by a meandering river more than four million years ago – at a time before ice covered the area and humans were just beginning to evolve from primates. 3-D view of the subglacial canyon, looking to the southeast from the north of Greenland (J. Bamber, University Bristol) Researchers at Bristol University, the British Antarctic Survey and Nasa stumbled across the canyon when using airborne radar to image the landscape beneath the ice. They believe the buried valley, which is longer than the Grand Canyon in Arizona, may still contain running water and acts as an important channel for melt water beneath the ice. It winds its way from the centre of Greenland to a deep fjord on the northern coast, and water still trickles out into the Arctic Ocean from beneath the glaciers. Scientists said this probably explains why they have not found lakes beneath the ice sheet there, while beneath the ice in Antarctica they are relatively common.

New York, Miami and New Orleans to Flood - A study carried out recently by Nature Climate Change took a look at and analyzed past and present floods in the world and was able to predict the future floods that will take place concerning 136 cities. At the present time, the average global flood loss stands at $6 billion per year. That will increase in 2050 to an estimated $60 to $63 billion in the world. This is primarily due to the fact the populations will increase in the coastal areas studies along with economic growth. Three major cities in the USA are going to be responsible for almost a third of the total cost of the average flood loss estimates that have been calculated by Nature Climate Change. Those cities are Miami, New York and New Orleans. The reason why? It’s simply because those three cities have largely inadequate flooding protection. Countries that have traditionally suffered from flooding in the past and have historically had to come to grips with the problem (such as Amsterdam or Rotterdam for instance) do not even rank on the list drawn up by Nature Climate Change.

Bank of America Tower and the LEED Ratings Racket: When the Bank of America Tower opened in 2010, the press praised it as one of the world’s “most environmentally responsible high-rise office building[s].” It wasn’t just the waterless urinals, daylight dimming controls, and rainwater harvesting. And it wasn’t only the Leadership in Energy and Environmental Design (LEED) Platinum certification—the first ever for a skyscraper—and the $947,583 in incentives from the New York State Energy Research and Development Authority. It also had as a tenant the environmental movement’s biggest celebrity. The Bank of America Tower had Al Gore. At the Tower’s ribbon-cutting ceremony, Gore powwowed with Mayor Michael Bloomberg and praised the building as a model for fighting climate change. “I applaud the leadership of the mayor and all of those who helped make this possible,” he said. Gore’s applause, however, was premature. According to data released by New York City last fall, the Bank of America Tower produces more greenhouse gases and uses more energy per square foot than any comparably sized office building in Manhattan. It uses more than twice as much energy per square foot as the 80-year-old Empire State Building. It also performs worse than the Goldman Sachs headquarters, maybe the most similar building in New York—and one with a lower LEED rating. It’s not just an embarrassment; it symbolizes a flaw at the heart of the effort to combat climate change.“What LEED designers deliver is what most LEED building owners want—namely, green publicity, not energy savings,”

US electrical grid on the edge of failure -- Facebook can lose a few users and remain a perfectly stable network, but where the national grid is concerned simple geography dictates that it is always just a few transmission lines from collapse. That is according to a mathematical study of spatial networks by physicists in Israel and the United States. Study co-author Shlomo Havlin of Bar-Ilan University in Ramat-Gan, Israel, says that the research builds on earlier work by incorporating a more explicit analysis of how the spatial nature of physical networks affects their fundamental stability. The upshot, published today in Nature Physics, is that spatial networks are necessarily dependent on any number of critical nodes whose failure can lead to abrupt — and unpredictable — collapse1. The electric grid, which operates as a series of networks that are defined by geography, is a prime example, says Havlin. “Whenever you have such dependencies in the system, failure in one place leads to failure in another place, which cascades into collapse.”   The warning comes ten years after a blackout that crippled parts of the midwest and northeastern United States and parts of Canada. In that case, a series of errors resulted in the loss of three transmission lines in Ohio over the course of about an hour. Once the third line went down, the outage cascaded towards the coast, cutting power to some 50 million people. Havlin says that this outage is an example of the inherent instability his study describes, but others question whether the team’s conclusions can really be extrapolated to the real world.

As Worries Over the Power Grid Rise, a Drill Will Simulate a Knockout Blow — The electric grid, as government and private experts describe it, is the glass jaw of American industry. If an adversary lands a knockout blow, they fear, it could black out vast areas of the continent for weeks; interrupt supplies of water, gasoline, diesel fuel and fresh food; shut down communications; and create disruptions of a scale that was only hinted at by Hurricane Sandy and the attacks of Sept. 11.  This is why thousands of utility workers, business executives, National Guard officers, F.B.I. antiterrorism experts and officials from government agencies in the United States, Canada and Mexico are preparing for an emergency drill in November that will simulate physical attacks and cyberattacks that could take down large sections of the power grid.  They will practice for a crisis unlike anything the real grid has ever seen, and more than 150 companies and organizations have signed up to participate.

The US Wastes Enough Energy Each Year to Power the UK for Seven Years - Each year the Lawrence Livermore National Laboratory releases an analysis of the energy input and energy use of the US economy to determine the energy efficiency. It might be somewhat surprising to know that in 2012 the US wasted 61% of all energy input into its economy, making it just 39% energy efficient. Of the 95.1 quadrillion British Thermal Units (BTUs) of raw energy that entered the US economy, only 37.0 quadrillion BTUs were actually used, with the other 58.1 quadrillion BTUs being wasted. In 1970, the US economy actually managed to use more energy than it wasted, using 31.1 quadrillion BTUs and only wasting 30.6 quadrillion BTUs, achieving an energy efficiency of higher than 50%. Since then the overall energy efficiency of the economy has steadily fallen as the use of electricity generation and transport has increased. Power plants and internal combustion engines are notoriously inefficient, and as there use has increased, so the efficiency of the economy has fallen.  Some people even suggest that the 39% energy efficiency stated in the analysis is generous, with physicist Robert Ayres stating that the figure should be closer to 14%.

Japan Upgrades Fukushima Nuclear Incident To 'Serious' After Plant Operator Admits Leaks Started Weeks Before Being Discovered — Japan's nuclear regulator on Wednesday upgraded the rating of a leak of radiation-contaminated water from a tank at its tsunami-wrecked nuclear plant to a "serious incident" on an international scale, and it castigated the plant operator for failing to catch the problem earlier. The Nuclear Regulation Authority's latest criticism of Tokyo Electric Power Co. came a day after the operator of the Fukushima Dai-ichi nuclear plant acknowledged that the 300-ton (300,000-liter, 80,000-gallon) leak probably began nearly a month and a half before it was discovered Aug. 19. In a meeting with agency officials Tuesday night, TEPCO said radioactivity near the leak and exposure levels among patrolling staff started to increase in early July. There is no sign that anyone tried to find the source of that radioactivity before the leak was discovered. On Wednesday, regulatory officials said TEPCO has repeatedly ignored their instructions to improve their patrolling procedures to reduce the risk of overlooking leakages. They also said TEPCO underestimated the potential impact of the leak because underground water is shallower around the tank than the company initially told regulators. Earlier this week, Japan's industry minister said the government will take over cleanup efforts. The authority originally gave a Level 1 preliminary rating — an "anomaly," to the tank leak. Last week the authority proposed raising that to Level 3 — a "serious incident" — and it made that change after consulting with the International Atomic Energy Agency. The IAEA's ratings are designed to inform the international community, and changing them does not affect efforts to clean up the leak by the government and TEPCO. The 2011 Fukushima disaster itself was rated the maximum of 7 on the scale, the same as the 1986 Chernobyl accident.

Why Fukushima is worse than you think  - “Careless” was how Toyoshi Fuketa, commissioner of the Japanese Nuclear Regulation Authority, reportedly described the inspection quality of hundreds of water tanks at the crippled Fukushima plant following the recent discovery of a serious radioactive spill. China’s Foreign Ministry went further, saying it was “shocking” that radioactive water was still leaking into the Pacific Ocean two years after the Fukushima incident. Both comments are to the point, and although many inside and outside Japan surely did not realize how bad the March 11, 2011 disaster was – and how bad it could get – it seems clear now that we have been misled about the scale of the problem confronting Japan. The country needs international help – and quickly. While the amount of radioactivity released into the environment in March 2011 has been estimated as between 10 percent and 50 percent of the fallout from the Chernobyl accident, the 400,000 tons of contaminated water stored on the Fukushima site contain more than 2.5 times the amount of radioactive cesium dispersed during the 1986 catastrophe in Ukraine. So, where has this huge amount of highly contaminated water – enough to fill 160 Olympic-size swimming pools – come from? In the aftermath of the 2011 earthquake and tsunami, the reactor cores of units 1, 2 and 3 melted through the reactor vessels into the concrete. Nobody knows how far the molten fuel went through the containment – radiation levels in the reactor buildings are lethal, while robots got stuck in the rubble and some never came back out.

Why is Obama Administration Appointing Another Big Oil and Gas Executive to DOE? —“Paula Gant’s appointment to Deputy Assistant Secretary of Energy for Oil and Natural Gas, Office of Fossil Energy at the U.S. Department of Energy further highlights that the Obama Administration values the interests of the oil and gas industry over those of U.S. communities.“As an executive for the American Gas Association, Ms. Gant has played a key role in influencing federal regulations on behalf of the oil and gas industry. This is not a professional track record that suggests objectivity in regards to shale gas development.“Gant’s appointment mirrors that of Dr. Ernest Moniz, another ardent natural gas supporter who now oversees our nation’s energy agenda.“Just as drilling and fracking for oil and natural gas should have no role in policies designed to curb climate change, oil and gas industry executives should not be entrusted to write our nation’s energy rules.

Study Shines Light on Tremors and Fracking - So much oil and water is being removed from South Texas' Eagle Ford Shale that the activity has probably led to a recent wave of small earthquakes, according to a study that appears in the online edition of the journal Earth and Planetary Science Letters. The Wall Street Journal reviewed the findings in advance of publication. The peer-reviewed study's authors suggest that taking oil and water out of the ground allows surrounding rock and sand to settle, triggering small tremors that are typically too weak to be noticed on the surface. Environmental and community groups have expressed concerns about a link between earthquakes and hydraulic fracturing, a method of injecting water into dense shale formations in order to crack them open and tap into trapped oil.The new study doesn't find much evidence that the man-made fracturing is causing earthquakes all by itself. The connection is more indirect, the study found: New wells are extracting nearly 600,000 barrels of oil a day and a considerable amount of water as well. Given the scale at which oil is now being removed, enough liquids are being disturbed that rocks are settling and faults slipping, causing the small earthquakes. The cause of the earthquakes in South Texas is similar to what occurred around the city of Long Beach, Calif., last century. Oil production and groundwater wells caused much of the area to sink nearly 30 feet over many years.

More Than Flaming Water: New Report Tracks Health Impacts of Fracking on Pennsylvania Residents’ Health - Fracking isn’t exactly new at this point, but the rapid expansion of wells is still fresh, and long-term health studies just aren’t available yet. This week, however, the Southwest Pennsylvania Environmental Health Project (SWPA-EHP), a nonprofit which gathers data on the public health impacts of fracking, released some preliminary results from residents living in Washington County, PA. SWPA-EHP found 27 cases of Washington County residents reporting health concerns related to drilling. Seven people complained of skin rashes, four said they suffered infections, three experienced headaches or dizziness and 13 complained of trouble breathing. This handful of cases is far from a complete survey of the area, just the first attempt at documenting illness associated with exposure to contaminated air and/or water. Perhaps surprising in the results was that despite the proclivity of PA water to catch fire, the vast majority of reported health effects were related to exposure to air, not water. Only the skin rashes are believed to be caused by contaminated water. The study also suggests that natural gas processing stations seem to trigger more reported health problems than actual drilling sites, of which there are 700 in Washington County. In terms of number of active wells, Washington County comes in third for the state.

Frackers slash billions in payments to landowners: Report: Thousands are receiving far less money than they were promised by energy companies to use their properties. Some are being paid virtually nothing. Over the last decade, an untold number of leases were signed, and hundreds of thousands of wells have been sunk into new energy deposits across the country. But manipulation of costs and other data by oil companies is keeping billions of dollars in royalties out of the hands of private and government landholders, an investigation by ProPublica has found. An analysis of lease agreements, government documents and thousands of pages of court records shows that such underpayments are widespread. Thousands of landowners like Feusner are receiving far less than they expected based on the sales value of gas or oil produced on their property. In some cases, they are being paid virtually nothing at all. In many cases, lawyers and auditors who specialize in production accounting tell ProPublica energy companies are using complex accounting and business arrangements to skim profits off the sale of resources and increase the expenses charged to landowners. Deducting expenses is itself controversial and debated as unfair among landowners, but it is allowable under many leases, some of which were signed without landowners fully understanding their implications. But some companies deduct expenses for transporting and processing natural gas, even when leases contain clauses explicitly prohibiting such deductions. In other cases, according to court files and documents obtained by ProPublica, they withhold money without explanation for other, unauthorized expenses, and without telling landowners that the money is being withheld. Significant amounts of fuel are never sold at all – companies use it themselves to power equipment that processes gas, sometimes at facilities far away from the land on which it was drilled. In Oklahoma, Chesapeake deducted marketing fees from payments to a landowner – a joint owner in the well – even though the fees went to its own subsidiary, a pipeline company called Chesapeake Energy Marketing.

Has the Shale Bubble Already Burst? - Just like the famous Gold Rushes of the 19th century, US shale gas development is turning out to be a limited and regional market opportunity. Across the Atlantic, the high financial and human costs to fracking also mean that Europe should forget any fantasies about repeating the US shale boom. Many US shale companies that have been beating the drums of shale “revolution” are now facing oil and gas well depletion. In February 2013 the US Energy Information Administration (EIA) warned that “diminishing returns to scale and the depletion of high productivity sweet spots are expected to eventually slow the rate of growth in tight oil production”. The average depletion rate of wells in the Bakken Formation (the largest tight oil play in the US) is reported to be 69 percent in the first year and 94 percent over the first five years (37 percent and 50 percent in the Barnett Formation). Due to the lack of reliable data on shale industry many experts (for example, Deborah Rogers from Energy Policy Forum) await possible future write-downs in shale assets. Naturally smaller investors will not hear about the write-downs in the news. Rock-bottom gas prices on the American market make it extremely difficult to drill more wells and maintain current levels of production, unless technology radically changes. “The cheap price bubble in the US will burst within two-to-four years,” believes David Hughes, a geoscientist and former team leader on unconventional gas for the Canadian Potential Gas Committee. “At a high enough price, the supply bubble will burst perhaps 10-to-15 years later, when drilling locations become sparse.”

Pipeline-Capacity Squeeze Reroutes Crude Oil - WSJ.com: More crude oil is moving around the U.S. on trucks, barges and trains than at any point since the government began keeping records in 1981, as the energy industry devises ways to get around a pipeline-capacity shortage to take petroleum from new wells to refineries.The improvised approach is creating opportunities for transportation companies even as it strains roads and regulators. And it is a precursor to what may be a larger change: the construction of more than $40 billion in oil pipelines now under way or planned for the next few years, according to energy adviser Wood Mackenzie. U.S. oil production has reached its highest level in two decades, while imports have fallen dramatically. A system built to import oil and deliver it to coastal refineries has become ill-equipped to handle rising production in Texas, North Dakota and Canada's Alberta province. "All of the pipes are pointed in the wrong direction," says "We are turning the last 70 years of oil-industry history in North America on its head, and we are turning it on its head in the next 10 to 15 years." With oil prices persistently above $100 a barrel, companies drilling new wells don't want to forgo revenue while they wait years for new pipelines. That leaves them with trucks, trains and barges to move an increasing amount of crude. Oil delivered to refineries by trucks grew 38% from 2011 to 2012, according to the U.S. Energy Information Administration, while crude on barges grew 53% and rail deliveries quadrupled. Although alternatives are growing rapidly, pipelines and oceangoing tankers remain the primary method for delivering crude to refineries.

Flanagan South Pipeline -- who needs the Keystone XL? - On a field just north of this tiny farm town along Missouri Highway 15, about 60 miles of pipe is stacked neatly in four rows that stretch almost as far as the eye can see. In the coming months, the hundreds of pieces will be strung together as part of Enbridge Energy Co.’s Flanagan South Pipeline, a new 589-mile artery that will transport heavy Canadian oil through the nation’s midsection. The Flanagan South line will link the Flanagan oil terminal an hour and a half southwest of Chicago with a crude oil hub at Cushing, Okla. From there, other pipelines can move oil south to the nation’s refining capital on the Texas coast. Calgary-based Enbridge says the 36-inch diameter Flanagan South Pipeline will run diagonally across 11 Missouri counties from just north of Hannibal to Bates County, about an hour south of Kansas City. For most of the route, it will run alongside the 60-year-old Spearhead Pipeline, also owned by Enbridge.

Oil spill would 'overwhelm' resources, B.C. minister warned  - Officials in British Columbia privately warned the environment minister that the province lacks the ability to manage oil spills from existing and future oil traffic, and even a moderate spill would overwhelm their ability to respond, documents show. Ottawa's decision to deal with coastal oil spills from a base in Quebec would make it much harder to contain spills, and Transport Canada and the Coast Guard lack the needed "environmental expertise" to manage them, said the documents obtained by The Canadian Press under freedom of information laws.The B.C. government has said Enbridge's proposed Northern Gateway pipeline — which would deliver Alberta oilsands products to a tanker port in Kitimat, B.C., for export to Asian markets — and Kinder Morgan's proposed expansion of its existing TransMountain pipeline into the Port of Metro Vancouver, could increase tanker traffic by more than 1,000 trips annually off the Pacific coast.

The World Faces a Helium Shortage -- I fought long and hard against the urge to use a pun in the title…‘helium market deflates’… ‘helium worries balloon’…’helium market blowing up’ ….etc, etc, etc. The long side subject I was initially off on a tangent about was the speculative positions in crude. . But as Fed taper fears have tapered optimism, these positions have been unwound somewhat, and WTI prices have eased lower from near the highs of the year. As for Brent crude, further support from geopolitical tension on seventeen different fronts has meant that speculative longs for Brent have reached a record high in the latest data out earlier this week.  But it’s the short side of the story – a potential global helium shortage – which has re-piqued my interest this week. The story goes that the US has been stockpiling helium in ‘The Federal Helium Reserve’ (no, really) – an underground reservoir near Amarillo – since it was built in 1929. There is also a processing plant and 450 miles of pipelines. The US produces about 75% of the world’s helium, with half of that stored in the aforementioned reserve. The problem is that the Congress passed ‘The Helium Privatization Act’ in 1996, which stated that the government would effectively end sales from the reservoir once its debt was paid off. And this is expected to happen in, um, early October.

The Mystery of Cannibal Capitalists and Ecuadorian Entrepreneurs - William K. Black -  Ecuador’s President Correa is a serious economist and that this makes him unpredictable for those who assume that ideology determines his policies.  Paradoxically, it is the apex American parasites – the largest financial institutions and their lawyers – who have cannibalized capitalism by becoming ideologues.  Ecuador has substantial oil reserves in the Yasuni preserve.  Ecuador is a developing nation that could use the revenues from developing that oil.  As I have explained in prior columns, Correa’s budget priorities are precisely those recommended in the Washington Consensus – education, health, and infrastructure.  The resultant economic growth, reduction in poverty and inequality, and reversal of Ecuador’s substantial loss of population to emigration has made Correa the most popular head of state in the Americas. The Yasuni preserve is a terrible place to produce oil.  It is an environmentally sensitive area that will suffer serious damage if things go well and horrific damage if there are serious oil leaks.  It is an indigenous area and oil development will cause serious problems with indigenous peoples even if things go very well.  Correa is not merely an economist, but a creative one.  He came up with the optimal solution – the rich nations should pay Ecuador to never produce oil in the preserve.  The rich nations would get tradable credits in return.  Naturally, though almost everyone agrees that it is a great idea that should be adopted in many parts of the world the richer nations refused to agree to the plan.

Barclays Warns About The Oil Price "Spillover Effects" From Syria - The increasing likelihood of some form of limited US led military action in Syria is compounding concerns about the stability of the world’s key oil producing region and Barclays warns that it will likely exert upward pressure on prices until the nature of the possible military intervention becomes apparent. But the bigger risk for the oil market is the potential for the Syrian conflict to spread to neighboring producing countries and imperil regional output, as the Syrian conflict is fueling broader sectarian tensions across the entire Middle East and has become something of a proxy war. The problem for global oil prices is that all of this Middle East volatility is taking place against the backdrop of a recent rise in unplanned outages in the oil market outside Syria. In sum, Barclays is concerned that with geopolitical tension and physical outages on the rise, crude oil markets are at an inflection point. Via Barclays, The possible military action, which media reports (e.g., Reuters) indicate could take the form of cruise missile strikes targeting select Syrian military installations, is unlikely to put any additional crude supplies directly at risk. Although not a large producer, Syrian oil production has declined to a trickle of 50 kb/d compared with 350 kb/d in March 2011. Syrian oil minister Suleiman al-Abbas was recently quoted as saying that production was only 39 kb/d during H1 13. It remains unclear if this reflects only production from assets in government-controlled areas. Iran is now supplying Syria with a $3.6mn line of credit for oil and oil product purchases, supporting the thesis that Syria’s domestic upstream and downstream infrastructure is in dire straits.

Oil up above $110 a barrel on Syria fears  — Tensions over Syria continued to feed supply concerns in the Middle East on Wednesday, lifting futures prices for oil to a close above $110 a barrel even after the latest U.S. data showed an unexpected climb in the past week’s crude supplies. Prices for West Texas Intermediate crude traded in New York logged their highest close in more than two years and one investment bank said Brent crude in London could surge to as high as $150 a barrel amid the crisis. Oil markets are not trading based on the U.S. inventory data, and they probably won’t until the Syria situation plays out, said Tariq Zahir, managing member at Tyche Capital Advisors. On the New York Mercantile Exchange, crude oil for October delivery added $1.09, or 1%, to settle at $110.10 a barrel, after surging almost 3% Tuesday. In electronic trading overnight, the contract topped $112 a barrel.

Oil Surges Past $112 a Barrel on Syrian Crisis - The price of oil rose surged past $112 a barrel Wednesday, as the U.S. edged closer to intervening in Syria’s civil war. U.S. Defense Secretary Chuck Hagel said Tuesday that American forces were ready to act on any order by President Barack Obama to strike Syria in response to the alleged use of chemical weapons in the conflict. U.S. benchmark oil for October delivery rose $3.02, or 2.8 percent, to $112.03 a barrel at midday Bangkok time in electronic trading on the New York Mercantile Exchange. Oil prices jumped $3.09 to close at $109.01 a barrel on the Nymex on Tuesday. The last time oil closed above $112 a barrel was on May 2, 2011. Still, oil remains far below its record close of $145.29 a barrel, reached on July 3, 2008. The price of oil is has surged more than 15 percent in the last three months on concerns over the civil war in Syria and unrest in Egypt. Neither country is a major oil exporter, but traders worry that the violence could spread to more important oil exporting countries or disrupt major oil transport routes.

SocGen's Shocking Oil Forecast: $150 Upside; $125 Base Case Following Syrian Attack "Within A Week" -If SocGen is right in its just released oil price forecast in a "Syrian war world", then the global economy is about to undergo an apoplectic shock the likes of which have not been seen since the summer of 2008, when Lehman brothers had to be taken under to generate the deflationary shock sending crude from $130 to $30 in the matter of days. The French bank's forecast in a nutshell: "Base case scenario: $125 for Brent. We believe that in the coming days, Brent could gain another $5-10, surging to $120-$125, either in anticipation of the attack or in reaction to the headlines that an attack had started. In our base case, we assume an attack begins in the next week. Upside scenario: $150 for Brent If the regional spill over results in a significant supply disruption in Iraq or elsewhere (from 0.5 – 2.0 Mb/d), Brent could spike briefly to $150."

Syria - A Minor Oil Player - Syria has been in headline news off and on for two years now and it appears that the looming conflict in the Middle East is once again weighing heavily on the world's oil markets.  That said, there is very rarely any mention of Syria's oil and gas reserves or production levels, a situation that I hope to resolve with this posting. Syria's first oil production began in 1968 with most of the current oil production being located along the Euphrates Graben in the northeastern part of the country.  For those of my readers that are non-geoscientists, a graben is a downthrown block of land that is bounded on both sides by a series of faults that is created as the earth's crust is pulled apart.  In the case of the Euphrates Graben, the feature is about 100 kilometres wide and extends for 160 kilometres in a southeast-northwest orientation.  Here is a map showing the location of the Euphrates Graben.  Here is a map showing Syria's oil and natural gas infrastructure: Here is a map showing the contract areas and oil and gas fields in Syria:

Worldwide loss of oil supply heightens Syria attack risk -- Libya's oil output has crashed to a near standstill over the past year as warlords and strikes paralyse the country, tightening the screws on global crude supply as the crisis in Syria comes to a head. The country’s oil ministry said production has slumped to an average of 300,000 barrels per day (b/d) in August, down by more than four-fifths from its peak after the overthrow of the Gaddafi regime two years ago. “Militia groups are behaving like terrorists, using control over oil as political leverage to extract concessions,” said Dr Elizabeth Stephens, head of political risk at insurers Jardine Lloyd Thompson. Port closures and strikes have compounded the damage but the deeper story is the disintegration of political authority. Libya is the most extreme example of political mayhem around the world disrupting output and causing a chronic shortfall in oil supply. Production has slumped in Iraq, Nigeria, Iran, Yemen and Syria itself, each for different reasons. This has cut daily global supply by 1.1m over the past year to 92m, explaining why Brent crude prices have remained stubbornly high despite the slump in Europe and China’s slowdown. To compound the problem, Libya’s oil is some of the highest quality produced in the Middle East and the kind preferred by European refiners. Jitters over Syria have already pushed Brent to $115, near levels that typically erode confidence and inflict serious economic damage.

China Growth Can Sink Closer to 6% on Waning Job Needs - Chinese officials shifting the economy away from exports and investment can allow growth to sink closer to 6 percent within the next five years without triggering a destabilizing jump in unemployment. The pace of expansion needed to absorb new entrants to the labor force will slip to 6.4 percent in 2018 from 7.3 percent this year, according to the median forecast in a Bloomberg News survey of 12 economists last month. Premier Li Keqiang is targeting a 7.5 percent expansion in 2013.  China’s declining working-age population and a jump in jobs in labor-intensive service industries such as logistics may help to limit unemployment in coming years. Swelling local-government debt and environmental degradation underscore the case for letting growth settle at a slower pace than the investment-driven 9.3 percent average of the past five years.  “We have a shrinking workforce that’s unfavorable for headline growth but favorable from an employment standpoint,”

China 'Officially' Admits PMI Data Inaccurate - Over six weeks ago we first noted that there were problems with the industry-specific data underlying the Chinese PMI numbers when we added that "the random disappearance of data was disorienting." Fast-forward to last week and the greater-than-50 PMI print heard around the world, which provided just enough momentum ignition to warrant more optimism in world equity markets that the second-half of the year would indeed prove to be a mythical renaissance. Well, it turns out that China's official National Bureau of Statistics has admitted that "we can’t ensure all industry-specific data can reach accuracy requirements," adding that they "were concerned that some of the numbers may affect related investors and users." Translation - the data in some industries was so bad that by telling the truth, our data would have become viciously self-fulfilling for their demise. The Juncker-rule is alive and well...

Why $3.4tn in foreign reserves is not China’s escape hatch - It is true that China dipped into its foreign exchange reserves in the late 1990s to help recapitalise its banks before shifting their bad debts into specially created bad banks. However, the government cannot now go to the same well to any large extent for a number of reasons. The first is that any large scale spending of the reserves would amount to a massive money-creation exercise by the central bank. This is to do with mechanics of how the reserves accumulated. To buy the dollars that China does not want sloshing around the economy, the central bank creates Renminbi. However, in order to avoid a big money-printing exercise it also issues treasury notes into the market to soak up – or sterilise – the local currency created to buy the foreign currency. The vast majority of the foreign exchange reserve assets at the People’s Bank are matched by Renminbi liabilities in China’s banks and other financial institutions. If it tries to spend dollars without repaying these liabilities it undoes its earlier sterlisation and prints money. If China wants to print money to soak up its bad debts – and take the risks that come with this policy – its foreign reserves are really irrelevant to that decision.

In Hong Kong, High-Skilled Jobs Decline - Hong Kong is facing an expansion of low-skilled employment at a time when the number of high-skilled jobs is contracting, reflecting a torpid environment for the territory’s financial services industry and other white-collar sectors. In the second quarter, the number of high-skilled jobs slipped by 0.9% from a year earlier, following a 2.4% drop in the first quarter. By contrast, non-professional jobs surged 3.8% in the second quarter after rising 4.7% in the first. Overall, total employment rose 2.5% year-on-year to 3.75 million positions in the second quarter. Of these, 1.38 million are high-skilled jobs while 2.37 million are in the low-skilled segment. The reason for a contraction in the number of high-skilled positions, according to human resources professionals, is weak hiring in the financial sector. The financial-services industry contributes about 20% of employment and just under a fifth to national output but it’s share has been falling. That’s in contrast to rapid growth of the retail sector and other blue-collar industries that have driven GDP growth lately as more mainland Chinese shop here.

A note on the ineffectiveness of monetary stimulus - A commenter on the previous post raised the idea, promoted by the “market monetarist” school, that monetary policy is so effective as to make fiscal policy entirely unnecessary, at least when interest rates are above the zero lower bound. My views on this issue were formed by the experience of the late 20th century, and in particular, the recession that began in 1990, following steep increases in interest rates. Having planned a “short, sharp, shock”, the RBA started cutting rates in January 1990.  They didn’t go for 25 basis point moves in those days. Over the period to December 1992, rates were cut by more than 12 percentage points, from 17.5 per cent to 5.25 per cent. Over the same period, unemployment rose from 6 per cent to 10.9 per cent, a record for the period since the Depression. As I said in the previous post, tight monetary policy can reliably cause recessions, but expansionary monetary policy in a deep recession is “pushing on a string”.

China and Japan Really Don't Like Each Other - Having friends in both China and Japan, I have often been asked to explain both sides’ actions since the Diaoyu/Senkakus crisis began in September 2012. For example, my Chinese friends cannot understand why the Abe government is so “stubborn” and isn’t willingly trying to repair relations with China, while my Japanese friends wonder the same thing about the Chinese government. A recent survey of Chinese and Japanese citizens views of each other’s countries helps shed light on these issues.  The results of the survey could provide answers to the questions of my friends.This survey, which was commissioned by the Japanese think tank Genron NPO and China Daily, asked 1,805 Japanese citizens and 1,540 Chinese citizens about their views of the other country. The survey found that 92.8 percent of Chinese respondents hold unfavorable views of Japan, a startling 28 percent rise from the year before. Similarly, 90.1 percent of respondents in Japan had an unfavorable or relatively unfavorable view of China, compared with 84.3 percent last year. For both countries, these figures were higher than in the previous nine annual surveys conducted.

BOJ’s Kuroda Offers Evidence Bond-Buying Is Working - Bank of Japan Governor Haruhiko Kuroda presented evidence Saturday that the central bank’s bond-buying effort is starting to produce results. Increases in Japanese stock prices, long-term interest rates that have remained quite stable and low, improved employment conditions, and signs that business investment is picking up were among the signs Mr. Kuroda cited. He also said that investors’ inflation expectations appear to be picking up. Mr. Kuroda made the comments at the annual global banking summit in Jackson Hole, Wyo., hosted by the Federal Reserve Bank of Kansas City. During the question and answer session, Mr. Kuroda defended the BOJ’s policy prescriptions as “completely justified” and said there was no evidence it was raising risks to the stability of the financial system. Japan’s financial system is “quite sound,” he said. Japan’s problem has been continuous deflation, and the bond-buying program is designed to fix that, he said.

Japan's pump-primed recovery proves US deficit hawks wrong - Dean Baker  -- Japan's budget deficit last year was more than 10% of GDP. That would be more than $1.6tn in the US economy today. Its gross debt is more than 245% of GDP. That would imply a debt of almost $40tn in the United States, which would mean a debt of $125,000 for every man, women, and child in the country. Those are the sorts of numbers that policy types in Washington find really scary. Fortunately for the Japanese people, the folks currently running their economy are more interested in sound economic policy than pushing scare stories about debt and deficits. Rather than rushing to reduce the deficit, Japan's new prime minister, Shinzo Abe, went in the opposite direction. He deliberately increased spending to create jobs.He also appointed a new head of Japan's central bank who is committed to raising the inflation rate. Japan has been suffering from near-zero inflation, or even deflation, since the collapse of its stock and housing bubbles in 1990. Abe's pick as head of the central bank has committed the bank to raising the inflation rate to 2%. Implicit in this commitment is the notion that the bank will buy up as many Japanese government bonds as needed to reach its inflation target.In other words, the bank is prepared to print lots of money.

Japan's debt-funding costs to hit $257 billion next year: document -  - Japan expects to spend a record $257 billion to service its debt during the next fiscal year, a document obtained by Reuters showed, underscoring the huge burden created by the government's borrowings. The amount to be allocated for debt-servicing for the year that will begin on April 1 is nearly as large as the gross domestic product of Singapore, which the World Bank put at $275 billion at the end of 2012.Japan's Ministry of Finance (MOF), charged with drafting the state budget and issuing government bonds, will request 25.3 trillion yen ($257 billion) in debt-servicing costs under the budget, the document showed on Tuesday.That will be up 13.7 percent from the amount set aside for the current fiscal year, reflecting the ministry's plan to guard against any future rise in long-term interest rates. The increased debt-servicing cost may heighten pressure on Prime Minister Shinzo Abe to proceed with a scheduled two-stage sales tax hike from next year, which is seen as a necessary first step in fixing Japan's tattered finances.

Japan’s Public Pension Fund Suffers Biggest-Ever Bond Losses - Japan’s Government Pension Investment Fund, the world’s largest manager of retirement savings, posted its smallest gain in three quarters in the period ended June on record domestic bond losses. GPIF, which has 121 trillion yen ($1.24 trillion) in assets, earned a 1.9 percent return last quarter compared with a 6.9 percent gain in the prior three months, according to a statement on its website today. Market investments in Japanese bonds fell 1.5 percent while domestic stocks jumped 9.7 percent, the fund said. Losses on local bonds were wider than the previous record quarterly decline in 2008, said Tokihiko Shimizu, director general of the research department at GPIF. “Returns from domestic stocks and overseas bonds and equities compensated for the loss in domestic bonds,” Shimizu said in a telephone interview today. “Diversifying our assets was effective.”

Is The Japanese Consumer Losing Faith? The big question this week in Japanese data is whether the economy can sustain the gains made so far by Abenomics. The extraordinary monetary stimulus pushed by Prime Minister Shinzo Abe has made big gains across the board, boosting economic growth this year. Consumption has picked up and exports have done well, supported by a weaker yen. But signs are emerging the shoots of consumer confidence could already could be wilting. Last week, subdued department store sales set off alarm bells. On Thursday, preliminary retail sales figures brought more bad news, falling 0.3% on year in July. On a seasonally adjusted basis, retail sales were down 1.8% on the previous month, the biggest fall since August 2011. Japanese officials are keen to point out that extreme heat and rain in July, which kept shoppers inside, plus one less Sunday in the month compared to the year-ago period, might have given a one-off blow to the numbers. Officials also pointed out that summer bonuses this year were likely spent in June, damping outlays in the following month. Still, economists aren’t as convinced the number can be written off.The problem is that increased economic activity hasn’t translated into more investment by firms. Companies, especially those in the manufacturing sector, still have large amount of spare capacity. Workers’ wages aren’t rising, even as inflation begins to creep up in Japan for the first time in years, which could throw some cold water over the recent optimism.

Yen Devaluation Starting to Pay Dividends With Increased Exports - Despite having a very weak economy, the yen actually strengthened over the duration of this expansion because of Japan's safe haven status.  In fact, from the yen's ETF's lows in 2008 to its highs in 2011, it gained a little over 32%.  However, since the end of last year and the introduction of "Abenomics" (which includes yen devaluation to increase the competitiveness of Japan's exports) the yen's ETF has dropped almost 26%.  The end result is an increase in exports, as shown in this excerpt from the latest BOJ Central Bank Meeting Minutes: Real exports had turned upward in the January-March quarter of 2013 and kept increasing in the April-May period relative to that quarter, after having continued to decline in the July-September and October-December quarters of 2012. Exports of motor vehicles and their related goods -- due in part to the effects of developments in foreign exchange rates -- had resumed an uptrend, assisted by a pick-up in those to China -- which had seen a significant drop -- while those to the United States and other regions had been steady. Exports of capital goods and parts as a whole had recently started to bottom out, with upward movements observed in exports to the United States and East Asia, disregarding the fluctuations in ships. Exports of IT-related goods as a whole appeared to be heading for a bottom, with the effects of the downshift in demand for parts for final products of smartphones -- which had taken place since the end of 2012 -- easing.The latest exports release shows a 12% year over year increase.  Here's a chart of total exports from the latest BOJ monthly economic report:

Trans-Pacific Partnership: Canadian MPs Have No Access To Drafts U.S. Pols Can See, NDP Says - The Conservatives are keeping secret the draft text of a sweeping free trade agreement Canada is negotiating with a dozen Pacific Rim countries, despite the fact that any U.S. congress member can access the document, the NDP says. “If the U.S. can allow its legislators to see the TPP text, there is no reason that Canada can’t,” NDP trade critic Don Davies said in a statement.The latest round of negotiations in the Trans-Pacific Partnership (TPP) opened in Brunei last week and runs to the end of the month. Canada joined the talks in 2012 after years of lobbying.If finalized , the deal would create a free trade area that would cover Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam, along with Canada.  The TPP would cover about 40 percent of global economic output and about one-third of world trade.

Rupee drops on importer dollar demand; RBI steps in to halt slide (Reuters) - The rupee weakened on Monday, tracking offshore rates and as month-end dollar demand from importers dragged the currency lower, prompting the central bank to step up its dollar sales in late trade, pulling it off session lows. Sustained foreign selling in equities also continued to raise concerns about the gaping current account deficit. India's Finance Minister P. Chidambaram met foreign investors on Saturday to seek suggestions on attracting dollar inflows, according to local media reports. The reports quoted Secretary for Department of Financial Services Rajeev Takru as saying the government could announce some measures in 8-10 days. India urgently needs to attract capital as foreign institutional investors (FIIs) have sold about $4.2 billion in bonds this year. Adding to concerns, overseas funds are also shedding some of their stock positions, having sold about $750 million in equities over the previous six sessions. Still, traders remained sceptical about whether India can attract foreign capital to help narrow a record high current account deficit despite the surge in debt yields, as growth is stuck at a decade low while an expected wind down in U.S. monetary stimulus is expected to hit emerging markets.

Danger Zone for Indonesia to Boost Sukuk Costs - Indonesia’s need for dollars to defend the plunging rupiah will see the country pay the highest yield since 2009 when it sells global sukuk, according to Mandiri Sekuritas and Manulife Asset Management Indonesia. The nation will offer around $1 billion of Shariah- compliant bonds after investor meetings, the last of which is today, Dahlan Siamat, Islamic financing director at the debt management office, said in an interview last week. Mandiri Sekuritas and Manulife Asset see a yield of between 6.5 percent and 7 percent for 10-year securities, which would be the most since Indonesia sold its debut dollar sukuk in 2009 and more than double the 3.3 percent paid at the last sale in November. Bank Indonesia announced measures aimed at increasing the supply of foreign-exchange on Aug. 23 to stem an 8.5 percent plunge in the rupiah this quarter, the fourth-worst performing currency in the world. Reserves dropped 18 percent this year to $92.7 billion, enough to cover 5.1 months of imports and short- term external debt, according to Mandiri Sekuritas. That compares with the three-month minimum recommended by the International Monetary Fund.

Indian rupee hits record low as confidence in govt ebbs (Reuters) - The Indian rupee hit a record low and shares slumped on Tuesday after parliament's approval of a $20 billion plan to provide cheap grain to the poor renewed doubts about the government's resolve to control spending ahead of elections due next year. The alarm over India's fiscal deficit eclipsed an announcement by Finance Minister P. Chidambaram that the government had approved infrastructure projects worth 1.83 trillion rupees ($28.38 billion), a step aimed at reviving economic growth and shoring up investor confidence. Instead, the rupee plumbed new depths after Chidambaram spoke and his promise that the government will meet its fiscal deficit target also failed to turn sentiment. "I have already said that 4.8 percent of GDP and the absolute number that was indicated in the budget is a red line. The red line will not be breached," Chidambaram told a news conference. "I think we'll simply have to be patient, be firm, do whatever is required to be done, and the rupee will find its appropriate level." Traders said the currency market is working in a climate of fear as repeated efforts by authorities to turn the markets around fail to have a holding impact. The rupee has lost more than 16 percent against the dollar so far in 2013 - making it the worst performer by far among Asian emerging market currencies tracked by Reuters - despite frantic attempts by the government and central bank to support it and repeated comments by the finance minister that the rupee is oversold.

Diesel prices may go up by Rs 5-6 per litre: report - Brace for a sharp rise in petrol and diesel prices, as the sharp fall in the value of the rupee against the dollar, and the recent strengthening global oil prices, have shot up India's crude oil import bill. Oil companies have asked the Oil Ministry for a one-time raise of diesel prices by at least Rs.-5-6 per litre, ministry sources told NDTV. The food security programme will also put pressure on the government to bite the bullet on fuel price hike. Any slippage on fiscal deficit targets would not be viewed favourably by the rating agencies. The Lok Sabha on Monday approved a plan worth nearly $20 billion (Rs. 130,000 crore) to provide cheap grain to the poor. On Monday, the rupee a new low of 66.25 against the US dollar, a fall over over 20 per cent since May, sharply increasing the import bill of oil companies. And on top of that global crude prices are nearly at a six-month high on geopolitical concerns. Fuel retailers Indian Oil Corp, Hindustan Petroleum and Bharat Petroleum Corp sell diesel, kerosene and cooking gas at subsidised rates. These oil companies are suffering a loss of Rs. 10.22/litre on diesel, Rs. 33.54/litre on kerosene and Rs. 412 per LPG cylinder. The government had in January allowed oil companies to raise diesel rates by up to 50 paise per month. Any hike beyond 50 paise would have to be cleared by the Cabinet. Rating agency Moody's has recently warned that the falling rupee would inflate the fuel subsidy bill, and put pressure on the fiscal deficit.

Capital Flight Drains Reserves as Rupee, Rupiah Fall: Currencies - Asian nations are depleting foreign reserves as they seek to bolster their currencies while investors pull billions of dollars from the region. Of the 10 Asian central banks with the largest reserves, six have cut their holdings this year, led by a record 18 percent reduction by Indonesia, data compiled by Bloomberg show. Their reserves are rising at the slowest pace in data going back to 2000. Holdings in Asia probably contracted once price moves are taken into account, Citigroup Inc. estimates.Asian nations are getting hit particularly hard from the rout in emerging markets, with the Bloomberg-JPMorgan Asia Dollar Index poised for the biggest annual drop since 2008. Standard & Poor’s warned last week that the flight of capital from Asia may trigger higher financing costs, especially for those nations with large deficits in their current accounts.

Latest on India: rupee in free fall, stagflation setting in, risks of sovereign downgrade and investor panic rising - This is beginning to sound like a broken record, but India's currency has come under severe pressure - again. India's central bank, the RBI, seems to have completely lost control over the rupee. The currency broke through 67 to the dollar this morning - a level that was difficult to fathom just a few months ago.This is hitting the domestic economy hard. Just when the Indian consumer spending has slowed, prices are about to rise - potentially rapidly. Here is an example. The Economic Times: - Indian companies such as Whirlpool of India Ltd say they can't plan more than a couple of months out as a fast-falling rupee currency drives up the cost of imports, forcing them to raise prices even as consumer spending crumbles. The timing is particularly tough for consumer companies that were counting on India's September-to-December holiday season to spur sales. India's consumers, whose spending helped see the country through the global financial crisis in 2008, are closing their wallets, squeezing companies from carmakers to shampoo sellers. Companies that import finished goods or raw materials are the worst hit as they scramble to hold onto margins while balancing the need to raise prices without deterring buyers. . One would think that with this type of currency depreciation, India's exports should help with economic growth. Not quite. BW: -Consumers worldwide shouldn’t expect to see a surge in Made-in-India products in the coming months, however. The July increase comes after a period of weakness: India’s exports dropped 1.8 percent in the 2012-13 fiscal year. And while the currency has been steadily weakening for two years, the decline of the rupee hasn’t helped narrow India’s current-account deficit. Instead, the trade gap has just gotten bigger, hitting 9 percent of gross domestic product in the first quarter.

India rupee closes in on 69 per dollar in biggest day fall for 18 years (Reuters) - India's central bank will provide dollars directly to state oil companies in its latest attempt to shore up a currency that has slumped to a record low, reflecting the stiff economic challenges facing the country in an uncertain global environment. The Reserve Bank of India announced late on Wednesday a special window "with immediate effect" to sell dollars through a designated bank to Indian Oil Corp Ltd (IOC.NS), Hindustan Petroleum Corp (HPCL.NS), and Bharat Petroleum Corp "until further notice". The RBI last opened such a window during the 2008 global financial crisis, although it had been widely expected to re-implement the measures after last month telling oil companies to buy dollars from a single bank. The steps are the latest in a series of extraordinary measures undertaken by the RBI to combat a currency fall of more than 20 percent this year, by far the biggest decline among the Asian currencies tracked by Reuters. State-run companies are the biggest source of dollar demand in markets - worth $400 million to $500 million daily - and directing them to a special window is meant to reduce pressure on the rupee, which fell as much as 3.7 percent to an all-time low of 68.85 on Wednesday, recording its biggest one-day fall in 18 years.

Indian Food Inflation Is Getting Out Of Control: Vegetable prices in India spiked 46.59% in July year over year, another ugly bullet point in the country's persistent struggle with massive food inflation. In particular, the onion — a staple vegetable whose rising prices have dogged ruling parties in the past — saw a particularly dramatic jump. From Mint: Across cities, onion prices are hovering at anywhere between Rs.50 and Rs.80 a kilo, nearly double last month’s levels. The latest wholesale price index (WPI) numbers released on Wednesday show that onion prices rose 144% in July over the year-ago period, after a similar increase in the previous month. Since January, onion price levels have been nearly double what they were a year ago. July's heavy rains damaged vegetable crops in areas of the country and contributed to the price hike, according to the Wall Street Journal. And India has already lost hundreds of billions of dollars due to inflation in the past few years. Of course, the country's poor population, which spends the lion's share of income on food, has been hit hardest. India's central bank has cut interest rates three times this year, but lowering it further could further crush the rupee and drive inflation higher, the Journal reported. 

Rupee freefall: Cars, consumer durables to cost more - As the rupee continues its freefall against the dollar, cars, TVs, washing machines and other home appliances are set to cost more with companies set to hike prices to offset impact on their margins. While General Motors India has announced that it will hike the price of three of its models by up to Rs 10,000 from September first week, Godrej Appliances and Haier also said they would increase prices of their products by up seven per cent from next month.  "The sharp rupee depreciation combined with heavy discounting due to competitive pressure has adversely impacted margins. So, we have decided to raise prices in the range of Rs 2,000-10,000 from September first week," General Motors India Vice-President P Balendran told.

Reflections on Peak Oil, India, Asia, and Global Growth; What's the Mathematical Outcome? - In response to Currency Lessons: Think a Sinking Currency is Always Good For Manufacturers? my friend "BC" pinged me with a few comments.

  1. India has a trade deficit of 10% of GDP.
  2. 70% of India electricity generation is from fossil fuels.
  3. 100% of India oil consumption is imported.
  4. 20% of India natural gas consumption is imported.
  5. India's Domestic crude oil and natural gas proven reserves are equivalent to 4-5 and 11-12 years of consumption at the 10-yr. trend rate.
  6. India is a disaster of national and regional instability in the making and not far behind Turkey and MENA [Middle East and North Africa].
  7. The ongoing economic decline or collapse and social disintegration in MENA, Turkey, Pakistan, Indonesia, India, and parts of China, will make the economic, social, and political landscape increasingly difficult, if not impossible, for most of us.
India wants to maintain 6% growth. China wants to maintain 7.5% growth. The US wants to maintain growth. Europe desperately wants to resume growth. Every country on the planet wants to increase exports relative to inports. Ignoring Turkey, Indonesia, Pakistan, Africa, and the Mideast, the wants and needs of India, China, Europe and the US are mathematically impossible. That every country on the planet wants to increase exports relative to imports is mathematically impossible in and of itself.

India to sell dollars to oil companies to shore up rupee - India's central bank will provide dollars directly to state oil companies in its latest attempt to shore up a currency that has slumped to a record low, reflecting the stiff economic challenges facing the country in an uncertain global environment. The Reserve Bank of India (RBI) announced late yesterday a special window "with immediate effect" to sell dollars through a designated bank to Indian Oil Corp Ltd, Hindustan Petroleum Corp, and Bharat Petroleum Corp "until further notice". The RBI last opened such a window during the 2008 global financial crisis, although it had been widely expected to re-implement the measures after last month telling oil companies to buy dollars from a single bank. The steps are the latest in a series of extraordinary measures undertaken by the RBI to combat a currency fall of more than 20 percent this year, by far the biggest decline among the Asian currencies. State-run companies are the biggest source of dollar demand in markets – worth $400 million to $500 million daily – and directing them to a special window is meant to reduce pressure on the rupee, which fell as much as 3.7 percent to an all-time low of 68.85 yesterday, recording its biggest one-day fall in 18 years. Rupees traded in markets outside of India recovered after the measures, with one-month forward contracts dealt at 68.30 from levels of around 70 rupees before the announcement.

RBI sells dollars directly to oil importers; kicks the can down the road - India's central bank, the RBI, is trying new measures to stabilize the rupee. One of the key sources of pressure on the currency is the nation's need to import fuel. Oil companies have to buy dollars (sell rupees) in order to purchase crude oil in the international markets (including from Iran) to meet the nation's massive energy needs. Rather than having these oil firms go into the foreign exchange markets to buy dollars (which have become more expensive by the day) the RBI wants to sell them dollars directly. The goal is to keep these large importers from flooding the market with rupees. Reuters: - The Reserve Bank of India will provide dollars directly to state oil companies in its latest attempt to shore up a currency that has slumped to a record low, reflecting the stiff economic challenges facing the country in an uncertain global environment. The Reserve Bank of India announced late on Wednesday a special window "with immediate effect" to sell dollars through a designated bank to Indian Oil Corp Ltd, Hindustan Petroleum Corp, and Bharat Petroleum Corp "until further notice". The steps are the latest in a series of extraordinary measures undertaken by the RBI to combat a currency fall of more than 20 percent this year, by far the biggest decline among the Asian currencies tracked by Reuters. The announcement of this decision stabilized the rupee - for now.According to Reuters, the RBI will "sterilize" the dollars it provides to India's large energy firms. As it sells dollars to the oil companies, it will simultaneously buy dollars in the forward market to replenish its foreign reserves in the future. The central bank is doing what it can to avoid a repeat of 1991, when foreign reserves dwindled - forcing India to seek help from the IMF (see post).Reuters: - Officials familiar with RBI thinking told Reuters the dollar sales for state-run oil companies would be offset by positions in forward markets.

India’s Economic Crisis - Simon Johnson - We are now partway through a full cycle of crises, beginning with the United States (from 2007) and Europe (from 2008 in earnest). It is now the turn of emerging markets to face real problems, including India, a country that experienced great and long overdue success for 20 years. There are several types of emerging market crisis. One of the more common varieties starts in the following manner. There is a boom, based on natural resources or finding new niches for manufacturing exports or even implementing sensible liberalization measures. The private sector expands and more prominent companies find it increasingly easy to borrow overseas. Dollar (or other foreign currency-denominated) loans become attractive because they carry a lower interest rate than does borrowing in domestic currency. International investment banks beguile the local elite – the economic and political people who make policy decisions – with stories of how their country and the world has changed, so it makes sense to borrow more. This is not a hard sell. Policy makers want to believe they have found the special elixir of economic growth and, in recent years, to believe they have “decoupled” from the prolonged recessions and slow growth in the United States and Western Europe.And issuing debt – “increasing leverage,” in the jargon – feels like alchemy during good times. If you put less money down to buy an asset (i.e., less equity and more debt in your purchase) and the asset appreciates in value – then you have a made a great return on your equity. But you are almost certainly not thinking about risk-adjusted returns, i.e., what happens when asset prices fall. Less equity means the value of your debt will exceed the value of your asset that much sooner. Put all this together, and you have a classic recipe for vulnerability. Capital inflows (borrowing overseas plus foreigners coming into the local stock market) tend to keep the exchange rate more appreciated than it would be otherwise. This encourages imports and discourages exports, so it is easy to develop a current account deficit (meaning that the country buys more goods and services from the rest of the world than it sells).

None of the Experts Saw India’s Debt Bubble Coming. Sound Familiar? - So now India is the latest casualty among emerging economies. Over the past 10 days, the rupee has slid to its lowest-ever rate, and the Indian economy may well be on the verge of a full-blown currency crisis. In this febrile situation, it is open season for rumours and pessimistic predictions, which then become self-fulfilling. Each hurriedly announced policy measure (raising duties on gold imports, some controls on capital outflows, liberalising rules for capital inflows and so on) has had the opposite of the desired effect. Everything the government does seems to be too little, too late – or even counterproductive. These are all classic features of the panic phase of a financial market cycle. The real surprise in all this is that investors and Indian policymakers are surprised. The Indian economy has been in trouble for quite a while already, and only willful blindness could have led to ignorance on this. Output growth has been decelerating for several years, and private investment has fallen for 10 consecutive quarters. Industrial production has declined over the past year. But consumer price inflation is still in double digits, providing all the essential elements of stagflation (rising prices with slowing income growth). At the moment the external sector is the weakest link. Exports are limping along but imports have ballooned (including all kinds of non-essential imports like gold), so both trade and current account deficits are at historically high levels. They are largely financed by volatile short-term capital. This has already started leaving the country: since June more than $12bn has been withdrawn by portfolio investors alone.This situation is the result of internal and external imbalances that have been building up for years. The Indian economic boom was based on a debt-driven consumption and investment spree that mainly relied on short-term capital inflows. This generated asset booms in areas such as construction and real estate, rather than in traded goods. And it created a sense of financial euphoria that led to massive over-extension of credit to both companies and households, to compound the problem.

Monkeying With The Rupee - There's a story --- here's one of several YouTube videos on this delightful subject --- about how to catch a monkey. You use a jar or an empty coconut shell and fill it with peanuts. Monkey approaches, reaches into jar and clenches its greedy little paw around the peanuts. But it can't pull its full hand out, and what's more, it won't let the peanuts go. End of monkey.  How governments in developing countries have wished for similar success when it comes to foreign investment! How India, or Indonesia, or Brazil, or the many countries before them, have hoped that the hard currency could come monkeying in, and then stay, forever enraptured by the goodies that emerging markets have to offer! Alas, it's never worked that way --- or perhaps it temporarily has with foreign direct investment --- but certainly never with foreign portfolio investment. What flows in can flow out, and with high probability it will. You can, of course, impede its flow by imposing exit controls but the reputational loss will set you back a generation or more. Foreign capital flow is a two-edged sword, and as India is currently discovering, both edges are very sharp indeed.

Why India’s Economy Is Stumbling - FOR the past three decades, the Indian economy has grown impressively, at an average annual rate of 6.4 percent. From 2002 to 2011, when the average rate was 7.7 percent, India seemed to be closing in on China — unstoppable, and engaged in a second “tryst with destiny,” to borrow Jawaharlal Nehru’s phrase. The economic potential of its vast population, expected to be the world’s largest by the middle of the next decade, appeared to be unleashed as India jettisoned the stifling central planning and economic controls bequeathed it by Mr. Nehru and the nation’s other socialist founders. But India’s self-confidence has been shaken. Growth has slowed to 4.4 percent a year; the rupee is in free fall, resulting in higher prices for imported goods; and the specter of a potential crisis, brought on by rising inflation and crippling budget deficits, looms.  To some extent, India has been just another victim of the ebb and flow of global finance, which it embraced too enthusiastically. But India’s problems have deep and stubborn origins of the country’s own making. The current government, which took office in 2004, has made two fundamental errors. First, it assumed that growth was on autopilot and failed to address serious structural problems. Second, flush with revenues, it began major redistribution programs, neglecting their consequences: higher fiscal and trade deficits.  Structural problems were inherent in India’s unusual model of economic development, which relied on a limited pool of skilled labor rather than an abundant supply of cheap, unskilled, semiliterate labor. This meant that India specialized in call centers, writing software for European companies and providing back-office services for American health insurers and law firms and the like, rather than in a manufacturing model. Other economies that have developed successfully — Taiwan, Singapore, South Korea and China — relied in their early years on manufacturing, which provided more jobs for the poor.

India’s Central Bank Governor Concedes to Missteps - It is rare for officials to admit that their policies have been less than perfect, but India’s central bank governor Duvvuri Subbarao did just that late Thursday, in his last public speech as head of the Reserve Bank of India. Mr. Subbarao, whose five-year term as RBI governor ends Sept. 4, said the bank could have done a better job of explaining the intentions behind the various steps it has taken in the last three months to support India’s declining currency. “There has been criticism that the Reserve Bank’s policy measures have been confusing and betray a lack of resolve to curb exchange-rate volatility,” Mr. Subbarao said at a lecture in Mumbai. He said that the RBI is unequivocally committed to curbing volatility in the rupee. “I admit that we could have communicated the rationale of our measures more effectively,” he added. The Indian rupee has fallen nearly 20% against the U.S. dollar since May on fears that the U.S. central bank would soon withdraw its easy-money policies, and concerns about India’s wide current-account deficit.

RBI Powerless on Rates as Swaps Show Deeper Crunch: India Credit - India’s incoming central bank Governor Raghuram Rajan has little room to use borrowing costs to spur Asia’s third-largest economy as the rupee plummets, interest-rate swaps show. The cost to lock in rates for a year using the contracts surged 267 basis points this quarter to 10.16 percent yesterday as investors bet the Reserve Bank of India will prolong a cash crunch it created to shore up the currency. A similar rate in China was at 4.09 percent. The RBI said it will sell dollars to the nation’s biggest oil importers through a swap facility to stem the slide in the rupee, which plunged 3.9 percent yesterday to a record low of 68.8450 per dollar.Rajan, who takes office on Sept. 5, will inherit an economy with a record current-account deficit, the highest inflation rate among the largest developing nations and company bond yields above 10 percent. Gross domestic product probably grew 4.6 percent last quarter from a year earlier, the least in four years, a Bloomberg survey showed before data due tomorrow. “The liquidity steps taken by the RBI have led to a gut-wrenching credit squeeze, going in the direction of worsening growth,”

India GDP growth slows more than expected— India on Friday posted the third straight quarter of sub-5% growth, increasing worries for authorities who are already struggling to stabilize a crashing currency and restore investor confidence in the South Asian economy. Data released by the statistics ministry show gross domestic product increased 4.4% from a year earlier in the in April-June quarter, slower than the 4.8% expansion in the previous quarter. The pace was the weakest since the first quarter of 2009 when the economy was reeling due to the effects of the global financial crisis. The expansion also fell short of market expectations for a 4.6% increase, the median estimate in a Wall Street Journal poll of 18 economists. India’s annual growth rate fell to a decade-low of 5.0% in the last fiscal year ended March 31 as sustained inflation, swelling fiscal and current-account deficits, tight credit availability and a slow policy response to address these problems hurt business confidence and choked investments.

India's forex reserves got poorer by another $1 billion - With rupee hitting successive lows, India's forex reserves shrunk over $1 billion in the week to August 23 as Reserve Bank of India sold dollars in a lame effort to hold back the falling currency. The forex reserves fell to $277.722 billion, which prime minister Manmohan Singh said is enough for seven months of imports. In rupee terms, reserve rose Rs 670 billion to Rs 17,891 billion Since April this year, India's reserves got poorer by a whopping $14.324 billion as foreign investors recalled their investments from the local markets in search of a better return in the US where bond yield has risen following withdrawal of quantitative easing. "Our forex reserves stand at $278 billion and are more than sufficient to meet India's external financing requirements," Singh said in the Parliament Friday. He said India's external debt is only 21.2% of GDP and while short-term debt has risen, it stands at 5.2% of GDP. During 1991 crisis, India had forex reserves for just about 15 days of imports. The rupee closed Friday at 66.38 a dollar, after hitting a new closing low 68.83 on August 28.

India’s Rupee Has Worst Month Since 1992 on Slowdown Concern - India’s rupee completed its biggest monthly loss since 1992, the world’s worst currency performance, on concern a deepening economic slowdown will deter investors as the U.S. prepares to pare stimulus. The currency slumped to a record this week as a surge in oil prices amid political tension over Syria threatened to widen the current-account deficit and push Asia’s No. 3 economy toward its biggest crisis in more than two decades. Global funds increased sales of local assets this week as UBS AG, BNP Paribas SA and Standard Chartered Plc cut growth forecasts for India. The rupee pared losses after the central bank said on Aug. 28 it will supply dollars directly to local oil importers.

India's rupee crisis crimps middle class lifestyles - With the currency hovering at record lows of nearly 69 rupees to the dollar and seen heading south, the estimated 300-million-strong middle-class are being forced to rethink many of their plans. Holidays abroad are being jettisoned as India grapples with its “new normal” — a weak currency, growth at a decade-low of five per cent, stubbornly high consumer price inflation and elevated interest rates that are stifling investment. “Dollar on an escalator, rupee on a ventilator, nation in the ICU,” reads one Twitter joke that went viral in India, lamenting the nation’s economic trials. Subhash Goyal, head of the Indian Association of Tour Operators, forecasts up to a 20 per cent drop in Indian tourists going abroad this year and calls the situation “grim”. “It’s the middle class which is worst impacted [by the rupee’s drop],” Goyal said, adding: “People are already postponing plans.” Sales of cars have also gone into reverse as Indians steer clear of showrooms due to high financing and fuel costs and the economic slowdown. India’s car sales slid by over seven per cent in July, marking a record ninth straight month of decline.

Philippine, Indian Data Highlight Pressures on Emerging Asia - National output data for the Philippines on Thursday and India on Friday should highlight how Asia’s economies are feeling the pinch from recent market volatility and still-soft global activity. The Philippines to some extent has been shielded from the selloff in emerging market assets that followed indications from the U.S. Federal Reserve that it will start winding down its stimulus. Since the start of this year, Fitch Ratings and Standard & Poor’s have promoted the Philippines to investment grade, citing factors including the government’s declining reliance on foreign currency debt and moderating inflation. The third major ratings agency, Moody’s, has its Philippine rating on review for upgrade. Economists expect Thursday’s data to show slowing but still robust activity in the country. Moody’s Analytics expects Philippine gross domestic product grew 7.2% on-year in the second quarter — supported by healthy domestic demand –following 7.8% growth in the January-March period. “We expect full-year GDP growth to be around 6.5% in 2013 and 2014, making the Philippines one of the world’s fastest-growing economies,” said Katrina Ell, associate economist at Moody’s Analytics. The rupee slid Wednesday to its second-straight record low, having dropped more than 20% against the US dollar since the start of May. The Philippine peso, by contrast, has fallen a more modest 7.6% during that time.

Central banks told to cooperate on managing global liquidity (Reuters) - Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday. Opening the second day of an annual monetary symposium in Jackson Hole, Wyoming, after a week in which several top emerging markets suffered steep losses, a former Bank of France deputy governor painted a grave picture of the problem. "The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements," Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies. "Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and cooperation between central banks," said Landau, now a professor at Princeton. But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the "fragmentation" of global capital markets.

Bankers Brace for Fed Bond-Buying Wind-Down - WSJ.com: Central bankers around the world are bracing themselves for more financial turbulence as the Federal Reserve prepares to wind down its easy-money policies. Global markets have reeled since May, when the Fed began signaling it could soon start scaling back its $85 billion-per-month bond-buying program. U.S. mortgage rates have been rising, and currencies and stocks in many developing economies have been falling. This volatility is "a salient reminder" that the effects of the Fed's pullback "may not be smooth," Charles Bean, deputy governor for monetary policy at the U.K. central bank, said in a speech here this weekend at the Kansas City Fed's research conference.

Central Bankers Say Emerging Economies Will Be Ready for Fed Exit - The stimulus campaigns of the Federal Reserve and the central banks of Europe and Japan, by depressing domestic interest rates, have helped to push trillions of dollars into developing markets in recent years. Now that the Fed has declared its intent to start easing up on the accelerator by the end of the year, some of that money is starting to slosh back to the United States. Outflows from emerging markets have exceeded inflows since the Fed’s June announcement; Bloomberg calculates that emerging-market stocks have lost more than $1 trillion in value; emerging-market currencies are depreciating rapidly. The question of what central banks are supposed to do about it dominated the formal agenda here at the Kansas City Fed’s annual monetary policy conference. The answers were surprisingly mellow. The rest of the world would like the Fed to explain its plans clearly, and then to travel slowly. Bankers from developing nations said they might need to impose some restrictions on the outflow of capital, but expressed little concern over the potential for serious economic disruptions. The Fed’s exit “is a net positive for emerging markets,” said Luiz Awazu Pereira da Silva, the Central Bank of Brazil’s deputy governor. “We prepared ourselves in Brazil. And I think we are now sort of capable of mitigating the risks for the unwinding of these measures.”

On The Global QE Exit Crisis - The global economy could be in the early stages of another crisis. Once again, the US Federal Reserve is in the eye of the storm. As the Fed attempts to exit from so-called quantitative easing (QE) – its unprecedented policy of massive purchases of long-term assets – many high-flying emerging economies suddenly find themselves in a vise. Currency and stock markets in India and Indonesia are plunging, with collateral damage evident in Brazil, South Africa, and Turkey. The Fed insists that it is blameless – the same absurd position that it took in the aftermath of the Great Crisis of 2008-2009, when it maintained that its excessive monetary accommodation had nothing to do with the property and credit bubbles that nearly pushed the world into the abyss. It remains steeped in denial: Were it not for the interest-rate suppression that QE has imposed on developed countries since 2009, the search for yield would not have flooded emerging economies with short-term “hot” money. As in the mid-2000’s, there is plenty of blame to go around this time as well. The Fed is hardly alone in embracing unconventional monetary easing. Moreover, the aforementioned developing economies all have one thing in common: large current-account deficits.According to the International Monetary Fund, India’s external deficit, for example, is likely to average 5% of GDP in 2012-2013, compared to 2.8% in 2008-2011. Similarly, Indonesia’s current-account deficit, at 3% of GDP in 2012-2013, represents an even sharper deterioration from surpluses that averaged 0.7% of GDP in 2008-2011. Comparable patterns are evident in Brazil, South Africa, and Turkey.

Ahead of G20, China urges caution in Fed policy tapering - The U.S. Federal Reserve must consider when and how fast it unwinds its economic stimulus to avoid harming emerging market economies, senior Chinese officials said on Tuesday. The warning by China's Vice Finance Minister Zhu Guangyao and central bank Vice Governor Yi Gang came as economies from Brazil to Indonesia struggle to cope with capital flight as U.S. interest rates rise ahead of an expected tapering off in the Federal Reserve's bond buying program that unleashed liquidity across the world. The United States - the main currency issuing country - must consider the spill-over effect of its monetary policy, especially the opportunity and rhythm of its exit from the ultra-loose monetary policy," Zhu said. China will refrain from providing stimulus to the world's second-largest economy, which he said was on track to grow around 7.5 percent this year - in line with the government's target. "On monetary policy, the focal point (of G20) will be on how to minimize the external impact when major developed countries exit or gradually exit quantitative easing, especially causing volatile capital flows in emerging markets and putting pressures on emerging-market currencies," Yi said. Yi said a $100 billion foreign-currency fund being discussed by countries that make up the BRICS grouping of Brazil, Russia, India, China and South Africa will be set up in the foreseeable future. He said China would provide "a big share" of the funds but he did not give details.

In 2 Charts, Here’s How Emerging Market Funds Are Hemorrhaging Cash Unlike Anything Seen In Years - The really big story in global markets is the whoosh of cash away from the emerging world. For a long time, emerging markets seemingly could do no wrong. They were on a natural, upward growth glide. Their central bankers weren't "debasing" their currencies. They had commodities, and exports, and positive demographics, and all that. But the tides are turning. The developed world is easing less than it used to be. The commodity cycle seems to have peaked. And people are waking up to all kinds of structural problems that persist in these economies. So the cash is leaving these economies, and one place you can see it most plainly is in the funds (equity and fixed income) that are dedicated to emerging markets. Via SocGen, check out the "hemorrhaging" of these funds.

Will Emerging Market's Sliding Currency Become an International Crisis? - Over the last few months, India's problems have come home to roost.  Their growth has dropped as the result of a bloated domestic government and rather draconian foreign investment rules.  Their current account relative to GDP is large with little sign of getting smaller and inflation is still at uncomfortable levels, thereby boxing in the central bank.  For more information, see here and here. And the currency continues to slide: India’s battered rupee was on track for its worst one-day fall in more than two decades on Wednesday, plunging 3.4 per cent in morning trading to breach Rs68 to the US dollar for the first time in a downbeat reaction to a government plan to rescue the floundering economy.  Palaniappan Chidambaram, finance minister, on Tuesday outlined a 10-point scheme to reduce the nation’s current account deficit and restore economic growth, responding to another day of sharp stock market losses and currency decline.  Here's a chart of the rupee ETF that shows two recent breaks of support (see the blue arrow):And India is not alone in it's problems.  The latest news out of Brazil is not encouraging. First, we see the manufacturing sector's reading fell below 50, indicating a contraction: Brazilian manufacturers reduced their output in July. Subsequently, the PMI fell to a 13-month low, and indicated that the country’s manufacturing economy
deteriorated for the first time since September 2012. 
Here's a chart of the data:

The Asian Crisis Versus The Euro Crisis - Krugman - I was one of those economists for whom the Asian crisis of 1997-1998 came as a disturbing revelation, a demonstration that events all too reminiscent of the Great Depression could still happen in the modern world. Between the acute crises in Southeast Asia and the long stagnation in Japan, it was — or so I thought — all too clear that we did not, in fact, have this thing under control. Unfortunately, not enough people grasped that lesson, and a decade later we had a global crisis that made the Asian crisis look trivial by comparison. The first thing you want to say is that all the crisis economies — even Indonesia, which had by far the worst time in the beginning — eventually bounced back strongly:  This is in stark contrast to the experience of the countries that seem like the closest parallel to SE Asia this time around, the troubled euro area debtors. Here’s a comparison of Indonesia after 1997 and Greece after 2007, with the later years for Greece being the current IMF projections; the number of years after the pre-crisis peak is on the horizontal axis:

Emerging economies sought semi-hot money through currency manipulation - As we look across major emerging economies, even some of the strongest have not been spared. Consider Turkey for example. The lira is now toying with the 2-to-the-dollar level - even after the central bank has taken a number of steps to stabilize the currency.Hurriyet Daily News: - The Turkish central bank said it would apply more monetary tightening by not holding one-week repo auctions, halting funding from its policy rate and opening forex-selling auctions of at least $350 million. At this point the central bank is desperate, adjusting its policy each week or even more than once a week. It is however having little success, as the currency slides, ...How did we get here? How is it that the Fed's actions, which had to take place sooner or later, precipitated a severe market squeeze on one of the strongest emerging economies - among others? An interesting answer came from Donald Kohn, the former Fed vice-chair, who presented at Jackson Hole.FT: - With cheap capital flowing in, some emerging markets failed to run a disciplined economic policy, or carry out reforms to boost future growth. Those are the economies that now face the greatest difficulties. One argument at Jackson Hole, although expressed with much diplomacy and politesse, was whether those imbalances in emerging markets are an inevitable result of easy monetary policy in the US and elsewhere, or the fault of developing country policy makers.“The recipient countries have considerable control over how this works out and what stability conditions are inside their own countries,” said Donald Kohn, the former Fed vice-chair, now at the Brookings Institution. One of the ways that monetary policy from the United States was transmitted to the rest of the world was by resistance to exchange rate appreciation in many other countries.”

Singapore and southeast Asia and tapering - This is from a comment by mbka at Scott Sumner’s blog, I had exactly the same impression: …here in Singapore, the consensus of semi official and private chatter on investment matters, newspaper analysis etc., has long been that QE has fuelled Singapore’s real estate boom through unnatural capital influxes and that it caused all sorts of bubbles elsewhere in the region too. Further, consensus is that all this is going to come down now that QE is about to end. All this is practically presented as fact. (Counter-measures are being taken as well, for instance Singapore just introduced much tighter credit checks to limit the escalating debt service ratios of families to a maximum of 60% of income. That is because everyone expects interest rates to rise globally.)Come to think of it, this means that bankers and officials in the region have an Austrian model of the world (printing hot money in the US leads to bubbles elsewhere). Scott’s post is interesting too, as it represents his attempt to come to terms with the apparent bubble collapse from the unwinding of QE.

Baht Falls Toward Three-Year Low on Growth Concern; Bonds Drop - Thailand’s baht fell toward a three-year low and government bonds declined after a surprise drop in exports added to concern Southeast Asia’s second-largest economy will struggle to emerge from a recession this quarter. Overseas sales decreased 1.5 percent in July, the third decline in a row and less than the 0.8 percent gain forecast by economists surveyed by Bloomberg, a report showed yesterday. The country will post a current-account deficit of $550 million in July, according to another Bloomberg survey before data due Aug. 30, while figures released last week showed the nation entered a recession for the first time since 2009. “The trade data boosted concern about the possibility of economic recovery in the third quarter,” “In addition, the nation has been seeing a deficit in the current-account balance, putting downward pressure on the baht for a while.”

Fall in Thai Exports Hides Good News for Southeast Asia - A fall in exports would hardly seem reason for Thailand to celebrate, but there are signs that the slump in demand from its key trade partners is easing, a picture reflected across Southeast Asia. Thailand’s exports slipped 1.5% on-year in July and rose only 0.6% in the January-July period. But that was better than declines of 5.3% in May and 3.4% in June, reflecting the fact that demand from China, Japan, the U.S. and E.U. – Thailand’s four largest export partners – is improving. The story of choppy but gradually improving exports has been echoed around Southeast Asia. Vietnam on Monday reported a robust 11.6% on-year rise in August exports, slightly softer than July’s 13.7% gain but still strong. In Singapore, non-oil domestic exports improved to a 0.7% on-year fall in July, after June’s 8.9% drop. Indonesia’s exports fell 4.5% in June from a year earlier after dropping 8.6% in May, while Philippine exports rose 4.1% in June following a 0.8% fall in May. In Malaysia, June exports contracted 6.9% compared with May’s 5.8% fall, but that was better than economists’ expectations for 7.5% contraction.

The end of cheap US cash claims another victim: Indonesia - In a fashion similar to what became known as the "Asian Contagion" in the late 90s, the current stress in emerging economies has been spreading. One of the nations to experience financial stress recently has been Indonesia, Southeast Asia’s largest economy. The impact of capital outflows from emerging economies on Indonesia's financial markets has been swift and severe. Here are the key financial indicators:

  • 1. Indonesia's equity markets are down 17% in the past 3 months (note that the market peaked in late May, corresponding to this event)-
  • 2. The government bond market (sell-off also started around the same time) -
  • 3. Currency (the exchange rate went vertical last week) -
  • 4. Sovereign CDS isn't very liquid but is still showing signs of financial stress.
The question some are asking is whether this is just a contagion-driven panic or are there fundamental flaws in the economy? Just as the case with India (see post), trade imbalance in Indonesia is behind some of this adjustment. In the past, foreign investment covered up the problem, but the party is now over. Investors - not surprisingly - have become uneasy with the chart below: A massive structural problem like this is an invitation for a punishment from the markets. Indonesia (just as Brazil and others) is trying to plug the trade gap hole. NYTimes: - Indonesia announced a package of policy measures on Friday to reduce imports and bolster investment in labor-intensive industries as it struggles to revive confidence and consumer spending in its economy, Southeast Asia’s largest. The intervention comes after a punishing week for emerging markets, with currencies from Brazil to India hit hard by fears of higher global borrowing costs and a reduction in cheap cash from the United States. Indonesia has faced sell-offs in the rupiah, stocks and bonds after an unexpectedly large second-quarter deficit in its current account — a measure of foreign trade and investment — prompted fears that the weak global economy would only further erode exports at a time when a surge in inflation is crimping domestic demand.

    The U.S. Strike on Emerging Markets - WSJ.com: A looming war in the Middle East, the lingering legacy of a recent U.S. recession, and very low interest rates suggesting the next move must be upward. Summer 2013, yes, but also summer 2002. For emerging markets, the outlook is darker this time. Enlarge Image CloseEmerging markets have been melting in the summer heat. This week, with the Indian rupee and Turkish lira hitting record lows against the U.S. dollar, the focal point is expected U.S. military action in Syria. By injecting fear into oil markets, Syria does exacerbate a problem facing several emerging markets: energy costs. Priced in dollars, Brent crude is still 22% below its 2008 peak. But in rupees, for example, it is around 25% above the 2008 high point. Higher energy import bills widen current-account deficits menacing several emerging markets. Meanwhile, the threat of war encourages foreign investors to withdraw to safe harbors, draining away the portfolio flows required to plug the gap. The real threats to emerging markets, though, lie not in Damascus but in Washington and at home. Foreign capital that helped plug current-account deficits in several emerging markets is being called home by the prospect of higher rates. Some $23 billion has flowed out of emerging-markets bonds since May 22, not too far short of the $30 billion that had flowed in since mid-2012, according to Barclays. This, in turn, raises local funding costs and stokes inflation via falling exchange rates.

    Brazil, Indonesia launch measures to shore up their currencies - Brazil and Indonesia have moved to stem the declines in their currencies and shore up confidence at the end of a torrid week for emerging markets where local borrowing costs hit a two-year high. The central bank of Latin America’s largest economy said late on Thursday that it would launch a currency intervention programme worth about $60bn to ensure liquidity and reduce volatility in the nation’s foreign exchange market. On Friday, Indonesia’s chief economic minister Hatta Rajasa told reporters that the government would increase import taxes on luxury cars, introduce tax incentives for companies investing in agriculture and metals industries and aim to reduce oil imports.  Brazil’s huge programme, which will be conducted through currency swap and repurchase agreements, follows a more than 15 per cent depreciation in the real against the dollar this year to its weakest levels in more than four years. Brazil’s central bank said in its statement that it would on Monday to Thursday offer $500m a day in currency swaps to support the real, while on Fridays it would sell $1bn on the spot market through repurchase agreements.

    Stage is Set for Bank Indonesia to Raise Rates - Indonesia’s central bank is facing a tricky situation: The rupiah currency is getting pummeled by an exodus from emerging markets and investor fears over the nation’s large trade deficit and government debt. That means Bank Indonesia may have no choice but to raise interest rates at the extra policy board meeting it called for Thursday — even though growth is slowing rapidly as China, Indonesia’s largest trading partner, cools. Concerned about growth, Bank Indonesia has tried to put off another rate hike after raising rates 0.75 percentage point since June. Annual economic growth slowed in the second quarter to 5.8% from 6.0% in the first quarter, and the government now says it will be tough to hit its full-year target of 6.3%. Two weeks ago, despite the sliding currency, the central bank stood pat to avoid harming growth further. On Friday the government and central bank announced a raft of policy measures targeting the country’s current-account deficit. But the decision to call an extraordinary meeting this week shows the central bank is feeling pressure to support its currency above all else. The rupiah has fallen nearly 12% so far this year, one of the worst records among emerging markets, as investors shy away from Indonesia’s current account deficit. The currency was relatively stable Wednesday, trading around 10,900 to the dollar, as the central bank was suspected of intervening in the market. Other countries in Asia are in a similar dilemma. India recently pushed up borrowing costs seeking to drain excess liquidity from the system, then quickly reversed course amid fear that the move would hurt companies. But many observers say countries with large trade deficits like India and Indonesia must defend their currencies above all else.

    Indonesia’s Rupiah Completes Worst Month Since 2008 on Outflows - Indonesia’s rupiah completed its worst month since the global financial crisis of 2008 on concern the U.S. will start cutting stimulus that has buoyed emerging-market assets as early as September. The currency pared its losses after Bank Indonesia raised its benchmark interest rate yesterday to a four-year high in an unscheduled move to stem exchange-rate weakness. The reference rate was boosted by 50 basis points to 7 percent, before a Sept. 2 report that economists predict will show faster inflation. Global funds pulled 1.02 trillion rupiah ($91 million) from local sovereign debt this month through Aug. 28 and a net $577 million from stocks through yesterday, official data show. The rupiah slumped 5.9 percent in August, the biggest drop since November 2008, to 10,920 per dollar as of 4:15 p.m. in Jakarta, prices from local banks show. It advanced 0.1 percent today following the interest-rate increase and traded at a 3.9 percent premium to the one-month non-deliverable forwards, which fell 8.1 percent in August and gained 1 percent today to 11,363, data compiled by Bloomberg show.

    The Unsaved World, by Paul Krugman - The rupiah is falling! Head for the hills! On second thought, keep calm and carry on.  The thing is, the last big rupiah plunge was in 1997-98, when Indonesia was the epicenter of an Asian financial crisis. In retrospect, that crisis was a sort of dress rehearsal for the much bigger crisis that engulfed the advanced world a decade later. So should we be terrified about Asia all over again?  I don’t think so... Consider, for example, the worst-case nation during each crisis: Indonesia then, Greece now. Indonesia’s slump, which saw the economy contract 13 percent in 1998, was a terrible thing. But a solid recovery was under way by 2000. By 2003, Indonesia’s economy had passed its precrisis peak; as of last year, it was 72 percent larger than it was in 1997. Now compare this with Greece, where output is down more than 20 percent since 2007 and is still falling fast. Nobody knows when recovery will begin, and my guess is that few observers expect to see the Greek economy recover to precrisis levels this decade. Why are things so much worse this time? One answer is that Indonesia had its own currency, and the slide in the rupiah was, eventually, a very good thing. Meanwhile, Greece is trapped in the euro. In addition, however, policy makers were more flexible in the ’90s than they are today. The International Monetary Fund initially demanded tough austerity policies in Asia, but it soon reversed course. This time, the demands placed on Greece and other debtors have been relentlessly harsh, and the more austerity fails, the more bloodletting is demanded.

    Asian Vulnerability, Then and Now - Paul Krugman  -- Still working on the crisis du jour, the markets’ sudden turn against emerging economies. The big question here is how serious this really is — is it the kind of thing that costs a few finance ministers their jobs and maybe causes mild recessions when central banks hike rates, or is it a potential economic catastrophe? It’s important to understand that this is not at all the same question as asking whether the economies in question have deep structural flaws, lousy infrastructure, inferior politicians etc.. You can have all that and still skirt serious recession; you can also have a wonderfully innovative and efficient economy and suffer business cycle disaster (see America, 1929). My take is still that the risks of real disaster are low. Here’s why. This site conveniently has a chart showing Indonesia’s external debt as a share of gross national income (not exactly the same as GDP, but close enough): You see fairly elevated levels in the mid-1990s, then the ratio soars in the crisis. That’s the infamous devaluation/balance sheet effect: Indonesia’s private sector had lots of debt in dollars, so when the markets turned and the rupiah plunged, that debt ballooned relative to income and assets, causing a severe real-side crisis. But as you can also see, Indonesia has a much lower debt ratio now — about half what it was in the mid-90s. What about India? I’ve already noted that its external debt level is relatively low — lower than Indonesia now, let alone Indonesia in the 90s:

    Is the emerging market growth story over? - Thailand has fallen back into recession, Mexico's economy is shrinking again, Russia is growing at just 1.2% - the pace of the slowly recovering West. Brazil's growth was less than 1% last year, while the country that many have their eyes on is India, which is struggling with a pace of growth that is more reminiscent of the pre-1980s era than the rapid expansion of the past decade. Of course not all emerging economies are in the same boat. For instance, the Philippines has grown faster than expected in the second quarter, by 7.5% from a year earlier. But, there are a number, especially the large emerging economies, which are slowing. And that raises the question as to whether the emerging market growth story is over, with investors pulling at least some of their money out from these countries.Economic growth in the past decade was supported by a commodity boom and a lot of US consumption that turned out to be based on cheap but ultimately unsustainable debt. As the so-called commodity super-cycle moderates and the US consumer buys at a more moderate level, growth will slow around the world.  And, put into perspective, emerging economies are still forecast to grow by 5% or more by the International Monetary Fund in the next couple of years, barring a crisis. Growth may have slowed from the heady days of 7%-plus growth, which was more than double America's in the late 1990s and 2000s, but it's still a decent clip.

    Three Years After Warning Of "Currency War", Brazil Goes All In - In September 2010, Guido Mantega coined the phrase "currency war" as he proclaimed the world's central bank's FX interventions were dangerous for citizens' purchasing power and would lead to a vicious circle of competitive devaluations. In March, Mantega unleashed a mini-war by taxing foreign borrowings and threatening capital controls. But this week, after the BRL devalued over 26% since March as Fed Taper talk and EM capital flight takes hold around the world, Brazil has waded into the world's currency war with the largest currency intervention the nation has ever planned. Following a dismal current account deficit print, as The FT reports, "Brazil will launch a currency intervention program worth about $60bn to ensure liquidity and reduce volatility in the nation’s foreign exchange market" - offering USD500 million per day in currency swaps to support the Real. But, as Citi warns, it does not fix any of Brzail's problems.

    Brazil struggles as its currency goes soft - Two short years ago, Brazil had a terrible problem with its currency – it was far too strong. Local factories, unable to compete with Chinese imports made cheaper by the real’s appreciation, were closing their doors. Fernando Pimentel, the trade minister and a close adviser to President Dilma Rousseff, declared that “Brazil has joined the team of countries with strong currencies” and urged industries to adapt to the new reality.Now, as global investors shed assets in emerging markets worldwide, Brazil’s problem has abruptly turned upside-down. The real, along with India’s rupee, has weakened more than any other major currency since May. Its tumble of 16 per cent is forcing businesses, policymakers and consumers to prepare for consequences including inflation and costlier foreign financing. The decline has become another symbol of Brazil’s fall from grace among investors and produced a severe case of whiplash among producers who complain that the basic pillars of Latin America’s largest economy have constantly shifted under Rousseff’s left-leaning government. Consequences will be felt everywhere from fuel pumps in Sao Paulo to retail outlets in Miami and New York City, where Brazilians were such prolific shoppers during the strong-currency years that the U.S. Travel Association referred to them as “walking stimulus packages” in 2012.

    Brazil Real Weakens Amid Concern Intervention Won’t Stem Decline - Brazil’s real extended the biggest three-month drop among major currencies on speculation a $60 billion intervention program isn’t enough to stem the slide. The real fell 1.3 percent to 2.3799 per dollar in Sao Paulo. It jumped the most in almost two years Aug. 23, the day after the central bank said it will auction $1 billion of loans every Friday and offer $500 million worth of foreign-exchange swaps four times a week for the rest of 2013. Policy makers are stepping up efforts to support the real after it declined 14 percent over the past three months, raising concern that its tumble will fuel inflation already running near the top end of the government’s target. As part of the intervention program, the central bank sold all 10,000 currency swaps offered in an auction today.

    Brazil Raises Rates 50 Basis Points - From Bloomberg: Brazil’s central bank raised the key rate by half a percentage point for a third straight meeting, as a plunge in the currency undermines efforts to slow inflation in the world’s second-largest emerging market. The bank’s board, led by President Alexandre Tombini, today unanimously voted to raise the benchmark Selic rate to 9 percent from 8.5 percent, as forecast by 50 of 52 economists surveyed by Bloomberg. One economist expected a 75 basis-point increase, while one forecast a 25 basis-point boost.   “The committee considers that this decision will contribute to put inflation on a decline and assure that this trend will persist next year,” The central bank is in a very unenviable spot: growth is slowing but inflation is still at uncomfortable levels.  This indicates that the real's drop and the accompanying rise in inflation is seen as the larger threat to the economy.For more on Brazil, see links here, here and here.

    Brazil Raises Rate to 9% as Real Undercuts Inflation Fight -Brazil’s central bank raised the key rate by half a percentage point for a third straight meeting, as a plunge in the currency undermines efforts to slow inflation in the world’s second-largest emerging market. The bank’s board, led by President Alexandre Tombini, today unanimously voted to raise the benchmark Selic rate to 9 percent from 8.5 percent, as forecast by 50 of 52 economists surveyed by Bloomberg. One economist expected a 75 basis-point increase, while one forecast a 25 basis-point boost. “The committee considers that this decision will contribute to put inflation on a decline and assure that this trend will persist next year,” policy makers said, according to their statement posted on the central bank’s website. The statement was virtually identical to their July 10 communique. Brazil’s central bank has stepped up efforts to prevent a declining real from undercutting the largest rate increase among the world’s major central banks by pushing inflation above its target range. While last week’s announcement of a $60 billion intervention plan has helped to buoy the currency, policy makers have maintained the pace of rate increases to fight pass-through to consumer prices

    Mexican Economy Slowing - From Bloomberg:  Mexico’s economy grew less than forecast by any of the analysts surveyed by Bloomberg in the second quarter as industrial production declined on a sluggish U.S. recovery.  Gross domestic product expanded 1.5 percent from the year earlier, rebounding from a revised 0.6 percent growth rate in the previous three months, the National Statistics Institute said on its website today. The median estimate of 17 economists surveyed by Bloomberg was for growth of 2.3 percent. The economy contracted 0.7 percent from the previous quarter.  The central bank cut its growth forecast for this year to between 2 percent and 3 percent this month from 3 percent to 4 percent on stagnant exports to the U.S. and muted public spending. Growth will accelerate in both the third and fourth quarters, rising to 4 percent next year as the U.S. recovery strengthens and the government passes key economic reforms, according to the median estimate in a Bloomberg survey.  Industrial production fell 0.6 percent in the second quarter from the year earlier, the statistics agency also said today. The construction sector contracted 4 percent over the same period amid a drop in government spending. Here's a chart of the data:

    Puerto Rico Debt Poised for Worst Year Since 2000 - Municipal debt from Puerto Rico is poised for its worst year since at least 2000 as the U.S. commonwealth prepares to sell its first general-obligation bonds in 18 months. Securities from the island have lost 16.3 percent this year, more than three times the decline of the $3.7 trillion municipal market, Standard & Poor’s data show. Borrowings of the territory and its local agencies haven’t had an annual drop that steep since at least 2000. Puerto Rico is on the brink of speculative grade amid recurring budget deficits and a pension system that has a lower funding level than any U.S. state. The $600 million general-obligation refinancing sale planned for September will repay loans used to balance the budget for the fiscal year that ended June 30, Jose Pagan, interim president of the Government Development Bank for Puerto Rico, said last month. Investors demanded 2.76 percentage points of extra yield as of Aug. 28 to buy 30-year commonwealth general obligations rather than top-rated munis, the most since January, data compiled by Bloomberg show.

    All 25,000 candidates fail Liberian university entrance exam -- The University of Liberia. Number of applicants this year: nearly 25,000. Number gaining admission: zero. The "epic fail" of every single candidate in the admission exam provoked bafflement, consternation and heated debate on Tuesday, with some convinced that flaws in Liberia's education system had been brutally exposed. A government minister likened it to "mass murder". At first it appeared there would no freshers at west Africa's oldest degree-granting institution when the new academic year gets under way next month. But then an intervention by president Ellen Johnson Sirleaf forced the university to back down and give places to a lucky 1,800. According to university officials, the applicants lacked enthusiasm and did not have a basic grasp of English. Spokesman Momodu Getaweh told the BBC's Focus on Africa programme that the university stood by its decision and would not be swayed by emotion. "In English, the mechanics of the language, they didn't know anything about it. So the government has to do something."

    Is it nuts to give money to the poor?: ...Cash transfers have been my day job for quite some days now. If you’ve been following this blog, you might have seen me describe my study of a wildly successful government program in Uganda, one that sent $8000 to groups of 20 young people to help them start skilled trades. Or an even more successful charitable program in Uganda that gave some of the poorest women on the planet cash to become traders. “Dear governments,” I wrote, “Want to help the poor and transform your economy? Give people cash.” What’s interesting is that journalists keep turning to me to rain on my own parade. That’s fair, because that’s one of the things I do best. A few days after my plea to governments, I wrote another post, “Why cash transfers are not the next big thing.”Perhaps that’s why I appear in Goldstein’s article as the skeptical academic. GiveDirectly is very optimistic about giving $1000 to poor people in Kenya. So am I, I say, but the research doesn’t really support it. Yet. ... Actually, there are couple of good reasons I’m well placed to be the skeptic.One is that the wildly successful projects I studied gave other stuff, such as training or conditions or social pressure to invest. That probably mattered a lot, and we simply don’t know if pure cash will work as well. That brings me to the second reason: I have two other projects in the field right now that give plain cash, and the signs are not so good. ... The early signs on cash transfers are not promising, but again, less than half the data are in. So maybe I, and GiveDirectly, will prove ourselves wrong.

    Denmark Predicts Bigger Deficit as Economic Outlook Is Cut -- Denmark said its budget deficit will widen as the government of Scandinavia’s weakest economy cut its growth forecast for this year. Gross domestic product will grow 0.2 percent in 2013, less than the 0.5 percent forecast in May, the finance ministry said today. Weaker growth and increased spending will drive up the government’s budget deficit to 2 percent of GDP next year from 1.7 percent in 2013, it said. Denmark’s $355 billion economy stagnated in the first quarter after shrinking 0.5 percent in 2012. The economy is struggling to emerge from a burst property bubble, which triggered a banking crisis and wiped out more than a dozen lenders since 2008. That’s undermined confidence and hurt consumer spending, which makes up half Denmark’s economy.

    Portugal’s public debt rises to 131.4 pct of Gross Domestic Product -- Portugal’s public debt totalled 214.57 billion euros at the end of the first half of the year, which accounted for 131.4 percent of the country’s Gross Domestic Product (GDP), according to figures published Thursday in Lisbon by the Bank of Portugal. According to the central bank, public debt rose by 1.43 percent against the first quarter of the year, when it totalled 211.5 billion euros. The latest evaluation from the three-way commission – European Commission, European Central Bank and the International Monetary Fund – showed that at the end of 2013 the debt totalled 122.9 percent of GDP, or 202.1 billion euros. The figures showed that the country’s public debt continues to rise, from 123.8 percent of GDP in December 2012 to 127.1 percent in March and 131.4 percent in June, with the Bank of Portugal noting that the rising trend had occurred in all the sectors that were accounted.

    Record number awaiting surgery in Spain -- The number of Spaniards waiting to undergo surgery has hit a historic high, amid massive budget cuts and layoffs imposed by the conservative government of Prime Minister Mariano Rajoy. A report, published by the Spanish newspaper El Pais on Monday citing official figures from the Health Ministry, showed that the number of patients waiting for an operation nationwide rose from 395,000 to 571,000 between June to December 2012. "Without medical professionals, and without means, the health system cannot keep up," In addition, the waiting period for these patients has also gone up from 76 to 100 days, making it the largest increase since the Health Ministry began keeping statistics in 2004. Moreover, the report showed that the patients who have been waiting more than six months for an operation rose by seven percent, despite being the legal maximum waiting period for some diseases.

    More pain in Spain but signs of recovery - The latest government figures show that in June Spain's exports surged 10.5pc from a year earlier, a boom that nearly wiped out the nation's trade deficit. Spain's trade deficit was €106m in June, a steep drop from the €2.7bn deficit registered a year earlier and a figure heralded by the conservative government of Mariano Rajoy as a long period of recession was finally coming to a close.  Last month Spain's national statistics agency reported that GDP had decreased by only 0.1pc in the second quarter of 2013 compared to the first, which saw a bigger decline of 0.5pc. That and a drop in unemployment figures, largely considered to be a result of seasonal hiring in the tourism industry, are the first signs of the "light at the end of the tunnel" that the government has been promising since initiating a series of deeply unpopular austerity measures.  Ministers and officials have been keen to hammer home the message that the worst of the crisis has passed. "Our economy has turned the corner and we are at the start of a change in trends which will allow us, with effort, to create jobs again. The foundations have been laid," Rajoy said at an event in July, shortly before leaving Madrid for his summer holidays. Luis de Guindos, Spain's Economic Minister meanwhile was quick to point out that "the recession has come to an end".

    Mortgages Plunge 42% from Year Ago in Spain, 38th Consecutive Drop; Signs of Recovery? Spain Need Another Bailout? - Prime Minister Mariano Rajoy wants you to believe the Spanish economy is improving. One look at housing suggests any improvement is an illusion. Here are some highlights from a translation of the La Vanguardia article Mortgages plummet 42.2% in June

    1. The number of mortgages for home purchase in June fell 42.2% compared to June of 2012
    2. Mortgages declined every month for 38 months. June signed just 14,053 home mortgages, the lowest monthly figure of the last ten years.
    3. The six-month total from January to June 2013 was 115,895 signed mortgages. That is less than the one-month total for May of 2007 which had 118,669 signed mortgages.
    4. The average value of mortgages dropped, down 9% from a year ago to 97,495 euros.
    5. This was the worst half-year since the data series for this indicator began, in 2003.

    Credit growth remains the weakest link in Eurozone's recovery - In spite of some positive economic signals out of the Eurozone (see Twitter chart), the area continues to struggle with credit growth. The latest loan growth measures still look quite bleak. We may however be seeing the first signs of the bottoming out of consumer credit, although the "improvements" are by no means compelling. This slight increase in consumer credit (above) is mostly due to lower declines in credit card and auto debt, as the euro area consumer is still deleveraging but at a slower rate. Growth in the Eurozone mortgage loans however continues to weaken. Not surprisingly a great deal of this weakness in mortgages is generated by Spain (chart below) and Italy to some extent. The collapse in mortgage growth from the peak of 27% per year during the pre-financial crisis years demonstrates the massive housing bubble that Spain is still unwinding. In contrast to household credit, which may have on aggregate bottomed out in June, corporate loan declines in the Eurozone have actually accelerated, generating a 1.4% total credit contraction in the area. The explanation for this trend is quite clear:   Reuters: -  Adjusted for sales and securitization, the drop in loans to the private sector was 1.4 percent on an annual basis, the biggest on the record.

    French jobless figures hit new high in July - The number of jobseekers in mainland France breached a new record in July, rising by 6,300 to 3,285,7000, the Labour Ministry said Tuesday. The government described the figure, which represented an increase of 0.2 per cent on June, as "moderate." Unemployment in Europe‘s second-biggest economy has been growing for 27 months. President Francois Hollande has vowed to halt the trend by the end of the year.

    The Gloire To Come - Paul Krugman - A very belated reaction to Steven Erlanger’s piece on French decline, on fears that the proud nation is slipping into second-tier status. One point one should always note here is Roger Cohen’s: the French have been morose for decades now, yet the country remains a pretty good place to live. Maybe some discounting is called for?But there’s another point I almost never see mentioned: there’s one thing the French are still managing to do that other rich European nations, Germany in particular, aren’t as good at — namely, having children. Here are the Eurostat population projections out to 2060: If we assume that major European nations will have similar levels of GDP per capita, which seems reasonable, then by mid-century France, not Germany, will be the biggest European economy, through sheer force of numbers. If the EU is still holding together, this could mean that France is in turn the leader of one of the world’s great economic powers. Welcome to the new French empire!

    European Unemployment Remains At All Time High: Ranges From 4.8% To 27.6% - Europe may be a union, but when it comes to the distribution of unemployment rates across its 27 member nations (and as of July 1 with the addition of Croatia, 28), it is anything but. As the latest chart from Eurostat shows summarizing the just released July data, it is confusing if one should be more stunned by the continuing record unemployment in the Euroarea, which at 12.1% was once again an all time high (in line with expectations), or the gaping distribution of slack and lack of labor opportunities in the "Union", which ranges from 4.8% for Austria on the low end, and hits a gargantuan 27.6% for Greece on the high side (although with Spain at 26.3% it is rapidly approaching and threatening to overtake).  More details from Eurostat: Among the Member States, the lowest unemployment rates were recorded in Austria (4.8%), Germany (5.3%) and Luxembourg (5.7%), and the highest in Greece (27.6% in May 2013) and Spain (26.3%). Compared with a year ago, the unemployment rate increased in seventeen Member States and fell in eleven. The highest increases were registered in Cyprus (12.2% to 17.3%), Greece (23.8% to 27.6% between May 2012 and May 2013), Slovenia (9.3% to 11.2%) and the Netherlands (5.3% to 7.0%). The largest decreases were observed in Latvia (15.7% to 11.5% between the second quarters of 2012 and 2013) and Estonia (10.1% to 7.9% between June 2012 and June 2013).

    A European Recovery? Not Exactly! (15 graphs) There has been much celebration in the media of the fact that several European economies showed positive growth in the Second Quarter of 2013 based on the most recently released data from Eurostat. If this upward trend was widespread and robust this would indeed be encouraging news because virtually all of Europe has been suffering from a double-dip recession (Germany, UK, and France being moot) following the financial crisis of 2007-2009. The latest data from Eurostat shows Real GDP increasing for the biggest economies – Germany, France, and the U.K.  The flash estimates of quarter-to-quarter growth rates also suggest an up-turn in Portugal. But Spain Italy and The Netherlands are still declining, suggesting that the optimism should be seriously moderated. In this post we also show the path of the percentages changes in Real GDP for the so-called PIIGS or GIPSIs. The picture for these economies is decidedly more bleak.  Only Iceland is showing signs of recovery while the others continue to contract with little sign of moderation. Also worth noting is the scale of the graph for the smaller economies which underscores how much deeper the contraction in these economies was.Looking at all of these economies together it would take a colossal leap of the imagination to see this as a picture of recovery, as was widely reported last week.The pattern of consumption in the major European Economies pretty much mirrors the pattern of GDP. One exception is France, where consumption fell very little during the recession and has since recovered. The decline in consumption in the GIPSIs has been deep, reflecting the tremendous toll of the continuing fiscal crisis. Perhaps more alarming is the continued double-dip decline in capital formation in all of the European economies. This hardly seem like a signal of impending recovery.

    Greece joining euro was a mistake: Merkel - Greece should never have been allowed to join the euro, German Chancellor Angela Merkel said, as she tries to lay the blame for the eurozone's debt crisis at the door of her political opponents. Campaigning for re-election next month, Germany's center-right leader said her Social Democrat predecessor, Gerhard Schroeder, had been wrong to support Greece's membership and agree to relax strict budget rules designed to underpin the currency. "This crisis has been formed over many years through mistakes that were made when the euro was created," she said at a campaign rally Tuesday. "For example, one should not have accepted Greece into the eurozone ... Chancellor Schroeder accepted Greece and weakened the stability pact," said Merkel. "Both were fundamentally wrong and are the reasons for our problems today."

    Britain to be roped into EU rescue aid for Greece - The European Commission is planning use of EU budget funds for the next rescue of Greece, roping Britain into future responsibility for shoring up the eurozone currency structure. G√ľnther Oettinger, Germany's EU commissioner, said on Sunday that a third package worth over €10bn will be needed in 2014 and will partly come in the form of direct help rather than a debt haircut for existing creditors. The Greek daily Kathimerini said Athens and Brussels are negotiating the use of EU structural funds that draw on the collective EU budget, co-funded by the British taxpayer and other non-euro states. Most of the rescue aid so far for Greece, Portugal, Cyprus, and Spain's banking system has come from the eurozone's rescue machinery, outside the EU treaty structure. Britain has provided bilateral aid to Ireland, and is involved in EMU debt rescue policies through the International Monetary Fund, but has otherwise stood aloof. Use of EU budget funds appears not to be targeted against the British government but would have the effect of drawing Britain into the morass, compelled to spend scarce resources perpetuating an EMU policy that many view as deeply misguided. It would also set a precedent that may be extended to Portugal if it need fresh help, and possibly larger countries if Europe's recovery falters.

    Child poverty in Britain is causing ‘social apartheid’ - Britain risks "sleepwalking into a world where inequality becomes so entrenched that our children grow up in a state of social apartheid", according to a leading charity. In a damning report to be published next week, the National Children's Bureau finds that, in many respects, child poverty is now a bigger problem than during the 1960s, when it carried out a seminal study, Born to Fail?.The report compares aspects of children's lives today to data from the Born to Fail? cohort study of 11-year-olds, carried out in 1969. It finds that significantly more children are growing up in relative poverty today – 3.6 million compared with 2 million – and claims that these children suffer "devastating consequences throughout their lives".The report finds that:

    • ■ A child from a disadvantaged background is still far less likely to achieve a good level of development at four than a child from a more privileged home.
    • ■ Children living in deprived areas are much more likely to be the victim of an unintentional injury or accident in the home.
    • ■ Children from the poorest areas are nine times less likely than those living in affluent areas to have access to green space, places to play and to live in environments with better air quality.
    • ■ Boys living in deprived areas are three times more likely to be obese than boys growing up in affluent areas, and girls are twice as likely.

    Labour's cost of living problem - First,let's be clear way real wages have fallen. Duncan's right to say that inflation is not to blame, simply because we've seen many periods of inflation around current levels without falling real wages. Blaming inflation for falling real wages is like blaming plane crashes upon gravity.  Nor is it because workers' incomes are being squeezed by more powerful capitalists. In recent years, the share of wages has been more or less flat; this week's figures show that the wage share of GDP is actually slightly higher than it was before the recession. Instead, real wages have fallen simply because there's a massive excess supply of labour. If we add part-timers who'd like a full-time job and the inactive who'd like to work to the measured unemployed, there are 6.2 million waiting to work more - equivalent to 15.4% of the working age population. And there's an unknown number who are under-employed on the job.  Policies to increase real wages must, therefore, include measures to reduce this excess supply. And herein Labour faces two constraints. One is its commitment to some form of fiscal restraint. The other is that it faces demands (sadly from working class voters too) for "welfare reform", the effect of which would be to strengthen people's incentives to look for work, thus raising the labour supply

    Bank of England Ready to Inject More Stimulus — Carney - Bank of England Gov. Mark Carney, in his debut speech on Wednesday, announced new measures to boost lending in the U.K. and said the central bank is ready to step in with fresh stimulus if the country's economic recovery falters. Once again, however, his message seems to have fallen on deaf ears: U.K. government bonds fell and traders stuck to bets that the Bank of England won't be able to keep its pledge to hold interest rates at a historic low until 2016. Mr. Carney, who arrived at the BOE from Canada on July 1, has had little success so far in guiding markets. In a break with tradition, the BOE pledged Aug. 7 to keep its benchmark interest rate at a record low of 0.5% until unemployment in the U.K. falls to 7%—a threshold officials don't think will be met until 2016. But markets are still betting rates will rise in 2015, as the economy picks up steam. Central bank officials worry that those expectations may ripple through into higher loan rates for households and businesses, potentially choking off the nascent recovery. Mr. Carney signaled that the BOE's Monetary Policy Committee stands ready to bear down on those market rates if they start to damage financial conditions in the economy. "The MPC will be watching those conditions closely," he said in a speech at the chamber of commerce in Nottingham, a former industrial city in England's East Midlands. "If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further," Mr. Carney said.