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

Saturday, February 1, 2014

week ending Feb 1

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 30, 2014: Federal Reserve Statistical Release: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Q&A: A Voice for an Activist Fed - The Federal Reserve is often described as if it were a person – just one person – but it actually makes decisions by committee, and that committee is in flux. Only six of the 12 officials who voted on policy last January will still be voting when the Federal Open Market Committee holds its first meeting of 2014 this week. Two new voters are likely to define the extremes of the debate as the committee charts the Fed’s continuing effort to revive the economy. One is Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, perhaps the last official who wants the Fed to expand its efforts to reduce unemployment. Meanwhile, Richard Fisher, president of the Federal Reserve Bank of Dallas, is pressing for a faster retreat.  Mr. Kocherlakota and Mr. Fisher sat for separate interviews with The New York Times to talk about monetary policy and the economy this month before the media blackout that precedes each Fed meeting. A transcript of Mr. Kocherlakota’s comments, edited for clarity, follows. Mr. Fisher’s interview is in a separate post.

Q&A: An Advocate for a Quicker Taper - As the voting membership of the Federal Reserve’s policy-making committee, the Federal Open Market Committee, turns over at a meeting this week, one of the new votes will be cast by Richard W. Fisher, president of the Federal Reserve Bank of Dallas. In pressing for a faster retreat from the Fed’s bond-buying effort to stimulate the economy, he represents one extreme in a debate that will test the ability of the incoming chief, Janet L. Yellen, to unite the committee after she succeeds the current chairman, Ben S. Bernanke. Mr. Fisher sat for an interview this month to discuss monetary policy and the economy before the media blackout that precedes each Fed meeting — as did another new voter, Narayana Kocherlakota of the Minneapolis Fed, who backs continued stimulus. A transcript of the interview with Mr. Fisher, edited for clarity, follows.

Federal Reserve and Ben Bernanke Cut Quantitative Easing Stimulus - The Federal Reserve’s Federal Open Market Committee announced Wednesday that it would continue its “taper” of it’s bond-buying stimulus program, reducing monthly purchases of U.S. government debt and mortgage bonds from $75 billion per month to $65 billion per month. The decision came despite a surprisingly weak jobs report released earlier this month, which estimated that the U.S. economy added just 74,000 jobs in December, and speculation of late that a pull back in Fed stimulus was helping to foment volatility in emerging markets like Argentina and Turkey. “Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters,” the FOMC said in a statement. “Labor market indicators were mixed but on balance showed further improvement.”

FOMC Statement: More Taper  - FOMC Statement: Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. [...]Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Fed Statement Following January Meeting -- The following is the full text of the Fed statement following the January meeting:

Parsing the Fed: How the Statement Changed - The Federal Reserve releases a statement at the conclusion of each of its policy-setting meetings, outlining the central bank’s economic outlook and the actions it plans to take. Much of the statement remains the same from meeting to meeting. Fed watchers closely parse changes between statements to see how the Fed’s views are evolving. The following tool compares the latest statement with its immediate predecessor and highlights where policy makers have updated their language. This is the January statement compared with December.

Fed Watch: And The Taper Continues - The FOMC meeting came and went with the expected result - the tapering process continued on schedule, undeterred by the current emerging market turmoil. Of course, the Fed doesn't want to be seen as reacting to every gyration financial markets. But even more importantly, the Fed wants out of the asset purchase business on the belief that a.) tapering is not tightening and b.) even if it was tightening, they could compensate via forward guidance. The global stumble, however, is challenging that thinking. The statement acknowledged the better tone of the data:Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters.while at the same time giving a nod to weak job growth in December: Labor market indicators were mixed but on balance showed further improvement.Inflation is low, but that is offset by stable expectations: Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. Upside and downside risks are equally weighted: The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced.Low inflation is an issue they are assessing, but it is not sufficiently worrisome to alter the pace of the taper:Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.At these rates, inflation is only a deterrent against higher interest rates, not tapering.Despite the plunge in the unemployment rate, the combination of the Evans rule and enhanced forward guidance remains unchanged: The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal.

The Fed’s converging misses on inflation and unemployment  -The final FOMC statement of the Bernanke era included nothing unexpected, which didn’t stop markets from expressing disappointment.  But looking ahead, there are at least two reasons why the Yellen Fed might soon consider, or at least should consider, downplaying the unemployment rate threshold in its forward guidance in favour of a greater emphasis on inflation. The first, and more widely discussed, is that there remains uncertainty about what is causing the demographic-adjusted decline in the labour force participation rate, and therefore it’s also uncertain how reliably the unemployment rate is reflecting labour market health. ... The second reason is partly a matter of simple mathematics. The unemployment rate, now at 6.7 per cent, has been falling quickly towards the Fed’s central tendency forecast of 5.2-5.8 per cent for the long-term rate, while the latest year-on-year readings for both core and headline inflation (1.1 and 0.9 per cent respectively) have remained well below the Fed’s explicit 2 per cent target — as they have for nearly two years.

Fed Extends, Increases Reverse Repo Test Program -- The Federal Reserve has extended and increased the size of an experimental lending facility it hopes may eventually replace the federal funds rate as the primary benchmark for U.S. borrowing costs. The central bank emphasized that the tests didn’t represent a change in the stance of monetary policy but were rather a part of “prudent advance planning” for an eventual tightening of interest rate policy. The daily allotment for the so-called reverse repurchase agreements was increased to $5 billion from $3 billion. “It is expected that, over the coming months, the maximum allotment cap may be increased further,” the Fed said. The Fed on Wednesday said it would further reduce the pace of its bond buys by $10 billion to $65 billion per month.

Mr. Market is Getting Frazzled Over the Fed’s Neglect of Its Pet Wishes - Yves Smith - A brief surge of optimism, in the form of a short-lived rally in the belegured Turkish Lira and South African rand after their central banks raised interest rates to try to halt the plunge in currency values, has fizzled. And the Fed reducing its dosage of market tonic, in the form of QE, only soured investors’ already bad mood.   The tone of media coverage has been and remains that advanced economies should not be affected much by the emerging markets tsuris. After all, the IMF raised its growth forecast! The US is anticipated to have GDP growth of 2.8%, up 0.2% from earlier forecasts! Consumer confidence is rising and most corporations beat earnings expectations. Never mind that many lowered guidance during 4Q, so beating a phony new goal isn’t exactly a resounding accomplishment. And the central bank also seems remarkably unperturbed about the lousy state of the job market (the FOMC statement called the latest labor market data “mixed” and noted that the housing “recovery” had softened a tad. But hey, Japan’s going to grow 0.4% faster! The reality is the central bank seems belatedly to have come to the recognition that QE was not doing anything for the real economy. In fact, a strong case can be made that is was hurting it, by lowering interest payments on safe assets, which many retirees rely on for spending. But it certainly juiced asset prices. And now that financial regulators think the banks are healthier, the Fed seems to believe they can withstand whatever losses they might take from wrong-footing bond positions.   And as for blowback to emerging markets, the Fed has been consistent in its lack of interest for their welfare. It was unresponsive to BRIC and other central bank complaints about how hot money was distorting their economies when QE was launched. And since, as the San Francisco Fed analysis indicated, the biggest source of funds to emerging economies was international fund managers and not banks, the central bank apparently figures they and their investors can take their lumps.

The emerging markets and Fed tapering -- A frequently asked question, to which we now have much of the answer, is how might the Federal Reserve’s tapering of its bond buying program impact the emerging market economies? A less frequently asked question is how might developments in the emerging markets impact the pace of Fed tapering? This is rather surprising since the emerging market economies now account for around half of global GDP, which means that how they fare has an important bearing on US and global economic growth prospects.  Between May 2013 and September 2013, following Ben Bernanke’s intimation that the Fed might begin tapering its bond purchasing program, capital flows to the emerging markets are estimated by the World Bank to have declined by 30%. This led to substantial exchange rate pressure on a number of large emerging market countries like Brazil, India, Indonesia, South Africa, and Turkey (the so-called Fragile Five). It also led to a significant downgrading of those countries’ economic growth prospects, which prompted the IMF to downgrade its global economic growth forecast by as much as half a percentage point.  In recent weeks, there again appears to have been a substantial reversal in capital flows to the emerging markets in response to the Federal Reserve’s announcement that it will be scaling back its bond purchases from US$85 billion a month to US$75 billion a month. This reversal is manifesting itself again in substantial pressure on the same key emerging market economies’ currencies as it did following Bernanke’s speech last year. One must expect that this pressure will force these countries to tighten their macro-economic policies in an effort to stabilize their currencies, which is bound to cloud their economic growth prospects in 2014.

Former IMF Chief Economist, Now India’s Central Bank Governor Rajan Takes Shot at Bernanke’s Destabilizing Policies --  Yves Smith -- As Bernanke is about to take leave of office, attacks on his policies are becoming louder, thanks to financial markets turmoil resulting from the Bernanke/Geithner approach to the crisis: do whatever it takes to restore as much of status quo ante as possible. The problem, of course, is that status quo ante is what got us in this mess in the first place.   Another element of the resolution of the crisis that is simply not acknowledged in the American or European media all that much is the degree to which emerging economies engaged in stimulus programs which helped keep the global boat afloat, while advanced economies fixated on saving the banks and did far too little in the way of shoring up demand.  India central bank governor Raghuram Rajan took to Bloomberg to criticize the Fed for its failure to coordinate policies with the rest of the world. And Rajan can’t be dismissed as a partisan defending his country’s policies. Rajan is a Serious Economist, former IMF chief economist, and best known in popular circles for presenting a badly-received paper at Greenspan’s last Jackson Hole session that said that financial innovation was making the world riskier and could well cause a full blown financial crisis. And he assumed office only last September,  so he’s also not defending policies he implemented. Rajan is blunt by the standards of official discourse. I suggest you watch the interview starting at 9:10.

Why The Fed Should Not Taper Alone - The Fed’s decision to taper its large-scale asset purchases is causing turmoil in emerging markets. But neither the Fed nor the US Treasury seem remotely concerned. The FOMC’s latest decision to continue the taper at $10bn per month makes no mention of anything other than US domestic conditions. And Jack Lew, the Treasury Secretary, suggests that problems in emerging market are more down to bad policy on their part than anything the Fed is doing. But Raghuram Rajan, the governor of the central bank of India, argues that the Fed should not be acting unilaterally. He calls for co-operation between central banks. And he has a point. After the 2008 financial crisis, there was a brief period of co-operation between monetary authorities in the G20. Emerging market economies agreed to support the extraordinary monetary policy conducted by the Fed. As a result they have experienced inflows of capital that have created inflationary pressures and caused currency appreciation. This has in some cases been aggravated by poor domestic policy – Argentina really is a basket case, and other countries (including India) have operated monetary policy that is arguably too loose. The flows of capital into emerging markets caused by QE are now reversing as the Fed gradually tapers its asset purchases. And if there is one thing we have learned over the last few years, it is that sudden reversal of capital flows are highly destabilizing.

Will China Stop Taper? - So, let’s consider the possible channels of contagion that could see China slow the Fed down. There are four. The first is the trade channel. The US exports roughly US$150 billion of goods to China per annum out of total of approximately $700 billion in merchandise exports. That’s not much in a $16 trillion economy so any slowdown is unlikely to be large enough to slow growth materially. Besides, the Chinese rebalancing should actually increase its imports over time as it boosts consumption. The second channel is more significant. The US imports about $500 billion in Chinese goods per annum. And if they are falling in price because China is slowing and commodity prices are falling then that’s a material disinflationary pulse into the US economy. As I’ve illustrated before, goods are where US inflation is at its most weak: I expect Chinese inflation to remain weak and commodity prices to fall further so this is definitely a potential channel of taper slowing if inflation falls below the Fed’s comfort zone. The third channel is China’s impact on global bond prices. The Chinese rebalancing should lead (over time) to capital account liberalisation and considerably lower current account surpluses. In that event China will by definition be recycling fewer surpluses into foreign market investment including US Treasuries. That will see upwards pressure on yields without the Fed doing anything, though this likely a long term influence more than an immediate issue. The fourth channel of influence is markets themselves. Will Chinese slowing infect forex and credit market stability enough that the Fed might feel contagion risk warranted slowing taper? JPMorgan asks the question: The past two weeks have presented surprises from almost ever corner – undershoots on Chinese activity data; stress in Chinese credit/money markets; idiosyncratic developments in Russia, Turkey and Argentina; data wobbles in the US – but only the China ones meet the criteria for potentially being systemic for FX because the underlying issue is opaque and large-scale. By comparison, it is a stretch to say that the US is slowing meaningful and durably. It would also be difficult for other EMs, somewhat large as they are, to contaminate global currency markets because they lack the trade linkages to other economies.

Fed’s Low Interest Rates Don’t Spur Business Investment - On Wednesday the Federal Reserve’s Federal Open Market Committee issued a release detailing its future course. The release stated that because of slight improvements in economic growth, employment, and spending, the members decided to taper their monthly bond purchases by another $10 billion, echoing December’s reduction. No mention of the turmoil in emerging markets or the declining labor force participation rate. The Federal Reserve will now purchase $30 billion in mortgage-backed securities and $35 billion in long-term Treasury securities each month.  The Fed will continue reinvesting principal payments from its debt and rolling over Treasury securities at auction. According to the release, its “sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery.”  The FOMC believes that if it can keep long-term interest rates low, business investment—which has been sorely lacking in this recovery—will increase and the economy will grow. But two Federal Reserve economists, Steve Sharpe and Gustavo Suarez, find little real-world evidence that low interest rates encourage business investment. Their new paper brings into question a central tenet of macroeconomic monetary policy—that higher interest rates reduce business investment and lower rates spur investment.

Bullard on the 'Death of a Theory' - Following this post, James Bullard (President of the St. Louis Fed, and member of the FOMC - the US equivalent of the Monetary Policy Committee) kindly sent me his article (pdf) entitled ‘Death of a Theory’. As the theory he is referring to is the idea of fiscal stimulus at the Zero Lower Bound (ZLB), the title tells you that the article comes to the opposite conclusion to my post. His article is clearly written, and works with the New Keynesian framework which I also use. So we do not need to worry about those who practice the demand denial that Paul Krugman talks about here. I also think the article reflects the views of many economists. For these reasons, I thought it would be useful to say why I disagree with it. Bullard gives three reasons why “Fiscal policy should return to being set for the medium and longer run.” They are that:

  • (i) actual political systems are ill-suited to implement the advice from the theory
  • (ii) monetary stabilization policy has been quite effective [at the ZLB], making fiscal experiments redundant 
  • (iii) governments pushed distortionary taxes into the future, which in the theory reduces or eliminates the desired effects.

Let me take each in reverse order.

Kocherlakota and the Cultists - Paul Krugman - Narayana Kocherlakota, president of the Minneapolis Fed, is the prodigal son of monetary stimulus. He was the Fed’s leading hawk a few years ago, reflecting in part the ultra-freshwater macro doctrines of the Minnesota econ department and his bank’s closely associated research department. But he did something amazing: he looked at evidence, listened to his critics, and changed his views — becoming the Fed’s leading dove. This is totally praiseworthy, especially because it almost never happens. Binyamin Applebaum’s article on NK also contains dramatic evidence of the intellectual climate from which he had to emancipate himself, in the form of an email from Ed Prescott, founder and relentless promoter of real business cycle theory. Prescott: It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed. In reality, few if any topics in economics have been studied as thoroughly as the real effects of monetary policy. And the overwhelming consensus, from multiple lines of inquiry is that monetary policy has powerful real effects. This consensus could be wrong — such things have happened — and Prescott could make the case that the consensus is wrong. But that’s not what he’s saying. He’s declaring it “an established scientific fact” that what everyone outside his sect believes is totally false.  That’s not science, whatever Prescott may think; it’s being part of an irrational cult. And kudos to Kocherlakota for learning to stop drinking the Kool-Aid

Recent “U-turns” in Forward Guidance Were Avoidable - The Federal Reserve and the Bank of England have each recently backed away from “forward guidance” that they had given earlier in the form of thresholds for the unemployment rate.   As a result of their changes in emphasis, they are both being accused of confusing the financial markets. The Fed at the end of 2012 had said that it planned on keeping monetary policy easy at least until the unemployment rate had fallen below 6 ½ %.     The Bank of England in mid-2013 had made a similar statement, with a threshold figure for UK unemployment of 7%.    But Governor Mark Carney, at Davos a few days ago, signaled that he is now moving away from that guidance. The reason: the British labor market is now “in a different place” from what was expected:   Similarly, the Fed said last month that it now expects to keep interest rates low well past the time that the 6 ½ % mark is reached, using information other than the unemployment rate.   Again, the reason is obvious.  The Fed hadn’t expected to reach the threshold for tightening in 2014 or even 2015.  But unemployment has fallen unexpectedly quickly, reaching 6.7% in December — not because of unexpectedly rapid growth in the economy which might call for  earlier tightening, but, in large part, because discouraged workers have left the labor force altogether.    Both the Fed and the Bank of England are accordingly now subject to much criticism for having delivered forward guidance that they were subsequently unable to stick to.   Are the critics then being entirely unfair?

A new call for rev-repo to become the new policy rate - To those who have been watching the developments in the Fed’s fixed-rate full-allotment repo facility*, it won’t come as a bracing shock that the facility’s interest rate might eventually be synced with the interest rate paid on reserves and supplant the federal funds rate as the Fed’s new policy rate. A short paper by Joseph Gagnon and Brian Sack arguing in favour of such a framework has been eagerly awaited and is now live (hat tip Real Time Economics). Sack’s authorship is especially notable given that he was head of the New York Fed’s markets desk until June 2012, when he was replaced by Simon Potter. From the introduction to the paper: In particular, we believe that the Fed should set the interest rate at which it will off er overnight reverse repurchase agreements as its policy instrument and that it should maintain the interest rate paid on bank reserves at the same level. Under our proposal, all banks and many other financial institutions would have an unlimited ability to invest at the Fed at the specified interest rate. All other interest rates, including the federal funds rate, would be determined in the market, presumably with the risk-free interest rate set by the Fed exerting a powerful influence on them.

Yellen to Confront Danger of Too-Low Inflation While Tapering QE -- One of Janet Yellen’s first challenges as Federal Reserve chairman is generating enough inflation to meet the central bank’s target of 2 percent. Policy makers have failed to attain their goal for almost two years and now are paring the pace of their bond buying. Inflation rose at a 0.9 percent rate for the 12 months ending in November, according to the central bank’s preferred measure. The last time prices were climbing at or above 2 percent was in April 2012. “Every month that passes with inflation stuck below the target, the pressure to come up with a plan to deal with it grows,” “They are slowly acknowledging that this is a serious risk.” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a Jan. 7 speech that too-low inflation can be “a cause for real concern” because it increases the possibility a “negative shock” to the economy may lead to deflation. That could cause households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up. Too-low inflation also means higher inflation-adjusted interest rates, making it harder to achieve a sufficient pace of growth. “Furthermore, persistently low inflation can theoretically undermine the credibility of the central bank,” said Rosengren, who dissented against the December decision to cut monthly bond buying by $10 billion. If the Fed announces a goal “but is unable to achieve that target in a reasonable time frame, some may call into question its ability to do so in the medium- or long-term as well.”

PCE inflation rate lowest since 2009 - holds key to future Fed policy moves - Economic indicators continue to point the Fed staying the course with the policy of "small taper" (see post) - a gradual reduction in securities purchases. Behind all the noisy economic data over the past month, one key measure is telling the central bank to remain cautious. The Fed's preferred inflation measure, the so-called PCE price index has grown less than 1% over the past year (chart below) - the lowest quarterly growth in inflation since 2009. At this rate of price increases, many economists refer to the current situation as "disinflationary". To be sure, there is more to this story than weakness in US inflation. It is important to point out that we are seeing quite a divergence between key components of the PCE index. Growth in the cost of services declined after the financial crisis but stabilized at around 2% per year more recently - which where the Fed wants to see the overall index. On the other hand, prices for durable goods in the US peaked in the mid-90s and have since been undergoing a secular decline (chart below), becoming a major detractor from the overall inflation index growth. Furthermore, price declines on durable goods have accelerated somewhat over the past quarter.  One specific item worth pointing out is the growth in healthcare costs. When people think of rising prices on services, they often point to healthcare. While healthcare costs have historically grown much faster than the overall service sector, that is no longer the case (chart below). Given the massive public (and private) sector future liabilities that are linked to healthcare expenditures (see post), in the long run this trend is absolutely critical for the US.

PCE Price Index Update: Core Inflation Remains Far Below the Fed Target - The January Personal Income and Outlays report for December was published today by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate of 1.07% is a small rise from last month's 0.87%. The Core PCE index of 1.16% is fractionally higher than last month's 1.12%. The general disinflationary trend in core PCE (the blue line in the charts below) must be quite troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator consistently moved in the wrong direction, and since May of last year it has been hovering in a narrow YoY range of 1.12% to 1.20%.  The adjacent thumbnail gives us a close-up of the trend in Core PCE since January 2012. The first chart below 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.  I've calculated the index data to two decimal points to highlight the change more accurately. For a long-term perspective, here are the same two metrics spanning five decades.

Diagrams & Dollars: Modern Money Illustrated - You Tube

Killing the Economy - The economy has been debilitated by the offshoring of middle class jobs for the benefit of corporate profits and by the Federal Reserve’s policy of Quantitative Easing in order to support a few oversized banks that the government protects from market discipline. Not only does QE distort bond and stock markets, it threatens the value of the dollar and has resulted in manipulation of the gold price.  When US corporations send jobs offshore, the GDP, consumer income, tax base, and careers associated with the jobs go abroad with the jobs. Corporations gain the additional profits at large costs to the economy in terms of less employment, less economic growth, reduced state, local and federal tax revenues, wider deficits, and impairments of social services.When policymakers permitted banks to become independent of market discipline, they made the banks an unresolved burden on the economy. Authorities have provided no honest report on the condition of the banks. It remains to be seen if the Federal Reserve can create enough money to monetize enough debt to rescue the banks without collapsing the US dollar. It would have been far cheaper to let the banks fail and be reorganized.  The same policymakers and economists who told us that “markets are self-regulating” and that the financial sector could safely be deregulated also confused jobs offshoring with free trade. Hyped “studies” were put together designed to prove that jobs offshoring was good for the US economy. It is difficult to fathom how such destructive errors could consistently be made by policymakers and economists for more than a decade. Were these mistakes or cover for a narrow and selfish agenda?

GDP By Industry for 2012 - The BEA has released revisions for Gross Domestic Product by Industry for years 1997 all the way to 2012.  Unfortunately but not surprising, manufacturing was revised downward in their real value added to economic growth.  Overall GDP grew 2.8% in 2012 and that year's better news is private goods GDP increased more in growth in comparison to private sector services. The below pie chart shows the percentage of GDP each industrial sector is by real, or adjusted for prices, value of the sector.  This tells us what business sectors and industries really run the economy and it is not Wall Street per say.  We see manufacturing as a whole is 12.5% of overall GDP by value added.  Value added means gross output minus intermediate inputs.  This is sales, receipts, other operating income, commodity taxes, changes in a firm's inventories minus their raw materials, semifinished goods used and services purchased.  Finance, insurance, real estate, rental, and leasing is an astounding 19.5% of GDP which is unchanged from before the recession.  Real estate and rental and leasing by itself actually grew, whereas finance and insurance shrank their percentage of the GDP pie.  Considering this sector was the cause of economic implosion, this is probably not a good thing to have it being almost 20% of the overall economy.  Professional and business services overall is less, 11.5% of overall GDP.  The industry includes managerial positions, research, technical professions, administration and even waste management.  Now take a look at the below 202-2007 average GDP pie chart each industrial sector adds.  Some of the changes in GDP share per industry are structural.  For example, technology was still separate from many people's daily lives in 2007 whereas today, it is interwoven.  It is no surprise that this area shows growth.  Yet,manufacturing was 15.0% of GDP averaged between 2002 and 2007 and now only 12.5%.  This is in spite of manufacturing reaching it's 2007 levels.  What this shows is manufacturing's long decline, starting in earnest about year 2000.  It is clear manufacturing has been offshore outsourced and by doing so is simply hollowing out the U.S. economy.  Manufacturing spawns a host of other industries, including advanced R&D, so all should be very concerned at manufacturing's declining GDP share.  On the other hand, we expected the construction industry to be less of the overall economy, since the earlier decade construction boom was fueled by the housing bubble.

Forecasting GDP: A Look at the WSJ Economists’ Collective Crystal Ball - Tomorrow we get the Advance Estimate for of Q4 GDP -- a rear-view metric, to be sure, and one that will be subject to two subsequent monthly revisions and annual revision in July. Nevertheless, it will be of considerable interest to economy watchers around the world. Meanwhile the latest Wall Street Journal monthly survey of economists offers a range of professional views on how GDP fared. This month's survey was conducted January 10-14. As a reminder, Q3 Real GDP underwent two upward revisions -- from the Advance Estimate of 2.8% to the Second Estimate of 3.6% and the Third Estimate of 4.1%. Q4 was somewhat complicated by the government shutdown. Here's a snapshot of the full array of opinions in the January survey for tomorrow's Q4 GDP. I've highlighted the values for the median, average (mean) and mode (most frequent).

GDP Growth at 3.2% in 4th Quarter Says Commerce Department - The U.S. economy grew at an annualized rate of 3.2 percent in the fourth quarter of last year, the government estimated Thursday.The Department of Commerce estimate was in line with economists’ expectations, and when combined with third-quarter growth of 4.1%, it represents the best six-month stretch of economic growth in two years. Growth for all of 2013, however, was only 1.9%, a decrease from 2012 that was brought down by slow growth during the first half of the year. Nearly all sectors of the economy contributed to the healthy growth, from consumer spending to business investment and state and local government spending. The one big drag on growth was reductions in federal government spending, which decreased by 12.6% in the fourth quarter.

Q4 GDP 3.2%, Weekly Initial Unemployment Claims increase to 348,000 - From the BEA: Gross Domestic Product, 4th quarter and annual 2013 (advance estimate) 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 3.2 percent in the fourth quarter of 2013 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis...The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and state and local government spending that were partly offset by negative contributions from federal government spending and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. The DOL reports: In the week ending January 25, the advance figure for seasonally adjusted initial claims was 348,000, an increase of 19,000 from the previous week's revised figure of 329,000. The 4-week moving average was 333,000, an increase of 750 from the previous week's revised average of 332,250.  The previous week was revised up from 326,000. The following graph shows the 4-week moving average of weekly claims since January 2000.

GDP Q4 Advance Estimate: A Solid 3.2% - The Advance Estimate for Q4 GDP, to one decimal, came in at 3.2 percent. The GDP deflator used to calculate real (inflation-adjusted) GDP fell to 1.3 percent from 2.0 percent in Q3. Both the median and mean forecasts of the Wall Street Journal's latest survey of 49 economists had been for a lower 2.8 percent. correctly forecast 3.2 percent. Although the Q4 GDP of 3.2 percent is a decline from the Q3 4.1 percent, it is approximately at its long-term average of 3.3 percent, despite the economic stresses of the October government shutdown. 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 3.2 percent in the fourth quarter of 2013 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.1 percent.  The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency, The "second" estimate for the fourth quarter, based on more complete data, will be released on February 28, 2014. The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and state and local government spending that were partly offset by negative contributions from federal government spending and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. The deceleration in real GDP in the fourth quarter reflected a deceleration in private inventory investment, a larger decrease in federal government spending, a downturn in residential fixed investment, and decelerations in state and local government spending and in nonresidential fixed investment that were partly offset by accelerations in exports and in PCE and a deceleration in imports.  The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.2 percent in the fourth quarter, compared with an increase of 1.8 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 1.7 percent in the fourth quarter, compared with an increase of 1.5 percent in the third. [Full ReleaseHere is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite.  I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

Q4 GDP: Solid Report, Positives Looking Forward - The advance Q4 GDP report, with 3.2% annualized growth, was slightly above expectations. Personal consumption expenditures (PCE) increased at a 3.3% annualized rate - a solid pace. However the Federal Government subtracted 0.98 percentage points from growth in Q4, and residential investment subtracted 0.32 percentage points.    Imagine no Federal austerity - Q4 GDP would have been above 4%.  Luckily it appears austerity at the Federal level will diminish in 2014, and of course I expect that residential investment will make a solid contribution this year. Change in private inventories made another positive contributions in Q4 (added 0.42 percentage points).  I expect inventories will probably be a drag in 2014. On a Q4-over-Q4 basis, real GDP increased 2.7% (above the Fed's December projections of 2.2% to 2.3%).  On an annual basis, real GDP increased 1.9%. Note: See GDP: Annual and Q4-over-Q4 for the difference in calculations.  The first graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.The drag from state and local governments appears to have ended after an unprecedented period of state and local austerity (not seen since the Depression).  State and local governments have added to GDP for three consecutive quarters now. I expect state and local governments to continue to make small positive contributions to GDP going forward. The blue bars are for residential investment (RI).  RI added to GDP growth for 12 consecutive quarters, before subtracting in Q4.  However since RI is still very low, I expect RI to make a solid positive contribution to GDP in 2014.The third graph shows non-residential investment in structures, equipment and "intellectual property products".

Vital Signs: Fed’s GDP Forecast Finally Hits the Bull’s Eye -- Forecasting how much a $17-trillion economy is going to expand in any given year is a very difficult task. Even the best economists cannot always predict events like unintended inventory-building or a federal shutdown. Just ask the Federal Reserve. In the first quarter of each year, the Fed releases its first of two Monetary Policy Reports  to Congress (the update is released in the summer). The report includes projections for how fast that year’s gross domestic product will grow. GDP growth is calculated on a fourth-quarter to fourth-quarter percent change. Earlier in this recovery, the Fed’s track record was pretty poor. The central tendency forecasts (a tally of Fed officials’ forecasts with the three highest and three lowest projections excluded) missed the economy’s pace, usually with the projections being too optimistic about GDP. The Fed’s crystal ball was clearer in 2013. At the start of last year, the Fed’s central forecast expected real GDP to grow between 2.3% and 3%. According to the Commerce Department’s advance look at GDP released Thursday, the U.S. economy grew 2.7%, just about in the middle of the forecast range. The Fed should roll out its new projections later this quarter. But the current forecast calls for real GDP to expand between 2.8% and 3.2% this year. If the Fed hits the middle mark again, the U.S. economy will grow at its fastest pace since 2005.

GDP 3.2% for Q4 2013 - Q4 2013 real GDP has come in at 3.2%, a good showing.  Personal consumption expenditures was almost 70% of the growth whereas federal government spending took off almost a percentage point of GDP.  Exports increased significantly while imports did not.  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.  GDP in this overview, unless explicitly stated otherwise, refers to real GDP.  Real GDP is in chained 2009 dollars. This below table shows the percentage point spread breakdown of Q4 from Q3 GDP major components and their spread.   Consumer spending, C in our GDP equation, is almost a percentage point more of GDP than Q3. Spending was fairly evenly spread among various goods and services. Below is a percentage change graph in real consumer spending going back to 2000. Graphed below is PCE with the quarterly annualized percentage change breakdown of durable goods (red or bright red), nondurable goods (blue) versus services (maroon). Imports and Exports, M & X added 1.33 percentage points to Q4 GDP as exports grew much more than imports. A word of caution on advance GDP reports, very often imports are significantly revised upwards and data comes into the Census. The BEA estimates data for December that hasn't all be gathered. Government spending, G was an amazing -0.96 percentage points of Q4 GDP as federal government spending contracted by –12.6%. These are budget cuts and shut downs showing the deep negative impact on the economy. Defense spending contractions shaved off –0.68 percentage points of GDP and contracted –14.0%. Below is the graph of government spending showing clearly the never ending budget cuts have been a real drag on economic growth.

Q4 GDP -- The BEA announced that real GDP increased at a saar of 3.2% for 2013 Q4. The report did little to change anyone’s mind about about the current state of the economy. The recovery continues but at a very moderate pace. Overall, it appears a solid report…although there are always things to quibble about. For the year, GDP increased at an anemic 1.9% pace, following 1.8% in 2011 and 2.8% in 2012. This can be seen in graph below which plots GDP for 10 years after the beginning of the last 5 business cycles. It is clear that the rate of growth of GDP is currently lower than in any of the previous 4 recoveries. Additionally, you can see that the average length between recessions is around 9 years (or 36 quarters). That means that the economy typically expands for 9 years before another contraction. Currently, the US is 6.25 years into its ‘recovery’ from the 2007 recession and is not close to the rate of growth in previous expansions. Consumption growth picked up, 3.3% in the fourth quarter (the highest gain since 2010 Q4), contributing the lion’s share to overall GDP growth at 2.26 percentage points. Private domestic investment grew at a 3.4% clip, a large decline from its third quarter growth of 17.2% which can be contributed to a slowdown in both residential and non-residential structures. Government consumption expenditures and gross investment declined 4.9%. The government shutdown played a role there. rivate investment has finally risen above its pre-recessionary level in 2007 Q4. Although the housing sector has shown signs of recovery over the past year, residential investment is still far below the peak in 2007 Q4 and it declined again in the fourth quarter. This is an economy that continues to recover but is hampered in part by the lack of vitality elsewhere in the world economy.  We will focus on Europe in our next post.

Preliminary Q4 GDP Declines To 3.2% As Expected; Final 2013 GDP 1.9%, Down From 2.8% In 2012 - After the blistering final Q3 GDP print of 4.1% (to be revised far lower eventually), the preliminary Q4 GDP number had only one way to go, down - and sure enough it dropped to the expected 3.2% (well below Joe LaVorgna's 4.0% forecast), capping 2013 GDPat 1.9%, down solidly from the 2.8% growth recorded in 2012. "Assume a recovery..."  The good news: the composition of the preliminary Q4 GDP number was better, with inventories only accounting for 0.42% of the final 3.22% print, compared to 1.67% previously. In fact, for the first time since Q1, Personal Consumption was responsible for more than half of GDP growth, generating 2.26% of the annualized growth compared to 1.36% in Q3.Still on a quarterly basis, Personal Consumption of 3.3% missed expectations of a 3.7% growth, up from 2.0% - did the consumption surge already roll over before the quarter ended? Why yes, if one looks at abysmal holiday retail sales numbers.  The key contributors to consumption growth were Services, and specifically a jump in spending on housing and utilities (from -0.31% to 0.14%), as well as Food Services and Accommodations which rose from 0.02% to 0.43% annualized. Which was to be expected as inventory is being absorbed by consumption. The question is how much longer can consumers keep this behavior up with collapsing purchasing power.  The bad news, and here all "CapEx is growing" fans please look away, Fixed Investment tumbled from 0.89% to just 0.14% annualized, as investment across the board dipped but mostly in non-residential structures (down -0.03% from 0.35%) and a collapse in residential fixed investment from 0.31% to -0.32%.  Finally, net trade contributed a whopping 1.33% in GDP, the most since the 2.39% increase in Q2 2009. How much longer can the US continue boosting its GDP on the back of the shale boom, and declining imports, remains to be seen. However, just like the inventory build up now has to be soaked up, so the net trade boost is about to become a drag on growth, precisely in time for the consumer to also pull back. In other words, enjoy the Q4 GDP surge - it won't last into 2014.

U.S. economy gaining momentum - The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 3.2% annual rate in the fourh quarter. That’s two quarters in a row now of above average growth. Given recent experience, that sounds pretty good. The brightest star was U.S. exports of goods and services, which contributed 1.5 percentage points to the 3.2% total. Nearly half of the export gains came from the foods, feeds, and beverages category, in which agricultural goods shipped to China figured prominently. Another important contribution came from exports of nondurable industrial materials. This includes exports of refined petroleum products, which are one byproduct of growing domestic production of crude oil.The biggest drag came from the public sector, resulting in part from the federal shutdown in October. Lower government purchases of goods and services subtracted 0.9 percentage points from the fourth-quarter GDP growth rate. Bill McBride believes that public spending and private investment should make positive contributions in the current year: [Residential investment] should make a positive contribution in 2014, the drag from the Federal Government should diminish, state and local governments should make a small positive contribution again this year, and investment in equipment and software and non-residential structures should also be positive in 2014.Two quarters of above-average GDP growth have brought our Econbrowser Recession Indicator Index down to 3.3%, which is a very favorable reading. Note that in calculating this index we allow one quarter for data revision and trend recognition. Thus the latest value, although it uses the GDP numbers released today, is actually an assessment of the state of the economy as of the end of 2013:Q3. However, our index is never revised, so that the numbers plotted in the graph below since 2005 are exactly the values as they were reported one quarter after each indicated historical date on Econbrowser.

Scratching Just One Level Below Surface, Growth Numbers Look a lot Less Impressive: The last six months of 2013 saw the headline GDP growth rate reach 3.7 percent. That’s a healthy number. Not gangbusters (we really have seen growth rates over 5 percent for a year or more in previous recoveries where there was slack in the economy comparable to what persists today), but undeniably healthy.So what’s to be glum about?Strip out the contribution of inventory investments and exports, and add in (rather than subtract) the value of imports. This is a measure of real “final sales to domestic purchasers,” or, what is sometimes called domestic demand. It’s a measure of how much demand from households, businesses, and governments is growing—and since the economy’s problem remains a huge shortfall of this demand relative to productive potential, it’s a key barometer of health.Domestic demand growth for the last six months of 2013 was only half as fast as headline GDP growth (1.8 percent). ...Are there any reasons to be less glum about 2014? For sure. The big one is that federal fiscal policy will no longer be actively throttling growth. It knocked nearly a full percentage point off the fourth quarter growth rate. To be clear, fiscal policy won’t aid growth in 2014, instead it will provide a very slight drag rather than an anvil-heavy drag. This is what counts as progress in today’s fiscal policymaking. But, we’ll take what we can, I guess.

America's economy: An unimaginable waste | The Economist: YESTERDAY, the Bureau of Economics Analysis released its first estimate for economic growth in the fourth quarter of 2013. It was pretty decent by the standards of America's recovery. Output expanded at a 3.2% annual pace. That was down from a 4.1% rate in the third quarter, but the third quarter figure was buoyed by transitory factors while fourth quarter growth was powered ahead by consumer demand, investment, and export growth. Hopes are high that momentum might be sustained into early 2014. I am having trouble generating enthusiasm, however. Here is the bigger picture: Growth in this recovery has been slower than in either of the past two recoveries, despite the much larger decline in output during the recession. There is no sign of any reduction in the enormous gap that opened up between actual output and trend. On reasonable estimates, the cumulative loss of output relative to potential will approach $6 trillion in 2014, or almost $20,000 for every man, woman, and child in America. America is on the verge of writing off a stunning amount of annual output forever. Faster quarterly growth is better than slower quarterly growth, but no one in America's government should be remotely happy about its economic performance.

Visualizing GDP: The Consumer Helped Balance Inventories -- 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. Here is the latest overview:The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and state and local government spending that were partly offset by negative contributions from federal government spending and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.  The deceleration in real GDP in the fourth quarter reflected a deceleration in private inventory investment, a larger decrease in federal government spending, a downturn in residential fixed investment, and decelerations in state and local government spending and in nonresidential fixed investment that were partly offset by accelerations in exports and in PCE and a deceleration in imports.  Let's take a closer look at the contributions of GDP of the four major subcomponents. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release, 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 2.26 of the 3.23 real GDP. The contribution from PCE showed increased significantly from Q3. 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. I've added arrows to highlight the quarter-over-quarter change for the major components.

Goldman Lowers Q1 GDP Forecast To 2.7% Due To Inventory Impact - Earlier today we summarized the Q4 GDP print and said it would be virtually impossible for the economy to carry over a comparable annualized growth rate into 2014. Moments ago Goldman agreed, when it cut its Q1 GDP forecast by 30 bps to 2.7%. From Jan Hatzius: BOTTOM LINE: Q4 GDP grew in line with expectations, although the composition was slightly softer than expected. We start our Q1 GDP tracking estimate three-tenths below our prior assumption at 2.7%.  Although the composition of this morning's report was slightly softer than expected, solid 2.9% growth in real final sales to private domestic purchasers suggests positive underlying momentum heading into 2014.  We start our Q1 GDP tracking estimate three-tenths below our prior assumption at 2.7%, due to the larger-than-expected inventory contribution in Q4.

Old Man Winter Starts to Chill Growth -- The polar vortex is hitting the economy in its solar plexus. In early January, I wrote that the first freeze of 2014 probably wouldn’t have an economic impact, but a prolonged period of bad weather “could create a cumulative drag on first-quarter [gross domestic product] growth.”  That is looking to be the case, at least for January. With many parts of the U.S. experiencing consecutive days of freezing temperatures and snowfall, Old Man Winter probably is creating a cumulative drag. Hints of that are showing up in various data reports for January. Last week, the flash January factory survey by data provider Markit said some respondents stated “extreme weather conditions in January had temporarily disrupted output levels.” So, too, the Kansas City Fed said its survey of area manufacturers showed production declined slightly this month because of weather. Store chains are also feeling the freeze. “It was a slow period for sales over the past week with some bouts of abnormal seasonal weather curbing the consumers’ appetite to shop,” the International Council of Shopping Centers said.  Consumer spending may also take a hit because households are paying more for natural gas to heat their homes. No surprise, the Federal Reserve has taken note. “Weather was mentioned 21 times in the latest beige book, almost always in a negative context, the most in any winter month Beige Book since at least 2011,”

Stephen Roach Warns "Anyone Trumpeting A Faster US Recovery Is Playing The Wrong Tune" - Indicators of US balance-sheet repair hardly signal the onset of the more vigorous cyclical revival that many believe is at hand. Optimists see it differently. Encouraged by sharp reductions in households’ debt-service costs and a surprisingly steep fall in unemployment, they argue that the long nightmare has finally ended. That may be wishful thinking. Notwithstanding the Fed’s claims that its unconventional policies have been the elixir of economic renewal in the US, the healing process still has years to go. This should not be surprising.  Far too many US households made enormous bets on the property bubble, believing that their paper gains were permanent substitutes for stagnant labor income... and appear to be doing the same again.

Excerpts of Obama’s State of the Union Address - Washington Wire - Excerpts of President Obama's State of the Union address.

At Each SOTU The Economy Has Been in the Best Shape Since President Obama Took Office - Dean Baker - The NYT had a peculiar account of the state of the economy in its lead up to the state of the union address. At one point it told readers that: "several indicators show that the economy is in its best shape since he took office in 2009."  This is peculiar since it would have been true in 2010, 2011, 2012, and 2013 also. In effect, the recession could be seen as throwing the economy into a big hole. We have been climbing out of the hole ever since. It would take an extraordinary turn of events to throw us back down to the bottom of the hole so the real question is the rate at which we get out of the hole. Thus far the rate has been quite slow. Even if we sustain the somewhat faster growth rate projected for 2014 we would not be getting out of the hole (measured as returning to full employment) until the end of the decade. 

Whatever It Takes? No, It Takes Whatever -  - Krugman - I think Josh Marshall gets this right.  The real theme of the SOTU was “Whatever.” I think the fading of the deficit both in reality and as an issue is important here. A missive from Fix the Debt landed in my inbox: We are disappointed that President Obama did not choose to place a greater focus on our nation’s long-term debt problems in tonight’s State of the Union address. The President should be actively working with Congress seeking solutions to our debt problem rather than relegating it to the political sidelines. The State of the Union was a chance for him to lead on this issue instead of leaving these tough choices to be made by the next President.  That’s the whine of people who have found themselves irrelevant. Obama isn’t afraid of the big bad deficit any more, and he knows that there won’t be a Grand Bargain, so there’s nothing he can or should do on the front that absorbed so much of his energy for three years.

American State of the Union: A Festival of Lies - Black Agenda Report - “When you say ‘jobs,’ he says tax cuts – just like the Republicans, only Obama first cites the pain of the unemployed, so that you know he cares.” “Believe it,” said the current Prevaricator-in-Chief, in the conclusion to his annual litany lies. President Obama’s specialty, honed to theatrical near-perfection over five disastrous years, is in crafting the sympathetic lie, designed to suspend disbelief among those targeted for oblivion, through displays of empathy for the victims. In contrast to the aggressive insults and bluster employed by Republican political actors, whose goal is to incite racist passions against the Other, the sympathetic Democratic liar disarms those who are about to be sacrificed by pretending to feel their pain. Barack Obama, who has presided over the sharpest increases in economic inequality in U.S. history, adopts the persona of public advocate, reciting wrongs inflicted by unseen and unknown forces that have “deepened” the gap between the rich and the rest of us and “stalled” upward mobility. Having spent half a decade stuffing tens of trillions of dollars into the accounts of an ever shrinking gaggle of financial capitalists, Obama declares this to be “a year of action” in the opposite direction. “Believe it.” And if you do believe it, then crown him the Most Effective Liar of the young century

The Real State of the Union - The state of the Union is crap. 20% of the country is doing OK. 1% is doing fantastically. 0.001% is doing so well it’s criminal, literally. They don’t own everything yet but they do own the politicians, judges, regulators, academics, and reporters. So they’re getting there. The other 80%, the rubes, the muppets, the serfs, are mired in an undeclared, ongoing depression.   50 years on I can safely state that the War on Poverty has been won. The poor have been defeated, the middle class conquered. They just don’t know it. Many sense that something is wrong, even drastically wrong, but few realize they have been totally and thoroughly betrayed by those they trusted with the governance of the country and themselves. They cannot admit –they have been admirably taught not to admit — even the possibility of the class war waged against them and which they have definitely and definitively lost. They continue to look to those who did this to them to fix things and make them better. They may grumble but there is no hint of real opposition or organized rebellion. Theirs is a Union of misery, lost hopes, lesser lives. The Union of the rich and elites is triumphant. So we have two states of the Union because we have two Unions, one of the many and one of the few, the haves and have-nots, the winners and the losers. We have one Union based on reality and hard work and another which feeds off it.

New Fiscal Showdown Builds Over Debt Limit - Republican lawmakers insisted Sunday that any increase in the nation’s borrowing authority should have policy changes attached, a demand at odds with White House officials and Senate Democrats, who held firm in their position that Congress must pass a “clean” debt-limit increase. Senate Minority Leader Mitch McConnell (R., Ky.), appearing on “Fox News Sunday,” said it was “irresponsible” and “unreasonable” for President Barack Obama to call on Congress to raise the debt ceiling without being open to policy changes. White House advisor Dan Pfeiffer countered that Republicans should “spare the country the drama” of another fiscal showdown like the one that led to a government shutdown in October. “Democrats and Republicans girding for another political fight over increasing the nation’s debt limit do not have a lot of time to debate the issue. Treasury Secretary Jacob Lew, in a letter to Congress last week, said the U.S. government would exhaust its borrowing powers by late February without action by Congress. The White House and Senate Democrats have repeatedly said they are not open to negotiating with Republicans on policy changes in return for increasing the debt ceiling. Mr. Pfeiffer confirmed that position Sunday and was echoed by top Democratic leaders. Republicans lawmakers have already begun to consider what policy riders they could attach to a debt-ceiling increase to force negotiations. House Republicans leaders are mulling a number of discrete policy changes, including some to the 2010 health-care law, as their opening gambit in negotiations with Democrats. A decision on how to proceed is likely to come after a House GOP retreat in Maryland at the end of this week.

Commentary on "Debt Limit": Senator McConnell Announces Intention to Fold Losing Hand Again - Unfortunately "debt ceiling" sounds virtuous, but it isn't - it is actually a question of "paying the bills".   And Congress will "pay the bills". As I pointed last January, a poker analogy is that the GOP is bluffing into the best possible hand - and everyone knows it.  They will have to fold, and everything they say is just political posturing. Senator McConnell said today that he intends to fold and not go "all in" with his bluff: "[W]e’re never going to default. [House Speaker John Boehner] and I have made that clear.”  : There are certain politicians who think it is OK to not pay the bills as long as the U.S. makes interest and principal payments on the debt.  That is crazy talk.  There is a name for people who don't pay their bills: deadbeats.  If politicians don't pay their personal bills, they are deadbeats.  But if they stop the government from paying the bills, we are all deadbeats.  And there will be serious economic consequences for not paying the bills on time.  The consequences will build over time, but in a few months, not "paying the bills" will ripple through the entire economy.  BUT if Congress stopped paying the bills, people would remember.  It was Republican Senator Mitch McConnell who said in 2011, if the debt ceiling isn't raised the "Republican brand" would become toxic and synonymous with fiscal irresponsibility. So it won't happen; Congress will pay the bills. 

Lew: White House to Oppose Conditions on Debt Ceiling - U.S. Treasury Secretary Jacob Lew told Democratic lawmakers at a closed-door meeting Tuesday the Obama administration would again oppose Republican efforts to attach conditions on extending the nation’s debt ceiling, drawing a line in the sand a little over a week ahead of a key deadline on the government’s borrowing ability. “He was saying we don’t mess with the debt ceiling — and he was very firm in that,” said Rep. Peter Welch (D., Vt.) as he left the weekly House Democratic caucus meeting. “He said the president is not negotiating on it,” Mr. Welch said, adding that “it’s very reassuring that the president is firm on this that the secretary is firm.”  The U.S. is on track to exhaust its borrowing powers by late February, Mr. Lew said in a letter last week. In October Congress agreed to suspend the borrowing limit until Feb. 7., a move that allowed the Treasury to continue borrowing until at least that date. The government has the ability to take emergency steps to buy additional time, but the exact amount of extra borrowing time tends to be imprecise. “We have to do something this month,” said Rep. Gene Green (D., Texas) after leaving the meeting. “The debt ceiling is not spending more money – it’s actually paying what we’ve already spent. They tried to make that point.”

Lew: Debt-limit likely to be hit by late February -- Congress should swiftly raise the debt limit as extraordinary steps to avoid hitting the ceiling will be exhausted by late February, Treasury Secretary Jacob Lew told lawmakers on Tuesday, a Treasury spokesman said. In a meeting with House Democrats, Lew "noted that Treasury's forecasts show no reasonable scenario in which extraordinary measures would last for an extended period of time and that those measures will likely be exhausted by late February," the spokesman said. House Repubicans are opposed to a "clean" debt limit increase and the White House is resisting any negotiations about what measures could be included in the legislation to garner Repubican support. Treasury will begin using accounting gimmicks to avoid the debt ceiling on Feb. 7 unless a deal is reached.

The Debt Ceiling "X-Date" Is Back: May Hit As Soon As February 28 - While everyone focuses on the turmoiling in Emerging Markets, a good, old standby is back - the periodic "debt ceiling" IMAX tragicomedy.  Recall that the debt limit, which has been suspended since October 17, is scheduled to be reinstated on February 8. At that time, the nation will be operating right at the debt limit, and the Treasury Department will use extraordinary measures to temporarily issue additional public debt to meet federal financial obligations as it always does during episodes of political posturing that without fail take place until the 11th hour, 59th minute, and 59th second. However, unlike last year when there was a 5 month interval between hitting the debt ceiling, and the day the Treasury's funds fully ran out - the infamous X Date - this time the emergency measures will only last a limited time. What this means when looking at a calendar, is that the Treasury may not have sufficient cash-on-hand to cover all obligations due as soon as February 28.

GOP Has Choices – None Easy – on Debt Ceiling - House Republicans are meeting Thursday at a hotel in Cambridge, Md., to map out their legislative strategy for the year, but they face a near-term decision that could dictate everything else that follows – what to do with the debt ceiling. The Treasury Department has said the ceiling will have to be lifted or suspended by late February to prevent the government from falling behind on its bills. The White House has said the debt ceiling must be raised or suspended without conditions, insisting President Barack Obama will not negotiate any spending or policy changes in exchange for an increase in the borrowing limit. Senate Budget Committee Chairman Patty Murray (D., Wash.) has said Senate Democrats also wouldn’t budge.But a number of Republicans, including House Budget Committee Chairman Paul Ryan (R., Wis.), have said there will have to be some conditions placed on any increase in the debt ceiling in order to win enough votes to pass the House. He hasn’t specified what the GOP might call for, but he’s hinted it could be a change to promote more energy development or perhaps some sort of regulatory rollback.Republican leaders have been cautiously trying to tamp down expectation that they can win something big in this fight.House Speaker John Boehner (R., Ohio) is likely to remind his colleagues at the retreat how the October government shutdown cost their party politically, and warn that another fiscal fight could backfire if misplayed.

GOP Set to Fold on the Debt Limit - It appears enough of the Congressional Republicans realized the debt limit is not a point of leverage over President Obama so their best option is to just quickly raised it. We will likely get a clean increase with relatively little drama. From Politico: The most senior figures in the House Republican Conference are privately acknowledging that they will almost certainly have to pass what’s called a clean debt ceiling increase in the next few months, abandoning the central fight that has defined their three-year majority. The reason for the shift in dynamics in this fight is clear. Congress has raised the debt limit twice in a row without drastic policy concessions from President Barack Obama and Senate Democrats, essentially ceding ground to Democrats. Obama and Senate Majority Leader Harry Reid (D-Nev.) are again ruling out negotiations over the nation’s borrowing limit, which would leave Republicans fighting against a unified Democratic front. It’s a tricky situation for the GOP in an election year: They would have to pass a clean debt limit bill or risk default. Between this, government funding legislation and the farm bill it appears this year Congress might just do the bare minimum required of them instead of starting big public fights which needlessly damage the economy.

Does the Debt Ceiling Have to Be Raised? -- Lately, the word out of Washington, DC from the plugged in people is that there will be no debt ceiling crisis coming up before the election. Politico says so, and so does the National Journal. MSNBC also agrees. But not so fast, says the Washington Post, echoing the Wall Street Journal provided the House Republicans can agree on “. . . an extortion demand.” If they can, then we wll have another debt ceiling crisis. Here’s a statement from Dave Johnson at the Center for the American Future (CAF) characterizing the possible crisis from a “progressive” point of view.“Republicans voted for a budget that caved in to many of their economy-sabotaging, hostage-ransom austerity demands. Now the “debt ceiling” has to be raised in February so the government can pay for that budget that Republicans voted for. Republicans are saying no way without a new ransom. Or they’ll blow up the economy. Even hinting at this is economic sabotage. This is a false statement. The false part of it is the flat unqualified claim that the debt limit must “. . . be raised in February so the Government can pay for that budget the Republicans voted for.”  By now it’s common knowledge that this series and one or more of these options are proposed in many other places and have been discussed for a few years now. There’s no excuse for Dave Johnson not to know about these alternatives. Yet he’s characterizing the crisis falsely, unless we think he can show that none of these other options can work, and certainly he didn’t even attempt to do that in his post, and has never considered them anywhere else.

Obama’s Plan to Use Executive Action Triggers Criticism - Republican lawmakers said President Barack Obama risks antagonizing an already polarized Congress by threatening to use executive authority to make good on the policy agenda he will outline in his State of the Union address. Senate Republican Leader Mitch McConnell of Kentucky said Obama is wrong to think he can bypass lawmakers if they don’t make legislative progress this year. After failing to win congressional support last year for priorities such as revised immigration laws, raising the minimum wage and gun background checks, administration officials touted a backup strategy of executive action, even as a new Washington Post-ABC News poll showed 63 percent of Americans lack confidence in Obama’s ability to make the right decisions for the country’s future.  McConnell said Obama erred since the 2010 elections that brought Republicans to power in the House by deciding to have “hung out on the left and tried to get what he wants through the bureaucracy, as opposed to moving to the political center.”  After failing to win congressional support last year for priorities such as revised immigration laws, raising the minimum wage and gun background checks, administration officials touted a backup strategy of executive action, even as a new Washington Post-ABC News poll showed 63 percent of Americans lack confidence in Obama’s ability to make the right decisions for the country’s future.

The Shopping List as Policy Tool - — THE federal government spends around $500 billion annually on goods and services. So when Uncle Sam throws his weight around, markets move. Historically, presidents have used this leverage to achieve policy goals that were politically difficult to accomplish through legislation. President Obama has made one major foray into this realm. In September 2012, he issued an executive order strengthening rules preventing federal agencies from using factories that relied on forced labor or trafficked workers. “As the largest single purchaser of goods and services in the world,” he wrote, “the United States government bears a responsibility to ensure that taxpayer dollars do not contribute to trafficking in persons.”  More recently, the White House has been mum on whether it will use this leverage again. But pressure is mounting. Gay-rights advocates have called on the Obama administration to issue an executive order banning discrimination by federal contractors. Environmentalists have said the government could go a long way toward controlling climate change simply by tightening fuel-efficiency requirements on the government’s roughly 600,000-vehicle fleet. This alone would force changes throughout the entire auto market, they say.

Fiscal Policy, the Long-Term Budget, and Inequality – Dean Baker - Asserting that budget policy, fiscal policy, and inequality are integrally linked is not just rhetoric. In fact, they are inextricably tied through economic relations that are too little appreciated. The failure to appreciate these ties often leads to policies that are ineffective or even self-defeating. This essay describes how the policies are necessarily linked beginning with fiscal policy and macroeconomic policy. It then turns to a discussion of social insurance programs and inequality and the long-term budget.  Most college-educated people have been through an intro econ class where they were punished with the basic macroeconomic accounting identities. They then quickly forget them as soon as the class was over. Unfortunately, this appears to be as true for people engaged in economic policy debates as for the larger public. The good or bad thing about accounting identities is that there is no way around them: They must be true. One of the basic macroeconomic accounting identities is that net national savings must be equal to the trade surplus. This means that the total of private and public savings, net of investment, must be equal to the trade surplus. For algebra fans this means that: (S -I) + (T-G) = X-M;  Where S is the sum of all private savings, both household and corporate. I is investment, which means both corporate investment and the construction of residential housing. T is taxes and G is government spending, so T-G means the budget surplus.  X is exports from the United States, while M is imports into the United States. This means that X-M is the trade surplus. This number has also been a large negative in recent years, as the country has been running a large trade deficit.

Our Dangerous Budget and What to Do About It - Jeffrey D. Sachs - The December budget deal, worked out between Representative Paul Ryan and Senator Patty Murray, has been widely greeted with relief. Since the first days of the Obama Administration in 2009, Washington has been in a pitched battle over the budget, with endless fights over stimulus packages, temporary tax cuts, spending limits and sequestration, fiscal cliffs, debt ceilings, and government shutdowns.  Yet the budget battles have never been quite what they’ve seemed, and the new bipartisan agreement is not a victory of bipartisan reason. Despite all of the budget turmoil over the past five years, the long-term trajectory of the US budget has remained remarkably and dangerously unaltered. With this new agreement, the US takes another step toward a diminished future. The long-term budget trajectory is the combination of three trends. First, ever since Ronald Reagan’s successful assault on government, beginning in 1981 (“Government is not the solution to our problem; government is the problem”), federal tax revenues in a normal year have stabilized at around 18–20 percent of the Gross Domestic Product (GDP). Adding in state and local governments, the total tax take in the US is around 30 percent of GDP. In Canada, Europe, and Japan, the total tax take (national, state, and local) is at least several percentage points of GDP higher than in the US. Canada averages 38 percent, Germany 45 percent, and social democratic Denmark 55 percent.

Confronting Old Problem May Require a New Deal - The job market is not in as bad a shape as it was at the depths of the downturn in the 1930s. The standard measure of unemployment stands at 6.7 percent rather than over 20 percent. Still, by any reading of the statistics, the economic emergency set off by the implosion of the housing bubble is far from over.  Broader measures of joblessness paint a bleak picture. As Lawrence Summers, President Obama’s former top economic adviser, noted in a speech at the International Monetary Fund in November, “the share of men or women or adults in the United States who are working today is essentially the same as it was four years ago.”Today, the American economy is still roughly 8 percent smaller than it would be if it had followed the path the Congressional Budget Office forecast in August 2007. That’s a gap of $1.5 trillion, or almost $5,000 for every person in the country.The failure to rebound has revived the old, recurring fear: Is stagnation inevitable? Has the economy — has the job market — become stuck for good?For all the political back-and-forth over these questions, calls for more radical moves to revive the economy have largely vanished from the policy debate.The Obama administration’s boldest propositions are sensible, from raising the minimum wage to $10.10 to extending emergency unemployment insurance. But they are not quite on the scale of a trillion dollars’ worth of lost gross domestic product.

About That Coin - Paul Krugman -- Some comments I’ve seen indicate that people still think the trillion-dollar platinum coin idea was self-evidently ridiculous. Guys, you missed the memo — literally. From last month:The Obama administration was serious enough about manufacturing a high-value platinum coin to avert a congressional fight over the debt ceiling that it had its top lawyers draw up a memo laying out the legal case for such a move, The Huffington Post learned last week.The Justice Department’s Office of Legal Counsel, which functions as a sort of law firm for the president and provides him and executive branch agencies with authoritative legal advice, formally weighed in on the platinum coin option sometime since Obama took office, according to OLC’s recent response to HuffPost’s Freedom of Information Act (FOIA) request. While the letter acknowledged the existence of memos on the platinum coin option, OLC officials determined they were “not appropriate for discretionary release.”  A bad idea? Maybe — Obama and company seem to have successfully played chicken on this issue. But ridiculous, no — it was seriously considered as an option.

Obama and the One Percent - Krugman - Another week, another outburst by a one-percenter comparing progressive taxation to Nazi atrocities. I particularly liked the end: Kristallnacht was unthinkable in 1930; is its descendent “progressive” radicalism unthinkable now? Because it’s just obvious that San Francisco progressives are the political heirs of fascism, right? You do wonder why the WSJ published this screed.  Anyway, thinking about this sort of thing makes me realize that there’s a danger, especially for progressives, of confusing the proposition that Obama’s billionaire haters are stark raving mad — which is true — with the proposition that Obama has done nothing that hurts the plutocrats’ interests, which is false. Actually, Obama has been tougher on the one percent than most progressives give him credit for. Start with taxes. The Bush tax cuts haven’t gone completely away, but at the very high end they have been pretty much reversed; plus there are additional high-end taxes associated with Obamacare. The result is that taxes on wealthy Americans have basically been rolled back to pre-Reagan levels:  Meanwhile, financial reform looks as if it will have significantly more teeth than expected. So the one percent does have reason to be upset. No, Obama isn’t Hitler; but he is turning out to be a little bit of FDR, after all.

Paranoia of the Plutocrats, by Paul Krugman - Extreme inequality, it turns out, creates a class of people who are alarmingly detached from reality — and simultaneously gives these people great power. The example many are buzzing about right now is the billionaire investor Tom Perkins,. In a letter to the editor of The Wall Street Journal, Mr. Perkins lamented public criticism of the “one percent” — and compared such criticism to Nazi attacks on the Jews, suggesting that we are on the road to another Kristallnacht. You may say that this is just one crazy guy and wonder why The Journal would publish such a thing. But Mr. Perkins isn’t that much of an outlier. He isn’t even the first finance titan to compare advocates of progressive taxation to Nazis. Back in 2010 Stephen Schwarzman, the chairman and chief executive of the Blackstone Group, declared that proposals to eliminate tax loopholes for hedge fund and private-equity managers were “like when Hitler invaded Poland in 1939.” And there are a number of other plutocrats who manage to keep Hitler out of their remarks but who nonetheless hold, and loudly express, political and economic views that combine paranoia and megalomania in equal measure...

Demonizing The Rich, Schadenfreude And Assholes --File this Business Insider story under: We do not make this shit up. Over the weekend, billionaire venture capitalist Tom Perkins caused controversy when he said that the way activists and progressives in San Francisco are starting to treat the super rich reminds him of how the Nazis treated the Jews. Here's Perkins of Kleiner Perkins Caufield and Byers fame (high-tech venture capitalists)— Regarding your editorial "Censors on Campus" (Jan. 18): Writing from the epicenter of progressive thought, San Francisco, I would call attention to the parallels of fascist Nazi Germany to its war on its "one percent," namely its Jews, to the progressive war on the American one percent, namely the "rich." From the Occupy movement to the demonization of the rich embedded in virtually every word of our local newspaper, the San Francisco Chronicle, I perceive a rising tide of hatred of the successful one percent. This is a very dangerous drift in our American thinking. Kristallnacht was unthinkable in 1930; is its descendent "progressive" radicalism unthinkable now?

Why the Rich Feel Besieged: A Checklist - What is it that has the Davos set so freaked out these days? I'm not talking about Wall Street Journal editorials decrying the evils of class warfare. I'm talking about the fact that an awful lot of people claim that rich people are really and truly feeling besieged. It's not an act and it's not just paranoia—they're even seeking therapy to deal with it.  So what is it? I don't know, but I want to toss out a few bullet points just to stir up discussion:

  1. Over the past few decades, the rich have been accustomed to being lionized: splashed on the covers of magazines as the movers and shakers of the economy and feted in ballrooms for their philanthropy. That's largely a thing of the past.
  2. Even worse, the rich have come in for a lot of abuse since the financial crash. Fairly or not, they feel increasingly socially ostracized, and few things promote a feeling of indignation and persecution more than that.
  3. Most of them have a feeling that they personally have done nothing wrong.
  4. They have a belief that the protestors against the 1 percent are mostly just unreconstructed lefties who want to demonize the business class and shake them down for a handout. It's the Sixties all over again.
  5. They've been made to feel guilty for their success. Hell, even the pope is lecturing them.
  6. Some of them have a genuine belief that the government is trying to intimidate them from speaking out. This is what's behind their mania for keeping political contributions secret

Jamie Dimon's Raise Proves U.S. Regulatory Strategy is a Joke - If you make a big show of punishing someone, and when you're done they still don't think they have a behavior problem, you probably picked the wrong punishment. Every parent on earth knows this implicitly – but does the Obama White House finally get it, too, now, after Jamie Dimon's raise? When the board of JP Morgan Chase gave its blowdried, tirelessly self-regarding CEO a whopping 74 percent raise – after a year in which the Justice Department blasted the bank with $20 billion in sanctions – it was one of those rare instances where Main Street and Wall Street were mostly in agreement.Everyone from the Financial Times to to the Huffington Post decried the move. The Wall Street pundits mostly thought it was a dumb play by the Chase board from a self-interest perspective, one guaranteed to inspire further investigations by the government. Meanwhile, the non-financial press generally denounced the raise as a moral obscenity, yet another example of the serial coddling of Wall Street's habitually overcompensated executive class.Both groups were right. But to me the biggest news was how brutal an indictment Jamie's raise was of the Obama/Holder Justice Department, which continues to profoundly misunderstand the mindset of the finance villains they claim to be regulating.

For Narcos and Jamie Dimon, Crime Does Pay: Dimon Gets 77 Percent Raise to $20 Million - With somewhere around $20 billion in fines for civil and criminal violations, JPMorgan Chase is making history.  Of course, as most narcos know, you've got to factor in losing some money to making a lot of money.  That means the leaders of the so-called banks too big to fail -- like their drug cartel counterparts -- are doing just fine indeed. That is just the case with Jamie Dimon. After a year of virtually non-stop settlements with the US government for various violations of regulations and the law (but no criminal indictments or personal fines against Dimon, or prosecuted criminal charges against the JP Morgan Chase), his board felt that a 77 percent increase in his salary to $20 million a year was in order.  News of the raise came last week as 90 percent of Americans are still feeling an economy dragging them down. As a New York Daily News January 26 editorial noted with scorn: With too-big-to-fail arrogance on steroids, the board members of scandal-tainted JPMorgan Chase have boosted Chief Executive Officer Jamie Dimon’s salary by 77% to a fat, happy and offensive $20 million. The entire lot of them are beyond shame.On Dimon’s watch, JPMorgan has paid out an unprecedented $20 billion in legal settlement and penalties for banking violations that stretched from improperly gorging on the sub-prime mortgage crisis to abetting Bernie Madoff’s vast thievery.

Exclusive: Bank of America’s trading practices have been probed, filing shows (Reuters) - The U.S. Department of Justice and the Commodity Futures Trading Commission have both held investigations into whether Bank of America (BAC.N) engaged in improper trading by doing its own futures trades ahead of executing large orders for clients, according to a regulatory filing. The June 2013 disclosure, which Reuters recently reviewed on a website run by the securities industry regulator FINRA, sheds light on the basis for a warning by the Federal Bureau of Investigation on January 8. The warning, in the form of an intelligence bulletin to regulators and security officers at financial services firms, said that the FBI suspected swaps traders at an unnamed U.S. bank and an unnamed Canadian bank may have been involved in market manipulation and front running of orders from U.S. government-owned mortgage giants Fannie Mae and Freddie Mac. Reuters has since learned that Bank of America's trading practices regarding Fannie and Freddie are the subject of probes, and that the investigations are ongoing. Bank of America spokesman Bill Halldin declined comment when asked abut the investigations.

Bitcoin’s Future Gets a Hearing - Bitcoin’s future may have started taking shape in a conference room in lower Manhattan on Tuesday, as New York state’s top banking regulator convened two days of public hearing on the subject of regulating virtual currencies. The strong sense from both sides was that regulation is coming, that it will be a good thing, and that bitcoin has already crossed the point where it’s just a passing fad. Indeed, one panelist said that bitcoin’s already passed its “tipping point,” at which it could have slipped deeper into the criminal world and disappear or turn mainstream. The hearing was a “huge opportunity to set the right tone,” said Cameron Winklevoss, a panelist along with his twin brother, Tyler. The two operate Winklevoss Capital Management. Benjamin Lawsky, superintendent of the New York Department of Financial Services, flanked by three other officials from his department, kept the proceedings informal. He encouraged the panelists to think of it more like a conversation than a hearing and asked a series of broad questions. He even seemed sympathetic when he complained about having to wait three days to transfer money from his savings account at his bank to pay his monthly credit card bill at the same bank. That said, he also clearly believes that bitcoin is going to have to come under some kind of regulation.

Debt Collection Industry Poised for Changes - I spent a year as a policy fellow at the Consumer Financial Protection Bureau. One of the most things I got to work on while I was there were the rules defining "large market participants" in the debt collection and credit reporting markets. After issuing final rules, the CFPB began to supervise these non-bank entities; marking the first time any federal regulator had the authority to do so.  Recently, the Bureau published an Advanced Notice of Proposed Rulemaking on debt collection (comments are due by February 28). The ANPR marks the first time that a regulator will interpret the Fair Debt Collection Practices Act, a statute that has barely changed since its enactment in 1977. What's more, because of its UDAAP authority; the CFPB will be able to write rules defining unfair, deceptive, and abusive practices that apply to both collectors and creditors. I've written elsewhere about how the systemic problems in the collections ecosystem begin at the creditor, so this is exciting news. What might be surprising though is that the collections industry seems to share in this excitement.Earlier this week, I participated in the Large Market Participant Summit where collection agencies subject to the CFPB's supervision met to discuss common issues. The ANPR was the hot topic at the conference; everyone was hard at work on their comments to the 162 questions posed by the Bureau. From the industry's perspective it seemed that the consensus was that regulation was long overdue and the industry (cautiously) welcomed it. There was even a sense that consumer advocates and collectors might actually agree on some issues.

NYSE Margin Debt Hits an All-Time High - The New York Stock Exchange publishes end-of-month data for margin debt on the NYXdata website, where we can also find historical data back to 1959. Let's examine the numbers and study the relationship between margin debt and the market, using the S&P 500 as the surrogate for the latter. The first chart shows the two series in real terms — adjusted for inflation to today's dollar using the Consumer Price Index as the deflator. I picked 1995 as an arbitrary start date. We were well into the Boomer Bull Market that began in 1982 and approaching the start of the Tech Bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit its all-time daily high, although the highest monthly close for that year was five months later in August. A similar surge began in 2006, peaking in July 2007, three months before the market peak. The latest data puts margin debt as at an all-time high, not only in nominal terms but also in real (inflation-adjusted) dollars.

Equity Funds Have Largest Weekly Outflow In Over Two Years - There is one major problem when the entire market is a rigged casino (by both the Fed and HFTs), favoring degenerate gamblers over traditional investors: at the first whiff of trouble everyone bails. Or as BofA politely puts it, "Typically flows follow returns and this week was no exception." In the past week, trouble whiffed, and the degenerate gamblers, loaded up to the gills with record margin debt hightailed it out of the casino, leading to the largest weekly equity fund outflow in over two years! Add some record leverage to the equity withdrawal, continued EM turbulence, ongoing Japanese deflation exports, oh and of course the ongoing Fed taper which has been solely responsible for all S&P gains since 666, and suddenly you have all the ingredients for a broad market crash.

The Disappointing Office of Financial Research - Simon Johnson - One of the better ideas to surface during the early financial reform discussions was to create some form of national institute of finance, an independent body that could support outstanding research and help develop a broader understanding of lurking risks. In the Dodd-Frank Act of 2010, largely through the efforts of Senators Jack Reed, Democrat of Rhode Island (who introduced specific legislation),and Mark Warner, Democrat of Virginia, this became the Office of Financial Research. Unfortunately, while the office had well-intentioned parents, it was also cursed at birth by a modern Carabosse (the bad fairy who curses Sleeping Beauty). Timothy Geithner, then Treasury secretary, strongly opposed the creation of an independent body focused on diagnosis and assessment of systemic risks. Not being able to talk the Senate out of taking some action in this direction, Mr. Geithner fell back on a standard bureaucratic trick – he took the Office of Financial Research into the Treasury and set about ensuring that it would never be particularly effective.Four years down the road, it looks as though Mr. Geithner largely got his way. It would take a sweeping change and perhaps new leadership for the vision of Senators Reed and Warner to become something close to reality.

We Are Sleepwalking Towards A Cashless Society -- HSBC, the world’s third largest bank and money launderer of choice for drug traffickers, arms dealers and terrorist groups worldwide, was recently in the news for limiting the amount of cash customers could withdraw from their own accounts (though, after the hue and cry that policy engendered, HSBC has rescinded it). To wit, from the BBC: Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it… Listeners have told Radio 4′s Money Box they were stopped from withdrawing amounts ranging from £5,000 to £10,000.During the same period the bank seemingly had no such troubles honouring electronic transfers, from which one can fairly surmise that it’s customer’s cash, rather than customer’s money in general, that’s at issue. This new stunt from the British-based bank, already up to its neck in just about every financial scandal imaginable, is merely the latest episode in big finance and big government’s all-out assault on cash transactions. For years national governments have been seeking to reduce the number and size of cash transactions within and between their respective economies. In the U.S., any business or person receiving $10,000 or more in “cash” (in quotes because it’s not just cash) for a sale must file Form 8300. Banks must also report cash transactions of that size.

Deposit Insurance and the Global Financial Crisis - How does deposit insurance affect bank stability?  This is a question that has been around for a while but has come up again after the global financial crisis.  In response to the crisis, a number of countries substantially increased the coverage of their safety nets in order to restore market confidence and to avert potential contagious runs on their banking sectors.  Critiques worry that such actions are likely to further undermine market discipline, causing more instability down the line. My earlier research on this issue suggests that on average deposit insurance can exacerbate moral hazard problems in bank lending, making systems more fragile.   This is ironic since deposit insurance is supposed to make the systems more stable, not less. But what if the impact of deposit insurance on stability varies depending on the economic conditions? Does deposit insurance help stabilize banking systems by enhancing depositor confidence during turbulent times? This is the question we try to answer in a new paper with Deniz Anginer and Min Zhu where we take advantage of the latest global financial crisis. Specifically, using a sample of 4,109 publicly traded banks in 96 countries, we examine the impact of deposit insurance on bank risk and systemic stability separately for the crisis period from 2007 to 2009, as well as the three years from 2004 to 2006 leading up to the global financial crisis.  We use z-score  (a commonly-used accounting measure of bank risk) and stock return volatility to measure standalone risk of an individual bank, and the marginal expected shortfall (MES) of Acharya, Engle and Richardson (2012) to measure the risk posed by an individual bank to the banking system as a whole.

“All You Need for a Financial Crisis . . .. . are excess optimism and Citibank.” That’s a saying that someone, probably Simon, repeated to me a few years ago. Crash of 1929, Latin American debt crisis, early 1990s real estate crash (OK, that wasn’t a financial crisis, just a crisis for Citibank), Asian financial crisis of 1997–1998, and, of course, the biggie of 2007–2009: anywhere you look, there’s Citi. Sometimes they’re just in the middle of the profit-seeking pack, but sometimes they play a leading role: for example, the Citicorp-Travelers merger was the final nail in the coffin of the Glass-Steagall Act and the immediate motivation for Gramm-Leach-Bliley. Citigroup is also the poster child for one of the key problems with our megabanks: the fact that they are too big to manage and, on top of that, the usual mechanisms that are supposed to ensure half-decent management don’t work. Around 2009, if you were to describe the leading characters in the TBTF parade, they were JPMorgan, the last man standing (not so much anymore); Goldman, the sharks who bet on the collapse; Bank of America, the ego-driven empire-builder; and Citi, the incompetent (“I’m still dancing”) fools. For these reasons, Art Wilmarth thinks it’s important to understand exactly what went wrong at what was, relatively recently, America’s largest bank. He has a new paper out discussing the many failings of Citigroup in the decade leading up to the financial crisis in great detail. I don’t think it contains any new facts that weren’t in the public record, but he does draw a lot of his examples from court documents (such as the Enron bankruptcy examiner’s report) that most of us haven’t read, so you will probably learn something.

U.S. Banks Loosen Loan Standards - Big banks are beginning to loosen their tight grip on lending, creating a new opening for consumer and business borrowing that could underpin a brightening economic outlook. In both the U.S. and Europe, new reports released Thursday show banks are slowly starting to increase their appetite for risk. The U.S. Office of the Comptroller of the Currency said banks relaxed the criteria for businesses and consumers to obtain credit during the 18 months leading up to June 30, 2013, while the European Central Bank said fewer banks in the euro zone were reporting tightened lending standards to nonfinancial businesses in the fourth quarter of 2013. Fueling the loosening is a rosier economic picture, competition for a limited pool of loans and a sustained low-interest-rate environment that has banks reaching for returns. The thaw, while at its earliest stages, could buttress the increasingly optimistic 2014 global growth projections. The World Bank predicts global growth of 3.2%, bolstered by stronger recoveries in the U.S. and the euro zone. The Federal Reserve predicts U.S. growth between 2.8% and 3.2%, while the euro zone is expected to grow by 1.1% after two years of contracting. At the same time, the easing carries risks, including a return to the type of lax underwriting standards that sowed the seeds of the crisis. The comptroller's report said it would still classify most banks' standards as "good or satisfactory" but did strike a cautionary tone. "The more [banks] loan, just naturally there is going to be more risk. It's a matter of how well they can control that risk,"

Mirabile Dictu! Post Office Bank Concept Gets Big Boost - Yves Smith  - Naked Capitalism readers have frequently called for the Post Office to offer basic banking services, as post offices long have in many countries, notably Japan. That idea has gotten an important official endorsement in the form of a detailed, extensively researched concept paper prepared by the Postal Service’s Inspector General. I’ve embedded it and strongly urge you to read and circulate it. One of the stunning parts in reading the document is to see how wildly successful this program could be, precisely because traditional banks are withdrawing from many of the neighborhoods in which moderate and lower-income people live, and non-banks offer targeted, richly priced services, too often designed to take advantage of desperation or simple lack of alternatives. Even though most of us are aware of this general picture, the USPS IG, dimensions the scale of this problem and the costs to the affected households. There are 34 million un and underbanked American households, which translates into 28% of the population. And consider what this second-class status translated into in fees and other charges: The average underserved household has an annual income of about $25,500 and spends about $2,412 of that just on alternative financial services fees and interest. That amounts to 9.5 percent of their income. To put that into perspective, that is about the same portion of income that the average American household spends on food in one year.5 In 2012 alone, the underserved paid some $89 billion in fees and interest.  The Postal Service’s existing branch network and its presence in payment services (it currently offers domestic and international postal money orders and prepaid debit cards via American Express) and positive customer perceptions (it is widely seen as highly trustworthy) makes it easy to expand its financial service offerings. In some ways, this move would represent the Postal Service returning to its roots, since the Postal Savings System provided savings accounts from 1911 to 1967, and at its peak served over 4 million customers. And even though banks are certain to squawk, the fact that they’ve abandoned many communities and districts strengthens the Postal Service’s case for filling the gap: Providing Non-Bank Financial Services for the Underserved

Postal Service Banking: How the USPS Can Save Itself and Help the Poor -- One of the key messages of tonight’s State of the Union address will be President Obama’s willingness to bypass Congress to create jobs and reduce inequality. As luck would have it, yesterday a new government report detailed an innovation that would preserve one of the largest job creators in the country, save billions of dollars specifically for the poor, and develop the very ladders of opportunity that Obama has championed as of late. What’s more, this could apparently be accomplished without Congressional action, but merely through existing executive prerogatives. What’s the policy? Letting the U.S. Postal Service (USPS) offer basic banking services to customers, like savings accounts, debit cards and even simple loans. The idea has been kicked around policy circles for years, but now it has a crucial new adherent: the USPS Inspector General, who endorsed the initiative in a comprehensive white paper.

Postal Banking: Maybe Not So Crazy After All - A recent white paper by the U.S. Postal Service’s Office of the Inspector General floated the idea of introducing postal banking services as a means of expanding financial inclusion. Not surprisingly, the banking industry has rushed to condemn the idea—which would create new competition for financial services—as sort of creeping socialism. But when one considers postal banking more carefully, the idea isn’t so crazy, although it raises a number of real questions and challenges.   First, the idea of a postal bank is not new to the United States. The USPS successfully operated a postal savings bank from 1911 to 1967. The system was designed as the Republican (!) alternative to federal deposit insurance. The Postal Savings Bank was constrained by its statutory limitations to offering only passbook savings, but in World War II the Postal Savings Bank pioneered new ideas and technologies to help service members, such as deposit by mail. Put another way, we’ve done postal banking successfully before, without the world collapsing. Looking globally, the United States is very much the outlier in not having a postal banking option. Most developed countries (and many developing countries) offer some form of postal banking. There’s a great deal of variation in the services postal banks around the world offer, ranging from payments, like the successful giro system in Europe, to mortgages in Switzerland. Nor are postal banks always niche players—the Japanese postal bank is one of the largest financial institutions in that country. Postal banking hasn’t been a disaster elsewhere.

Unofficial Problem Bank list declines to 600 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for January 24, 2014.  Changes and comments from surferdude808:  A bank failure, several action terminations, and a merger reduced the institutions count on the Unofficial Problem Bank List to an even 600. The removals caused a $1.9 billion decline in assets to $197.9 billion. A year ago, the list held 825 institutions with assets of $309 billion. Actions were terminated against United Bank & Trust Company, Versailles, KY ($537 million Ticker: FFKT); CFBank, Fairlawn, OH ($245 million); and Mid America Bank, Janesville, WI ($100 million). Mountain 1st Bank & Trust Company, Hendersonville, NC ($675 million Ticker: FFIS) found its way off the list through an unassisted merger. For the second consecutive week there was an exit through failure as The Bank of Union, El Reno, OK ($331 million). It has been since August 2013 when failures occurred on consecutive weeks. Next week, we anticipate the FDIC will release its enforcement action activity through year-end 2013.

NY Judge OKs $8.5 Billion Bank of America Settlement: A New York judge on Friday approved most of the $8.5 billion Bank of America settlement over investor losses from mortgage-backed securities, concluding that trustee Bank of New York Mellon acted reasonably with one exception. Critics of the settlement had argued that it represented only a fraction of the losses. State Supreme Court Justice Barbara Kapnick wrote that BNY Mellon "did not abuse its discretion" in entering the 2011 settlement agreement and did not act in bad faith. However, she said the trustee acted unreasonably in settling loan modification claims without investigating their potential worth. She approved the settlement excluding those claims. "The uncertainty and risk associated with litigation played a large role in the trustee's decision," Kapnick wrote. "It is also clear that the trustee placed considerable weight on the fact that the settlement was supported by 22 institutional investors, including arms of the federal government, prominent investment managers acting as fiduciaries for their clients, and institutions managing their own money." The offers and demands exchanged in negotiating the settlement ranged from $1.5 billion from Bank of America to $16 billion by the institutional investors, Kapnick noted.

US seeks $2.1bn from BofA over mortgage fraud - The US government has asked for $2.1bn in penalties from Bank of America in a high-profile case where the bank was found liable for civil fraud over bad mortgages sold to Fannie Mae and Freddie Mac. The request comes as a blow to the bank as the government has more than doubled its earlier demand of about $860m. The case dubbed the “hustle” – after the bank’s internal “high-speed swim lane” for rushing through loans – is one of several large legal cases that BofA still faces. The bank is expected to reach multibillion-dollar settlements with other government agencies over alleged faulty mortgages and is awaiting approval on a separate $8.5bn mortgage-backed securities settlement with private investors. The initial $860m fine the government sought was based on gross losses incurred by Fannie and Freddie resulting from bad mortgages by Countrywide, which Bank of America acquired in 2008. The higher figure is based on gross revenues generated by the bank, rather than losses incurred by Fannie and Freddie.

Quelle Surprise! Bond Investors Notice that Servicers Let Houses Fall Apart - Yves Smith - Bloomberg last Friday, Gundlach Counting Rotting Homes Makes Subprime Bear: The founder of $49 billion investment firm DoubleLine Capital LP is largely avoiding the subprime-mortgage bonds that jumped about 17 percent last year after home prices surged by the most since 2006, deterred by the lengthy process to sell foreclosed houses and the destruction that’s creating.“These properties are rotting away,” Gundlach, 54, said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash. Needless to say, that’s a lot of spin in a short space. Notice that it’s the “lengthy foreclosure process” that is the cause of trouble, when in fact servicers delay foreclosures when they already have more foreclosed homes than they can offload. But the really funny bit is that Gundlach is giving his investors some sort of special insight in telling them that many of the properties backing the remaining balances in subprime bonds are falling apart.  Compare the Bloomberg story with this account by Dave Dayen in Salon last July, The Housing “Recovery” Is a Total Sham: Out on the alphabet streets in this once-thriving Florida community, the houses are dotted with black mold. Some have buckled roofs. Others are hollowed out by fire, or the wiring has been stripped. Pests and critters have moved in as the people moved out. On some streets, half of the homes feature boards along the windows, and ubiquitous “No Trespassing: No Traspasar” signs in English and Spanish. “Those are to keep the drug sales out,” says my tour guide, Lynn Szymoniak of the nonprofit Housing Justice Foundation. “I’ve been stopped doing these tours, cops have told me, ‘you’re not supposed to be here.’”

Congressmen Call for Hearings on Risks of Rental Securtizations - Yves Smith  - Private equity firms have been playing residential landlord for only a few years, but the impressive amount of capital they’ve deployed in this strategy means they’ve had significant impact in the markets they’ve targeted. And while PE investors might claim they’ve done communities a big favor by snapping up foreclosed and other distressed properties, playing a critical role in the housing recovery, some of these new landlords are already developing less than savory reputation. That should be no surprise, since PE firms in their traditional business play a numbers game, levering up and squeezing companies for more cashflow, leading to job losses and too often, bankruptcies.. So there’s every reason to suspect them of structuring similar “heads I win, tails you lose” deals in the single family rental business. Mark Takano, a Congressman who represents communities in California’s Inland Empire, one of the areas hit hardest by the housing bust, is concerned, and with good reason. He has noticed that prices for rentals have moves up smartly even as economic conditions in his district remain poor. He hypothesizes that the PE wall of money that washed in is a big, if not the, contributor. He’s also troubled by the idea that of not only being too big and removed to care much, but also having the securitization further insulated them from responsibility. He’s asked for hearings into rental securitizations.  Even though financial experts recommending spending at most 30% of income on housing expenses, almost 1/3 in two cities in his district, Riverside and Moreno, spend 50% or more. And in Riverside, while median income is $5,524 below its pre-crisis peak, median rental costs rose by $756 in the same period.  Yet at first blush, Takano’s charge sounds implausible: if private equity landlords have increased the supply of rental housing, how could that have led to more costly rentals? While stringent bank credit conditions play a big role, Takano believes that some renters would and even could be homeowners, were they not competing with all-cash buyers. His report explains:

Black Knight: Mortgage Delinquency Rate increased in December, Down almost 10% year-over-year - According to the Black Knight (formerly LPS) First Look report for December, the percent of loans delinquent increased seasonally in December compared to November, and declined about 9.9% year-over-year. Also the percent of loans in the foreclosure process declined further in December and were down 28% over the last year. Black Knight reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 6.47% from 6.45% in November. The normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 2.48% in December from 2.50% in November.   The is the lowest level since late 2008. The number of delinquent properties, but not in foreclosure, is down 332,000 properties year-over-year, and the number of properties in the foreclosure process is down 472,000 properties year-over-year. Black Knight will release the complete mortgage monitor for December in early February.

Black Knight Financial Services' December "First Look" Mortgage Report: Foreclosure Inventory Down Nearly 30 Percent at Close of 2013 - - The Data and Analytics division of Black Knight Financial Services (formerly the LPS Data & Analytics division) reports the following "first look" at December 2013 month-end mortgage performance statistics derived from its loan-level database representing approximately 70 percent of the overall market.

  • -- Delinquencies Up Slightly; Overall Trend for 2013 Still One of Improvement
    -- Foreclosure, Seriously Delinquent Inventories Lowest Since 2008
    -- Loans in Foreclosure Delinquent an Average of 920 Days
    -- Foreclosure Starts Down 23 Percent for the Year 
    Total U.S. loan delinquency rate (loans 30 or more days past due, but not in foreclosure):                                      6.47%
    Month-over-month change in delinquency rate:                             0.26%
    Year-over-year change in delinquency rate:                              -9.85%
    Total U.S. foreclosure pre-sale inventory rate:                          2.48%
    Month-over-month change in foreclosure pre-sale inventory rate:                                                                  -0.74%
    Year-over-year change in foreclosure pre-sale inventory rate:                                                                 -27.90%
    Number of properties that are 30 or more days past due, but not in foreclosure:                                             3,243,000
    Number of properties that are 90 or more days delinquent, but not in foreclosure:                                             1,280,000
    Number of properties in foreclosure pre-sale inventory:              1,244,000
    Number of properties that are 30 or more days delinquent or in foreclosure:                                                  4,488,000
    States with highest percentage of non-current* loans:       MS, NJ, FL, NY, LA
    States with the lowest percentage of non-current* loans:    MT, CO, AK, SD, ND

CFPB Alleges Mortgage Insurer Operated 15-Year-Long Kickback Scheme - The Consumer Financial Protection Bureau has begun proceedings against PHH Corporation for its involvement in a 15-year-long mortgage insurance kickback scheme that collected hundreds of millions of dollars from homeowners.  The CFPB announced Wednesday that it is seeking a civil fine, an injunction to prevent future violations and victim restitution from PHH Corporation and its residential mortgage origination subsidiaries, PHH Mortgage Corporation and PHH Home Loans LLC, as well as it’s wholly-owned subsidiaries, Atrium Insurance Corporation and Atrium Reinsurance Corporation, for violating the Real Estate Settlements Procedures Act and harming consumers through a kickback scheme beginning as early as 1995 and continuing until at least 2009. The New Jersey-based corporation and its affiliates are accused of:

  • Creating a system where it received as much as 40 percent of the premiums that consumers paid to mortgage insurers, collecting hundreds of millions of dollars in kickbacks;
  • charging more money for loans to consumers who did not buy mortgage insurance from one of its kickback partners.
  • pressuring mortgage insurers to “purchase” its reinsurance with the understanding or agreement that the insurers would then receive borrower referrals from PHH.

Wall Street’s New Housing Bonanza -- Wall Street’s latest trillion-dollar idea involves slicing and dicing debt tied to single-family homes and selling the bonds to investors around the world. That might sound a lot like the activities that at one point set off a global financial crisis. But there is a twist this time. Investment bankers and lawyers are now lining up to finance investors, from big private equity firms to plumbers and dentists moonlighting as landlords, who are buying up foreclosed houses and renting them out. The latest company to test this emerging frontier in securitization is American Homes 4 Rent. The company talked to prospective investors at a conference in Las Vegas last week about selling securities tied to $500 million of debt, according to people briefed on the matter. American Homes 4 Rent, which went public in August, has tapped JPMorgan Chase, Goldman Sachs and Wells Fargo as its bankers for a debt deal that is expected to be sold by the end of the first quarter, these people said. While this securitization market is still in its infancy, a recent Wall Street estimate put potential financing opportunities for the single-family rental industry as high as $1.5 trillion. Already some members of Congress and economists are worried about another credit bubble.

Weekly Update: Housing Tracker Existing Home Inventory up 1.8% year-over-year on Jan 27th - Here is another weekly update on housing inventory ... for the 15th consecutive week housing inventory is up year-over-year (but not by much).  This suggests inventory bottomed early in 2013. There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.The Realtor (NAR) data is monthly and released with a lag (the most recent data was for December).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years.This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012, 2013 and 2014.  In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year.  Inventory in 2014 is now 1.8% above the same week in 2013 (red is 2014, blue is 2013). `Inventory is still very low - and barely up year-over-year - but this increase in inventory should slow house price increases. 

CoreLogic: Completed Foreclosures Down 24% in 2013 - From CoreLogic: The foreclosure inventory fell 31 percent nationally in 2013 According to CoreLogic, there were 620,111 completed foreclosures across the country in 2013 compared to 820,498 in 2012, a decrease of 24 percent. For the month of December, there were 45,000 completed foreclosures, down from 52,000 in December 2012, a year-over-year decrease of 14 percent. On a month-over-month basis, completed foreclosures decreased 4.1 percent, from 47,000 reported in November 2013. Completed foreclosures are an indication of the total number of homes actually lost to foreclosure. Since the financial crisis began in September 2008, there have been approximately 4.8 million completed foreclosures across the country. As a basis of comparison, prior to the decline in the housing market in 2007, completed foreclosures averaged 21,000 per month nationwide between 2000 and 2006. As of December 2013, approximately 837,000 homes in the United States were in some stage of foreclosure, known as the foreclosure inventory, compared to 1.2 million in December 2012, a year-over-year decrease of 31 percent. The foreclosure inventory as of December 2013 represented 2.1 percent of all homes with a mortgage compared to 3.0 percent in December 2012. The foreclosure inventory was down 2.7 percent from November 2013 to December 2013. “The foreclosure inventory fell by more than 30 percent in December on a year-over-year basis, twice the decline from a year ago,” . “The decline indicates that the distressed foreclosure inventory is healing at an accelerating rate heading into 2014.”  This graph from CoreLogic shows the foreclosure inventory by state (Foreclosure inventory are properties in the foreclosure process). The foreclosure inventory is still high in some judicial foreclosure states. From CoreLogic:

Foreclosures Fell a Whopping 24% in 2013 - Real Estate analytics firm Core Logic announced Wednesday that there were a total of 620,111 foreclosures across the country in 2013, a 24% decline from 2012 when 820,000 homes were foreclosed upon.Despite the marked decline in the number of foreclosures year over year, foreclosure activity remains well above its normal rate of 21,000 foreclosures per month between 2000 and 2006. “Clearly, 2013 was a transitional year for residential property in the United States.” said Anand Nallathambi, president and CEO of CoreLogic. “We are turning a long-awaited corner.” As with the real estate market in general, the pace of foreclosure activity varied greatly depending on location. Florida lead the country with 118,906 foreclosures in 2013, while booming North Dakota saw just 417. Looking forward, many states like New York, Illinois, and Florida still have many foreclosures to complete. Core Logic tracks what it refers to as ” the foreclosure inventory,” or homes that are in some stage of of foreclosure. Looking forward the states that will continue to have heavy foreclosure activity include Florida, New Jersey, New York, Connecticut, and Maine. The map below shows the percentage of homes with a mortgage that are in some stage of foreclosure.

Freddie Mac: Mortgage Serious Delinquency rate declined in December, Lowest since February 2009 - Freddie Mac reported that the Single-Family serious delinquency rate declined in December to 2.39% from 2.43% in November. Freddie's rate is down from 3.25% in December 2012, and this is the lowest level since February 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".   Although this indicates progress, the "normal" serious delinquency rate is under 1%. The serious delinquency rate has fallen from 0.86 percentage points over the last year - and at that rate of improvement, the serious delinquency rate will not be below 1% until mid-to-late 2015. 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. So even though distressed sales are declining, I expect an above normal level of distressed sales for another 2+ years (mostly in judicial foreclosure states).

MBA: Mortgage Purchase Applications Increase Slightly - From the MBA: Mortgage Applications Essentially Flat in Latest MBA Weekly Survey Mortgage applications decreased 0.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 24, 2014. The results include an adjustment to account for the Martin Luther King, Jr. holiday. ...The Refinance Index decreased 2 percent from the previous week. 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) decreased to 4.52 percent, the lowest rate since the week ending November 29, 2013, from 4.57 percent, with points increasing to 0.40 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.  The first graph shows the refinance index. The refinance index is down 68% from the levels in early May. With the mortgage rate increases, refinance activity will be significantly lower in 2014 than in 2013. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index is now down about 12% from a year ago.

Mortgage Volumes Hit Five Year Low -- The volume of home mortgages originated during the fourth quarter fell to its lowest level in five years, according to an analysis published Thursday by Inside Mortgage Finance, an industry newsletter. Lenders have benefited from an unusually long refinance boom over the last five years as the Federal Reserve has embarked on multiple efforts to stimulate the economy by reducing borrowing costs.Mortgage originations soared in early 2009 after rates on the 30-year fixed-rate mortgage fell below 5%. The Fed’s latest bond-buying campaign unleashed an even more robust refinancing wave in late 2011, when rates fell below 4%. Lenders have also benefited from government programs that made it much easier for some borrowers who owed more than their homes were worth to refinance.The Inside Mortgage Finance report confirms large drops in mortgage production that many banks have reported over the last two weeks. Volumes tumbled by 19% in the third quarter, fell by another 34% in the fourth quarter, according to the tally. Mortgage demand weakens in the winter months as home-buying activity slows, but it held up over the past two years because of much stronger refinancing demand.Overall originations in 2013 stood at nearly $1.9 trillion, down nearly 11% from 2012 but still the second best year for the industry since the mortgage bust deepened in 2008. The Mortgage Bankers Association forecasts originations will fall to $1.1 trillion, the lowest level in 14 years.The report also showed that the nation’s largest lenders continued to account for a shrinking share of mortgage originations, at around 65.3% of all loans, down from over 90% in 2008.

U.S. Home Prices Up 0.3 Percent for the Month; Up 8.5 Percent Year-Over-Year - Today, the Data & Analytics​ division of Black Knight Financial Services (formerly the LPS Data & Analytics​ division) released its latest Home Price Index (HPI) report, based on November 2013 residential real estate transactions. The Black Knight 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 Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales. To view and download the graphics within this release, click here.

Case-Shiller: Comp 20 House Prices increased 13.7% year-over-year in November - S&P/Case-Shiller released the monthly Home Price Indices for November ("November" is a 3 month average of September, October and November prices). This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities).   From S&P: Winter Shows No Signs of Cooling in Home Prices According to the S&P/Case-Shiller Home Price Indices Data through November 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed that the 10-City and 20-City Composites increased 13.8% and 13.7% year-over-year. Dallas posted its highest annual return of 9.9% since its inception in 2000. Chicago also stood out with an annual rate of 11.0%, its highest since December 1988. For the month of November, the two Composites declined 0.1%. After nine consecutive months of gains, this marks the first decrease since November 2012. Nine out of 20 cities recorded positive monthly returns ...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 20.8% from the peak, and up 0.9% in November (SA). The Composite 10 is up 20.1% from the post bubble low set in Jan 2012 (SA). The Composite 20 index is off 19.9% from the peak, and up 0.9% (SA) in November. The Composite 20 is up 20.8% from the post-bubble low set in Jan 2012 (SA). The second graph shows the Year over year change in both indices. The Composite 10 SA is up 13.9% compared to November 2012. The Composite 20 SA is up 13.7% compared to November 2012. Prices increased (SA) in 20 of the 20 Case-Shiller cities in November seasonally adjusted. (Prices increased in 9 of the 20 cities NSA) Prices in Las Vegas are off 45.8% from the peak, and prices in Denver and Dallas are at new highs (SA).

Case-Shiller Home Price Index Posts First Monthly Drop In One Year - And the hits just keep on coming: after the atrocious Durable Goods number, it was the turn of the Case Shiller housing data, which reported what many already knew - in November the 20 City Composite index (the Non-seasonally adjusted version which as the report's authors acknowledge is the accurate one) posted its first monthly decline, dropping modestly from 165.9 to 165.8, or down 0.06%, since November of 2012. And while on an annual basis, the increase was still a solid 13.71%, up from October's 13.61%, these backward looking numbers will quite soon turn sharply negative once the sharp bounce in 2013 - driven not by a housing recovery but by institutional all cash buyers and foreign money launderers seeking to park their cash in the US - get anniversaried.

A Look at Case-Shiller by Metro Area - Home prices extended a winning streak in November, with 2013 shaping up as the best year for gains since 2005, according to the S&P/Case-Shiller indexes.The composite 20-city home price index, a key gauge of U.S. home prices, was up 13.7% in November from a year earlier. All 20 cities have posted year-over-year gains for 11 straight months. Prices in the 20-city index were 0.1% lower than the prior month, but that’s mostly due to the weaker winter selling season. Adjusted for seasonal variations, prices were 0.9% higher month-over-month. Nine of the 20 cities posted a monthly declines, though on a seasonally adjusted basis priced no city saw a drop. Though home-price gains have been strong, the Case Shiller data are lagged. Many expect increases to moderate this year. “The rapid gains in house prices over the past year are the result of low inventories of homes for sale and strengthening home buying activity. But a slowdown in the pace of house price appreciation is in store for 2014,” s. “We are anticipating a meaningful increase in the supply of homes for sale. The survey evidence suggests that rising prices are motivating more owners to list their homes. And judging by the recovery in housing starts, the inventory of new homes for sale is also set to rise strongly.”

Comment on House Prices: Real Prices, Price-to-Rent Ratio, Cities - I've been hearing some reports of a slowdown in house price increases (more than the usual seasonal slowdown), but this slowdown in price increases is not showing up yet in the Case-Shiller index.  I expect to see smaller year-over-year price increases going forward. 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 $276,000 today adjusted for inflation (about 38%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation).The first graph shows the quarterly Case-Shiller National Index SA (through Q3 2013), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through November) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q1 2004 levels (and also back up to Q3 2008), and the Case-Shiller Composite 20 Index (SA) is back to June 2004 levels, and the CoreLogic index (NSA) is back to October 2004. 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 Q1 2001 levels, the Composite 20 index is back to May 2002, and the CoreLogic index back to May 2002.

Zillow: Case-Shiller House Price Index expected to show 13.5% year-over-year increase in December - The Case-Shiller house price indexes for November were released today. Zillow has started forecasting Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close.   It looks like another very strong month ...From Zillow: Case-Shiller Forecast: Apprieciation Remains Strong The Case-Shiller data for November came out this morning, and based on this information and the December 2013 Zillow Home Value Index (ZHVI, released January 22) we predict that next month’s Case-Shiller data (December 2013) will show that the non-seasonally adjusted (NSA) 20-City Composite Home Price Index and the NSA 10-City Composite Home Price Index increased 13.5 and 13.6 percent on a year-over-year basis, respectively. The seasonally adjusted (SA) month-over-month change from November to December will be 0.7 percent for both the 20-City Composite and 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 December will not be released until Tuesday, Feb. 25.  More on the differences between a repeat sales index, including the Case-Shiller indices, and an imputed hedonic index like the ZHVI can be found here. We expect home value appreciation to continue to moderate through the end of 2013 and into 2014, rising 4.8 percent between December 2013 and December 2014 — a rate much more in line with historic appreciation rates. The following table shows the Zillow forecast for the December Case-Shiller index.

Home Prices Rising Not the Same As Recovery. There's No Recovery - Home prices are still rising according to the latest NAR data showing a monthly gain of 1.3% and 9.9% year to year increase in December. That’s consistent with a wide variety of home price measures, including the real time index of listing prices reported by That index has proven to accurately depict real time market conditions, later verified by the closed sales data which lags the contract date by at least 3 months. Case Shiller’s lag is even worse. Because of its extreme, and unnecessary, smoothing methodology, it has a built in lag of around 5 1/2 months.  But does that mean that the housing market is “recovering” as widely touted by Fed mouthpieces and its Wall Street and media handmaidens? The answer is emphatically no. Existing home sales volume has rebounded to about half the peak levels of 2005. That’s so so. The reason prices are rising across the board is because the inventory crunch is persisting. There is a severe shortage of houses for sale in the most desirable markets. The idea that the housing “recovery” is contributing to economic growth is phony. The implication in all the pronouncements that housing is recovering is that home construction is rising. The fact is that new home construction has only had a dead cat bounce. It’s barely off the lows seen at the bottom of the housing crash in 2008 and 2009. The Commerce Department will release new home price, sales volume, and inventory data for December on Monday. It will again show that there is no recovery in the single family housing development industry. Multifamily bounced back in 2013, but there’s some question whether that can be sustained.

A Comment on the Pending Home Sales Index - From the NAR: December Pending Home Sales Fall The Pending Home Sales Index, a forward-looking indicator based on contract signings, fell 8.7 percent to 92.4 in December from a downwardly revised 101.2 in November, and is 8.8 percent below December 2012 when it was 101.3. The data reflect contracts but not closings, and are at the lowest level since October 2011, when the index was 92.2. . “Unusually disruptive weather across large stretches of the country in December forced people indoors and prevented some buyers from looking at homes or making offers,” he said. “Home prices rising faster than income is also giving pause to some potential buyers, while at the same time a lack of inventory means insufficient choice..”..The PHSI in the Northeast dropped 10.3 percent to 74.1 in December, and is 5.5 percent below a year ago. In the Midwest the index declined 6.8 percent to 93.6 in December, and is 6.9 percent lower than December 2012. Pending home sales in the South fell 8.8 percent to an index of 104.9 in December, and are 6.9 percent below a year ago. The index in the West, which is most impacted by constrained inventory, dropped 9.8 percent in December to 85.7, and is 16.0 percent below December 2012.A few comments:
• Mr. Yun blamed some of the decline on the weather (the weather was unusually bad in December), but the index was down sharply in the South too (probably not weather), and in the West (partially related to low inventories).
• My view is there were several reasons for the decline in this index: weather in some areas, fewer distressed sales, less investor buying, fewer "pending" short sales, and low inventories.  I think fewer distressed sales, fewer "pending" short sales, and less investor buying are all signs of a healthier market - even if overall sales decline.
• Mr Yun is forecasting 5.1 million existing home sales in 2014, about the same as in 2013. I'll take the under on that forecast, and I think it would be a positive sign if sales were under 5 million in 2014 as long as distressed sales continue to decline and conventional sales increase.

Pending Home Sales Chart - Housing Inflation Despite Weak Sales As Inventories Stay Tight | The Wall Street Examiner: The National Association of Realtors (NAR) Pending Home Sales Index (PHSI) number for December fell by 8.7%, crushing clueless Wall Street economists whose consensus guess was for a decline of 0.2%. The headline number is a seasonally adjusted representation of the trend, and may or may not reflect actual market conditions at the time.  The actual, not seasonally adjusted number of pending home sales (sales going under contract) for December was approximately 250,800, based on the historical average ratio of the PHSI to actual final sales. That was a drop of 86,400 from November.The average December decline going back to 2005 was a drop of 62,000. The December reading was the lowest level of sales since December 2010 when a sales vacuum followed the expiration of the second home buyers tax credit housing stimulus program. The current pending home sales index was down 6.1% from the year ago period. Blame the weather if you want, but any way you slice it, it was a bad performance. The disastrous seasonally adjusted representation was actually on point. As a result of the fall in pending home sales, the inventory to contracts ratio, a measure of market tightness, rose from 6.1 in November to 7.4 in December. This is normal seasonality. Listings typically increase more than sales in December. However, the ratio also rose on a year to year basis from 6.85 in December 2012. This would normally indicate a loosening market, but in this case the number still indicates tight conditions. Other than 2012, it’s the lowest reading since 2005.

No, The Plunge In Home Sales Was "Not" Due To Cold Weather - This morning's utter collapse in pending home sales - a 6-sigma miss by 'economists' unaware that it was cold in December - has been ushered away on the back of "weather" reasoning. However, a glance at the chart below confirms this is total bullshit. As Goldman Sachs admits "broad-based declines by region suggest that colder-than-average weather was likely not the primary driver." Via Goldman Sachs, Pending home sales dropped 8.7% in December (vs. consensus -0.3%), the largest decline since the expiration of the first-time homebuyer tax credit in 2010. Sales declined in the Northeast (-10.3%), West (-9.8%), South (-8.8%), and Midwest (-6.8%). The broad-based declines by region suggest that colder-than-average weather was likely not the primary driver, given slightly warmer-than-average temperatures on the Pacific coast in December.

New Home Sales Fall For Second Straight Month - The number of new homes sold in December fell for the second straight month, the Commerce Department announced Monday, to a seasonally-adjusted, annual rate of 414,000 homes. Despite the monthly fall, the annual rate was the best since 2008. Sales of new homes typically decline during the winter months, and the below-average temperatures experienced by most of the country may be playing a role in the sales declines. The average interest rate on 30-year mortgages also rose significantly in the final weeks of 2013, and may have affected prospective buyers’ ability to afford new homes.Despite the monthly declines, home sales for the entire year increased 16.4% compared to 2012, marking the second straight year that new home sales increased on an annual basis.

New Home Sales at 414,000 Annual Rate in December - The Census Bureau reports New Home Sales in December were at a seasonally adjusted annual rate (SAAR) of 414 thousand.  November sales were revised down from 464 thousand to 445 thousand, and October sales were revised down from 474 thousand to 463 thousand.    The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in December 2013 were at a seasonally adjusted annual rate of 414,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 7.0 percent below the revised November rate of 445,000, but is 4.5 percent above the December 2012 estimate of 396,000. An estimated 428,000 new homes were sold in 2013. This is 16.4 percent above the 2012 figure of 368,000.Even with the increase this year, new home sales are still near the bottom for previous recessions. The second graph shows New Home Months of Supply. The months of supply increased in December to 5.0 months from 4.7 months in November. The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal).This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale is near the record low. The combined total of completed and under construction is still very low. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In December 2013 (red column), 28 thousand new homes were sold (NSA). Last year 28 thousand homes were also sold in December. The high for December was 87 thousand in 2005, and the low for December was 23 thousand in 1966 and 2010.

Charting New Home Sales: Good and Bad in December Report - Monday’s new-home sale report for December wasn’t great. But it’s too soon to tell whether the 7% drop in sales from November should be a cause for concern to homebuilders.  The Commerce Department revised down sales for November and October, which had rebounded strongly from the summer drop-off in sales that followed a big spike in mortgage rates. Here’s a look at today’s report in charts: Annually, we’re improving, but this gives us a good perspective on just how deep the downturn has been and how long it is taking us to come back. We’re still well below the levels of the 1990-91 downturn.  The monthly figures show that sales stumbled in the summer, after mortgage rates went up. They appeared to recover in October and November, but dropped again in December. Potential reasons: weather, affordability and low inventory.This is the same chart, looking at the year-over-year change in new homes sold Inventories, while up a little bit this year, are still very low… And while builders are selling far fewer homes than in normal periods, they appear to be selling more expensive properties.

New Home Sales Plunge; Miss By Most Since July - The taper-driven rate-rise scare mid-summer that stalled home-buyer (speculator) confidence has been matched by the Decmeber 2013 numbers. New Home sales plunged 7.0% against expectations of only a 1.9% drop as total sales (seasonally adjusted and annualized) dropped to 414k - the biggest miss (against 455k exp.) since July 2013. Of course the data is dreadfully sparse and noisy, as we note a mere 1,000 (non-seasonally-adjusted) homes were sold in the Northeast. Notably, the exuberant levels of the last few months have also been revised markedly lower.  Perhaps the most disturbing data point was the number of actual new houses sold in the Northeast region when observed on an unadjusted, not annualized basis. The only thing one can possibly say here is that at 1,000, at least it wasn't zero.

New Home Sales Tank in December - It's The Demand, Stupid! - New home sales in the US in December were an unqualified disaster. The headline number came in at a seasonally adjusted rate of 414,000 for the month, missing the consensus estimate of 457,000 by a mile. Miracle of miracles, the headline seasonally adjusted number accurately conveyed the reality for a change. Actual, not seasonally adjusted (NSA) sales in December totaled 28,000, a drop of 4,000 (-12.5%) from November and unchanged from December 2012. The month to month drop was much worse than is typical for December. This may be one of those rare instances where it is legitimate to blame the weather. If that’s the case, the numbers will snap back with the Spring thaw. January is likely to be another month in the deep freeze.  The mainstream media and government functionaries have been happy to proclaim a housing recovery that is contributing to economic growth. Yes, there’s been growth. A year ago the annual growth rate hit an astounding 30%. But from what? That gain came from such a low level that it was barely noticeable in the big picture. New home sales today remain only slightly above the record lows set in 2008. Monthly sales have been in the 25,000-45,000 range over the past year. Compare that with 2005 when they were in the 85,000 to 125,000 range. Of course, back then, the housing bubble was the economy.

New Home Sales: Weak Finish, Solid Growth in 2013 - Earlier: New Home Sales at 414,000 Annual Rate in December Although sales in December were weak, the Census Bureau reported annual sales were up 16.4% from 2012.  This was the highest level for sales since 2008, but still the sixth worst year on record.Sales would have been higher in 2013, except some homebuilders were land constrained (not enough entitled land), and many homebuilders pushed prices sacrificing a little volume.  Still a 16% annual increase in sales is solid growth. This table shows the annual sales rate for the last ten years.Based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years - substantially higher than the 428 thousand sales in 2013.  This suggests significant upside over the next several years.   So I expect the housing recovery to continue.  Note: Inventories of completed and "under construction" homes are still historically low. The Census Bureau reported 40 thousand completed homes for sale, just above the record low set in June 2013. And there were 97 thousand homes "under construction" in December, well below the median of 185 thousand over the last 40 years. So there are no concerns about too much inventory (inventory is probably too low in some areas).And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to close over the next few years.

New Home Prices: New Record for Average and Median in 2013 - Here are two graphs I haven't for some time ...  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 December 2013 was $270,200; the average sales price was $311,400." 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 have moved to higher price points. The average price in 2013 was $320,900, above the previous high of $313,600 in 2007. The median price in 2013 was $265,800, above the previous high of $247,900 in 2009. 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.

A reminder about housing sales and prices - House prices show a lot of seasonality, so the only good way to keep track of them is YoY, and YoY price increases are still running very strong. So how can I be forecasting a decline in house sales if prices have continued to rise so strongly?  Because sales will peak and turn down before prices. In case you needed a refresher, here's a graph of sales of single family homes (red, right scale) compared with median prices for new single family homes (blue, left scale) for the last 10 years: Recall that sales peaked a full two years before nominal prices turned down.  While I don't believe we are in a new bubble (adjusted for income, prices haven't risen nearly so much off their bottom), there has been quite an outcry that traditional first time homebuyers are priced out of some markets. In any event, I believe the transmission of higher interest rates through the housing market will unfold the same way.  Sales will turn down before prices do.  But isn't inventory still tight?  Yes, but remember that the months-of-supply metric can resolve either through more inventory coming on the market, or monthly sales declining, or both, which is what happened when the housing bubble burst.  If in the next few months sales decline to 900,000 annualized, that will go a long way to a "normal" number of months of supply.

Vital Signs: Inventory of New Homes Remain Low -- New-home sales ended 2013 with a whimper, but that doesn’t mean the housing industry will be hurting in 2014. Sales of new homes unexpectedly fell 7% in December, to an annual rate of just 414,000. But bad weather may have kept some potential buyers away from open houses. If so, sales should pop once the weather moderates. What’s important to the outlook for residential construction is the new-home market is in better balance than it was during the bust. Demand has held steady and builders are no longer carrying a large supply of houses for sale. The inventory of new homes for sale spiked over the summer when a jump in mortgage rates made potential buyers skittish. But since then, supply has come back down to manageable levels. Even at December’s reduced sales pace, the inventory of homes for sale would last only 5 months. The low supply means much of the demand for new homes in 2014 will have to be satisfied by new construction, not what’s already on the market. That’s why home builders are optimistic they will stay busy in 2014.

The housing slowdown has already begun - With yesterday morning's surprise -50,000 month/month decline in new home sales, the 2013 housing data is in the books, and it confirms that in 2013 there was a marked slowdown in the housing recovery. Below is the graph of building permits (blue), starts (green), new home sales (beige) and existing home sales (orange) for the last three years, normed to 100 at the start of each year: After being up over 10% in each of 2011 and 2012 (over 20% as to permits), permits, starts, and new home sales finished 2013 up 10% or less for the year, and existing home sales are actually negative for the year. Now here is the same data presented as YoY percentage change, and compared with the YoY change in interest rates (red, inverted, right scale): The simple fact is that the housing market follows interest rates usually with a six to nine month lag. Finally, here are housing permits (blue) and starts (green) in 100,000's YoY vs. interest rates, inverted: The past history is that a 1% increase in interest rates typically is consistent with a 100,000 decline in permits and starts. The data that we have seen in December confirms that in 2013 we already have seen a slowdown, and is in accord with my forecast that at some point this year, we will see a YoY change of -100,000 in permits and/or starts. Could it be different this time? Of course, but history is on my side.

Lawler on Homebuilders: Weak Net Orders, "Considerable optimism about the prospects for home sales in 2014"  - From economist Tom Lawler: Below is a summary table of some stats from large publicly-traded builders who have reported results for last quarter. Note that for the six builders in the table, “home sales” based on net orders in 2013 were up 5.7% from 2012, while “home sales” defined as closed sales were up 20.1% on the year.The combination of higher mortgage rates and unusually aggressive home price increases in many parts of the country led to a substantial dip in new home contract signings in the second half of last year. Most builders expressed considerable optimism about the prospects for home sales in 2014, and are planning accordingly, and most increased significantly their land/lot positions over the last year or two. Most builders also reported gross margins in the last quarter of 2013 that were at or near seven year highs. The combination of elevated land/lot positions and elevated margins suggests that any slower-than-expected pace of home sales would likely lead to little or no home price growth in 2014. Builder results reported so far suggest that Census’ new home sales estimates for the fourth quarter of 2013 are likely to be revised downward.

Why the Homeownership Rate Is Misleading -- On Friday, the Census Bureau will remind us that the homeownership rate is at or near an 18-year low. After rising to an all-time high of 69.2 percent in 2005 near the height of the housing bubble, the homeownership rate fell to 64.9 percent in 2013, the lowest level since 1995. This drop represents millions of people who lost homes to foreclosure, can’t get a mortgage or haven’t been able to save for a down payment. Furthermore, the homeownership rate is likely to fall further before hitting bottom. Shouldn’t we be panicking that the American dream of homeownership is drifting out of reach?  Nope. At this stage of the housing recovery, the falling homeownership rate turns out to be misleading. In fact, for young adults, who were hit especially hard in the recession and housing crisis, the decline in their homeownership rate might paradoxically be a sign of improvement. The rate can mislead in the other direction, too: During the worst of the housing crisis, the falling homeownership rate clearly understated the damage done.Let me explain. Households can be one of two things: owners or renters. The homeownership rate equals the share of households that are owners. But look at people instead of households, and people have a third option: living under someone else’s roof. When young adults live with their parents, or older people live with their grown children, or people live with housemates, they count as part of someone else’s household. Those people are technically neither owners nor renters, and they don’t count in the homeownership rate. That’s why the homeownership rate can mislead: It omits people who are not in the housing market themselves as owners or renters.

The Real State of the Union - 2014 Edition - As I have done in the past, I like to post a non-political, realistic version of the real State of the Union, just in time for the Presidential summary.  Generally, I think that a few graphs give us the general idea of what has happened over the past year since the last address.  In this posting, I'll look at two main issues; income inequality and the federal debt and present a few graphs that illustrate the real state of the union. The President has recently been focussing some of his efforts/talking points on income inequality.  To that end, here is a graph showing the share of labor compensation in GDP, telling us how much of the nation's total income is going to laborers instead of capital-holders: The 2011 level of 62.2 percent is just above the lowest level seen since 1947 that was seen in 2010 and is well below the level of 65.4 percent in 2000.  To at least some degree, the decline can be attributed to increased competition from imports; as an industry faces greater competition from imports, the share of income going to labor drops.   There's nothing like sending jobs overseas!  In contrast, here is a graph showing the increase in after-tax corporate profitability since 2000: These graphs show us that corporations have benefitted over the past 13 years while laborers have not.  The White House definitely has its work cut out on the issue of income inequality.  Let's switch gears and look at the current federal public debt situation.  Here is a graph showing the growth in the total federal public debt since the President Obama's first year in office from data on the Treasury's Debt to the Penny website:

BEA: Personal Income increased less than 0.1% in December, Core PCE prices up 1.2% year-over-year - The BEA released the Personal Income and Outlays report for December:  Personal income increased $2.3 billion, or less than 0.1 percent ... in December according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $44.1 billion, or 0.4 percent...Real PCE -- PCE adjusted to remove price changes -- increased 0.2 percent in December, compared with an increase of 0.6 percent in November. ... PCE price index -- The price index for PCE increased 0.2 percent in December, compared with an increase of less than 0.1 percent in November. The PCE price index, excluding food and energy, increased 0.1 percent in December, the same increase as in November...Personal saving -- DPI less personal outlays -- was $495.2 billion in December, compared with $541.0 billion in November. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 3.9 percent in December, compared with 4.3 percent in November. A key point is that the PCE price index was only up 1.1% year-over-year (1.2% for core PCE).   PCE increased at a 2.5% in December, but core PCE only increased at a 1.1% annualized rate in December (Well below the Fed's target).

Real Disposable Income Plummets Most In 40 Years -- We may not know much about "Keynesian economics" (and neither does anyone else: they just plug and pray, literally), but we know one thing: when real disposable personal income drops by 0.2% from a month earlier, and plummets by 2.7% from a year ago,  the biggest collapse since the semi-depression in 1974, something is wrong with the US consumer

The Latest on Real Disposable Income Per Capita - This morning I posted my latest Big Four update, which included today's release of the December data for 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 December nominal -0.09% month-over-month is disappointing, and when we adjust for inflation, the real MoM change is an even smaller -0.29%. The year-over-year metrics (-2.35% nominal and -3.39% real) should be ignored because they are skewed by the 2012 year-end tax jiggling. In another month or two, we'll have a more rational framework for the YoY data.  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 55.4% since then. But the real purchasing power of those dollars is up only 18.5%. 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.

Patterns of consumer spending show expansion to continue -- In the past I've noted that comparing the performance of personal consumption expenditures and real retail sales is a good way to see where we are in the economic cycle. Below is a graph comparing the two by subtracting YoY PCE growth from YoY real retail sales growth, through 1997. Note that the two interrelate in a very specific and non-random way: Early in economic expansions, YoY real retail sales growth far outstrip YoY PCE growth. As the economy wanes into contraction, YoY real retail sales grow less and ultimately contract more than YoY PCE's. You can see that retail sales minus PCE's are always negative BEFORE the economy ever tips into recession. That's 11 of 11 times. Further, in 10 of those 11 times (1957 being the noteworthy exception), the number was not just negative, but was continuing to decline for a significant period before we tipped into recession. This makes perfect sense, as retail sales generally include many far more discretionary purchases. As the economy accelerates, consumers make more discretionary purchases. As it slows, the more discretionary retail purchases are the first things cut. So, where do we stand now? Here's an update of the same graph from 1997 to the present: YoY retail sales are still stronger than YoY PCE growth. Similarly, while retail sales as a whole tend to plateau before recessions, measured per capita they are a good leading indicator, as households pull in their horns as to retail spending, which is part of what precipitates a recession. Here's real retail sales per capita for the last 20 years: These too are still improving. Both of these measures show us right now the economic expansion is in good shape.

Consumer Confidence Strengthens in January - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through January 16. The 80.7 reading was above the 78.1 forecast of and 6.1 above the November 77.5 (previously reported at 78.1). This measure of confidence has risen from its interim low of 72.0 in November but remains below its 82.1 interim high in June of last year. Here is an excerpt from the Conference Board report. "Consumers' assessment of the present situation continues to improve, with both business conditions and the job market rated more favorably. Looking ahead six months, consumers expect the economy and their earnings to improve, but were somewhat mixed regarding the outlook for jobs. All in all, confidence appears to be back on track and rising expectations suggest the economy may pick up some momentum in the months ahead."  Consumers' assessment of overall present-day conditions continues to improve. Those claiming business conditions are "good" increased to 21.5 percent from 20.2 percent, while those claiming business conditions are "bad" edged down to 22.8 percent from 23.2 percent. Consumers' appraisal of the labor market was also more positive. Those saying jobs are "plentiful" ticked up to 12.7 percent from 11.9 percent, while those saying jobs are "hard to get" decreased slightly to 32.6 percent from 32.9 percent.  Consumers' expectations, which had improved sharply in December, increased again in January. Those expecting business conditions to improve over the next six months remained unchanged at 17.4 percent, while those anticipating business conditions to worsen decreased to 12.1 percent from 13.9 percent. Consumers' outlook for the labor market was mixed. Those expecting more jobs in the months ahead declined to 15.4 percent from 17.1 percent. However, those anticipating fewer jobs decreased to 18.3 percent from 19.4 percent. The proportion of consumers expecting their incomes to increase rose to 15.8 percent from 13.9 percent, while those anticipating a decrease in their incomes declined to 13.6 percent from 14.3 percent.   [press release]

Michigan Consumer Sentiment: Little Changed - The University of Michigan Consumer Sentiment final number for January came in at 81.2, an increase from the 80.4 preliminary report, but below the December final of 82.5. Today's was slightly above the forecast of 81.0. The index is off its 85.1 interim high in July of last year. See the chart below for a long-term perspective on this widely watched indicator. 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 5 percent below the average reading (arithmetic mean) and 3 percent below the geometric mean. The current index level is at the 36th percentile of the 433 monthly data points in this series. The Michigan average since its inception is 85.1. During non-recessionary years the average is 87.5. The average during the five recessions is 69.3. So the latest sentiment number puts us 11.9 points above the average recession mindset and 6.3 points below the non-recession average.

UMich Confidence Drops Most In 3 Months - Previous month's epic miss and hurriedly revised expectations from UMich confidence was 'baffled with schizophrenic bullshit' when the Conference Board printed at near record post-crisis highs earlier in the week. It is perhaps not unexpected that despite a drop MoM, following the huge miss last month that UMich confidence would very modestly beat expectations. As in the last 2 cycles, we saw an echo surge in confidence and that has now (just as in the last two cycles of confidence) begun to fade. Both current conditions and economic outlook fell MoM.

Vital Signs: The 15%ers Are Feeling Better — and That’s Good for Economy - U.S. consumers are more upbeat about the economy in January. The Conference Board said Tuesday its confidence index increased 3.2 points to 80.7 in January, besting the 77.6 expected by economists. The rebound in confidence this month was quite evident among highest earners — households making more than $125,000 annually. These consumers make up roughly the top 15% of households by income bracket. Their index popped up to 126.4 in January, reversing the slow fade posted from September through December. (Besides receiving bigger paychecks, upper income families also tend to own stocks and their homes. As a result, they have benefited more than other income groups from last year’s jump in equity prices and rising home values.) Why is sentiment among the top 15% important to the economic outlook? Although confidence doesn’t always sway buying habits, higher-income families generate an over-sized share of consumer spending. According to Commerce Department data, in 2012 the top 20% of households (those earning $96,228 or more) accounted for 38.7% of total consumer expenditures. Consequently, if high-income consumers felt nervous enough about their finances that they cut back their spending, the economy would suffer. That doesn’t seem to be the case at the start of this year. No surprise that sellers of luxury products have benefited from the financial gains among wealthier families. But the two areas where higher-income families have an under-sized share of spending according to Commerce: paying rent and tobacco products.

Americans Burned Through $46 Billion In Savings To Fund December Purchases: Savings Rate Lowest Since January 2013 - If there was any confusion where the funding for what little shopping spree Americans engaged in during December, it should all go away now. While the street was expecting a 0.2% increase in both personal income and personal spending in the month of December, what it got instead was a flat print in income (i.e. unchanged from November) while spending (mostly for non-durable goods) spiked by 0.4% meaning there was a 0.4% funding hold that had to be filled somehow. That somehow we now know is personal savings, which tumbled from a revised 4.3% to 3.9% - the lowest since January 2013, only back then incomes would rise for the rest of the year driven by the 30% increase in the S&P "wealth effect." This time, with the Fed now tapering QE, the only way is down for both the "wealth effect" and Personal Incomes... and thus Personal spending, that majority component of US GDP. Finally, this data means that according to the BEA in December US consumers funded some $46 billion in spending through burning down their savings.

No: Saving Does Not Increase Savings -The misconceptions embodied in this post’s headline sow more confusion in economic discussions than any others. “Saving” and “Savings” seem like simple concepts, but they’re not. They have many different meanings, and their different usages (often implicit or unconscious) make coherent understanding and discussion impossible — even, often, in writings by those who have otherwise clear understandings of the workings of financial systems. In short: if you disagree with this post’s headline, you are thinking (perhaps unconsciously) in the “Loanable Funds” model. And the loanable funds model is complete, incoherent bunk. (I’m not even going to bother citing the hundreds of supporting links here, including unequivocal papers from central bank research departments worldwide; Google them.) Think this through with me: Your employer transfers $100K from their bank account to yours to pay you for your work. You’ve saved. But is there more savings in the banks? More money to lend? Obviously not. You buy $50K in goods from your employer, transferring the money from your account to theirs. They’ve saved. You’ve dissaved (spent). But is there more or less savings in the banks? More or less money to lend? Obviously not. You transfer $50K from your bank to your employer’s, in exchange for $50K in Apple stock or government bonds. Did you just “save” again? Is there more savings? More money to lend? Obviously not.

Shopping Malls Are Going Extinct - All across America, once-vibrant shopping malls are boarded up and decaying. Traffic-driving anchors like Sears and JCPenney are shutting down stores, and mall owners are having a hard time finding retailers large enough to replace them. With a fresh wave of closures on the horizon, the problem is set to accelerate, according to retail and real estate analysts. About 15% of U.S. malls will fail or be converted into non-retail space within the next 10 years, according to Green Street Advisors, a real estate and REIT analytics firm. That's an increase from less than two years ago, when the firm predicted 10% of malls would fail or be converted. "The risk of failure for a mall increases dramatically once you see anchor closures," said Cedric Lachance, managing director of Green Street Advisors. "Their health is very important ... and most of them are highly likely to continue closing stores." Within 15 to 20 years, retail consultant Howard Davidowitz expects as many as half of America's shopping malls to fail. He predicts that only upscale shopping centers with anchors like Saks Fifth Avenue and Neiman Marcus will survive. "Middle-level stores in middle-level malls are going to be extinct because they don't make sense," said Davidowitz, chairman of Davidowitz & Associates, Inc., a retail consulting and investment banking firm. "That's why we haven't built a major enclosed mall since 2006."

Retailers Ask: Where Did Teenagers Go? - Sales are down across the shelves of many traditional teenage apparel retailers, and some analysts and others suggest that it’s not just a tired fashion sense causing the slump. The competition for teenage dollars, at a time of high unemployment within that age group, spans from more stores to shop in to more tempting technology.And sometimes phones loaded with apps or a game box trump the latest in jeans.Mainstays in the industry like Abercrombie & Fitch, American Eagle Outfitters and Aéropostale, which dominated teenage closets for years, have been among those hit hard.The grim reports of the last holiday season have already proved punishing for senior executives at the helm of a few retailers.According to a survey of analysts conducted by Thomson Reuters, sales at teenage apparel retailers open for more than a year, like Wet Seal, Zumiez, Abercrombie and American Eagle, are expected to be 6.4 percent lower in the fourth quarter over the previous period. That is worse than any other retail category.

Dealerships say they have too many cars  --Automakers should watch their bloated inventories even though 2014 seems like it will be a good year for car sales, AutoNation Chairman and CEO Mike Jackson told CNBC on Thursday. The automakers have a "pretty bizarre" way of calculating inventories to justify these levels, he said in a "Squawk Box" interview. "But if you cut through the bogus calculations and look at dealer inventory for the Detroit Three, it's over a 100-day supply. And it simply doesn't need to be there." In response, Joe Hinrichs -- president of the Americas at Ford -- told CNBC: "We have been cutting some production in the fourth quarter of last year and in the first quarter of this year on a couple of our product lines where we saw the inventory grow a little bit." But Hinrichs added, "The industry is a little different now. With our capacity running max out, we actually grow an inventory in the winter, come down in the spring and summer because we run our plants full all year round. In the old days when we had excess capacity, we'd take the plants down in the winter and work overtime in the spring/summer to supply to the demand."He added: "We're watching it carefully, but I think we're going to be OK."

Vehicle Sales Forecasts: Decent Sales Expected for January - The automakers will report January vehicle sales on Monday, February 3rd.Here are a few forecasts:From Winter Weather Freezes January Auto Sales ... Says forecasts that 1,036,533 new cars and trucks will be sold in the U.S. in January for an estimated Seasonally Adjusted Annual Rate (SAAR) of 15.6 million. ... From Kelley Blue Book: New-Car Sales To Improve Nearly 2 Percent From Last Year; Kelley Blue Book Projects Best January Since 2007New-vehicle sales are expected to improve 1.6 percent year-over-year in January to a total of 1.06 million units, and an estimated 15.9 million seasonally adjusted annual rate (SAAR), according to Kelley Blue Book. ... At 15.9 million, this would be the highest recorded January SAAR since 2007, when it was 16.4 million. ... From J.D. Power: Strong January New-Vehicle Sales Produce Sunny Forecast for Auto IndustryNew-vehicle sales for January 2014 are expected to rise 3%, according to a sales forecast jointly issued by the Power Information Network (PIN) from J.D. Power and LMC Automotive. According to the forecast, consumers are expected to purchase 847,000 new vehicles in January 2014, meaning that dealerships would move more metal than in any January since 2004. It appears sales in January were OK even with the cold weather (January is usually the weakest month of the year, so there is a large seasonal adjustment).

Do White Buyers Get Better Loan Deals From Car Dealers?  - White car buyers are more likely to get better interest rates from car dealers than minorities, even if they don’t spend time and effort haggling to get the best rate, according to research by a consumer group. A survey of car buyers conducted for the Durham, N.C.-based Center for Responsible Lending is likely to add fuel to the debate about whether minority car buyers are treated fairly at dealerships, an issue being investigated by government officials.  The report, released last week, concludes that minorities still receive higher rates, even if they try to negotiate with their dealer.

Durable Goods New Orders Bomb Out for December 2013 - The Durable Goods, advance report shows new orders plunged by -4.3% for December 2013 after a 2.6% increase in November.  The really bad news in this report is core capital goods declined by -1.3%.  For the last two of three months durable goods new orders as a whole have declined.  While December is shaping up to a bad month for the economy, a word of caution as durable goods are often revised dramatically.  Below is a graph of all transportation equipment new orders, which plunged by -9.5% for the month.  This is not due to volatile aircraft orders as Motor vehicles & parts declined by -5.8%, also not a good sign.   Aircraft and parts new orders from the non-defense sector decreased -17.5%.  Aircraft & parts from the defense sector decreased by -12.9%.   Aircraft orders are notoriously volatile, each order is worth millions if not billions, and as a result aircraft manufacturing can skew durable goods new orders on a monthly comparison basis.  Core capital goods new orders dropped by -1.3% and has declined two of the past three months, although November's core capital goods new orders increased by 2.6%.  The drop in core capital goods new orders implies a slowing of economic activity.  Core capital goods is an investment gauge for the bet the private sector is placing on America's future economic growth and excludes aircraft & parts and defense capital goods.  Capital goods are things like machinery for factories, measurement equipment, truck fleets, computers and so on.  Capital goods are basically the investment types of products one needs to run a business. and often big ticket items.  A decline in new orders indicates businesses are not reinvesting in themselves.  Computers and related products by themselves dropped -7.8% in new orders, although who in their right mind would use Windows 8?  To put the monthly percentage change in perspective, below is the graph of core capital goods new orders, monthly percentage change going back to 2000.  Looks like noise right?  We use so many graphs to amplify trends for one month of data does not an economy make, so be aware month to month changes can be very misleading.

December Durable Goods Report: A Massive Disappointment - The January Advance Report on December 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 December decreased $10.3 billion or 4.3 percent to $229.3 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 2.6 percent November increase. Excluding transportation, new orders decreased 1.6 percent. Excluding defense, new orders decreased 3.7 percent.  Transportation equipment, also down two of the last three months, led the decrease, $7.7 billion or 9.5 percent to $73.1 billion. This was led by nondefense aircraft and parts, which decreased $3.8 billion. Download full PDF  The latest new orders number came in at -4.3% percent month-over-month, a dramatic plunge and way below the forecast of 1.8 percent. Year-over-year new orders were up a mere 0.1 percent. If we exclude transportation, "core" durable goods came in at -1.6 percent MoM and 2.9 percent YoY. was looking for a 0.5 percent MoM increase. If we exclude both transportation and defense, durable goods came in at -0.5 percent MoM but up 13.3 percent YoY (attributable to the -11.7 percent drop in December 2012, courtesy of the Fiscal Cliff). The Core Capital Goods number (captial goods used in the production of goods or services) was also negative at -1.3 percent MoM, but the YoY number is a positive 6.2 percent, similarly attributable in large part to the comparison with the Fiscal Cliff belt-tightening of December 2012.The first chart is an overlay of durable goods new orders and the S&P 500. We see an obvious correlation between the two, especially over the past decade, with the market, not surprisingly, as the more volatile of the two. Over the past year, the market has certainly pulled away from the durable goods reality, something we also saw in the late 1990s.

US durable goods swoon in December, casting pall on economy : Orders for long-lasting U.S. manufactured goods unexpectedly fell in December as did a gauge of planned business spending on capital goods, which could cast a shadow on an otherwise bright economic outlook. The Commerce Department said on Tuesday durable goods orders dropped 4.3 percent, pulled down by weak demand for transportation equipment, primary metals, computers and electronic products and capital goods. Last month's decline in orders for durable goods, which range from toasters to aircraft, was the largest since July and reversed November's revised 2.6 percent rise. Economists polled by Reuters had expected orders to rise 1.8 percent in December after November's previously reported 3.4 percent advance. Durable goods orders fell despite a strong rise in aircraft orders at Boeing. The aircraft company reported on its website that it received orders for 319 planes last month compared with 110 in November. Orders may have dropped because the model used by the government to iron out seasonal fluctuations was likely anticipating an increase in aircraft orders in December anyway. Excluding transportation, orders fell 1.6 percent, the biggest decline since March, after edging up 0.1 percent in November. While durable goods data is volatile from month to month, details of the report could support views that factory activity will cool off early this year after output grew at its fastest pace in nearly two years in the fourth quarter. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, fell 1.3 percent after rising by a revised 2.6 percent in November.

Durable Goods Orders Flat for Past Two Years  - The headline number for seasonally adjusted, nominal durable goods orders fell 4.3% in December. That was worse than the lowest guess of economists in a survey conducted by Bloomberg.  Actual, Real Durable Goods Orders Were At Same Level as December 2012 and 2011 In real terms, adjusted for inflation, and not seasonally adjusted, the actual unit volume of orders has been unchanged for two years. There is no growth. The manufacturing “recovery” ended in December 2011. In fact, this year shows a 0.8% year to year decline. Durable goods orders unit volume remains 14% below the December 2007 level. On a month to month basis, December is always an up month. This year was no exception, but the 6.2% gain from November is barely more than half of the usual 11.7% increase. It was way below the December 2012 jump of 16.3%. The Fed went on a money printing binge with QE3-4 taking effect in November 2012. From then until lately, stocks soared. But durable goods orders have stalled. The Fed driven stock market bubble is a fact. The manufacturing recovery is a myth.

Analysis: Not Really Any Positives in Durable-Goods Report - Sarah Watt-House, economist with Wells Fargo, and Mathew Passy break down the disappointing reading on Durable Goods for December.

Chart Of The Day: Orders Of Computers And Electronic Products Plunge To 1993 Levels - Because, like, nobody orders computers or electronics when, you know, it's cold out, in December the orders of computers and electronic products dropped to a level not seen since 1993. And yes, they did have computers back in 1993.

Vital Signs: Businesses Hem and Haw Over Spending - After putting together four months of gains through June, new orders for nondefense capital goods excluding aircraft — a proxy for business equipment investment — declined in four of the last six months of 2013. The volatility reflects the timidity among businesses when it comes to spending money for much of this recovery. The contribution to gross domestic product growth from business equipment spending has declined in the past three years. Some evidence suggests that caution could dissipate this year. Stronger demand from consumers and foreign customers could also push U.S. businesses to upgrade and expand their facilities. The uneven trend in new orders doesn’t mean the manufacturers of capex goods will suddenly close up shop. The backlog of unfilled orders in December was almost 10% higher at the end of 2013 than the end of 2012. Except for vehicles, all the major capital goods industries have seen unfilled orders increase over the year. But unless more new orders flow in, the pipeline will start to empty out later on in 2014.

December Manufacturing ISM Revised Lower, From Beat To Miss -- On January 2, the Institute for Supply Management announced the December Manufacturing ISM print: at 57.0, it was a beat of expectations of 56.8, and resulted in an expected boost to markets. Moments ago, the 57.0 print was quietly revised to 56.5. Which means the beat of consensus expectations quietly became a miss. But please don't say anything, because all that pro-cyclical, bullish media spin that was fabulated on the basis of a data point which subsequently was revised to a disappointment, would have to be revised...

Richmond Fed Manufacturing: Steady Growth in January - 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 the 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's update shows the manufacturing composite at 12, down slightly from last month's 13. This was a bit below the forecast for unchanged at 13. 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 12.7. Here is a snapshot of the complete Richmond Fed Manufacturing Composite series.

Chicago PMI 59.6 Beats Despite Decline: Employment Drops Most Since April - The worst news that could happen for stocks today was a Chicago PMI beat - after all it is becoming all too clear that the market is begging for a tapering of the tapering, and any and every bad news will be welcome. Alas, the Purchasing Managers Institute did not get the memo, and moments ago MNI-Deutsche Boerse reported (to subscribers first), that the January print was 59.6, below the revised December print of 60.8 but above the expected 59.0. This was thje third consecutive monthly fall following October’s jump to the highest since March 2011.  The only silver lining for stocks was that the Employment component slipped into contraction for the first time in nine months, printing at 49.2, down from 51.6. Must have been the fault of that horrible polar vortex in January then.. Or Bush of course.

The Myth of Industrial Rebound – Rattner - WITH metronomic regularity, gauzy accounts extol the return of manufacturing jobs to the United States.One day, it’s Master Lock bringing combination lock fabrication back to Milwaukee from China. Another, it’s Element Electronics commencing assembly of television sets — a function long gone from the United States — in a factory near Detroit.Breathless headlines in recent months about a “new industrial revolution” and “the promise of a ‘Made in America’ era” suggest it’s a renaissance. This week, when President Obama gives his State of the Union address, he will most likely yet again stress his plans to strengthen our manufacturing base. But we need to get real about the so-called renaissance, which has in reality been a trickle of jobs, often dependent on huge public subsidies. Most important, in order to compete with China and other low-wage countries, these new jobs offer less in health care, pension and benefits than industrial workers historically received.

Steve Rattner’s Manufacturing Muddle - NYT contributor Steve Rattner makes some good points about the state of US manufacturing in an oped this AM but the argument is confusing and unconvincing due to a pretty egregious omission.   If our manufacturing wages are so low relative to both their past levels and some of our advanced economy competitors (he mentions Germany), why are we not more globally competitive in the sector?  According to Steve, it’s not productivity differences—our advanced manufacturers are highly innovative, he claims.  It can’t be just China undercutting us on price—again, look at the German trade surpluses. The key omission in Steve’s analysis is thus the value of the dollar in international markets, or exchange rates.  Dean Baker was all over this well before me this AM.Rattner never once mentions the value of the dollar. This happens to be huge. [Data show]…that manufacturing employment first began to fall in the late 1990s, even as the economy was booming, after the dollar soared due to the botched bailout from the East Asian financial crisis. The run-up in the dollar had the equivalent effect of placing a 30 percent tariff on our exports and giving a 30 percent subsidy for imports. Under these circumstances, it is hardly surprising that manufacturing employment fell and the trade deficit soared. There’s no question that manufacturing employment and output in advanced economies are declining as other developing competitors come on line.  And it would be foolish to pin one’s hope for a full employment recovery on any one sector.  The interesting question is not “will a manufacturing revival ‘restore the US economy’”?  Though some politicians go there, Steve’s attacking a straw man–this is an area I work in a lot, and I’m not aware of any economists who think of the sector that way.

Foxconn eyes factories in U.S., Indonesia as China's luster fades (Reuters) - Taiwan's Foxconn Technology Group, the major supplier of Apple Inc's iPhones and iPads, may build high-tech factories in the United States and low-cost plants in Indonesia as the appeal of 'made in China' fades into a burden. Beset by rising costs and labor unrest in China, Chairman Terry Gou told employees on Sunday that Foxconn is considering diversifying away from its manufacturing heartland. The world's largest contract maker of electronic goods has little choice if it's to protect margins and stay ahead of peers who have adapted the Foxconn playbook into their own success stories. "The U.S. is a must-go market," said Gou, speaking at the group's annual party on Sunday to mark the end of the Chinese year. Many customers and partners have asked Foxconn to open shop in the U.S., Gou said, with an eye on advanced manufacturing much closer to their home base. At the same time, Indonesia will be a top priority this year as a potential production base with attractive costs and skills. That would tie in with Foxconn's deal to design and market phones in the country with BlackBerry Ltd as the Canadian company seeks to reverse its decline in the smartphone business.

Outsiders, Not Auto Plant, Battle U.A.W. in Tennessee -— At the Volkswagen plant nestled in Tennessee’s rolling hills, a unionization drive has drawn national attention as business groups worry about organized labor’s efforts to gain its first foothold at a foreign-owned automobile plant in the South. In a region known as anti-union, many view VW’s response as unusual, if not topsy-turvy.Unlike most companies that confront unionization efforts, Volkswagen — facing a drive by the United Automobile Workers — has not mounted a vigorous campaign to beat back the union; instead VW officials have hinted they might even prefer having a union. And while unions that seek to organize factories often complain that the playing field is tilted because they do not have access to workers in the plant, here the union opponents are the ones protesting what they say is an uneven field. The anti-U.A.W. forces are making themselves heard, warning that if the U.A.W. succeeds here, that will lend momentum to unionize two other prestigious German-owned plants: the Mercedes-Benz plant in Alabama and the BMW plant in South Carolina.

The Techtopus: How Silicon Valley’s most celebrated CEOs conspired to drive down 100,000 tech engineers’ wages - In early 2005, as demand for Silicon Valley engineers began booming, Apple’s Steve Jobs sealed a secret and illegal pact with Google’s Eric Schmidt to artificially push their workers wages lower by agreeing not to recruit each other’s employees, sharing wage scale information, and punishing violators. On February 27, 2005, Bill Campbell, a member of Apple’s board of directors and senior advisor to Google, emailed Jobs to confirm that Eric Schmidt “got directly involved and firmly stopped all efforts to recruit anyone from Apple.”Later that year, Schmidt instructed his Sr VP for Business Operation Shona Brown to keep the pact a secret and only share information “verbally, since I don’t want to create a paper trail over which we can be sued later?”These secret conversations and agreements between some of the biggest names in Silicon Valley were first exposed in a Department of Justice antitrust investigation launched by the Obama Administration in 2010. That DOJ suit became the basis of a class action lawsuit filed on behalf of over 100,000 tech employees whose wages were artificially lowered — an estimated $9 billion effectively stolen by the high-flying companies from their workers to pad company earnings — in the second half of the 2000s. Last week, the 9th Circuit Court of Appeals denied attempts by Apple, Google, Intel, and Adobe to have the lawsuit tossed, and gave final approval for the class action suit to go forward. A jury trial date has been set for May 27 in San Jose, before US District Court judge Lucy Koh, who presided over the Samsung-Apple patent suit.

Why are US corporate profits so high? Because wages are so low - U.S. businesses have never had it so good. Corporate cash piles have never been bigger, either in dollar terms or as a share of the economy. The labor market, meanwhile, is still millions of jobs short of where it was before the global financial crisis first erupted over six years ago. Coincidence? Not in the slightest, according to Jan Hatzius, chief U.S. economist at Goldman Sachs: “The strength (in profits) is directly related to the weakness in hourly wages, which are still growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment. Companies have been unable to raise prices much because of the economic recovery has been fragile. But they’ve still managed to boost profits beyond anything ever seen before because they’ve got away with employing as few workers as possible at as low a rate as possible. Compare and contrast these two charts:

Profits Up, Wages Down: What Economics Has to Say - We just learned that for the fourth year in a row, the real median weekly earnings for full-time workers fell slightly. The orange bars show the real, or inflation-adjusted, changes in these medians since 2007. The blue bars show nominal growth, which as you can see, has slowed in response to the weak job market. Interestingly, the only year of substantial growth in the real median was 2009, a year when nominal wage growth actually decelerated. The reason for the earnings gain was thus deflation: prices actually fell slightly that year (the Consumer Price Index was down 0.4 percent). That’s definitely not how we want to make real earnings grow. Profits, on the other hand, have been putting on a show. As a share of national income, corporate profits were 14.6 percent in the third quarter of 2013, the most recent quarter for which we have data. In the history of these data going back to 1947, there was only one quarter higher than that — the last quarter of 2011. The equity indexes may have gotten whacked last Friday, but for 2013 the Standard & Poor’s 500-stock index was up 27 percent, its strongest showing in 16 years. The two inverse trends are related. Profits are revenues minus costs, and with growth actually pretty tepid in recent years, at least in advanced economies, profits have been pushed more by squeezing costs, of which labor is usually the largest, than by particularly buff revenues. As a Goldman Sachs analysis put it last week, “the strength [of profits] is directly related to the weakness in hourly wages” and “profits are likely to accelerate in 2014 as G.D.P. and productivity growth recovers but wage growth picks up only gradually.”  Let’s unpack all of this.

ROSENBERG: There Are More Signs Of Wage Inflation Becoming A Reality -  Gluskin Sheff's David Rosenberg has previously warned that 2014 could see a return to inflationary pressures. Take into account that income inequality is becoming a major concern — as evidenced at the World Economic Forum in Davos, and President Obama is expected to address it in the State of the Union as well — and wage inflation is expected to trickle into inflation. Rosenberg now writes that there are "more signs of wage pressures." "The Fed's Beige Book contained no fewer than two dozen references to wage pressures and skilled job shortages and in sectors that cover around 40 million workers. I realize the average hourly and weekly earnings data from the non farm payroll survey are tepid but a big disconnect seems to have emerged between those measures and the broad wage/salary growth numbers out of the National Accounts data. After all, if Macroeconomic Advisors is anywhere near the ball park, nominal GDP growth is now advancing at over a 5% YoY clip and we know that this is not because of booming profit growth any more. "So returns to labor seem to be a proper theme. And what we get in return from whatever margin compression occurs will be social stability — income inequality is becoming a serious issue (Davos) and must be tackled. Hence the push by a variety of states to boost the minimum wage. To this end, I did notice this little ditty in the weekend FT — Organized Labor Held Steady in '13 on page A5 — keeping in mind that unionized workers have much higher median weekly earnings). In any event, the multi-year drop in union membership rates came to a screeching halt in 2013 at 11.3% and now we have more in the private sector (7.3 million) than in the government (7.2 million) which has not happened in a very long time. "But make no mistake, there is a deepening policy rush in this direction while it may well represent responsible fiscal policy, I also sense a return to some cost-push inflation as a result (and no, globalization with no longer bail us out — not with China's unit labor costs now rising at a double-digit annual rate)."

Gar Alperovitz on Mondragon and the Potential of Worker Owned Co-ops d Economy - Gar Alperovitz, professor of economics at the University of Maryland, speaks on Real News Network about the potential and limits of worker cooperatives, contrasting them with the planned economy of Walmart. He discusses, as these enterprises become larger, how synergies can develop among them.

What Jobs Will Robots Take? - Last week, I posted an article examining a report from The Economist listing jobs that it believes are most at risk from computerisation (see below).  According to The Economist, accountants, economists, pilots, retailers, amongst others, are all in the firing line. Algorithms for big data are now entering domains reliant upon pattern recognition and can readily substitute for labour in a wide range of non-routine cognitive tasks. Many service occupations – from fast food counter attendants to medical transcriptionists – which have been a key driver of jobs growth over past decades, could all soon be replaced by automation. Now The Atlantic has released a report of its own, arguing that nearly half of current jobs in the United States could be replaced by robots within a decade or two. Manufacturing, administrative support, retail, and transportation will continue to lose workers to automation – as has been the case for decades. However, cashiers, counter clerks, and telemarketers are equally endangered.  The report provides the below chart showing the probabilities of automation, with the jobs most at risk shown on the right and those least at risk on the left.

The Rise of 'Insourcing' Gives Internet Companies a New Way to Exploit Workers - It’s about time we talked about pay. The disparity between the top and bottom wage-earners combined with the inability for most minimum-wage workers to earn a livable income is one of the largest causes of economic stagnation and social justice concern of our time. I couldn’t be more thrilled that it appears we are making moves to raise the national minimum wage to be more in line with a living wage. This raise would have a direct impact on the 3.6 million workers with wages at or below the federal minimum and would have far-reaching positive consequences for our economy and society. But there is a new, fast-growing class of low-wage workers that would not see the benefit of this decision. These new “insourced” workers are individuals who contract with large Internet-based companies like Uber and Taskrabbit to perform services here in the United States, either at a rate set by the larger company or in a free-for-all bidding war. As contractors, these workers receive very little protection in terms of minimum wage laws or unions, let alone benefits or insurance for the work they do. And their ranks are growing fast.

The case for working less - The focus of conventional employment policy is on creating ‘more work’. People without work and in receipt of benefits are viewed as a drain on the state and in need of assistance or direct coercion to get them into work. There is the belief that work is the best form of welfare and that those who are able to work ought to work.  This particular focus on work has come at the expense of another, far more radical policy goal, that of creating ‘less work’. Yet, as I will argue below, the pursuit of less work could provide a route to a better standard of life, including a better quality of work life.The idea that society might work less in order to enjoy life more goes against standard thinking that celebrates the virtue and discipline of hard work. Dedication to work, so the argument goes, is the best route to prosperity. There is also the idea that work offers the opportunity for self-realisation, adding to any material benefits from work. ‘Do what you love’ in work, we are told, and success will follow. But ideologies such as the above are based on a myth that work can always set us free and provide us with the basis for a good life. As I have written elsewhere, this mythologizing about work fails to confront – indeed it actively conceals – the acute hardships of much work performed in modern society. For many, work is about doing ‘what you hate’.

What Obama Ignored About The ‘Lowest Unemployment Rate In Over 5 Years’ - President Barack Obama took pride in presiding over the nation's "lowest unemployment rate in over five years" during his State of the Union address on Tuesday. But while this statement is true -- the jobless rate dropped to 6.7 percent in December -- it's not exactly something to write home about.  That's because a large part of the most recent decline in December was the result of 347,000 people giving up the search for work entirely and dropping out of the labor force. Such a decision helps the unemployment rate look better on paper, since it pushes those people out of the unemployment picture altogether. But in reality, it is not a great sign for the millions struggling to find work. Economists refer to the statistic that accounts for these labor market drop-outs as the labor force participation rate. And as you'll see, it's been on the decline since well before the country's most recent recession, with little sign of improvement:

The Sunny Side of the Unemployment Report -- David A. Rosenberg, the chief economist at Gluskin Sheff, a Canadian research firm, is not known for his rose-colored glasses. Indeed, when he was at Merrill Lynch in New York, there were complaints that he was too negative.  All of which makes the following discussion of the American employment situation interesting. Rather than look at the (disappointing) December report in isolation, he looked at the job market performance in 2013. His comments are in italics.

  • 1. Employment rose 2% last year, representing a 2.26 million gain for all of 2013. I do hope nobody has too much trouble with a number like that in a year of near-record fiscal retrenchment. It was actually pretty good.
  • 2. Part-time jobs actually fell 0.7% so even with Obamacare, this was a full-time employment story. The ratio of full-time to part-time rose to 4.285, the highest it has been in over five years.
  • 3. Those working part-time for economic reasons fell 2% last year.
  • 4. Those not in the labor force aged 25-54 that do not want a job rose 4.5% in 2013.
  • 5. Those in that above-mentioned cohort who do want a job actually fell 3.3%.
  • 6. The number of 25-54-year-olds who are not counted in the work force that claim they are “discouraged” sagged 18.5% last year.
  • 7. The number of people who needed a second or third job fell 2.2% in 2013.
  • 8. Both the U1 and U2 unemployment rates have fallen to cycle lows of around 3.5%.
  • 9. The unemployment rate in the financial sector is down to 4.2%, in manufacturing down to 5.5%, in information technology down to 4.8%, in education/health down to 4%, and all the way down to 3.6% in the resource sector. This is over 40 million workers and represents a 40% chunk of private payrolls.
  • 10. If the unemployment rate in construction had not gone up from 8.6% to 11.4% due to the inclement weather in December, we would be sitting at a 6.2% national unemployment rate. The jobs market is tighter than you think.

Initial Jobless Claims Miss; Back To Levels First Seen 6 Months Ago -- The trend that was so many momentum-chasing bulls friend for so long has ended. The steady downward drift in jobless claims - all noise, debt-ceiling, winter storm, and software glitches aside - has ended. Initial claims rose 19k this week, missed expectations by the most in 6 weeks, and jumped to the same levels seen 6 months ago. The Labor Department says "nothing unusual" about this week's data but noted one state 'estimated' claims last week. Total benefit rolls dropped by 16k this week (back under 3 million) as emergency claimants remains "0". For those of the "seasonals are to blame" persuasion... this is the worst start to the year since the financial crisis...

When the job search becomes a blame game -Searching for a job is tough — and the nature of the hiring process in the United States makes matters far tougher, and more emotionally fraught for workers, than it needs to be. That is the central assertion of MIT’s Ofer Sharone in a new book based on his in-depth study of the American and Israeli white-collar labor markets, which operate very differently.   In the U.S., Sharone says, job hunts emphasize the presentation of personal characteristics; job seekers play, in his terms, a “chemistry game” with prospective employers. In Israel, by contrast, the job-placement process is more formally structured and places greater emphasis on objective skills. As a result, white-collar workers in the U.S. are more likely to take their job-market struggles personally, and find it harder to sustain searches.   “It’s very painful to keep getting rejected,” says Sharone, an assistant professor at the MIT Sloan School of Management. Moreover, widespread self-help advice for job seekers, he believes, “unintentionally exacerbates this problem” by encouraging unemployed workers to believe they entirely control their job-search outcomes. 

“If I Didn’t Sell Drugs, I’d Be Dead”: What It’s Like to Lose Unemployment Benefits -- It has been almost a month since Congress let emergency unemployment benefits expire for 1.3 million Americans. Since then, Republicans and Democrats have bickered about how to reinstate these benefits, with little progress—a comprehensive unemployment bill recently failed in the Senate, and similar measures in the GOP-run House haven't even gotten a vote. Harry Reid, the Democratic Senate majority leader, has promised to press the issue when lawmakers return from recess next week. But until Congress comes to some sort of agreement, unemployed Americans will have to wait.Shortly after Christmas, we spoke to seven Americans who were set to lose their benefits. We checked back with a few of them this week to ask how their situations have changed. We've also collected a few new stories—some directly, and some from other news outlets. Many of these people quoted here have chosen to remain anonymous so as not to damage their job prospects. Their responses have been condensed and edited for clarity.

Obama’s Plan to End Discrimination Against the Long-term Unemployed -  In his State of the Union address tomorrow night, President Obama will announce that some of the largest firms in the United States have signed a pledge not to discriminate in hiring against the long-term unemployed, reports The Wall Street Journal. ... Employers are simply using long-term unemployment as a heuristic, to weed out what they see as the weakest candidates. But this shortcut traps the unemployed in a cycle they cannot escape: The longer they’re unemployed, the progressively harder it becomes to acquire a job.  What Obama is trying to do in the State of the Union speech is to create a new kind of social norm in hiring. He’s arguing that employers should not let themselves use this kind of shortcut, and that more careful consideration can actually open up a wider pool of available talent. The administration has boiled down its recommendations to a series of best practices to avoid this form of discrimination. This isn’t going to revolutionize the job market. And it’s not as good as getting Congress to pass, say, a new infrastructure bill. But discrimination against the long-term unemployed is a kind of cultural problem in and of itself. And precisely, because it is a cultural problem, it’s the sort of thing a high-profile speech combined with concerted jawboning with corporate leaders has a hope of actually changing.

CEOs Pledge Support for Obama’s Effort to Help Long-Term Unemployed - President Barack Obama said Friday that he wants to connect ready-to-work Americans with ready-to-be-filled jobs as he announced that more than 300 U.S. companies have signed a pledge aimed at halting hiring practices that discriminate against the long-term unemployed. After meeting with nearly two dozen CEOs and executives at the White House, the president detailed his plans to put those who have been out of work for months back in jobs, and he called on businesses to adopt best practices for recruiting and hiring the long-term jobless. Mr. Obama also signed a presidential memorandum directing the federal government to adopt these practices to ensure that people who are out of work receive a fair shot in the federal hiring process. Gene Sperling, director of the president’s National Economic Council, said that 21 of the 50 largest companies in the country – and a total of more than 300 businesses – have committed to make hiring practices inclusive and to remove barriers to employing the long-term jobless. Employers such as AT&T Inc., Citigroup Inc., Ford Motor Company, PepsiCo Inc., Wal-Mart Stores Inc., and Xerox Corp have agreed to the pledge. News Corp, which publishes the Wall Street Journal, was among the companies that signed the pledge.

Occupy the minimum wage: will young people restore the strength of unions? - “By going to college and graduate school, I thought I was insulating myself from being broke and sleeping on friends’ couches and being hungry again. The big, scary part is that I am going to end up where I was, but now I am going to be in that awful situation with $50,000 of debt,” White says. White’s story is no exception. One in two college graduates are now either unemployed or underemployed. Millennials – even those from the middle class – are experiencing income inequality and America’s failed dream of upward mobility first-hand. The mismatch of college-educated young workers with low-wage, unskilled, precarious jobs is creating a new face of the once-dwindling American labor movement: young, diverse, led by millennials in their twenties and thirties, and fighting what they see as an unfair labor market. Their modest cause? Pushing for a higher minimum wage. Because of too many young people interested looking for work, these millennials reason that the labor movement is the only way to address large-scale poverty and income inequality – starting with their own. The "Fight for 15" movement is the most visible of these. Designed by the SEIU to raise the minimum wage from $7.25 an hour to $15 an hour, the effort has been driven by young activists. Last fall, the movement claimed its first legislative victory with residents in SeaTac, Seattle’s airport carrying suburb, voting to raise its minimum wage to $15 an hour.  “There’s more enthusiasm than there has been probably in our lifetime for this,” says Ady Barkan, attorney at the Center for Popular Democracy in New York, indicating that the "Fight for 15" movement is picking up where Occupy Wall Street left off.  He calls it “part of a similar cultural moment”.  

Teen employment and minimum wages - Last week Kevin Erdmann  at the idiosyncratic whisk blog published this chart to demonstrate how minimum wages have caused teen employment to suffer. It is an interesting chart, but it suffers from the sin of omitted variables. I constantly see similar charts from those opposing the minimum wage were they seem to assume that nothing impacts teen employment except the minimum wage.  They apparently believe that the business cycle never impacts teen employment or unemployment.   For example, we just suffered the second worse recession in US history that caused adult unemployment to soar.  But in their analysis, the great recession had no impact on teenagers. They claim that the last jump in teen unemployment was entirely attributable to minimum wage increases. I suggest we look at a different chart that shows three variables:the teen unemployment rate, minimum wages and recessions. First, notice in this chart that there were period in the 1960s, the late 1970s and the mid-1990s when the minimum wage rose and the teen unemployment rate fell.   I don’t know how many times Ive heard the claim that raising the minimum wage always causes employment to fall.  The data massively contradicts this claim. Next, observe in this chart that every rise in the teen unemployment rate was associated with a recession.  The only exception was one small rise in 1962.  This raises an important question.  Was the rise in the teen unemployment rate caused by the rise in the minimum wage or the recession?  In answering this question observe that every recession saw the teen unemployment rate rise and that the teen unemployment rate fell in every business expansion. On the other hand the relationship between teen unemployment and the minimum wage is inconsistent. The only time a rising teen unemployment rate has been associated with a rising minimum wage was when there also was a recession.

The EITC AND, not OR, the Minimum Wage -- Give this WaPo editorial a quick read.  It’s a nice description of a plan that raises low incomes by both raising the minimum wage and expanding the EITC.  I’ve heard some legitimate concerns about some of the proposed EITC tweaks in this plan, but it strikes me as a good starting point.  Note that both this piece and the one about the UK increase in the minimum (see earlier post) recognize that the higher minimum generates some public savings by reduced spending on safety net programs.  The proposed US plan applies some of these savings to the higher EITC.

Proposal to Raise Tip Wages Resisted - Currently under federal law, restaurant owners are required to pay a minimum of $2.13 an hour toward a waiter’s wages as long as customers’ tips lift the waiter’s pay to the $7.25 federal minimum wage. (If tips are too small to reach the minimum wage, then the restaurant is required to top off the waiter’s pay.)Nineteen states use the federal $2.13 tip wage, while 24 states have set a subminimum tip wage above that. Seven other states, most of them in the West, require waiters’ base pay to be at least the state minimum wage. In Washington State, with the nation’s highest state minimum wage, that means a waiter’s base wage, before tips, is $9.32 an hour.And now, as some Democratic senators and President Obama push to raise the minimum wage to $10.10 an hour, from $7.25, they are also backing increases to the tip wage (at $2.13, it is 29 percent of the minimum wage). Once again, the restaurant industry is fiercely opposed to a mandated increase.  Pointing to studies showing that many waiters live below the poverty line, Senator Tom Harkin, Democrat of Iowa, and chairman of the Senate Health, Education, Labor and Pensions Committee, argues that it is unfair that restaurant owners pay so little toward wages.Advocates for restaurant workers protest that waiters’ pay has remained flat for years. The tip wage alone has gone unchanged since 1991: Taking inflation into account, the $2.13 enacted back then is worth $1.24 today.

The Tight Link Between the Minimum Wage and Wage Inequality - A higher minimum wage is an important way to address wage inequality, as the erosion of the minimum wage is the main reason for the increase in inequality between low-and middle-wage workers (in particular the 50/10 wage gap, that between the median and the 10th percentile earner). This is particularly true among women, the group for whom the wage gap in the bottom half grew the most. As the figure below shows, two-thirds of the increase in the 50-10 wage gap can be attributed to the erosion of the real value of the minimum wage. [The 50/10 wage gap grew 25.2 (log) percentage points between 1979 and 2009 and that two-thirds of this increase (16.5 percentage points, or 65 percent of the total) can be attributed to the erosion of the minimum wage.] The paper this figure draws on usefully and appropriately captures the spillover impact of the minimum wage—the impact on those earning above the legislated rate. This finding makes sense, since it was in the 1980s that the minimum wage eroded the most, and that was the same time period when the 50/10 wage gap among women expanded greatly. The erosion of the minimum wage explains over a tenth (11.3 percent) of the smaller 5.3 (log) percentage point expansion of the 50/10 wage gap among men. For workers overall more than half (57 percent) of the increase in the 50/10 wage gap was accounted for by the erosion of the minimum wage.

Obama to Raise Minimum Wage Under Federal Contractors -  — President Obama plans to sign an executive order requiring that janitors, construction workers and others working for federal contractors be paid at least $10.10 an hour, using his own power to enact a more limited version of a policy that he has yet to push through Congress.The order, which Mr. Obama will highlight in his annual State of the Union address on Tuesday night, is meant to underscore an increasing willingness by the president to bypass Congress if lawmakers continue to resist his agenda, aides said. After a year in which most of his legislative priorities went nowhere, Mr. Obama is seeking ways to make progress despite a lack of cooperation on Capitol Hill.The minimum wage plan provides an example of what he has in mind. Mr. Obama called on Congress during last year’s State of the Union address to raise the minimum wage for workers across the board, only to watch the proposal languish on Capitol Hill, where opponents argued it would hurt businesses and stifle job creation. With prospects for congressional action still slim, Mr. Obama is using the executive order covering federal contractors to go as far as he can on his own.“You can be sure that the president fully intends to use his executive authority to use the unique powers of the office to make progress on economic opportunity, to make progress in the areas that he believes are so important to further economic growth and further job creation,” Jay Carney, the White House press secretary, told reporters on Monday.

President Obama Signs Executive Order to Increase Minimum Wages Paid by Federal Contractors -- Just hours before tonight’s State of the Union address, President Obama signed an executive order increasing the minimum wage paid by federal contractors from $7.25 to $10.10. The order affects wages paid under any new or renewed contracts.  The politics of this move are obvious—the president wants to build momentum to raise the national minimum wage - but this is unfortunate due to the disportionate negative impact of minimum wage laws on minority groups.Not only do such laws freeze out minority workers, they cost taxpayers billions more than is necessary—all to make an ideological point. The Congressional Budget Office estimates that repealing the Davis-Bacon Act could save taxpayers as much as $2 billion per year. The White House has not revealed how much today’s executive order will cost taxpayers, but its impact will be far more than monetary.

Obama's Minimum Wage Order is Out of Step with America  - President Obama's executive order raising the minimum wage from $7.25 to $10.10 an hour covers employees of federal government contractors who work on federal projects, and applies to new contracts.   It would give some workers as much as a 39 percent raise. But others would lose jobs, since Congress is unlikely to increase contractors' funding because Obama has raised the minimum wage by executive order, skirting congressional authority.   In a fact sheet, the White House stated, “Low wages are also bad for business, as paying low wages lowers employee morale, encourages low productivity, and leads to frequent employee turnover--all of which impose costs."  The order is more show than substance. If Obama cared about the issue, he could have ordered all employees of federal contractors—not just those working on federal contracts—to be paid $10.10 an hour immediately, indexed for inflation. President Lyndon Johnson’s 1965 Executive Order 11246, which banned government contractors from discrimination on the basis of race, sex, and national origin, covered all employees of federal contractors.

Companies resist president’s call for minimum wage rise - Employers of low-wage workers attacked Barack Obama’s call for a 40 per cent rise in the minimum wage even as the US president attempted to forge new partnerships with business groups to revive his second-term agenda. Restaurant chains and retailers warned that a wage hike of the kind Mr Obama is pushing through unilaterally for federal employees would cut the jobs available to young and low-skilled workers if it flowed through to the private sector. David French, senior vice-president for government relations at the National Retail Federation, a trade group, said: “We understand that the minimum wage rise polls very well and is politically popular with certain voters, but it doesn’t necessarily mean it’s the right thing to do. The challenge we see is it will make unemployment worse.” Mr Obama said in his State of the Union address on Tuesday evening he will mandate a rise in the minimum wage for workers employed on new federal contracts from $7.25 to $10.10. Although some states have increased it over the past year, the federal minimum wage has not been lifted since 2009, which the White House says amounts to a pay cut for workers. “Just last year alone, workers earning the minimum wage basically got the equivalent of a $200 pay cut because [it] stayed the same, but costs of everything else are going up,” Mr Obama said

Nearly Half of America Lives Paycheck-to-Paycheck  - The economic picture is looking brighter these days. The federal government announced Thursday that economic growth had picked up to its fastest pace in two years, while employment growth over the past five months has averaged a healthy 185,000 new jobs. But as evidenced by a report out Thursday from the Corporation for Enterprise Development, nearly half of Americans are living in a state of “persistent economic insecurity,” that makes it “difficult to look beyond immediate needs and plan for a more secure future.” In other words, too many of us are living paycheck to paycheck. The CFED calls these folks “liquid asset poor,” and its report finds that 44% of Americans are living with less than $5,887 in savings for a family of four. The plight of these folks is compounded by the fact that the recession ravaged many Americans’ credit scores to the point that now 56% percent of us have subprime credit. That means that if emergencies arise, many Americans are forced to resort to high-interest debt from credit cards or payday loans. And this financial insecurity isn’t just affected the lower classes. According to the CFED, one-quarter of middle-class households also fall into the category of “liquid asset poor.” Geographically, most of the economically insecure are clustered in the South and West, with Georgia, Mississippi, Alabama, Nevada, and Arkansas being the states with the highest percentage of financially insecure.

Minimum wage bills pushed in at least 30 states: (AP) — Minimum-wage increase proposals are getting the maximum push from Democrats in statehouses in more than half of U.S. states, highlighting the politically potent income inequality issue this year. Lawmakers in at least 30 states are sponsoring or are expected to introduce wage hike measures, according to a national review by The Associated Press. They hope to notch state-level victories as President Barack Obama and congressional Democrats remain stymied in attempts to raise the federal minimum wage above $7.25 an hour. The president is expected to mention the minimum wage in his State of the Union address Tuesday. Even in Republican-dominated capitals where the bills are longshots, the measures still give Democrats a chance to hammer home the popular theme of fair wages in what is an election year in most places."Congress is failing. They can take real action right in the states and have a demonstrable impact right here at home. For politics and policy, it's a winning strategy."Minimum wage is a perennial issue that has taken on a higher profile amid the slowly recovering economy and growing public debate about income inequality. A Quinnipiac University poll this month found 71 percent of Americans in favor of raising the minimum wage — including more than half of Republicans polled. Michael Sargeant, executive director of the Democratic Legislative Campaign Committee, calls it an "organic issue that's bubbling up from the grassroots." But it's also being pressed by politicians and labor unions. Democrats challenging Republican governors have taken up the issue, and there are ballot initiatives in several states. "We are facing a huge income gap that only continues to widen, where the workers at the top see large wage increases and the workers at the bottom are at a standstill. That needs to change,"

Can Doctors Fix Poverty? - Many health care professionals in Toronto are calling on their provincial government to raise the minimum wage by $3.75/hour to $14. They argue that poverty is not just a public health issue but “the biggest barrier to good health.” The group Health Providers Against Poverty is behind the movement and it seems that doctors orders may not be the right cure this time around. Lorraine Telford, an employee of a Mississauga health center, said that a tenth of the province’s children face dire financial situations at home while an additional fourteen percent are “in deprived situations. Because their nutritional needs are not being met, she argues, it’s impossible for them to be expected to perform well in school. Hunger does, the evidence shows, have a detrimental impact on the performance of children in school. Obesity does as well, and some argue that a major cause of obesity is that parents don’t have the energy to cook dinner or the money to afford healthy food. One of the doctors with the organization, Gary Bloch, pointed out that living conditions have a dramatic impact on people’s health. Before dealing with medication or other solutions, which many of his patients can’t afford, he works with them on issues related to their incomes and housing. He credits that focus to most of the improvements in the health of his lower income patients. Another member of the group, Axelle Janczur, argues that the impact for families would be huge, providing the poorest Ontarians an extra $650/month before taxes. She says that the impact on businesses would be minimal since those on the lower rungs of the workforce would spend their money at home, thus putting the money back into local businesses.

She’s a 29er -- A “29er” refers to someone working 29 hours per week, the maximum that an hourly employee can work and still be considered part time by the federal government, as defined under the Affordable Care Act.Before 2014, when the new federal definition took effect, Census Bureau data suggest that hardly anyone worked exactly 29 hours a week: about one in 1,000. Only six in 1,000 worked 26 to 29 hours a week.The Affordable Care Act requires that, beginning next January, large employers provide health insurance for their full-time employees (by the federal definition) or pay a penalty per full-time employee on the payroll. The annual penalty is $2,000 and, unlike employee salaries and benefits, is not deductible from business taxes. Small employers do not owe a penalty, unless they cross the 50-employee threshold, in which case the annual penalty is $40,000 for having that 50th employee. Subsequent hires would each carry a $2,000 annual penalty.Part-time employees do not create a health-insurance requirement or a penalty for their employer, which gives large and small employers an incentive to reduce at least some employees’ hours to 29 hours. A number of employers plan to do exactly this.But the incentives are not limited to penalty avoidance by employers, and began this month. Employees in families with income of less than 400 percent of the poverty line will lose access to generous federal subsidies if they make themselves eligible for employer health coverage by working full time at an employer that offers coverage to such employees.

The Realities of Class Begin To Sink In - Paul Krugman - One of the odd things about America has long been the immense range of people who consider themselves middle class — and are deluding themselves. Low-paid workers who would be considered poor by international standards, say with incomes below half the median, nonetheless considered themselves lower-middle class; people with incomes four or five times the median considered themselves, at most, upper-middle class.  But this may be changing. According to a new Pew survey (pdf), there has been a sharp increase in the number of people calling themselves lower class, and a somewhat smaller rise in the number calling themselves lower-middle, so that at this point the combined “lower” categories are close to a plurality of the population — in fact, closing in on, um, 47 percent:  This is, I believe, a very significant development. The whole politics of poverty since the 70s has rested on the popular belief that the poor are Those People, not like us hard-working real Americans. This belief has been out of touch with reality for decades — but only now does reality seem to be breaking in. But what it means now is that conservatives claiming that character defects are the source of poverty, and that poverty programs are bad because they make life too easy, are now talking to an audience with large numbers of Not Those People who realize that they are among those who sometimes need help from the safety net.

Money and Class - Paul Krugman --My post on Americans starting to recognize class realities has brought some predictable reactions, which I’d place under two headings: (1) “But they have cell phones!” and (2) it’s about how you behave, not how much money you have.  My answer to both of these would be to say that when we talk about being middle class, I’d argue that we have two crucial attributes of that status in mind: security and opportunity.By security, I mean that you have enough resources and backup that the ordinary emergencies of life won’t plunge you into the abyss. This means having decent health insurance, reasonably stable employment, and enough financial assets that having to replace your car or your boiler isn’t a crisis. By opportunity I mainly mean being able to get your children a good education and access to job prospects, not feeling that doors are shut because you just can’t afford to do the right thing. If you don’t have these things, I would say that you don’t lead a middle-class life, even if you have a car and a few electronic gadgets that weren’t around during the era when most Americans really were middle class, and no matter how clean, sober, and prudent your behavior may be.

Raw Data: It’s Elites Who Drive Polarization, Not the Working Class  - Who's responsible for increasing political polarization? Andrew Gelman suggests that one of the "cleanest pieces of evidence" is public attitudes toward abortion. If you look at the polling data, what you see is that attitudes between Democrats and Republicans start to diverge markedly around 1990. If you dig a little deeper, you find that the change is almost entirely among whites. If you dig a little deeper among whites, you get this: The biggest change in party polarization on abortion appears among those with mid to high incomes; those with college degrees; and those who are heavily tuned into politics. Among the fabled blue-collar whites, party ID doesn't really predict attitudes on abortion very well at all. Gelman avoids drawing any broad conclusions from this, and so will I. But it's interesting, especially since we've seen lots of evidence like this before. It's elites who have largely turned our major parties into polarized war zones, not the heartland.

Blogs review: More inequality, same mobility - What’s at stake: As President Barack Obama finalizes his sixth State of the Union address – which is expected to focus on “the problem […] that alongside increased inequality, we’ve seen diminished levels of upward mobility in recent years” the big economic news in the blogosphere came from a new study by Harvard’s Raj Chetty and Nathaniel Hendren, UC Berkeley’s Patrick Kline and Emmanuel Saez, and the U.S. Treasury Department’s Nicholas Turner, which shows that intergenerational income mobility, although low, has not diminished despite the increase in income inequality.

A Better Headline Would be “Mobility Stagnant as U.S. Economy Doubles” -  A new working paper by economists Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, and Nicholas Turner discusses changes in intergenerational economic mobility for people born between 1971 and 1993. The headline finding is that, when taken nationally, the economic mobility within the United States has been both stable and low throughout this timeframe, though there are large regional variations. I’m still drilling into the newly released data but I wanted to make a few comments about some of the initial discussion around their findings. American Enterprise Institute blogger James Pethokoukis argues that this “shows the 1% didn’t kill the American dream.” Other commentators have made similar arguments about economic inequality not impacting economic mobility. These claims are not supported by the research and I will respond in four parts.

Mobility and Inequality: More on Non-New Findings - Dean Baker - Robert Samuelson is happy to tell us that contrary to what he hoped some of us believed, there was not much change in mobility for children entering the labor force between the first President Bush and second President Bush's administrations. Samuelson misrepresents the study to imply that it finds that there has been no change in mobility over the post-war period. Samuelson  notes the study's finding that there has been little change in mobility for workers entering the labor market in 2007 compared to 1990. The study then refers to earlier work finding no change in mobility prior to 1990. This study did not itself examine the period prior to 1990.This is important since that is the period in which we might have expected growing inequality to have a notable impact on mobility. As far as mobility in the years prior to the 1990, contrary to the claim of this study, the research is far from conclusive. For example, an assessment published by the Cleveland Fed concluded:"After staying relatively stable for several decades, intergenerational mobility appears to have declined sharply at some point between 1980 and 1990, a period in which both income inequality and the economic returns to education rose sharply. This finding is also consistent with theoretical models of intergenerational mobility that emphasize the role of human capital formation. There is fairly consistent evidence that intergenerational mobility has stayed roughly constant since 1990 but remains below the rates of mobility experienced from 1950 to 1980."

How do we know if income inequality is getting worse? - President Obama will make economic inequality a central theme of his State of the Union address on Tuesday, according to reports, highlighting the issue's emergence as a key political issue.  Less clear is whether economics itself has much to offer in ensuring that the gains of economic growth are distributed equitably. As Harvard Business Review executive editor Justin Fox recently wrote: I think we’re eventually going to have to figure out what if anything to do about exploding high-end incomes without clear guidance from the economists. This is a discussion where political and moral considerations may end up predominating. And as Harvard’s Greg Mankiw made clear in his maddeningly inconclusive Journal of Economic Perspectives essay on inequality last summer, these are areas in which economists possess no comparative advantage. That is, economics can be helpful in characterizing the degree of inequality that exists, and it can help to explain why income is distributed so unequally. Economists are split on why inequality has been rising, with the dividing line mainly between those who believe technology and globalization are the key factors that account for the rise in incomes at the very top, and others citing factors such as the decline in unionization and the decline in tax rates at the top as the wealthy have captured the political process and successfully eroded union support, lowered their tax burdens and so on.

Inequality: From 1776 to the Present  - 237 years ago, when our nation first declared it's independence, our understanding of economics was much different back then—different than it was in 1930 with Keynesian economics—and then again, when we had Reaganomics during the 1980s. The GOP's Starve the Beast strategy pushed for reduced government spending in a growing population, lowering taxes on the very wealthy and advocated for less government regulation (and less corporate taxes) on huge multi-national corporations. Ever since "trickle-down economics" took effect, America can no longer afford to built a huge dam, a massive highway system, or put a man of the Moon. Since the Great Recession, companies have been unable to raise prices much, because the economic "recovery" has been fragile; because with high unemployment and stagnate wages, there has been a lack (of what otherwise might have been) a greater potential demand for more products and services. But yet, corporations have still managed to boost profits beyond anything we've ever seen before. From the Economic Populist: "The amount of cash multinational corporations are stashing is at an all time high and economists are wondering why.  A recent Federal Reserve research paper examined some of the reasons.  A big one is multinationals pay no taxes on profits if they park them offshore.  A stash of cash is building and the miser pile is now a mountain. A large study released early last year showed corporate taxes are at a 60 year low...Federal Reserve economists tell us corporations were sitting on over $5 trillion in cash and short term investments." Jan Hatzius, the chief U.S. economist at Goldman Sachs notes, "The strength [in profits] is directly related to the weakness in hourly wages...the weakness of wages and the resulting strength of profits are telling signs that the U.S. labor market is still far from full employment." He is most likely only admitting to this to keep quantitative easing (cheap money) flowing from the Fed into the coffers of the big banks (as if this was going to in any way force employers to raise wages).

Income Inequality in the U.S. Means Princes Don’t Go After Cinderellas - You can tax the rich, you can educate the poor, but there is another way to reduce the nation’s growing income inequality: Marry your scullery maid. Granted, this is not something that President Obama is likely to suggest when he delivers his State of the Union address on Tuesday. But a new working paper from the National Bureau of Economic Research says that Americans increasingly engage in what economists call “positive assortative mating” — meaning they marry someone who is about the same as they are. Princes do not tend to go after Cinderellas. The paper’s authors, led by Jeremy Greenwood at the University of Pennsylvania, mined census data from 1960 to 2005 and found that people’s tendency to marry someone of the same education level as their own increased steeply. After taking into account the increases in the education levels for men and women that have occurred between 1960 and 2005, the odds of a college-educated male marrying a college-educated female rose by 12 percentage points. They then looked at the effect of this self-selection on income inequality. In 1960, they found, a couple without high school degrees would have made 77 percent of the mean household income. But if the woman without a high school degree married a man with a college degree, their household would have made 124 percent of the average.

No, the Decline of Cinderella Marriages Probably Hasn't Played a Big Role in Rising Income Inequality -- Tyler Cowen points me to a paper today about the rise in assortative mating. Basically, this means that we increasingly marry people who are similar to ourselves. High school grads tend to marry other high school grads, and college grads tend to marry other college grads. The authors of the paper conclude that this has implications for rising income inequality: If matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller. Thus, assortative mating is important for income inequality. The high level of married female labor-force participation in 2005 is important for this result. The table on the right is a standardized contingency table that compares 1960 to 2005. The diagonal numbers show the percentage of each educational class who are married to others of the same educational class, and in every case the numbers are higher in 2005. This does indeed suggest that assortative mating has contributed to increasing income inequality.  This is interesting data, which is why I'm presenting it here. And it almost certainly has an impact on changes of income distribution between, say, the top fifth and the middle fifth. But the real drivers of rising income inequality, which have driven up the incomes of the top one percent so stratospherically, almost certainly lie elsewhere.

Follow-up: Pro-family, pro-children, anti-”marriage promotion” - Responding to the previous post, James Pethokoukis misreads the views of people like me. He writes: Folks who agree with [Waldman's] view often advocate a hugely expanded government safety net — universal pre-K, one-year paid parental leave, a universal basic income among other programs — to do the work of transmitting social and intellectual capital that intact families no longer can. Folks who are me do advocate for vastly expanded government benefits for families. I’d support universal pre-K, and I especially support a universal basic income. (Paid parental leave not so much, if the payer would be a prior employer.) But the purpose of these programs is not to “do the work…that intact families no longer can”. On the contrary, I support these programs because they would enable and assist the work that couples must do to stay together and in love and raise children well. As I tried to emphasize in the previous piece (maybe the goat sex joke obscured it): There is no nonmarginal constituency in the United States advocating for alternatives to the two parent family as the core unit of childrearing.  While as a free society we should be open to alternative arrangements, my expectation is that in flourishing communities, traditional families will remain the norm. The quantitatively relevant challengers to the intact, two-parent household are divorced parents and single moms. Those households do not result from any decline in positive norms surrounding married life, though they may in part enabled by a relaxation of negative norms surrounding single parenthood and divorce. Americans do not, in large numbers, choose to become single or divorced parents when they have the option of raising children in loving, economically secure marriages. They become single parents because they want to be parents and the loving, economically secure marriage is not available. People who imagine that nefarious alternatives to married childrearing are being promoted and must be countered in the cultural sphere are simply misguided.

40% of Americans Consider Themselves in the Lower Classes - The economic recovery is nearly five years old, but many Americans are feeling financially worse off than they were in 2008 according to study released Monday by the PEW Research Center in partnership with USA Today. According to the study, a smaller percentage of Americans (44%) identify as being middle class than ever before. At the same time, nearly as many Americans (40%) identify as lower-middle or lower class, while the share of Americans who consider themselves upper class has decreased significantly since 2008. The results show that, at least when it comes to Americans perceptions, the middle class is a rapidly shrinking demographic. Unfortunately, this isn’t just a case of a gullible public lapping up a media-generated narrative. The data show that the income of the median American has shrunk 8% between 2007 and 2012, and is at the same level today than it was in 1997. The average income for the highest quintile of earners only fell 2% during that time.

The new face of food stamps: working-age Americans - — In a first, working-age people now make up the majority in U.S. households that rely on food stamps — a switch from a few years ago, when children and the elderly were the main recipients. Some of the change is due to demographics, such as the trend toward having fewer children. But a slow economic recovery with high unemployment, stagnant wages and an increasing gulf between low-wage and high-skill jobs also plays a big role. It suggests that government spending on the $80 billion-a-year food stamp program — twice what it cost five years ago — may not subside significantly anytime soon. Food stamp participation since 1980 has grown the fastest among workers with some college training, a sign that the safety net has stretched further to cover America’s former middle class, according to an analysis of government data for The Associated Press by economists at the University of Kentucky. Formally called Supplemental Nutrition Assistance, or SNAP, the program now covers 1 in 7 Americans. The findings coincide with the latest economic data showing workers’ wages and salaries growing at the lowest rate relative to corporate profits in U.S. history.. Congress, meanwhile, is debating cuts to food stamps, with Republicans including House Majority Leader Eric Cantor, R-Va., wanting a $4 billion-a-year reduction to an anti-poverty program that they say promotes dependency and abuse.

Farm Bill conference proposes cutting $800 million per year in SNAP benefits - The Farm Bill conference committee report, released today, includes $800 million per year in cuts to the Supplemental Nutrition Assistance Program (SNAP), the nation's largest anti-hunger program. The conference report likely puts to rest several years of debate between the Republican-controlled House of Representatives, which sought much steeper cuts, and the Democratic-controlled Senate, which sought less severe cuts. Both houses of Congress are likely to pass the compromise in the conference committee report this week. The compromise is a disappointment to anti-hunger advocates. Program participants already in November faced the end of a temporary boost to program benefits. These new cuts are in addition to that change in November. Yet, in a sense, the cuts proposed today were inevitable, and about as mild as program supporters could expect. The actual mechanism for most of the cuts is a change to how utility costs are counted when benefits are calculated. Certain utility costs count as "excess shelter expenses," which are deducted from gross income during the computation of net income. SNAP benefits are based on net income (those with higher net income get smaller benefits), so eliminating a certain type of utility cost deduction amounts in practice to the same thing as a benefit cut.

Republicans Just Won the Food Stamp War - On Wednesday morning, Republicans won a years-long battle over whether to slash or spare food stamps when the House passed the farm bill, a $500 billion piece of legislation that funds nutrition and agriculture programs for the next five years. The farm bill has been delayed for more than two years because of a fight over cuts to the food stamp program, which is called the Supplemental Nutrition Assistance Program (SNAP). Last June, Speaker of the House John Boehner (R-Ohio) forced a vote on a bill that would have cut $20 billion from SNAP. But conservatives said the cuts were not deep enough, Democrats said they were far too deep, and the bill failed, 234-195. That September, House Republicans drafted new legislation slashing $40 billion from the food stamp program. That bill passed the House with Republican votes only. After months of negotiations with the Democrat-controlled Senate, which wanted much lower cuts of around $4 billion, the House finally passed a farm bill 251-166 Wednesday that contains a "compromise" $9 billion in reductions to the food stamp program. Both the Senate and President Barack Obama are expected to approve the legislation.  Here's why the compromise level of cuts is a Republican win: In addition to the $9 billion in food stamp cuts in this five-year farm bill, another $11 billion will be slashed over three years as stimulus funding for the program expires. The first $5 billion of that stimulus money expired in October; the rest will disappear by 2016. In the months since the first $5 billion in stimulus funding was cut, food pantries have been struggling to provide enough food for the hungry. Poverty remains at record high levels, and three job applicants compete for every job opening.

Stretched food pantry runs out of food - Last Saturday, the Loaves & Fishes food pantry in New Haven, Conn., ran out of food. Run by the Episcopal Church of St. Paul and St. James, the pantry has been pushed to the brink from recent decisions in Washington that resulted in cuts to food stamps and jobless benefits for the unemployed.  For most of last year, the little food pantry was feeding an average of 225 families a week. Then, starting in November, more families started showing up. That's when Congress failed to extend a recession-era bump in food stamps, which cut $11 less from each recipient's monthly grocery money.  The pantry is now feeding 300 families. And things could get worse.  This week, Congress is poised to pass a farm bill that would again trim food stamp benefits for 850,000 beneficiaries in 16 states and the District of Columbia.

Households Spend More on Healthy Foods When They Get Earned Income Tax Credit The Earned Income Tax Credit was created in the 1970s as an incentive for low-income Americans to stay in the workforce. It may also help them eat healthier food, according to new research from the Federal Reserve Bank of Chicago.  “We find that eligible households do spend more on food, and particularly on healthy foods in those months when most benefits are paid,” wrote economists, in a recent working paper, “The Earned Income Tax Credit and Food Consumption Patterns.” Unlike food stamps or Temporary Assistance for Needy Families cash benefits, which are paid out over the course of the year, the EITC usually is distributed as a lump sum payment in February or March with tax refunds.. They analyzed data from diaries collected as part of the Labor Department’s Consumer Expenditure Survey, focusing on the food purchasing habits of EITC-eligible households, and found those families spent more on food in months when more money would be available thanks to EITC refunds. The biggest increases in spending were on meat, poultry, fish and eggs, dairy products and healthy foods. The smallest increases were on fats, oils and sugar-sweetened beverages. Obesity rates are higher among low-income Americans, the authors noted, and programs like the Healthy Incentives Pilot have sought to encourage healthier food choices. But having money on hand matters, too.“Low income individuals eat healthier food when it is more accessible. Recent interventions have shown that households purchase more healthy food when it is more readily available or when it is relatively cheaper,”

Why ATMs in Legal Pot Shops Are Wreaking Havoc - Many of the Colorado shops that are licensed to sell marijuana have installed ATMs, for the convenience of their customers. What could possibly go wrong? Earlier this month, the Associated Press reported that Colorado legislators voted against a proposed bill to ban the use of government-issued EBT cards (a.ka., food stamps) at ATMs located inside shops selling marijuana. Regulations already don’t allow public-assistance cards to be used to withdraw cash at ATMs in casinos, gun shops, and liquor stores. But a 3-2 vote by state officials turned down the proposal to extend the ban to pot shops—strip clubs as well. For now at least, however, public-assistance recipients are free to withdraw cash at pot shop ATMs with their EBT cards. Unsurprisingly, Fox News jumped on the announcement, declaring that the decision was the equivalent of OKing “welfare for weed.” Marijuana supporters in Colorado, in fact, backed the plan mainly so that the budding industry could avoid drawing the attention of the media and the federal government with such “food stamps for pot” headlines. Ultimately, the ban was rejected because activists for the poor and legislators didn’t want to further limit access to benefits among public-assistance recipients. But it won’t be surprising if investigations go on the hunt for tales of EBT cardholders getting cash out of pot shop ATMs and immediately doing some shopping on the spot.

Unemployment Rates Fall in 39 U.S. States Last Month — Unemployment rates fell in four-fifths of US states in December and rose in just two, though most of the improvement stemmed from unemployed Americans giving up on their job searches.The Labor Department says that employers in 30 states added jobs, the fewest to report gains since August. Nineteen states reported job losses. Nationwide, employers added just 74,000 jobs last month, the fewest in three years and much lower than the average of 214,000 in the previous four months. Economists attributed some of the slowdown to cold weather. The unemployment rate fell to 6.7 percent, the lowest in more than five years. But the decline occurred mostly because more people stopped looking for work. The government only counts people as unemployed if they are actively looking for work.

BLS: State unemployment rates were "generally lower" in December - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally lower in December. Thirty-nine states and the District of Columbia had unemployment rate decreases from November, two states had increases, and nine states had no change, the U.S. Bureau of Labor Statistics reported today.... Rhode Island had the highest unemployment rate among the states in December, 9.1 percent. The next highest rates were in Nevada, 8.8 percent, and Illinois, 8.6 percent. North Dakota continued to have the lowest jobless rate, 2.6 percent.This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession. The size of the blue bar indicates the amount of improvement - Michigan, Nevada and Florida have seen the largest declines and many other states have seen significant declines. The states are ranked by the highest current unemployment rate. No state has double digit unemployment and the unemployment rate is at 9% in only one state: Rhode Island. The second graph shows the number of states with unemployment rates above certain levels since January 2006. At the worst of the employment recession, there were 9 states with an unemployment rate above 11% (red).

State Unemployment Ranged From 2.6% to 9.1% in December -- Thirty states added jobs in December and the unemployment rate fell in 39, signs of steady improvement in the labor market across much of the U.S. Texas added the most jobs last month (17,600), followed by Florida (14,100) and California (13,600), the Labor Department said Tuesday. Payrolls in those three states also increased the most over the past year. In the Lone Star State, information, mining and logging — a category that includes oil and gas — and professional and business services saw the fastest job growth. The state’s unemployment rate dropped for the fifth straight month to 6%. (The U.S. unemployment rate was 6.7% in December.) In California, a state hit hard by the housing bust, construction jobs rose by 4.8%, or 28,900, over the past year — the fastest growth category. The state’s leisure and hospitality industry saw payrolls rise 4.5%, or 73,400. Still, California’s unemployment rate — 8.3% — remains well above the national average. Florida’s construction payrolls rose 8.4%, or by 28,800, over the past year. Retail jobs also posted fast growth, with payrolls up 5.5%, or 55,000. The state’s unemployment rate was 6.2% in December, down from 7.9% a year earlier. At 9.1%, Rhode Island had the highest unemployment rate in the U.S. last month, followed by Nevada at 8.8% and Illinois at 8.6%. Rhode Island has maintained one of the nation’s worst jobless rates since 2008. See the full interactive graphic.

States Weigh New Plans for Revenue Windfalls - Governors across the U.S. are proposing tax cuts, increases in school spending and college-tuition freezes as growing revenue and mounting surpluses have states putting the recession behind them. Wisconsin Gov. Scott Walker and New York Gov. Andrew Cuomo are pushing for tax cuts as collections rise, while putting money into job-training and prekindergarten programs, respectively. In Georgia, Gov. Nathan Deal is proposing the largest increase in K-12 school funding since the recession to mark what he called the end of the "deep freeze," while Missouri Gov. Jay Nixon is calling for a boost in K-12 spending and holding tuition steady at state colleges. The improving fiscal picture is coming in an election year in many places, which is further animating debates over whether to restore recession-era budget cuts, fund new programs or reduce taxes. Some governors or legislators want to use the money as a cushion against likely swings in income-tax collections or to address mounting pension and health-care costs.

The Stealth Privatization of Pennsylvania's Bridges: At midnight of January 20, 2014, the Pittsburgh Post-Gazette announced that the administration of Gov. Tom Corbett finally decided to take action on the state's crumbling bridges. The action it is taking is to sign a 40-year contract to privatize Pennsylvania bridges. The word privatization does not appear in any of the announcements. Instead, PennDOT refers to the project as a public-private partnership. However, whether called a PPP, P3, public-private partnership, contracting out or privatization, the result is the same. Infrastructure privatization - that is privatization of roads, bridges, parking garages, parking meters, airports and the like - involves signing a contract, generally for a term of 30 to 99 years. In the case of Pennsylvania's bridges, the private contractor takes on responsibility for designing, constructing, financing and operating bridges for up to 40 years. [PennDOT, McCalls] Experience with infrastructure privatization shows what we can expect as the bridge privatization proceeds. Pennsylvania will hire a privatization industry insider as a consultant to advise the state. International firms such as Mayer Brown, Morgan Stanley and Macquarie frequently are hired to act as the consultant and, in other cases, will sit on the other side of the table as the private contractor. Consultants often are paid a "success fee" if a privatization agreement is reached. The success fee will motivate the adviser to recommend privatizing. The public tends to grumble about paying tolls, but that misses bigger issues, such as the contract's adverse-action rights. Adverse-action rights give the contractor the right to be paid compensation whenever an action lowers the amount of money the private contractor expects to receive.

Fraud-Ridden Banks Are Not L.A.’s Only Option “Epic in scale, unprecedented in world history. That is how William K. Black, professor of law and economics and former bank fraud investigator, describes the frauds in which JPMorgan Chase (JPM) has now been implicated. They involve more than a dozen felonies, including bid-rigging on municipal bond debt; colluding to rig interest rates on hundreds of trillions of dollars in mortgages, derivatives and other contracts; exposing investors to excessive risk; failing to disclose known risks, including those in the Bernie Madoff scandal; and engaging in multiple forms of mortgage fraud.So why, asks Chicago Alderwoman Leslie Hairston, are we still doing business with them? She plans to introduce a city council ordinance deleting JPM from the city’s list of designated municipal depositories. As quoted in the January 14th Chicago Sun-Times:The bank has violated the city code by making admissions of dishonesty and deceit in the way they dealt with their investors in the mortgage securities and Bernie Madoff Ponzi scandals. . . . We use this code against city contractors and all the small companies, why wouldn’t we use this against one of the largest banks in the world? A similar move has been recommended for the City of Los Angeles by L.A. City Councilman Gil Cedillo. But in a January 19th editorial titled “There’s No Profit in L A. Bashing JPMorgan Chase,” the L.A. Times editorial board warned against pulling the city’s money out of JPM and other mega-banks – even though the city attorney is suing them for allegedly causing an epidemic of foreclosures in minority neighborhoods.

Budget Watchdog: Debt Burden In Michigan Now $25,300 Per Taxpayer -- The liabilities of state governments, largely driven by underfunded pension and retiree health care costs, have been accumulating rapidly. According to the State Data Lab produced by the Chicago-based Truth in Accounting, Michigan has the fifth highest amount of debt per person when considering student loans and taxpayer burden. Truth in Accounting calculates available Michigan assets at $22.7 billion (without restricted and capital assets), and liabilities (without capital liabilities) at $97.7 billion, meaning each taxpayer has a financial burden of $25,300. College graduates in Michigan have an average student debt of $28,840. The state's taxpayer financial burden was $15,800 per tax paying citizen in 2009.When adding up liabilities, Truth in Accounting considers all assets (cash, investments, and money in fund accounts) and total bills ("liabilities disclosed in a state's financial report such as accounts payable, bonded indebtedness (bonds), and pension and Other Post-Employment Benefit (OPEB) obligations found in the state's and its retirement systems’ Comprehensive Annual Financial Reports (CAFRs)”). Note: The Supreme Court has ruled that OPEB obligations can be altered.

Bankruptcy In The USSA: Detroit Bondholders About To Be GM'ed In Favor Of Pensioners - First, the Obama administration showed during the course of the GM and Chrysler bankruptcy proceedings, that when it comes to Most Preferred Voter classes, some unsecured creditors - namely labor unions, and the millions of votes they bring - are more equal than other unsecured creditors - namely bondholders, and the zero votes they bring. Five years later we are about to get a stark reminder that under the superpriority rule of a community organizer for whom "fairness" trumps contract law any day, it is now Detroit's turn to make a mockery of the recovery waterfall. As it turns out, bankrupt Detroit is proposing to favor pension funds at roughly double the rate of bondholders to resolve an estimated $18 billion in long-term obligations, according to a draft of a debt-cutting plan reviewed by The Wall Street Journal.  The breakdown to unsecured stakeholders would be as follows: 40% recovery for pension funds, 20% for unsecured bondholders - all this to the same pari class of unsecured creditors. According to the WSJ the plan calls for recovery to be divided among the unsecureds amounting to $4.2 billion, more than the originally planned $2 billion to settle claims which included about $11 billion in unsecured debt, including $6 billion in health and other benefits for retirees; $3.5 billion for retiree pensions; and about $530 million in general-obligation bonds.

Guess Where the Middle Class Can’t Afford to Live Now - We’ve come to expect this sort of thing in places like San Francisco. But … Detroit? For years, one of the main selling points for relocating to shrinking, down on-their-luck cities like Detroit is that they’re so affordable. During the post-recession era, cities such as Baltimore and Detroit had hundreds of homes up for sale for under $10,000, sometimes even under $1,000. “The Detroit region is a very affordable place to live,” the Detroit Regional Chamber currently states in marketing materials, enticing workers to relocate to the area. “From lofts in the Cultural Center, to townhouses near Comerica Park, to single-family residences along the Detroit River, the Detroit region offers a variety of high demand housing at affordable prices.” Yet many of those Detroit residents who moved into those downtown lofts and townhouses in recent years no longer feel that they’re affordable. In some cases, the middle-class young professionals who have helped revitalize the city are facing rent hikes of 30%, 40%, or more, and they’re being forced out, the Detroit Free Press reported.

Green Cards for Detroit? Interesting Idea, but Mostly a Distraction - Rick Snyder, the Republican Governor of Michigan recently introduced a new plan to “jump-start” the economically suffering city of Detroit. He proposes that over the next five years, the government authorize the granting of 50,000 EB-2 green cards—i.e., immigrant visas granting legal permanent resident (LPR) status in the employment-based, second preference category—to foreign workers who hold advanced degrees or have “exceptional ability” and are willing to live and work in Detroit. This could either be done by creating additional new immigrant visas, or by reallocating existing ones. There’s no question that Detroit needs many more people to move into its empty spaces and increase its tax base dramatically. But is this the way to do it? It’s an interesting idea worth exploring, but the mechanics of it would be complicated, the numbers are probably unrealistic, and the politics will undoubtedly be messy. It also takes the focus off the 18 percent of workers in Detroit who are unemployed, and those who are seeing their pensions plundered. With that being said, here are some of the main issues at play.

‘Enough is enough’: Rand Paul suggests cutting benefits for unwed mothers with too many kids -- Sen. Rand Paul (R-KY) suggested the possibility of cutting government benefits for unwed mothers who have multiple children.“Maybe we have to say ‘enough’s enough, you shouldn’t be having kids after a certain amount,’” said Paul, who opposes legal abortion and has criticized the federal health care law’s contraception mandate as a violation of religious and economic liberty.  The likely 2016 presidential candidate made the remarks Thursday during a luncheon in Lexington, reported the Lexington Herald-Leader, in response to a question about workforce development.

School ditches rules and loses bullies -- Ripping up the playground rulebook is having incredible effects on children at an Auckland school. Chaos may reign at Swanson Primary School with children climbing trees, riding skateboards and playing bullrush during playtime, but surprisingly the students don't cause bedlam, the principal says. The school is actually seeing a drop in bullying, serious injuries and vandalism, while concentration levels in class are increasing. Principal Bruce McLachlan rid the school of playtime rules as part of a successful university experiment. "We want kids to be safe and to look after them, but we end up wrapping them in cotton wool when in fact they should be able to fall over." Letting children test themselves on a scooter during playtime could make them more aware of the dangers when getting behind the wheel of a car in high school, he said. "When you look at our playground it looks chaotic. From an adult's perspective, it looks like kids might get hurt, but they don't."

Utah kids in tears after school seizes and tosses out 40 lunches over debt -- Children at a Utah elementary school were in tears on Wednesday after a district nutrition manager seized the lunches of up to 40 students over negative account balances.  According to The Salt Lake Tribune, the children had already received their lunches at Uintah Elementary in Salt Lake City when the child-nutrition manager ordered cafeteria workers to take the meals away. “So she took my lunch away and said, ‘Go get a milk,’” fifth grader Sophia Isom told KSL. “I came back and asked, ‘What’s going on?’ Then she handed me an orange.   She said, ‘You don’t have any money in your account so you can’t get lunch.’”  Sophia said that the lunches were thrown away after being taken away from the students.

Wealth and PISA scores: why doesn’t money help U.S. performance more? The data was provided to The WorldPost by Pablo Zoido, an analyst at the Organisation for Economic Co-operation and Development, the group behind PISA. It shows that students’ wealth does not necessarily make them more competitive on an international scale. In the United States, for example, the poorest kids scored around a 433 out of 700 on the math portion of PISA, while the wealthiest ones netted about a 547. The lower score comes in just below the OECD average for the bottom decile (436), but the higher score also comes in below the OECD average for the top decile (554).“At the top of the distribution, our performance is surprisingly bad given our top decile is among the wealthiest in the world,” said Morgan Polikoff, a professor at the University of Southern California’s School of Education who reviewed the data.The data also makes for some jarring comparisons: Canada’s fourth decile performs as well as Chile’s top socioeconomic tier. Taiwan’s bottom sliver performs about as well as Montenegro’s wealthiest 10 percent. Vietnam’s bottom 10 percent slightly eclipses Peru’s top 10 percent. And the poorest kids in Poland perform about on par with Americans in the fourth decile.  The article is by Diehm and Resmovitz, pictures at the link, hat tip goes to @ModeledBehavior.  One possible implication is that the so-so U.S. performance on these tests is about culture in a way that just doesn’t reduce to poverty for the lower deciles.

California students challenge teacher employment rules in lawsuit  (Reuters) - A group of nine California students will challenge employment rules they complain force public schools in the most populous U.S. state to retain low performing teachers, as opening arguments kick off on Monday in a lawsuit over education policy. The lawsuit seeks to overturn five California statutes that set guidelines for permanent employment, firing and layoff practices for K-12 public school teachers, saying the rules violate the constitutional rights of students by denying them effective teachers. Among the rules targeted by the lawsuit is one that requires school administrators to either grant or deny tenure status to teachers after the first 18 months of their employment, which they complain causes administrators to hastily give permanent employment to potentially problematic teachers. "The system is dysfunctional and arbitrary due to these outdated laws that handcuff school administrators from operating in a fashion that protects children and their right to quality education," attorney Theodore Boutrous of the education advocacy group Students Matter said in a media call. The plaintiffs are also challenging three laws they say make it difficult to fire low-performing tenured teachers by requiring years of documentation, dozens of procedural steps and hundreds of thousands in public funds before a dismissal. Lastly, the plaintiffs want to abolish the so-called "last-in first-out" statute, which requires administrators to lay off teachers based on reverse seniority.

Hedgies Versus Teachers - - Krugman - So one thing I learned last night is that the right has a new meme: inequality is the fault of the government — you see, it’s all those overpaid government workers.I made the mistake of replying on the substance, which is that once you correct for education, government workers are paid about the same as their private-sector counterparts; basically, government workers are school teachers, which means that they need college degrees. But there is a better answer, and a teachable moment here, which gets at the real nature of inequality in America. It’s not about overpaid teachers.Let’s start by looking at the real winners in soaring inequality — the people who not only make incredible amounts of money, but get to pay very low taxes (and if you suggest closing their loopholes, you’re just like Hitler.) According to Forbes, in 2012 the top 40 hedge fund managers and traders took home a combined $16.7 trillion billion. Now look at those supposedly overpaid government employees. According to the BLS, the median high school teacher earns $55,050 per year.  So, those 40 hedge fund guys made as much as 300,000, that’s three hundred thousand, school teachers — almost a third of all high school teachers in America.

The era of the textbook cartel and $300 textbooks is ending, as the ‘college textbook bubble’ shows signs of deflating -  The chart above illustrates the “college textbook bubble” – the dramatic and unsustainable rise in the price of college textbooks.  Since 1998, the CPI for college textbooks has increased by 150%, compared to only a 44.8% rise in the CPI for all goods and services, and a negligible rise (only 0.05%) in the CPI for recreational books (non-educational books). The fact that the real price of recreational books has fallen significantly over the last 15 years would suggest that the rising cost of college textbooks can’t be justified by higher publishing costs, and has to be explained by other factors like the consolidation of publishers that has resulted in less competition and anti-consumer behavior. A new report “Fixing the Broken Textbook Market: How Students Respond to High Textbook Costs and Demand Alternatives” from the Student Public Interest Research Groups explains why college textbook prices have risen so dramatically, offers some recommendations, and highlights some of the non-monetary costs of unaffordable textbooks: According to the report, here’s what’s behind the “college textbook bubble”: The underlying cause for high prices comes from a fundamental market flaw in the publishing industry. In a typical market, there is a direct relationship between consumer and provider. The consumer exercises control over prices by choosing to purchase products that are a good value, and the competition forces producers to lower costs and meet demand. In the textbook industry, no such system of checks and balances exist. The professor chooses the book, but the student is forced to pay the price. Because of this, the student is, in essence, a captive market. Without the ability of the student to choose a more affordable option, publishers are able to drive prices higher without fear of repercussion. It is also important to note that just five textbook companies control more than 80% of the $8.8 billion publishing market, giving them near market monopoly and protecting them from serious competition.

Chicago pension tab: $18,596 for every man, woman, child - The much-discussed government worker pension debt in Chicago now has a price tag: $18,596 for every man, woman and child living in the city. That per-person figure is the highest among the nation’s 25 largest cities. It’s nearly double that of New York, the city with the second-largest tab. And it’s more than five times the median for locales included in the new study done by a major investment research company.The Morningstar survey is further evidence that Chicago is in deep financial trouble due to the large shortfall in its pension systems that cover police, fire and other city workers. The study also included debt from retirement systems covering the state, Chicago Public Schools and Cook County government, liabilities for which the 2.7 million or so Chicagoans are either partly or wholly on the hook. “We note that the state passed a sizable pension reform package in December, which should help ease the state’s portion of this burden going forward,” the report stated. “However, the magnitude of the per capita liability facing Chicago residents is expected to remain immense going forward, barring additional pension reforms on the local level.” Savings for Chicagoans from the state pension law is up in the air, however, after a group of major unions sued Tuesday to try to overturn it. Mayor Rahm Emanuel has pushed for the state to help provide the city with a pension fix, and Senate President John Cullerton has indicated that’s a priority this spring. One watchdog group said it’s about time.

What’s the Deal With Obama’s New MyRA Plan? -- One of the most intriguing ideas in the State of the Union was Obama's promise to use executive action to create a new middle-class savings vehicle that he calls a "myRA" (a pun, get it). The speech didn't really make it clear what this looks like exactly, and I have to say the White House's policy briefing sheet didn't either: Creating “myRA” – A Safe, Easy-to-Use Starter Savings Account to Help Millions of Middle Class Americans Save for Retirement. Starting to save is just the first step towards a secure retirement. Workers must have a place to invest their hard-earned savings that provides an appropriate balance of risk and return, and many private sector providers do not offer retirement savings options tailored to smaller balance savers. Our retirement system should help these potential savers and encourage them to begin building their retirement security. The President is using his executive authority to create “myRA” (my Retirement Account) – a new simple, safe and affordable “starter” retirement savings account that will be available through employers and help millions of Americans save for retirement. This savings account would be offered through a familiar Roth IRA Account and, like savings bonds, would be backed by the U.S. government.

What Is the Real Point of MyRA? -  One of the few concrete executive actions in the State of the Union address was President Obama’s plan to start MyRA. It is framed as a low cost government backed retirement saving bond/account. The more I learn about it the less sense it seems to make. It is really not very different from what is currently available. From the limited details they have put out it appears the money will just be put in the equivalent of Treasury bonds. Of course people can already just buy Treasury bonds or put their money into a Roth IRA that buys bonds. You can already pursue these options in a way that avoids wasteful fees. As best as I can tell the big advantage the program has is that “initial investments could be as low as $25 and contributions that are as low as $5 could be made through easy-to-use payroll deductions.” It would also cost employers almost nothing to enroll their employees. It would seem the main point is to make it easy to automatically have your employees put a little aside every week.  There are also some more cynical interruptions about what the MyRA is really about. For starters, the design is a real gift to big fund managers because the program bizarrely requires you to roll over into a private Roth IRA once you hit $15,000. The cap makes no policy sense. People who are using the MyRA instead of traditional IRAs are likely to be individuals who are not the best at finance. They could become prime targets for unscrupulous funds once they hit their limit. The MyRA also adds to the great risk-shifting taking place by continuing to promote “individual responsibility” instead of social insurance. Obama is not even making aspirational calls for an expansion of Social Security or private defined benefits plans. He is creating one individual savings plan while asking Congress to pass what he thinks would be a better individual savings proposal. Obama is only focused on marginally improving individual saving plans that politically prop up a bad idea which feeds a terrible trend. The real retirement problem in America has been shifting responsibility to individuals, not how the saving plans have been designed.

The Problem With President Obama’s ‘MyRA’ Savings Accounts - To better enable Americans to save for retirement, President Obama said he would order a new “starter” savings plan called MyRA geared at low-income households. It’s a fine idea. But as with any personal savings account, you must be able to fund it for it to matter. That may be the biggest problem with the program. Little is known about these new accounts. They would function like a Roth IRA, allowing savers to put in after-tax money that would then grow tax-free. They’d be available through your employer to anyone who does not have an individual retirement account or work for a company that offers a traditional pension or 401(k) plan. That comes to about 39 million households. The big advantage is that you could open a MyRA with as little as $25 and make contributions of as little as $5, creating a regular savings opportunity that most low-income households have never had. Typically, plan administrators require $1,000 or more to open an account. MyRAs would also benefit from a no-fee structure that does not eat away at savings. Your MyRA would also enjoy a government guarantee against loss of principal. The downside is that your money would be funneled into low-yielding Treasury securities and have little potential to grow enough to make a big dent in your personal retirement savings crisis—or that of the nation as a whole—until you have accumulated enough to roll it into a regular IRA where you might benefit from investments with greater growth potential. Offering low-income households a place to save doesn’t really fix the big problem: they still must have the money and the discipline to take advantage. More than half of workers have less than $25,000 in savings and 28% has less than $1,000 in savings, reports the Employee Benefits Research Institute. And with the MyRA, you could take money out anytime without penalty. That would be awfully tempting the first time money gets tight.

MyRA: The Devil Is In the Details of the President’s New Retirement Plan for Workers - There’s only three ways to think about President Obama’s new plan for offering workers retirement accounts as he disclosed in his State of the Union speech last night.

  • (1) President Obama and Treasury Secretary Jack Lew have decided to get into the financial services business as a front for Wall Street;
  • (2) Wall Street has conned the President into bypassing Congress and launch its decades-long push to establish private accounts in the hope that these could eventually replace Social Security;
  • (3) The reason we know so little about the details of this plan is that they’re not pretty.

The new account is to be called MyRA and would be structured as a Roth IRA where contributions go in after-tax but earnings compound untaxed over time. But Roth IRAs already exist and can be opened at any number of banks and discount brokers (or Wall Street firms where fees are much higher). Firms like Schwab also allow small IRA investors to diversify their holdings.  So exactly what does this new MyRA do for workers that they can’t get elsewhere? Employers would have to sign up to offer the plan through payroll deductions. Initial contributions to the account could be as low as $25. Funds could be withdrawn tax-free but there are no details on how long the funds would have to remain in the account or what age the participant would have to reach to withdraw the funds tax-free. The only investment eligible for the account would be a type of savings guaranteed by the government. IRAs need custodians under existing law. Just who is going to custody these funds and provide the service of keeping track of monies going in and coming out has yet to be explained by the President. Who will be issuing all of these small withdrawal checks to workers running short of living expenses from week to week also has not been explained. Is there a custodian fee and how much is it? Still to be explained.

Treasury to pick manager for Obama myRA retirement program (Reuters) - President Barack Obama's new "myRA" retirement savings program will be run by a private-sector money management firm chosen by the U.S. Treasury Department from a field of up to 30 firms, a senior administration official said on Wednesday. In a competitive bidding process to begin in the next few weeks, the Treasury Department will select a firm with experience in handling Roth individual retirement accounts (IRAs), the official said on a conference call with reporters. The time frame was not clear, with the official saying only that selection would take place in months ahead. true With millions of Americans saving little or no money for retirement, Obama unveiled his myRA account idea in his State of the Union speech on Tuesday evening. He wants the program to get under way in 2015, but many details remain to be worked out. The myRA would create another option for retirement savings, supplementing the existing IRAs, Roth IRAs and 401(k) retirement accounts. The myRA targets mainly lower-income Americans and those employed by small companies that tend not to offer retirement programs.

Vets push Congress for fix to pension cut --  Veterans groups are growing increasingly frustrated that Congress has not made any headway toward reversing a $6 billion cut to military pensions. The groups are determined to reverse the cut because they fear it is a first step toward larger cuts in military compensation and benefits. - More than a dozen bills have been introduced in both chambers to repeal the cut, which reduces the annual cost-of-living adjustment (COLA) by 1 percentage point below inflation for retirees younger than 62. The change would take effect in December 2015. While more than a third of lawmakers have backed one or more of the proposals, there has been no bipartisan agreement as to how to offset the $6 billion price tag, which will be examined at a Senate Armed Services Committee hearing on Tuesday. Those opposed to the cut worry they are running out of time to reverse it. They argue once it takes effect in 2015, it will be difficult to turn around. “We need to get it done now, in this Congress, because very soon, the majority of Congress’s attention is going to focus on reelection,”

Little-known aspect of Medicaid now causing people to avoid coverage - Add this to the scary but improbable things people are hearing could happen because of the new federal health-care law: After you die, the state could come after your house. The concern arises from a long-standing but little-known aspect of Medicaid, the state-federal program that provides health coverage to millions of low- income Americans. In certain cases, a state can recoup its medical costs by putting a claim on a deceased person’s assets.  This is not an issue for people buying private coverage on online marketplaces. And experts say it is unlikely that the millions of people in more than two dozen states becoming eligible for Medicaid under the program’s expansion will be affected by this rule. But the fear that the government could one day seize their homes is deterring some people from signing up. It is the latest anxiety to spring from the health-care law. After years of speculation about the sprawling legislation, which affects everything from the way people see their doctors to their finances, it is now a reality — and in some cases is causing fear.

Doctors Abusing Medicare Face Fines and Expulsion - The Obama administration is cracking down on doctors who repeatedly overcharge Medicare patients, and for the first time in more than 30 years the government may disclose how much is paid to individual doctors treating Medicare patients. Marilyn B. Tavenner, the administrator of the Centers for Medicare and Medicaid Services, said that “recalcitrant providers” would face civil fines and could be expelled from Medicare and other federal health programs. In a directive that took effect on Jan. 15 but received little attention, Ms. Tavenner indicated that the agency was losing patience with habitual offenders. She ordered new steps to identify and punish such doctors. A recalcitrant provider is defined as one who is “abusing the program and not changing inappropriate behavior even after extensive education to address these behaviors.” Cases will be referred to Daniel R. Levinson, the inspector general at the Department of Health and Human Services, who has authority to impose civil fines and exclude doctors from Medicare, Medicaid and other programs. Federal officials estimate that 10 percent of payments in the traditional fee-for-service Medicare program are improper. That would suggest at least $6 billion a year in improper payments under Medicare’s physician fee schedule. But Malcolm K. Sparrow, a Harvard professor and an expert on health care fraud, has said the losses could be greater because the official statistics “fail to accurately capture fraud rates” in Medicare

Did you know there’s a doctor shortage? - Seriously, this is getting old: Following are some of the key findings resulting from Merritt Hawkins’ 2014 Survey of Physician Appointment Wait Times and Medicaid and Medicare Rates of Acceptance

  • The average cumulative wait time to see a family physician in all 15 markets was 19.5 days, approximately the same as 20.3 days in 2009 (family practice was not included in the survey in 2004).
  • The average cumulative wait time to see a physician for all five specialties surveyed in 2014 in all 15 markets was 18.5 days, down from 20.4 days in 2009 and 20.9 days in 2004.

And then it gets worse. How many times do we have to say that there is a physician shortage before someone acts on it? Especially given this (medical graduates per 100,000 pop): We’re not making new docs fast enough. We’re increasing access. We’re complaining about the wait times.

One in Four U.S. Families Struggles to Pay Medical Bills -  One in four U.S. families struggled to pay medical bills in 2012, and 1 in 10 said they had costs they couldn’t pay at all, according to a government survey. The survey released today from the National Center for Health Statistics at the U.S. Centers for Disease Control and Prevention also found the lack of health insurance increased the burden of medical debt. Major provisions of the 2010 Patient Protection and Affordable Care Act take effect this year as the Obama administration seeks to extend health-care coverage to most of the nation’s 48 million uninsured. The law may help lessen some of the financial burdens of medical care. “Unpaid medical bills is the number one reason why families declare personal bankruptcy,” Pollitz said in a telephone interview. “It causes people to lose equity in their homes, to endanger their retirement and their kid’s college education. It will destroy a family financially.”

Republican State Lawmakers’ Refusal to Expand Medicaid Will Result in Thousands of Deaths - Yves Smith - While this site has been critical of the (Un)Affordable Care Act as a further subsidy to an already bloated medical-industrial complex, we do need to give the devil his due. One of the sections of the law that appears to have been genuinely beneficial is Medicare expansion. However, as most readers well know, the results are inequitable, with poor people in Republican states that refused to take up this provision being left out in the cold. As this Real News Network segment with Dr. Steffie Woolhandler, professor at the CUNY School of Public Health at Hunter College and visiting professor of medicine at Harvard Medical School, shows, the failure of Republican states to participate in Medicaid expansion has significant human costs.

Percentage of Americans lacking insurance drops in January -- The percentage of Americans who say they lack health insurance ticked down slightly in January, according to new data that appear to reflect the first effects of President Obama’s health law.  Gallup, which has regularly tracked Americans’ insurance status, reported Thursday that the share without any coverage had declined by about a percentage point in the first three weeks of January, to 16.1% of the adult population. That would represent slightly more than 2 million people. The data provide the first indication of whether Obamacare is succeeding at one of its main goals — reducing the number of Americans who lack insurance. It suggests the impact has been positive, but small so far, much as the law’s authors had expected.   The Obama administration and states have reported that as of early January, about 2.2 million people had signed up for coverage using the new marketplaces, known as exchanges, that the Affordable Care Act created. In addition to people who bought coverage on the new exchanges, several million more — the exact number remains uncertain — have qualified for Medicaid in states that have chosen to go along with the law’s expansion of that program.

No, Obamacare isn’t a ‘bailout’ for insurers: The term “bailout” is back. Specifically, Republicans are calling a feature of the Affordable Care Act — the risk corridor funds designed to share losses if insurance companies have greater than expected losses — a “bailout.” As such, conservatives are demanding that they be repealed. What stands out to me is that nobody is saying what a “bailout” actually entails. Can the academic literature help us here? Yes, in fact. Banking, bankruptcy and finance scholars have tried to piece together a definition of bailouts, and perhaps this could help move the conversation forward. This is a special issue, because as business professor David Moss elegantly demonstrates, the history of the government has always been bound up with its powers of risk management. Things like Social Security and the corporate charter aren’t thought of as “bailouts,” so what differentiates them? Law professor Cheryl D. Block gives a starter definition of “bailout” in Overt and Covert Bailouts: “[A] bailout is a form of government assistance or intervention specifically designed or intended to assist enterprises facing financial distress and to prevent enterprise failure.” According to Block’s definition, bailouts are a form of a government subsidy. But not all subsidies are bailouts. And she specifies three types of subsidies that aren’t bailouts: Bailouts should be distinguished from incentive subsidies, designed to promote a specific behavior such as marriage or savings. Bailouts should also be distinguished from relief subsidies, or the government’s role in providing types of insurance from, say, disasters. And bailouts also aren’t support subsidies, or things such as price supports, which are designed ultimately as a form of regulation of markets. These things all may be good or bad ideas, but they belong in a different category from bailouts.

Obamacare increases incomes of poorest, study finds: — The Affordable Care Act will "significantly" increase the incomes of Americans who fall in the bottom one-fifth of the income levels, while slightly decreasing — by .8% — the incomes of senior citizens, a new study finds. Those in the bottom one-fifth will see income measurements rise 6%; those in the bottom one-tenth will see an increase of more than 7%, according to researchers at the Brookings Institution, a non-partisan think tank. The law also increases incomes for people ages 25 to 64 in the poorest 20% by 9%, found authors Henry Aaron and Gary Burtless, both Brookings fellows. They looked at factors that are not typically included in income estimations, such as how much employers contribute for health insurance, and how much the government pays for Medicare or Medicaid. "Most families will be unaffected by reform," Aaron and Burtless wrote. "Their insurance arrangements will not change, and they are not expected to pay higher taxes or premiums to finance reform or their own insurance." In general, the law pays for increased health coverage for poorer Americans, which includes expanded Medicaid and subsidies to help pay for insurance, but raises taxes on higher-income Americans. The authors noted that people with high incomes will see a "notable share" of income losses because those who make more than $200,000 a year will pay a .9% Medicare tax and a 3.8% Medicare tax on unearned income.

GOP offers Obamacare replacement — and it’s a mess - The good news is that the first rank-and-file Republican healthcare plan of the Obamacare era doesn’t reflect a total state of denial. Its conservative authors — Sens. Tom Coburn, R-Okla., Orrin Hatch, R-Utah, and Richard Burr, R-N.C. — don’t pretend that they can repeal Obamacare and replace it entirely with conservative pabulum like tort reform and deregulation. Conservative pabulum comprises major parts, but not all, of the new plan. The rest of it is somewhat realistic insofar as it reflects a recognition that fixing the pre-Obamacare status quo requires raising some taxes and spending some money. Coburn, et al., propose to raise the taxes and spend the money in a more regressive, less generous way than Obamacare does, and would require major cuts to Medicaid, but at least we’ve escaped the fantastical realm of a great deal of earlier Republican thinking.But it’s not nearly good enough. If Republicans had offered this plan as an opening bid in 2009, they might have found Democrats willing to make a counteroffer and negotiate toward some kind of compromise — or they might have knocked the whole legislative process off the rails. But in 2014, a plan that devolves crucial aspects of Obamacare without any inducement for Democrats is a joke. It’s also kind of a mess.

Republican Alternative to Obamacare: Pay More, Get Less, Put the Insurance Companies Back in Charge -- Boy, can Democrats have fun with the new Republican alternative to Obamacare. It puts the health insurance companies back in charge and raises costs for almost all Americans. In particular, it substantially raises costs and threatens to cut coverage for the half of all Americans who get health insurance at work. Seniors, the group that Republicans have scared witless about Obamacare, would lose the real benefits they receive under Obamacare. The proposal from three Republican senators is a golden opportunity for Democrats to contrast the specific benefits of the Affordable Care Act (ACA) with what a repeal and replace agenda would really mean for Americans’ lives and health. When it comes to the politics of health care reform, my first adage is “the solution is the problem.” That is because once you get past vague generalities, like lowering cost and making coverage available, to proposing specifics, people will look to see how the proposals impact them personally. This is why health reform is such a political nightmare. Unlike most public policy issues, the impact is very understandable and real. With the ACA as the law of the land, in analyzing the Republican proposal we must compare its impact to the law it would repeal. The pre-ACA model of health insurance is irrelevant. Here is how the Republican plan would impact people, compared with the ACA: People who get health insurance at workbottom line: pay more for worse coverage.

Vital Signs: Health-Care Costs Come Off the Boil - Employers continue to hold down the growth in compensation, a task made easier by the large amount of slack in the labor markets. According to the Labor Department, compensation costs for all civilian workers increased 2% for the year ended in December. Wages and salaries increased 1.9%, while benefits rose 2.2%. Total compensation growth picked up slightly from 2012 but the rate is down significantly its prerecession pace. One reason: a long-run moderation in the growth of healthcare costs paid by private employers. After hitting double-digits in the early 2000s, the cost of medical benefits grew 3.0% during 2013. According to another Labor report, health benefits account for 7.7% of all private compensation. Slower growth in benefits creates room for businesses to lift wages. The Labor data show private wages and salaries increased 2.1% last year, up from 1.7% in 2012. With compensation unlikely to jump this year, inflation should remain low. “For now, the still-tame trends allow Fed officials to remain quite dovish with their forward guidance,”

We Are Giving Ourselves Cancer - DESPITE great strides in prevention and treatment, cancer rates remain stubbornly high and may soon surpass heart disease as the leading cause of death in the United States. Increasingly, we and many other experts believe that an important culprit may be our own medical practices: We are silently irradiating ourselves to death. The use of medical imaging with high-dose radiation — CT scans in particular — has soared in the last 20 years. Our resulting exposure to medical radiation has increased more than sixfold between the 1980s and 2006. The radiation doses of CT scans (a series of X-ray images from multiple angles) are 100 to 1,000 times higher than conventional X-rays.  The relationship between radiation and the development of cancer is well understood: A single CT scan exposes a patient to the amount of radiation that epidemiologic evidence shows can be cancer-causing. The risks have been demonstrated directly in two large clinical studies in Britain and Australia. In a 2011 report concluded that radiation from medical imaging, and hormone therapy, the use of which has substantially declined in the last decade, were the leading environmental causes of breast cancer.  CTs, once rare, are now routine. One in 10 Americans undergo a CT scan every year, and many of them get more than one. This growth is a result of multiple factors, including a desire for early diagnoses, higher quality imaging technology, direct-to-consumer advertising and the financial interests of doctors and imaging centers. CT scanners cost millions of dollars; having made that investment, purchasers are strongly incentivized to use them.

Bayer Pharmaceutical CEO: Cancer drug only ‘for western patients who can afford it’ -- In an interview with Bloomberg Businessweek, Bayer CEO Marijn Dekkers said that his company’s new cancer drug, Nexavar, isn’t “for Indians,” but “for western patients who can afford it.”  The drug, which is particularly effective on late-stage kidney and liver cancer, costs approximately $69,000 per year in India, so in March 2012 an Indian court granted a license to an Indian company to produce to the drug at a 97 percent discount.  Bayer sued Natco Pharma Ltd., but in March of last year, the High Court in Mumbai denied its appeal. Bayer CEO called the compulsory license issued by the Indian court “essentially theft,” then said “[w]e did not develop this medicine for Indians…[w]e developed it for western patients who can afford it.”

"Mutated" Bird Flu Kills 19, Infects 96 In 2014 Already; China Says Epidemic Risk Unchanged - The H7N9 mutation of the bird flu virus is "more prone to human infection" than the H5N1 virus, with the fatality rate reaching 20-30%. China's National Influenza Center (CNIC) has reported athat H7N9 has killed 19 in China this year already and the total number of infections has reached 96. Although , as always, details are few and far between, CNIC's Shu Yuelong states that "the risk assessment of H7N9 epidemic outbreak is unchanged," despite the admission that the virus is more difficult to prevent as there is no obvious symptom for H7N9 infected poultry. South Korea has expanded a poultry cull on fears of contagion.

Healthcare Triage: Banning trans fats versus sodas (video) I get a lot of flack on twitter for my seeming “hypocrisy”: We are seeing a lot of changes recently as to what we are “allowed” to eat. When the FDA decided to get rid of trans fats, I applauded. When New York City tried to ban sodas bigger than 16 ounces, though, I booed. Why is this not hypocritical? Watch and find out.

"Our Food Is Dishonestly Priced": Michael Pollan on the Food Movement's Next Goal of Justice for Food Workers - Take a stroll through most grocery stores, and many of the products claim to be organically grown or locally sourced. The foodie movement has swept America in the last decade, thanks in no small part to the work of journalists and intellectuals who have championed the cause online, in print and on the airwaves. Michael Pollan is inarguably one of the most influential of these figures. Pollan is most famous for his books, especially In Defense of Food: An Eater's Manifesto (2008) and The Omnivore's Dilemma: A Natural History of Four Meals (2006). As organic, locally grown food has emerged as a cultural and economic counterforce to industrialized agriculture, critics have claimed it is elitist and accessible only to those with the resources to pay more for their nourishment. Pollan and his allies have responded, in part, by drawing the public's attention to the low-wage workers who work in the field, behind the counter, and in the kitchen. In recent years Pollan has supported the efforts of the Coalition of Immokalee Workers, an organization dedicated to improving working conditions and wages for tomato pickers' in Florida; in December 2013 he sided with fast food strikers and their demand for a $15 dollar per hour wage. In an email missive for (received by 8 million subscribers), Pollan wrote: "If we are ever to . . . produce food sustainably and justly and sell it at an honest price, we will first have to pay people a living wage so that they can afford to buy it." In his words, fair wages must be part of the push to democratize food.

Is the USDA Really Dumb Enough To Approve Agent Orange Corn - The Obama administration announced last week that it expects to approve corn and soybeans that have been genetically engineered by Dow Chemical company to tolerate the toxic herbicide — 2,4-D. They are planning this approval despite the fact that use of this herbicide is associated with increased rates of deadly immune system cancers, Parkinson’s disease, endocrine disruption, birth defects, and many other serious kinds of illness and reproductive problems. Weed ecologists are unanimous in warning that approval of these crops will lead to vast increases in the use of this poisonous chemical. Researchers at Penn State say that in soybeans alone, planting of crops resistant to 2,4-D would increase the amount of 2,4-D sprayed on American fields to 100 million pounds per year — four times the current level. The researchers predict a cascade of negative environmental impacts, and add that the increasing use of the herbicide would actually worsen the epidemic of superweeds it is intended to address, by causing weeds to become resistant to multiple herbicides. A coalition of 144 farming, fishery, environmental and public health groups have asked the USDA not to approve the 2,4-D resistant crops. Citing studies that predict dire consequences to both human and environmental health, they add the concern among farmers that 2,4-D would drift onto their property and kill their crops, causing serious economic damage in rural communities.

Genetic Engineering Companies Promised Decreased Pesticides … But GE Crops Have Led to a 25% INCREASE In Herbicide Use - One of the main selling points for genetically engineered crops is that they would use substantially less pesticides than conventional crops. Because of that, and other, promises regarding GE crops, they have taken over much of the food crops in America. For example:

However, it turns out that GE crops need a lot more herbicides than conventional ones.Washington State University published a study showing: Contrary to often-repeated claims that today’s genetically-engineered crops have, and are reducing pesticide use, the spread of glyphosate-resistant weeds in herbicide-resistant weed management systems has brought about substantial increases in the number and volume of herbicides applied. If new genetically engineered forms of corn and soybeans tolerant of 2,4-D are approved, the volume of 2,4-D sprayed [background] could drive herbicide usage upward by another approximate 50%.

Genetic Weapon Against Insects Raises Hope and Fear in Farming - Scientists and biotechnology companies are developing what could become the next powerful weapon in the war on pests — one that harnesses a Nobel Prize-winning discovery to kill insects and pathogens by disabling their genes. By zeroing in on a genetic sequence unique to one species, the technique has the potential to kill a pest without harming beneficial insects. That would be a big advance over chemical pesticides. “If you use a neuro-poison, it kills everything,” said Subba Reddy Palli, an entomologist at the University of Kentucky who is researching the technology, which is called RNA interference. “But this one is very target-specific.  But some specialists fear that releasing gene-silencing agents into fields could harm beneficial insects, especially among organisms that have a common genetic makeup, and possibly even human health. The controversy echoes the larger debate over genetic modification of crops that has been raging for years. The Environmental Protection Agency, which regulates pesticides, will hold a meeting of scientific advisers on Tuesday to discuss the potential risks of RNA interference. “To attempt to use this technology at this current stage of understanding would be more naïve than our use of DDT in the 1950s,” the National Honey Bee Advisory Board said in comments submitted to the E.P.A. before the meeting, at the agency’s conference center in Arlington, Va. RNA interference is of interest to beekeepers because one possible use, under development by Monsanto, is to kill a mite that is believed to be at least partly responsible for the mass die-offs of honeybees in recent years.

Monarch Butterfly in 'Grave Danger' - The iconic monarch butterfly is a "species in crisis."  A new report from the World Wildlife Fund and Mexico’s National Commission for Protected Areas found that the number of monarch butterflies hibernating in Mexico dropped to its lowest level since records began in 1993. Clues that this year's numbers would be the continuation of a troubling trend have been in for months, with the new study bringing more grim proof that the monarch is in trouble. Using satellite and aerial photographs, the new study documented that 1.65 acres of forest were inhabited by monarchs during December of 2013, marking a 44% drop from the same time in 2012. While the study focused on deforestation and forest degradation in monarch reserves that serve as their winter habitat, it points to a trio of perils contributing to declining numbers of monarchs. From study: There are 3 primary threats to the monarch butterfly in its range in North America: deforestation and degradation of forest by illegal logging of overwintering sites in Mexico; widespread reduction of breeding habitat in the United States due to land-use changes and the decrease of this butterfly's main larval food plant (common milkweed [Asclepias syriaca]) associated with the use of glyphosate herbicide to kill weeds growing in genetically engineered, herbicide-resistant crops; and periodic extreme weather conditions throughout its range during the year, such as severe cold or cold summer or winter temperatures.

GMO Labeling Status Report - There’s increasing noise about the GMO labeling fight moving toward an FDA deal. A labeling bill languishes in Congress, but nothing will come of it until enough corporations want FDA labeling. A year ago Walmart, Coca-Cola, General Mills, and other manufacturers and retailers, along with the industrial organic sector, met with the FDA to discuss a deal for a weak, preemptive federal labeling policy whose goal would be to smother the state-level labeling movement. Today there’s competition between two potential FDA policies. There’s the hard line of the FDA continuing to refuse to require any labeling, while also banning state-level policy on the grounds that food labeling is purely a federal prerogative. (It’s especially funny to see the likes of New Hampshire Republicans advocating this Big Government position as if they were common liberals.) Monsanto and the cartel prefer this “solution”, and the Grocery Manufacturers Association declares this to be its preferred outcome.  Then there’s the softer scam of a false federal labeling policy whose only real teeth would be in its preemption of state policy, and of course in the way it would cut off the momentum of the grassroots movement at the knees. Just Label It and industrial organic are leading the charge for this inverted solution. The GMA is hedging its bets and has indicated that it would support this if it had to.

Legal Experts Reject Food Industry Claims That GMO Labeling Laws Are Unconstitutional - The food industry is playing every conceivable angle in its quest to keep labels off foods that contain genetically modified organisms (GMOs)—including, according to a leaked document, threatening to sue the first state that passes a GMO labeling law. (Maine and Connecticut passed GMO labeling laws in 2013. But both have “trigger” clauses that prevent the laws from taking effect until at least four neighboring states, with a combined population of 20 million inhabitants, pass similar labeling bills).The Organic Consumers Association has obtained the Grocery Manufacturers Association’s (GMA) “One-Pager” of talking points about GMOs and labeling laws. The document is intended for use by food industry lobbyists whose job it is to convince state lawmakers to reject GMO labeling bills in their states.The talking points include the usual misinformation about GMO safety testing and the so-called benefits of GMOs. But they also include claims that GMO labeling laws are unconstitutional—claims that legal experts say are baseless. The GMA may not have a legal leg to stand on. Still, the threats to sue states are clearly intended to strike fear in the hearts of those lawmakers genuinely concerned about spending tax dollars on costly court battles.

What The New Farm Bill Means For Energy And The Environment - House and Senate negotiators unveiled a new five-year Farm Bill on Monday, a $956 billion piece of legislation that’s been worked on for the past two years and, if passed, will be in effect for the next five. The House is expected to vote on the bill on Wednesday, with the Senate voting sometime after. The bipartisan bill has gained attention from some liberals for its cuts to food stamps — a program that makes up about 79 percent of the Farm Bill’s cost — and from some conservatives, who think the current bill doesn’t save enough compared to the current funding. But there’s also several energy and environmental implications in this Farm Bill, especially in the realm of conservation, which at $56 billion makes up 6 percent of the bill’s total funding. The bill includes a provision pushed by groups like Ducks Unlimited and Pheasants Forever that allows farmers and ranchers to have to meet a “minimum standard of environmental protection” if they want to receive federal crop insurance on wetlands and other sensitive land. The Farm Bill also tries to discourage farmers from converting native grasslands to farmland by limiting crop insurance subsidies for the first few years for newly converted land. But the bill also cuts about $6 billion from conservation over the next ten years by consolidating 23 conservation programs into 13. It’s also expected to deliver a blow to native wildlife by lowering the maximum number of acres in the Conservation Reserve Program (CRP) from 32 million to 24 million acres. Under the program, farmers convert some of their land back into grasslands, which can serve as crucial nesting habitat for animals like pheasants and ducks.

California water woes could be just beginning - As 2013 came to a close, the media dutifully reported that the year had been the driest in California since records began to be kept in the 1840s. UC Berkeley paleoclimatologist B. Lynn Ingram didn’t think the news stories captured the seriousness of the situation. “This could potentially be the driest water year in 500 years,” says Ingram, a professor of earth and planetary science and geography. “These extremely dry years are very rare,” she says. But soon, perhaps, they won’t be as rare as they used to be. The state is facing its third drought year in a row, and Ingram wouldn’t be surprised if that dry stretch continues. The NewsCenter spoke to Ingram about the lessons to be drawn from her research as California heads into what could be its worst drought in half a millennium.

Hottest years rankings: (1) 2010, (2) 2005, (3) 2007/1998, (4) 2013/2009/2003/2002 - The global temperature data for 2013 are now published. 2010 and 2005 remain the warmest years since records began in the 19th century. 1998 ranks third in two records, and in the analysis of Cowtan and Way, which interpolates the data-poor region in the Arctic with a better method, 2013 is warmer than 1998 (even though 1998 was a record El Nino year, and 2013 was neutral). The end of January, when the temperature measurements of the previous year are in, is always the time to take a look at the global temperature trend. (And, as the Guardian noted aptly, also the time where the “climate science denialists feverishly yell [...] that global warming stopped in 1998.”) Here is the ranking of the warmest years in the four available data sets of the global near-surface temperatures (1):

Midwest states declare emergency as cold blast worsens propane shortage - The governor of Iowa, Terry Branstad, has called on President Barack Obama to act as bitter winter weather caused a shortage of propane heating fuel and a massive spike in prices in some of the coldest regions of the US. Propane is used by more than 12m households across the country, according industry statistics, and its shortage has led to a state of emergency being declared in more than 30 states. Prices are up more than 17% from a year ago, according to the US Energy Information Administration.  Branstad has written to Obama expressing his concern about a crisis now sweeping the midwest: “Prices in some midwest locations have now exceeded $5 per gallon. Such prices are unsustainable for families, farmers and businesses,” he wrote.  Among other measures, he called on the president to relax transportation rules and allow drivers to work longer hours to deliver fuel while shortages continue. Branstad’s move came after Wisconsin governor Scott Walker became the latest governor to declare a state of emergency Saturday in response to the ongoing shortages and another incoming arctic front. Sub-zero temperatures swept the midwest again this week. On Tuesday the National Weather Service reported arctic winds blowing across Iowa and southern Minnesota would hold high temperatures to between 1 degree above zero and minus 3, with a low of 3 to 10 below zero.

Record-breaking heat in Alaska, some of the largest avalanches ever observed in that region - Jeff Masters: If you're wondering where California's missing precipitation has been going, look northwards to the south and southeast coasts of Alaska. The remarkably persistent ridge of high pressure that has blocked rain from falling in California during January has shunted all the rain-bearing low pressure systems northward, bringing exceptionally warm and wet weather to coastal Alaska.  Heavy rains, snows, and warm temperatures helped trigger a‪ series of huge avalanches that began on Friday, which blocked a 52-mile long section of the ‬Richardson Highway, the only road into Valdez, Alaska (population 4,000), located about 120 miles east of Anchorage.   The avalanches, called some of the largest avalanches ever observed in the region, blocked the Lowe River in Keystone Canyon, creating a large backup of water behind the snow and ice dam.  The highway is expected to be cleared no earlier than February 2, according to the city of Valdez website. As of January 26, 13.83" of precipitation had fallen in Valdez during the month of January. This is more than 8" above average for this point in the month, and close to the all-time record for January precipitation of 15.18", set in 2001 (records go back to 1972.) With more rain on the way Monday and Tuesday, this record could easily fall. Numerous locations in Southeast Alaska have beaten their rainiest January day on record marks.  Christopher C. Burt has much more detail on the record Alaska January warmth in his latest post, Record Warmth in Alaska Contrasts Cold Wave in Eastern U.S. - Temperatures of up to 40 degrees above normal occurred across the interior and West Coast of Alaska on Sunday. Bolio Lake Range Complex in Fort Greely, Alaska, located about 100 miles southeast of Fairbanks, hit 60 °F. This is only 2 °F short of the all-time state January heat record of 62 °F set at Petersburg in 1981.

Record Warmth in Alaska Contrasts Cold Wave in Eastern U.S. -- As the eastern half of the U.S. goes into the deep freeze (as outlined in Jeff Masters' blog today, the flip side is the record warmth that California and Alaska have been experiencing (for two straight weeks now). All-time monthly records for warmth have been set at numerous locations in both states, something that cannot yet be said to have occurred during the cold waves this month in the eastern U.S.The all-time warmest temperature ever observed in Alaska was tied on January 27 when the temperature peaked at 62 °F (16.7 °C) at Port Alsworth. This ties a similar reading measured at Petersburg on January 16, 1981.
The last half of January has been one of the warmest winter periods in the state’s history with temperatures averaging as much as 40 °F above normal on some days in locations in the central and western portions of the state. All time January monthly heat records have so far been established at Nome: 51 °F (10.6 °C) on January 27 (former record 46 °F/7.8 °C on January 7, 1942, POR since 1906), Denali Park HQ: 52 °F (11.1 °C) on January 27 (former record 51 °F/10.6 °C on January 21, 1961, POR since 1922), Palmer: 58 °F (14.4 °C) on January 26 (former record 52 °F/11.1 °C on January 20, 1961, POR since 1949), Homer: 57 °F (13.9 °C) on January 27 (former record 51 °F/10.6 °C on January 23, 1961, POR since 1932), Alyseka: 57 °F (13.9 °C) on January 26 (former record 50 °F/10.0 °C on January 4, 1995, POR since 1963), Seward: 58 °F (14.4 °C) on January 27 (former record 55 °F/12.8 °C on January 7, 2005, POR since 1949), Talkeetna: 47 °F (8.3 °C) on January 25 (former record 46 °F/7.8 °C on January 21, 2004, POR since 1949).

El Nino May Return as Models Signal Warming of Pacific Ocean.  - An El Nino weather pattern, which can parch Australia and parts of Asia while bringing rains to South America, may occur in the coming months as the Pacific Ocean warms, according to Australia’s Bureau of Meteorology. Most climate models suggest the tropical Pacific will warm through the southern autumn and winter, the bureau said in a statement today. Some models predict this warming may approach El Nino thresholds by early winter, it said. Australia’s autumn runs from March to May and winter is from June to August.  El Ninos, which are caused by the warming of the Pacific, affect weather worldwide and can roil agricultural markets as farmers contend with drought or too much rain. An El Nino trend is likely to develop this year, Gavin Schmidt, deputy director of NASA’s Goddard Institute for Space Studies in New York, said this month. It’s been almost five years since the last event, which typically occurs every two to seven years, according to Indonesia’s Meteorological, Climatology and Geophysics Agency. “It increases the chance that we’re not going to get trend wheat yields, that would be one of the risks. The other one would be on livestock, where you’d have lower pasture growth.”

UM researchers study how tropical Pacific shapes climate - For years, scientists have suspected that the warm waters of the western Pacific Ocean play a key role in shaping the Earth's climate. But satellite data provided only a partial picture of what's happening in this remote region of the globe. Now, an international team of researchers is engaged in an ambitious effort to quantify those natural processes, making dozens of flights in three aircraft from mid-January through February to track the gases and particles from the ocean as they rise into the upper atmosphere. "This has interested scientists for many years because we know the atmosphere [there] acts like a huge chimney this time of year,"   Guam, a U.S. military outpost and resort 3,300 miles west of Hawaii, is home base for the expedition. Salawitch is one of three principal investigators on the National Science Foundation-funded project; the other two are with the National Center for Atmospheric Research in Boulder, Colo., and with the University of Miami. While human influences have been closely scrutinized in recent decades, less is known about the natural sources and how the two interact, he said. The waters south of Guam are ideal for that inquiry. They typically have the warmest open-ocean surface temperatures on Earth. That heat fuels the formation of storms with unusually thick, towering clouds, which push upward in a powerful convection current.

Green Fade-Out: Europe to Ditch Climate Protection Goals - The EU's reputation as a model of environmental responsibility may soon be history. The European Commission wants to forgo ambitious climate protection goals and pave the way for fracking -- jeopardizing Germany's touted energy revolution in the process.  The climate between Brussels and Berlin is polluted, something European Commission officials attribute, among other things, to the "reckless" way German Chancellor Angela Merkel blocked stricter exhaust emissions during her re-election campaign to placate domestic automotive manufacturers like Daimler and BMW. This kind of blatant self-interest, officials complained at the time, is poisoning the climate. At the request of Commission President José Manuel Barroso, EU member states are no longer to receive specific guidelines for the development of renewable energy. The stated aim of increasing the share of green energy across the EU to up to 27 percent will hold. But how seriously countries tackle this project will no longer be regulated within the plan. As of 2020 at the latest -- when the current commitment to further increase the share of green energy expires -- climate protection in the EU will apparently be pursued on a voluntary basis.

'Insane, Disgusting' and 'Epic Treachery': NSA Spied on Climate Talks | Common Dreams: 'Obama admin. clearly never wanted Copenhagen talks to work,' says Bill McKibben following latest NSA revelations concerning climate talks.  As the Information reports: At the Copenhagen Climate Summit in 2009, the world's nations were supposed to reach an agreement that would protect future generations against catastrophic climate change. But not everyone was playing by the rules. A leaked document now reveals that the US employed the NSA, its signals intelligence agency, to intercept information about other countries' views on the climate negotiations before and during the summit. According to observers, the spying may have contributed to the Americans getting their way in the negotiations. And HuffPost's Ryan Grim and Kate Sheppard addThe document, with portions marked "top secret," indicates that the NSA was monitoring the communications of other countries ahead of the conference, and intended to continue doing so throughout the meeting. Posted on an internal NSA website on Dec. 7, 2009, the first day of the Copenhagen summit, it states that "analysts here at NSA, as well as our Second Party partners, will continue to provide policymakers with unique, timely, and valuable insights into key countries' preparations and goals for the conference, as well as the deliberations within countries on climate change policies and negotiation strategies."

What effect does cold weather have on people's views on climate change? -If climate change means higher temperatures, then what are people to make of the brutal cold that continues to cause havoc across the US? Or the fact that only three years ago the UK experienced one of its coldest Decembers for decades, if not centuries? With public concern about climate change stalling in recent years, these might seem exactly the sorts of weather events likely to generate sceptical viewpoints, a sign that something is seriously amiss in the case for climate change.  A study I have just had published in the journal Climatic Change suggests however that this way of interpreting extreme cold is actually quite rare. At the same time, I found that people’s reading of the weather was strongly influenced by their pre-existing attitudes towards climate change.  The extent to which people were already sceptical about the evidence base, human causation and impacts of climate change made a major difference to the meaning they placed on the weather. Sceptics tended to agree the winter constituted evidence against climate change, but the study’s results show that non-sceptics were at least as willing to accept the alternative position.

Propane shortage becomes an emergency -- As brutal cold continues to blast much of the nation, a propane shortage is driving up heating bills, prompting accusations of price gouging and leading to energy emergencies in more than a dozen states. "They're worried they might not be able to keep those chickens warm," said Jeff Helms of the Alabama Farmers Federation.And consumers are grousing about higher prices. "It looks like there's some price gouging going on," said Phillip Wallace, director of schools in Stewart County, Tenn., which were closed Thursday and Friday because they were short on propane for heating classrooms. The district was due to receive 2,000 gallons. But Wallace complained the propane cost $3.45 a gallon, up from $1.29. "I don't think that's right," he said. Minnesota, no stranger to winter weather, canceled school because of the cold. With frigid temperatures expected to continue, suppliers are rationing propane and officials are urging consumers to conserve fuel. About 6 million households nationwide, including many in rural areas, use propane to heat their homes.

The Oil Industry Just Talked EPA Into Reconsidering Its 2013 Mandate For Cellulosic Biofuel -- In a move cheered by the oil industry, the Environmental Protection Agency agreed last week to consider downgrading its 2013 mandate for cellulosic biofuel production. Refineries have until June 30 to meet the current 2013 target, which requires them to blend 6 million gallons of cellulosic biofuel into the nation’s fuel supply. The oil industry’s two biggest trade groups — the American Fuel & Petrochemical Manufacturers and the American Petroleum Institute — petitioned the EPA back in October to reconsider the requirement. Last Thursday, EPA head Gina McCarthy sent the groups back a letter saying their case met “the statutory criteria for granting a petition.”  In other words, “we’ll look into it.” Which seemed to satisfy the oil industry, for the moment: “It’s refreshing that EPA has finally agreed to reconsider bad public policy, mandating biofuels that do not exist,” said Bob Greco, API’s downstream director. “We continue to ask that EPA base its cellulosic mandates on actual production rather than projections that — year after year — have fallen far short of reality.”

Beijing’s Bad Air Would Be Step Up for Smoggy Delhi - In mid-January, air pollution in Beijing was so bad that the government issued urgent health warnings and closed four major highways, prompting the panicked buying of air filters and donning of face masks. But in New Delhi, where pea-soup smog created what was by some measurements even more dangerous air, there were few signs of alarm in the country’s boisterous news media, or on its effervescent Twittersphere.Despite Beijing’s widespread reputation of having some of the most polluted air of any major city in the world, an examination of daily pollution figures collected from both cities suggests that New Delhi’s air is more laden with dangerous small particles of pollution, more often, than Beijing’s. Lately, a very bad air day in Beijing is about an average one in New Delhi.The United States Embassy in Beijing sent out warnings in mid-January, when a measure of harmful fine particulate matter known as PM2.5 went above 500, in the upper reaches of the measurement scale, for the first time this year. This refers to particulate matter less than 2.5 micrometers in diameter, which is believed to pose the greatest health risk because it penetrates deeply into lungs.By the time pollution breached 500 in Beijing for the first time on the night of Jan. 15, Delhi had already had eight such days. Indeed, only once in three weeks did New Delhi’s daily peak value of fine particles fall below 300, a level more than 12 times the exposure limit recommended by the World Health Organization.“

Black Carbon Pollution Is Two To Three Times Worse In India And China Than Previously Thought - A new study has found that global estimates of black carbon emissions in certain areas of India and China could be two to three more times concentrated than previously thought. Black carbon, a major element of soot, is a particle that is generated by the incomplete combustion of fossil fuels, biofuel or biomass.  Published in Proceedings of the National Academy of Sciences, a team of researchers from France and China developed a new model for discerning the amount of black carbon pollution in the air. Previous models had failed to take into account regional differences, and instead provided information at the country level. By mapping regions rather than countries, the study indicated that parts of India and China could have as much as 130 percent higher black carbon concentrations than shown in standard country models.   Short-term and long-term exposure to black carbon can lead to a broad range of health impacts, including respiratory and cardiovascular effects as well as cancer and premature death, according to the U.S. Environmental Protection Agency. Black carbon contributes to particulate matter, or PM, pollution, which is made up of a mixture of solid particles and liquid droplets in the air. Black carbon falls within the PM2.5 category, otherwise known as “fine particles,” with diameters that are between 1.0 and 2.5 micrometers and are considered to pose the greatest health risks.  A recent World Health Organization study, “2010 Global Burden of Disease,” found that outdoor air pollution is contributing annually to over 3.2 million premature deaths worldwide — including 1.2 million in East Asia and 712,000 in South Asia in 2010.

Coal Markets Hit Hard as Emerging Economies Begin to Wobble: Slowing growth in developing countries has started to affect the commodities market, especially for coal, as orders are slashed and prices have fallen as much as 10 percent in a month. Commodities are often closely linked to the success of developing economies, whose demand for energy increases as wealth increases and infrastructure is improved. Charlie Morris, the head of absolute return at HSBC Global Asset Management, explained to Reuters that “commodity demand is more concentrated in fast-growing countries ... The marginal buyer of commodities is very much the emerging world and it's going through a bear market right now. Commodities will probably have a bad time for much of this year.”Thermal coal, as the cheapest fuel for electricity generation, is vital for the industrialisation of emerging economies, and has therefore been the hardest hit by the recent slowdown in growth. Currencies, such as the Indian rupee and the Turkish lira, have also fallen, making coal imports much more expensive. South African coal producers have been badly affected by the weakening of demand from India, forcing coal prices in the region down 8% in the last 10 days. George Cheveley, a portfolio manager at Investec Asset Management, warned that “people might see India cutting back on coal purchases and thermal coal prices might come down further.” Reuters adds that European coal markets have also suffered, with prices falling more than 6% over the past two weeks thanks to a reduction in demand from Turkey, and Australian coal prices are down 10% since the start of the year, currently at $78.75 per tonne.

How the Coal Industry Impoverishes West Virginia - Of course, what’s happening in West Virginia right now is no laughing matter. But how could the refugees not be reminded of their decimated homeland after finding themselves, along with 300,000 other West Virginians, without access to potable water? Unfortunately, West Virginia is no stranger to having its living conditions compared to those in developing countries. By almost any measure, West Virginia’s population suffers from some of the worst socioeconomic conditions in the country, and there is no divorcing these realities from the coal industry’s domination of the state. Currently, the Mountain State’s population is the least college-educated in the country, with less than 20 percent of its adult population possessing a bachelor’s degree. As anyone who attended school in this state can attest, the widespread notion that one can easily obtain a well-paying coal-mining job with little to no education continues to be a significant contributor to this trend. I will never forget the feeling of despair that overcame me as a high school student observing my class size dwindling year after year, as more of my classmates decided that dropping out was their best option. However, the coal jobs that sustained generations in these families are no longer there, and Walmart is now the state’s leading employer. Instead of taking a shortcut to a well-paying blue-collar job, my former classmates who decided to drop out instead sentenced themselves to a lifetime of economic slavery working minimum-wage retail and fast-food jobs. This vicious cycle of poverty and low levels of education has contributed to a plethora of other problems, including nation-leading rates in obesity, smoking and prescription drug abuse. Last year, named West Virginia the “most depressed” state in the country. Charleston, the state’s capital, was crowned the “most miserable city in the nation” based on its low ranking in the Gallup-Healthways Well-Being Index, which assigned each state and city in the country a score based on physical health, emotional health, self-described happiness, access to basic necessities and work environment. This distinction was attained prior to the poisoning of Charleston’s water supply by the laughably named Freedom Industries.

Don't Bet on Coal and Oil Growth - A mind-boggling sum of about $800 for each person on the planet is invested into fossil fuel companies through the global capital markets alone. That's roughly 10 percent of the total capital invested in listed companies. The amount of money invested into the 200 biggest fossil fuel companies through financial markets is estimated at 5.5 trillion dollars. This should be an impressive amount of money for anyone reading this.  By keeping their money in coal and oil companies, investors are betting a vast amount of wealth, including the pensions and savings of millions of people, on high future demand for dirty fuels. The investment has enabled fossil fuel companies to massively raise their spending on expanding extractable reserves, with oil and gas companies alone (state-owned ones included) spending the combined GDP of Netherlands and Belgium a year, in belief that there will be demand for ever more dirty fuel.This assumption is being challenged by recent developments, which is good news for climate but bad news for anyone who thought investing in fossil fuel industries was a safe bet. Frantic growth in coal consumption seems to be coming to an end much sooner than predicted just a few years ago, with China's aggressive clean air policies, rapidly dropping coal consumption in the U.S. and upcoming closures of many coal plants in Europe. At the same time the oil industry is also facing slowing demand growth and the financial and share performance of oil majors is disappointing for shareholders. Nevertheless, even faced with weakening demand prospects, outdated investment patterns are driving fossil fuel companies to waste trillions of dollars in developing reserves and infrastructure that will be stranded as the world moves beyond 20th century energy.

Underground Coal Burning Experiment Lacked Adequate Protest Period, EPA Says - Wyoming’s Department of Environmental Quality (DEQ) did not provide enough time for concerned citizens to protest an Australian company’s proposal to exempt a local aquifer from federal safe drinking water laws for an experimental coal project, and must now hold a public hearing about it, the Environmental Protection Agency’s Denver office said Wednesday. According to a release from the Powder River Basin Resource Council, the EPA made the decision after the DEQ admitted that it had provided notice for public participation, but only after it had already decided to exempt the aquifer from the federal Safe Drinking Water Act. DEQ also didn’t allow concerned landowners and citizens to comment at a November hearing about the exemption, Powder River said. Australian company Linc Energy is seeking the exemption in order to build a plant for underground coal gasification (UCG), a largely untested method of getting at coal that is otherwise buried too deep to retrieve. The process, according to Forbes, “captures the imagination;” in order to access the too-deep coal, the process sets it on fire while it is still underground, injecting it with oxygen and water to create synthetic natural gas. If approved, the plant would be the only one of its kind in the U.S. and it needs exemption from the federal Safe Drinking Water Act — the law that protects the quality of drinking water — to go forward. Local residents and environmental groups have been fighting the project, saying it is an untested process that only promises to contaminate their already dwindling water supply with deadly benzene.

Oilprice Intelligence Report: Japan - Too Soon to Bury Nuclear: The zero-nuclear position attributed to some 40% of Japan’s population is certainly understandable after Fukushima; nonetheless, the timing is simply not right. While great strides towards alternative energy resources are being made in Japan perhaps more than anywhere else in the world, just building the necessary infrastructure to supply a zero-nuclear power grid will take years, if not decades. We have closely and with great interest followed Japan’s progress at nuclear alternatives, from the hungry momentum for expensive LNG imports to exploration for “fire ice”, among myriad renewable energy resources. Liquefied natural gas has in the interim replaced nuclear energy as Japan’s primary source of power, driving up prices and inflating the country’s fuel bill significantly. Japan purchased a record 87.3 million metric tons of LNG in 2012 for a whopping $57.5 billion, which is double what it paid in 2011, Bloomberg reports, citing Japanese customs data. The news agency also notes that Japan’s current-account deficit in November was the biggest in comparable data back to 1985. “There is no doubt the nuclear shutdown is damaging the Japanese economy,”  “Japan’s national wealth has been outflowing to countries that produce oil and natural gas.”

Nuclear Restarts Spell Trouble for LNG -- There are two major factors that have emerged in the last five years that have sparked a surge in LNG investments. First is the shale gas “revolution” in the United States, which allowed the U.S. to vault to the top spot in the world for natural gas production. This caused prices to crater to below $2 per million Btu (MMBTu) in 2012, down from their 2008 highs above $10/MMBtu. Natural gas became significantly cheaper in the U.S. than nearly everywhere else in the world.  The second major event that opened the floodgates for investment in new LNG capacity is the Fukushima nuclear crisis in Japan. Already the largest importer of LNG in the world before the triple meltdown in March 2011, Japan had to ratchet up LNG imports to make up for the power shortfall when it shut nearly all of its 49 gigawatts of nuclear capacity. In 2012, Japan accounted for 37% of total global LNG demand. The future of LNG may indeed be bright, especially when considering that global energy demand has nowhere to go but up. But, investors should be aware of the very large threat that Japanese nuclear reactors present to upstart LNG projects.

Why Natural Gas Prices Are Soaring - On Friday, when stocks were plunging, natural gas soared 9.6% to $5.18 per million British thermal units (MMBtu) at the Henry Hub. Up 20% for the week. The highest close since June 2010. Back then, the “shale gas revolution” had turned into a crazy no-holds-barred land-grab and fracking boom that veered into overproduction and a “glut” – accompanied by a historic collapse in price. The US could not export its excess production due to export restrictions and the lack of major LNG export terminals. By April 2012, when the Japanese were paying around $17 per MMBtu for LNG on the world markets, natural gas in the US hit a decade low of $1.92 per MMBtu, and predictions that it would go to zero showed up in the mainstream media. That was the bottom. But nothing can be priced below the cost of production forever. By Friday, natural gas was up 170% from the April 2012 low. Turns out, only a low price can cure a low price. The low price caused demand to creep up. Gas exports via pipeline to Mexico have been growing, especially since additional pipeline capacity went into service last year. Mexico is switching power generation from using its own oil to cheap US natural gas. This allows it to export its more valuable oil to the US. Ka-ching. But building gas-fired generating capacity is a slow-moving process.  Other exports are also moving forward – in people’s heads. There are pipelines between the US and Canada, but the US is a net importer. Exports of LNG are at this point still a pipedream, so to speak, though deals are being made, contingent on getting government approvals to export LNG. It’s going to take years before LNG can be exported in large quantities.

It Could Be A Few Years Before North Dakota Stops Wasting Nearly A Third Of Its Natural Gas -- Since 2007, oil production in North Dakota’s Bakken formation has increased 40-fold, making it the second-largest oil producing state after Texas. Driven by technological advances such as hydraulic fracturing, this oil boom brought with it another product — natural gas. Due to a lack of infrastructure for storing, transporting, and compressing the gas, nearly 30 percent of North Dakota’s natural gas is flared, or burned off. This is both economically wasteful and environmentally costly — An estimated $100 million worth of gas is flared in North Dakota each month, emitting substantial amounts of greenhouse gases into the atmosphere.  On Wednesday, the North Dakota Petroleum Council’s flaring task force, made up of hundreds of companies, pledged to address this issue and significantly reduce the amount of gas being burned. “The industry can increase natural gas capture to 85 percent within two years, 90 percent capture in six years, and could capture up to 95 percent of gas,” the Council said in a press release. The gas being flared releases “roughly six million tons of carbon dioxide into the atmosphere every year, roughly equivalent to three medium-sized coal plants,” according to the New York Times, which also reported that “experts expect a 40 percent increase in the gas produced from the Bakken field by the end of 2015.” That means a lot of wasted energy.  Right now, just over half of the flaring occurs at wells that are unconnected to the gas gathering infrastructure. The rest occurs along pipelines at overcapacity or where compression demands can’t be met, according to a July 2013 report from CERES.

Solutions to H20 pollution elude officials in Cabot gas field Five years after blast, Pa officials continue tests in Dimock - Five years after the explosion of Norma Fiorentino’s water well signaled all was not well in Cabot’s Marcellus shale gas operation in northeast Pennsylvania, state environmental officials are still trying to gauge the impacts of drilling on the water supplies of local residents.  The agency is scheduling another round of tests to see whether methane levels in Dimock water wells are safe, Colleen Connolly, a spokeswoman for the Department of Environmental Protection, confirmed this week. It's the latest step in an investigation that literally began with a bang on New Year's Day, 2009. The explosion of the Fiorentino well prompted an investigation by the DEP that concluded water wells serving at least 19 homes contained explosive levels of natural gas that had migrated underground from Cabot’s nearby drilling operations.  Since then, dozens of water wells in Susquehanna County have been taken off line due to methane contamination. Some of the Dimock residents agreed to a settlement with Cabot, negotiated by the DEP, that compensated the parties with payments worth twice the assessed value of their properties, and systems to filter their water. Others have held out. They believe the systems, which require maintenance, are not an effective answer to the problem and do not filter other harmful chemicals associated with drilling. The settlement was finalized in 2010 under DEP Secretary John Hanger (now a gubernatorial candidate).  Hanger, who headed Governor Ed Rendell’s DEP, had originally pushed for an $11 million infrastructure project, to be paid for by Cabot, to restore fresh water to the residents. Cabot opposed the plan for a water line, and the administration withdrew it soon after Tom Corbett, an industry supporter, was elected governor.

Video: Fracking the Land of Lincoln - A disturbing new video of poisoned water, leaking oil rigs, and lax enforcement at Illinois oil wells highlights why proposed fracking regulation won’t protect the state’s environment or people. The Greenpeace interview with a southern Illinois native and former oil worker shows a fracking test well in a neglected part of the state where weak enforcement at existing wells is already endangering the public. Illinois’ new fracking law provides funding for the Office of Mines and Minerals (OMM) to hire new staff. But, that would only be a solution if lack of staffing were the primary problem. Gov. Quinn (D-IL) has refused to clean house and restructure an agency notoriously cozy with industry. The rules proposed for fracking are a sign the agency intends to continue the same old culture of weak enforcement that allows companies to pay meaningless fines while continuing to operate. Proposed fines from $50 to a few thousand dollars are pocket change, and even those can be waived at the agency’s discretion. Companies with hundreds of past violations may receive permits for new wells, as we’ve already seen with OMM’s poor oversight of coal mines. Many local residents understand something that groups headquartered hundreds of miles away who support the fracking law apparently don’t. Even if the new law does everything it’s designed to do, a fracking boom will still be a major environmental and public health disaster for downstate Illinois. A better funded OMM still can’t be relied on to protect Illinois with only weak penalties and an internal culture that views themselves as partners with industry.

A fracking jobs mess - A debate over job creation and the economic benefits of eastern Ohio’s Utica shale boom has continued unresolved since drilling and fracking began in late 2010.Oil and gas industry officials predicted in September 2011 that the growing effort to tap oil and gas in the Utica shale would lead to more than 200,000 new jobs in four years.So far, that has not panned out, even in the counties with the most drilling activity. For example, Carroll County’s job market is still below pre-recession levels based on two key measures. In November, the county had 12,800 employed residents and an unemployment rate of 7.6 percent, according to the Bureau of Labor Statistics. In November 2007, the county had 13,100 employed residents and an unemployment rate of 5.7 percent. via

Chaos Breaks Out In Natural Gas, Price Tripled Since April 2012 -- “Volatile,” a word that is often used to describe the price of natural gas with its random-appearing jumps and plunges, head fakes, and whiplash-inducing turnarounds, no longer describes the price of natural gas. “Chaotic” would be a better term. Friday last week, when stocks were getting sacked, natural gas soared 9.6% to $5.18 per million British thermal units (MMBtu) at the Henry Hub. Up 20% for the week. The highest close since June 2010. On Monday, natural gas got smacked back down about halfway, but on Tuesday it rose sharply.  February natural gas futures, which expired today, soared a dizzying 13% to $5.687 per MMBtu at the Henry Hub, the highest for front-month futures since January 2010. Much of the move occurred during the last hour of the trading day. It might have been the result of an epic short squeeze, and an act of utter expiration desperation. March futures jumped 7.4% to $5.305. Natural gas is now in the fairly rare condition of backwardation, when front-month futures are priced higher than forward futures. For example, November futures settled at $4.51 up 2.8%. Backwardation occurs during periods of peak demand, either in cold periods during the winter or a long heat wave during the summer when gas-fired powerplants run at near capacity in large parts of the country. It’s another sign of market desperation

Why President Obama’s Natural Gas ‘Bridge’ May Be On The Verge Of Collapse - In his State of the Union Speech Tuesday night, President Obama returned to a familiar dual theme: trying to cut America’s carbon emissions while at the same time pursuing an “all of the above” energy strategy:  If extracted safely, it’s the bridge fuel that can power our economy with less of the carbon pollution that causes climate change. Businesses plan to invest almost a hundred billion dollars in new factories that use natural gas. I’ll cut red tape to help states get those factories built and put folks to work, and this Congress can help by putting people to work building fueling stations that shift more cars and trucks from foreign oil to American natural gas. Unfortunately, the latest science suggests that bridge may be on the verge of collapse. First, the greenhouse gas emissions. Burning natural gas does indeed let off significantly less carbon dioxide than burning coal. But natural gas itself is mostly methane, an incredibly potent greenhouse gas that traps much more heat compared to an equivalent amount of CO2. And all along the production chain, from drilling to piping to transport, some of it will inevitably leak.  The Environmental Protection Agency has pegged natural gas leakage from production at 1.5 percent.  A separate study by fifteen scientists looked at comprehensive atmospheric data and models, and concluded the leakage was at least three percent.  That finding is backed up by other, more local studies by NOAA, which found a four percent leakage rate from natural gas production around Denver, a 6-to-12 percent rate from production in Colorado’s Uintah Basin, and a 17 percent rate in the L.A. basin. Second, the physical limits. A University of Texas study looked at a decade’s worth of information from the Barnett Shale — the formation near Fort Worth, Texas, with the longest history of natural gas franking — and determined that production for most wells fell exponentially over that time. At this point, they’re on track to reach only 10 percent of their potential — though the researchers did say well production could be “greatly improved” with better fracking methods, but that was a possibility only.

Fracking Under Houses Could Be New Norm As U.K. Puts Environmental Concerns On Backburner - Last week Cameron said that the U.K. is going “all out for shale,” and that in an effort to win local support for the controversial practice “revenues generated by shale gas companies could be paid directly in cash to homeowners living nearby,” reported the Guardian.  A recent study from Cambridge University agrees that U.K. citizens should be compensated for fracking, but not for the revenue generated from the fossil fuel — the study said people should be compensated for the environmental costs accrued through the emissions.. “The government’s ‘sweeteners’ of one percent of shale gas revenues to local communities and handing local authorities all of the business rates arising from shale gas wells can be seen as a financial compensation for the disruption fracking will cause locally,” writes Hope in an editorial for The Conversation. “The introduction of climate change taxation would tackle the far greater global disruption that the climate effects of shale gas would otherwise bring.”The U.K. is more than five times as densely populated as the United States. Ministers are currently considering changing trespassing laws to allow gas exploration to take place under residences even without owners’ permission, a major blow to property owners. This is an issue that has already divided local U.S. communities over the pros and cons of fracking as produced water, increased truck traffic, and gas leaks can cause residents major headaches, literally and figuratively.

Public Pressure Puts U.K. Fracking On The Defensive -- Fracking is on the defensive in the United Kingdom. Regulation of its dangerous byproducts and sustained public attention to its ill effects have led major driller Cuadrilla to withdraw several drilling permit applications, and public opposition continues to grow, with the environment secretary saying proponents have “failed to convince the public.”Hydraulic fracturing uses huge amounts of water mixed with other chemicals to blast open underground fissures and find new deposits of gas and oil. Cuadrilla was initially able to dump wastewater from test wells legally, and it did, treating and releasing two million gallons into the Manchester Ship Canal.But new European regulations in 2011 classified fracking water as radioactive waste, subjecting it to new safeguards. And indeed, a test of wastewater at a Cuadrilla site was found to contain radium levels 90 times higher than those of drinking water. Contaminants like metals, large amounts of salt, other chemicals, and high radium levels have been found even in treated wastewater. So for now, drilling is on hold in Lancashire as Cuadrilla attempts to develop new technology able to sufficiently clean wastewater. As radiation waste adviser Dr. Trevor Jones told the BBC, it’s unclear when drilling could restart as “suitable treatment technologies are not available off the shelf and that will inevitably delay fracking operations.” Now that Cuadrilla is being forced to deal with the the dangers of its wastewater, the future of fracking in the UK is uncertain. Contrast that with the experience in the U.S. where wastewater is buried, at great risk of leaking into drinking water, or is even spread on roads.

Why Shale Oil Boosters Are Charlatans In Disguise -- Something has bothered me of late: why is the price of crude oil still elevated? Other commodities have taken a battering since 2011. Gold, copper and iron ore - all are way down off their peaks. But oil has seemingly defied gravity. And that's despite increased supply from shale oil in the U.S., still soft demand particularly in the developed world and declining rates of inflation growth across the globe. What gives? Well, shale oil proponents will say falling oil prices are just a matter of time. And that the boom in shale oil will reduce U.S. reliance on foreign oil, leading to cheaper local oil, which will free up household budgets and spur consumption as well as the broader economy. Perhaps ... though I'd have thought all of that would be already reflected in prices.On the other side, you have "peak oil" supporters who suggest high oil prices are perfectly natural when oil production has peaked, or at least the good stuff has disappeared. Yet the boom in U.S. shale oil appears to put at least a partial dent in this thesis. There may be a better explanation, however. It comes from UK sell-side analyst, Tim Morgan, in an important new book called Life After Growth. In it, he suggests that the era of cheap energy is over. That the new unconventional forms of oil are far less efficient than old ones, meaning they require significant amounts of energy to produce. In effect, the energy production versus energy cost of extraction equation is rapidly deteriorating.Morgan goes a step further though. He says cheap energy has been central to the extraordinary economic growth generated since the Industrial Revolution. And without that cheap energy, future growth will be permanently impaired.

West Virginia’s Chemical Spill Was Larger Than Previously Reported, Company Reveals - The company responsible for the chemical spill that led to a water ban for 300,000 West Virginians has increased its estimate of how much of the chemicals spilled into the Elk River earlier this month. Freedom Industries now says about 10,000 gallons of a blend of crude MCHM and PPH leaked from their chemical plant into the Elk River, an increase from a previous estimate of 7,500 gallons and initial government estimates of no more than 5,000 gallons. So far, the company has been able to clean up about 1,272 gallons of the chemical using absorbent booms and other control devices. Freedom Industries made the revision when prompted by the West Virginia Department of Environmental Protection to disclose how the company came up with the initial estimate of 7,500. DEP officials, however, still say they aren’t sure how much of the chemical spilled into the river. “We are not making any judgment about [the estimate's] accuracy,” DEP Cabinet Secretary Randy Huffman said in a statement. “We felt it was important to provide to the public what the company has provided the WVDEP in writing. We are still reviewing the calculation and this is something that will be researched further during the course of this investigation.”

West Virginia Water Contains Formaldehyde, Official Says - A West Virginia state official told a legislative panel on Wednesday that he “can guarantee” residents are breathing in formaldehyde, a known carcinogen, nearly three weeks after a massive chemical spill contaminated the water supply for more than 300,000 residents.  Scott Simonton, a Marshall University environmental scientist and member of the state Environmental Quality Board, told the panel that he had found formaldehyde in local water samples and was alarmed by the lack of information regarding the lingering impacts of the spill on public health, the Charleston Gazette reported.  “It’s frightening, it really is frightening,” Simonton said. “What we know scares us, and we know there’s a lot more we don’t know.” Simonton said the crude MCHM can be broken down into formaldehyde, which causes cancer, and inhaled while people are showering.  Very little is known about crude MCHM and just how toxic it may be to humans. Initially, state authorities maintained that levels of the chemicals below 1 part per million were considered safe for people, based on consultations with the Centers for Disease Control and Prevention (CDC). The CDC’s recommendation, however, was derived from a study conducted by Eastman Chemical company, which only tested the mixture’s main ingredient and contained no human toxicity data.  Two days after the state began lifting the ‘do not use’ water ban, the CDC issued guidance advising pregnant women not to drink the water until there were no detectable levels of crude MCHM.   Simonton also expressed concern about the 1 ppm threshold and the studies used to derive it, telling the panel that “in one study it couldn’t even be determined what the cause of death was for the rats because there were so many different things happening to them.”

As Temperatures Reach -32° C, TransCanada Pipeline Explosion Leaves Thousands Without Gas --A TransCanada natural gas pipeline exploded and caught fire in the Canadian province of Manitoba on Saturday, sending flames up to 300 meters into the sky and cutting off gas supplies for 4,000 residents during sub-zero temperatures. On Monday, cold Arctic air forced temperatures below –32 Celsius in the communities affected by the explosion “but the extreme wind chill made it feel more like –45,” according to the Canadian Broadcasting Corporation. At a press conference on Monday, TransCanada’s Karl Johannson said the company does not know what caused the explosion and it “will take several weeks” to determine what happened. Johannson said three lines were impacted; Line 1, built in 1960, will be out of service for some time. Line 2, built in 1969, received significant damage but crews were working through the challenging conditions to repair it and, according to Johannson, the company expects to have service restored by Tuesday afternoon. Johannson noted that when service is restored, it doesn’t mean residents will have gas in their homes, as furnaces will need to be re-lit. A representative from Manitoba Hydro told reporters the company will have crews on hand to work through the night, going door-to-door if necessary. The impact of the explosion extended across the border, as well, with residents in the Midwest losing gas supplies during a period of bitter cold. Over the weekend, North Dakotans throughout the eastern part of the state were asked — in the middle of a sustained, severe cold spell — to turn their thermostats down to 60 degrees or lower.

Keystone resistance sparks 700% spike in cash offers for land - Cash offers have been skyrocketing for holdout Nebraska landowners who are willing to sign quickly to allow the Keystone XL pipeline onto their property. The landowners say they've received written offers from pipeline builder TransCanada Corp. in the last few weeks offering exponentially more money than initially promised, on the condition that they sign soon.  Those offers are pouring in at a pivotal moment for the Canada-U.S. pipeline, whose proponents hope to start building this year.  One family says it was initially guaranteed US$8,900 in 2012 to allow the pipeline through its farm. Now, according to an offer sheet dated Jan. 13, 2014, the figure has surged to $61,977.84. But, just like that old marketing slogan says, the offer's good for a limited time only. Included in the price tag is a $27,000 signing bonus that shrinks the longer they wait -- after 30 days it falls to $18,000, then after 45 days it disappears entirely. "They want it to be intimidating. This is more a psychological document than a legal document."

Keystone XL oil pipeline clears significant hurdle - (AP) -- The long-delayed Keystone XL oil pipeline cleared a major hurdle toward approval Friday, a serious blow to environmentalists' hopes that President Barack Obama will block the controversial project running more than 1,000 miles from Canada through the heart of the U.S. The State Department reported no major environmental objections to the proposed $7 billion pipeline, which has become a symbol of the political debate over climate change. Republicans and some oil- and gas-producing states in the U.S. — as well as Canada's minister of natural resources — cheered the report, but it further rankled environmentalists already at odds with Obama and his energy policy. The report stops short of recommending approval of the pipeline, but the review gives Obama new support if he chooses to endorse it in spite of opposition from many Democrats and environmental groups. Foes say the pipeline would carry "dirty oil" that contributes to global warming, and they also express concern about possible spills.

Report Opens Way to Approval for Oil Pipeline -  — The State Department released a report on Friday concluding that the Keystone XL pipeline would not substantially worsen carbon pollution, leaving an opening for President Obama to approve the politically divisive project.The department’s long-awaited environmental impact statement appears to indicate that the project could pass the criteria Mr. Obama set forth in a speech last summer when he said he would approve the 1,700-mile pipeline if it would not “significantly exacerbate” the problem of greenhouse gas emissions. Although the pipeline would carry 830,000 barrels of oil a day from Canada to the Gulf Coast, the report appears to indicate that if it were not built, carbon-heavy oil would still be extracted at the same rate from pristine Alberta forest and transported to refineries by rail instead. The report sets up a difficult decision for Secretary of State John Kerry, who now must make a recommendation on the international project to Mr. Obama. Mr. Kerry, who hopes to make action on climate change a key part of his legacy, has never publicly offered his personal views on the pipeline. Aides said Mr. Kerry was preparing to “dive into” the 11-volume report and would give high priority to the issue of global warming in making the decision. His aides offered no timetable.“He’ll deliberate and take the time he needs,” said Kerri-Ann Jones, the assistant secretary of state for oceans and international affairs.Environmentalists said they were dismayed at some of the report’s conclusions and disputed its objectivity, but they also said it offered Mr. Obama reasons to reject the pipeline. They said they planned to intensify efforts to try to influence Mr. Kerry’s decision. For more than two years, environmentalists have protested the project and been arrested in demonstrations against it around the country. But many Republicans and oil industry executives, who support the pipeline because they say it creates jobs and increases supplies from a friendly source of oil, embraced the findings.

Keystone Pipeline Report Predicts Little Climate Impact - An Obama administration analysis of the Keystone XL pipeline said it probably wouldn't alter the amount of oil ultimately removed from Canadian oil sands, boosting the pipeline's backers by suggesting it would have little impact on climate change. The release of the long-awaited report is one of the last steps before the up-or-down decision by President Barack Obama, who must juggle conflicting demands from supporters heading into midterm elections. The Keystone XL pipeline, which would carry oil from Canadian oil sands into the U.S. Midwest on the way to Gulf coast refineries, has become a potent symbol both for environmentalists who say it would accelerate global warming and for unions and business leaders who see it as a way to stoke North America's development as an energy-producing superpower. The environmental analysis released Friday by the State Department, which is responsible for assessing the project, weighed in at 11 volumes. It said that "approval or denial of any one crude-oil transport project, including the proposed project, is unlikely to significantly impact the rate of extraction in the oil sands."

7 Facts That Weren’t In The New State Department Report On Keystone XL - The State Department released its final supplemental environmental impact statement on the controversial Keystone XL pipeline on Friday. Critics and supporters of the pipeline alike have awaited the report, ever since President Obama last year singled out carbon pollution as a parameter in Keystone’s national interest calculation.The newly-released report admits to the obvious: that “the total direct and indirect emissions” of the project “would contribute to cumulative global GHG emissions.” But in its final analysis, it says the proposed pipeline is “unlikely to significantly affect the rate of extraction in oil sands areas,” and does not look at the overall greenhouse gas emissions of the tar sands oil that would flow through it. The pipeline’s prospects remain a mystery, much like they were when the draft environmental impact statement was released last year: it still says that the pipeline is not a big deal, will not appreciably increase carbon pollution, and will not have a significant environmental impact. But the report does not consider a scenario in which smaller amounts of tar sands oils are extracted, transported, and consumed. Every single scenario measured in it assumes that a Keystone XL-sized amount of tar sands oil will get burned.  But here are seven important facts that the state department’s survey left out:

Keystone XL and Its Impact on the Economics of Canada's Oil Sands - An analysis of the economics of Canada's oil sands by Carbon Tracker Initiative examines how Keystone XL (KXL) will impact the economics of Canada's oil sands.  Canada's oil sands producers have long regarded KXL (or its alternative, the Northern Gateway Pipeline) as the panacea to the problem with high price differentials, currently in the 40 percent range between oil sands-sourced oil and conventional oil (West Texas Intermediate).  As background, Canada's oil sands producers have rather ambitious expansion plans.  From a production level of 1.8 million BOPD in 2012, production from oil sands is expected to rise to 2.3 million BOPD in 2014, 4.5 million BOPD in 2020 and 5.2 million BOPD in 2025.  Here is a graph showing the ramping up of production from 2012 to 2030:  The proposed KXL pipeline will link Alberta with the United States Gulf Coast, allowing oil companies to export an additional 830,000 BOPD of which 730,000 BOPD would be available for oil sands production and 100,000 BOPD would be available for tight oil plays in the Williston Basin (i.e. the Bakken).  The KXL pipeline would provide:

  • 1.) A direct link to the Gulf Coast which would provide oil sands producers a price improvement (a reduction in the differential) since the oil sands oil (Western Canadian Select or WCS) is closer in quality to Mexican Maya which trades closer to the price of West Texas Intermediate
  • 2.) The pipeline will relieve the pressure on existing export routes, allowing prices on WCS to rise in the Midwest.

Now that we have some background information, let's look at CTI's analysis.  As we know, the producing costs for much of Canada's oil sands are at the upper end of the upper quartile of the world's oil production cost curve.   Data from several analysts suggests that the break-even oil price required to make an oil sands project economic range from $60 to $100 per barrel with SAGD projects having a break-even price of $65 to $85 per barrel.  Here is a graphic showing the cost curves for some of the key new oil projects around the world with Canada's heavy oil sands projects in red:

Gulf Coast squeeze looms for Canadian oil producers, expert says - Canadian crude may find itself squeezed out in an increasingly congested Gulf Coast because of rapid production from the Gulf of Mexico, Saudi Arabia, Mexico and Venezuela in the next few years, according to a respected Wall Street commodity analyst. The Energy Frontier: Reinventing Canadian natural gas companies“Each of these countries either have their own refinery capacity or have access to the Gulf Coast on a long-term basis,” said Edward Morse, managing director and global head of commodities at Citigroup Global Markets Inc. “No Canadian producer has long-term access or ownership in refineries in the Gulf Coast. Canadian producers might have to go downstream and become integrated to guarantee their market share in the Gulf Coast.” Calgary-based Cenovus Energy Inc. has a 50% stake in a 146,000-bpd refinery in Borger, Tex., but that is dwarfed by a Saudi joint venture with Royal Dutch Shell Plc. which owns and operates the Port Arthur refinery in Texas, the largest refinery in North America with a capacity of 600,00-bpd, apart from two other refineries on the Gulf Coast with a combined capacity of 465,000-bpd. Foreign companies in Canada, such as Shell and Exxon Mobil Corp., also have Gulf Coast refinery assets, but Mr. Morse’s underlying point is that United States’ hydrocarbon prowess is disrupting global energy markets with few certainties even for the more established trading routes and players.

Big oil companies spending more and producing less From the Wall Street Journal: (graphic)

A Forecast of Our Energy Future; Why Common Solutions Don’t Work -- Our number one energy problem is a rapidly rising need for investment capital, just to maintain a fixed level of resource extraction. This investment capital is physical “stuff” like oil, coal, and metals. We pulled out the “easy to extract” oil, gas, and coal first. As we move on to the difficult to extract resources, we find that the need for investment capital escalates rapidly. According to Mark Lewis writing in the Financial Times, “upstream capital expenditures” for oil and gas amounted to  nearly $700 billion in 2012, compared to $350 billion in 2005, both in 2012 dollars. This corresponds to an inflation-adjusted annual increase of 10% per year for the seven year period. In theory, we would expect extraction costs to rise as we approach limits of the amount to be extracted. In fact, the steep rise in oil prices in recent years is of the type we would expect, if this is happening. We were able to get around the problem in the 1970s, by adding more oil extraction, substituting other energy products for oil, and increasing efficiency. This time, our options for fixing the situation are much fewer, since the low hanging fruit have already been picked, and we are reaching financial limits now. To make matters worse, the rapidly rising need for investment capital arises is other industries as well as fossil fuels. Metals extraction follows somewhat the same pattern. We extracted the highest grade ores, in the most accessible locations first. We can still extract more metals, but we need to move to lower grade ores. This means we need to remove more of the unwanted waste products, using more resources, including energy resources.

Post-Energy Reform, Mexico Signs First Oil Deal with Russia -- Russia's Lukoil has announced an agreement with Mexico's state-run oil company Pemex for exploration, extraction and cooperation on environmental best practices. The cooperation memorandum was agreed on the sidelines of the World Economic Forum in Davos, Switzerland, and represents the first foreign partnership to be forged since Mexico moved to reform its energy sector in December and to Pemex’s 75-year state monopoly over exploration and production. Since 1938, Pemex has controlled the entire hydrocarbons production chain in Mexico. In the past decade, however, falling investment and a sharp drop in production from 3.8 million barrels per day in 2004 to 2.6 million barrels in 2013, has forced a government rethink that will open doors to international oil companies.   The entrance of international oil companies on the scene is expected to lead to a revival of production in Mexico to 3 million barrels per day by 2018 and 3.5 million barrels by 2025.

OPEC Preaches Stability while Making Unstable Bets -  OPEC Secretary-General Abdullah al-Badri said the 12-member cartel could make room for an increase in oil from Iran, Iraq and Libya. All three member states could be on the verge of a revival and the OPEC boss says accommodations could be made when they return. Emerging trends, however, suggest his anticipation may be premature. OPEC set a production target for its members of 30 million barrels of oil per day, but doesn’t have individual quotas in place.  Saudi Arabia and OPEC's top producers have been making up for shortages from Iran, Iraq and Libya, but now the secretary-general said it may be time to make accommodations.  The Organization of Petroleum Exporting Countries in its January market report said Iranian crude oil remains off limits for most European refiners because of sanctions pressure.  Iran in January managed to increase crude oil exports modestly after implementing the terms of multilateral nuclear deals. Shippers, however, said they're confused by the wording of regulations that would lift the ban on insurance for vessels carrying Iranian crude. For Iraqi oil, supplies were hampered by what OPEC described as "pipeline issues." At the same event at Chatham House, Hussain al-Shahristani, Iraq's deputy prime minister in charge of energy affairs, said oil from the Kurdish north should be exported through Iraq's State Oil Marketing Organization as outlined in the national constitution. There was no word on the proposal this week from the Kurdish government, which is making preparations to export crude oil on its own through Turkey. National security challenges in Iraq, meanwhile, are complicating developments ahead of April elections.

Beijing Cracks Down on Pollution, Banning New Refining, Steel, and Coal Plants - The city of Beijing has just announced that it will ban the construction of any new oil refining, steel, cement, and thermal power plants as well as preventing the expansion of any existing plants, in order to try and clean up the city’s air and reduce pollution. China is the largest polluter on the planet and the problem of smog in some of its major cities has been well documented over the past year or so. In January 2013 smog was so bad in Beijing that visibility was reduced to less than 200 metres, grounding flights in and out of the city, closing highways, and forcing many people to stay indoors. Public dissent over the environmental cost of the country’s economic development threatened to blow and in an attempt to appease any anger the central government drew up a pollution master-plan in September, which aimed to reduce the energy sectors dependence on coal and close any outdated and highly polluting industrial plants. This new document, published on the Beijing government’s website last week, is part of the nation’s master-plan and will be put into motion starting in March.

China details $3-trillion local public debt risk (Reuters) - China's local governments have published separate audit reports detailing their combined public debt of $3 trillion for the first time ever, to increase transparency and quell investor concerns. The audits showed China's wealthiest eastern provinces are the most indebted, though repayment burdens are more onerous in poorer areas such as the southwestern province of Guizhou, where the ratio of debt to GDP is the highest, at 79 percent. Most governments were shown repaying the vast majority of their debt on time, though a handful, such as Inner Mongolia, have fallen behind, with the portion of loans due but unpaid running as high as 28 percent. The burst of transparency follows criticisms from some experts this month that China was not releasing enough information about its local debt troubles, widely regarded by investors as the biggest threat to its $9.4-trillion economy. "The issues are the most pertinent in the poorer parts of the country," "Those parts of the country have difficulty repaying their debt."

China's shadow-banking sector a growing problem for booming economy facing inevitable slowdown - Experts are warning China's surging economy could be derailed by a debt crisis arising from it reliance on the so-called shadow-banking sector. China's big banks have strict lending requirements and give preference to large state-owned enterprises, forcing many companies and even government entities to look elsewhere for loans. Inevitably they turn to the shadow-banking sector. There are no exact figures but the sector is estimated at being the equivalent of 40 per cent of China's gross domestic product (GDP). "Shadow banking is the financial activity that exists outside the formal banking sector," said Michael Pettis, a former Wall Street banker who now works for Peking University. "So it includes things like wealth-management products, it includes pawn shops, it includes a wide variety of things - but basically it's the non-regulated part of the banking sector."

China ‘hard landing’ stokes fear at Davos – The risk of a hard landing for the economy in China as well as the threat of military conflict with Japan stoked fears at the World Economic Forum in Davos on Friday. Days after the world’s second-largest economy registered its worst rate of growth for more than a decade, top politicians and economists at the annual gathering of the global elite said the near-term outlook was bleak. Li Daokui, a leading Chinese economist and former central bank official, said: “This year and next year, there will be a struggle, a struggle to maintain a growth rate of 7-7.5%, which is the minimum to create the 7.5 million jobs every year China needs.” On 20 January, Beijing announced that its economy had grown at 7.7% in 2013, the worst rate since 1999. “The risk of a hard landing in China has not been dispelled yet,” added Nouriel Roubini, the economist who earned the nickname “Dr Doom” for predicting the collapse of the US housing market and global recession in 2008. He cited concerns over rising inequalities in China and the “vast challenge” facing authorities in Beijing as they bid to push through deep-seated economic reform.

Is China About To Plunge Into Financial Crisis? - Is China about to have its own Bear Stearns moment? I have been thinking a lot about this after reading a smart report released today by BofA Merrill Lynch Chinese economist Bin Gao, which looks at the recent debt restructuring at the China Credit Trust Co., a major Chinese financial institution. Just a few days ago, the Beijing based company was in danger of defaulting on a high risk, complex debt product. Then, suddenly, it managed to get its hands on enough money to restructure the half a billion-dollar deal and prevent the debt from going bad. Nobody knows who the investor was—the central government? a worried Chinese billionaire? As if that wasn’t bad enough, the secret bailout comes at a time when intra-bank lending rates in China are rising (which means banks don’t trust each other), market volatility is increasing, and the value of risky debt products is plunging.  Sound familiar? That’s exactly what happened in the run up to the 2008 collapse of Bear Stearns in the U.S. Indeed, says Gao, “the bailout looks very much like the Bear Stearns moment.” The CCT problem isn’t the only red flag out there–over the last few months, there have been a number of investment projects that have gone bad in China, including debt issued by a coal mining company, and a provincial government real estate project. The risk of infrastructure projects going wrong and creating a domino effect of exploding debt, just as the subprime mortgage crisis did in the U.S., is something that TIME warned about over two years ago, in a cover story by Ken Miller entitled The China Bubble.

The Reliability of Chinese GDP, Again - Is growth really collapsing?  Reader Steve Kopits doubts the veracity of the current reading on Chinese GDP growth. He writes: The oil stats say China’s growth has been decelerating for a year, and current GDP growth is in the 0-3% range. Is there another historical example of a major GDP driver like China growing at 7.5% and the currencies of its major vendors collapsing? Do we really believe China’s 7.5% reported GDP growth? In volume terms, that would be as much as 10% GDP growth in 2005. And in 2005 there were all sorts of stories in the press about China’s booming energy sector, housing, manufacturing, luxury goods, exports, infrastructure, etc. Most of what I read about China lately is air pollution, ghost cities and South China Sea tensions. [Are we] sure this economy is growing at 7.5%? Well, I cannot claim to be an expert on Chinese national accounts, although I know enough to say the level is probably off, and that the composition is probably mis-measured. But I am not sure the mis-measurement is any greater than it was in earlier times, so I am dubious q/q annualized real GDP growth is in the 0-3% range. Here is some data and econometric evidence to buttress my assertion.

China Manufacturing Back in Contraction, Staffing Declines at Sharpest Pace Since March 2009. The HSBC China Manufacturing PMI shows China manufacturing is back in contraction, following six months of barely positive growth.  Key points:

  • Growth of output eases to marginal pace
  • Quickest rate of job shedding since March 2009
  • Marked falls in input costs and output charge

January data signalled a deterioration of operating conditions in China’s manufacturing sector for the first time in six months. The deterioration of the headline PMI largely reflected weaker expansions of both output and new business over the month. Firms also cut their staffing levels at the quickest pace since March 2009. On the price front, average production costs declined at a marked rate, while firms lowered their output charges for the second successive month.After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) posted at 49.5 in January, down fractionally from the earlier flash reading of 49.6, and down from 50.5 in December. This signaled the first deterioration of operating conditions in China’s manufacturing sector since July.

China's January official PMI slips to six-month low (Reuters) - China's factory growth eased to an expected six-month low in January, hurt by weaker local and foreign demand, a survey showed, a soft start for the year that heightens worries of an economic slowdown. The official Purchasing Managers' Index (PMI) edged down to 50.5 in January from December's 51, the National Bureau of Statistics said on Saturday, in line with market expectations. The change reinforces concerns that China's economy is stuttering and could drag on financial markets on Monday as global investors, already nervous about capital flight in emerging markets, find another reason to sell riskier assets. true Emerging market stocks and currencies were sold off in the past week as investors cut financial bets in developing nations, in anticipation that the United States will continue to move to less easy monetary policy. Super-easy U.S. policy had spurred a flow of cash into emerging markets in recent years. Saturday's PMI showed China's factories saw fewer export orders and slacker growth in new orders last month. A sub-index for new orders fell to a six-month low of 50.9, and export orders slipped to 49.3, also a six-month low and below the 50-point threshold separating growth from contraction in PMIs. An employment sub-index fell to an 11-month low of 48.2.

The Carnage Continues In Asia As China PMI Confirms Contraction Deepening - Following last week's Flash PMI print of 49.6, the Final print for January China Manufacturing dropped further to 49.5 confirming the contraction is deepening. Japanese stocks were down the most since August in the early going as Nikkei futures extended the losses from the US day-session (and rather notably decoupled from USDJPY and breaking below 15,000). The Nikkei is heading for the worst month since May 2012 (-8.66% so far). S&P futures tracked USDJPY as 102.00 was defended aggressively. Chinese stocks are also tumbling (though not as hard as Japan and US) and the PBOC will not be adding liquidity today. Furthermore the blame is being shifted as Deputy FinMin Zhu warns that the "Chinese economy faces risks from overseas uncertainty." EM FX is drifting lower still.

China Trade Puzzle Revived as Hong Kong Data Diverge - China’s trade numbers, distorted by fake exports last year, are set to come under renewed scrutiny after a discrepancy between Hong Kong and Chinese figures for bilateral trade widened to the largest in eight months.  Hong Kong’s December imports from China fell 1.9 percent from a year earlier to HK$176 billion ($22.7 billion), the city’s statistics department said yesterday. That compares with $38.5 billion in exports to Hong Kong reported earlier this month by China’s customs administration, up 2.3 percent, based on data compiled by Bloomberg. Economists split on how to interpret the latest numbers, which follow reports earlier last year that invoices for fake exports were used to disguise capital inflows, inflating China’s trade data before regulators in May cracked down on the practice. Exaggerated overseas shipments would mean that global demand is weaker than China’s statistics indicate. “From the last few months’ data, we have seen hints that some Chinese exports are fake and in fact that reflects hot money inflows,” said Zhang Zhiwei, chief China economist at Nomura. China’s exports to Hong Kong in December exceeded the city’s reported imports from the mainland by about 70 percent, the biggest difference since April.  Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said the gap between China’s reported increase in exports to Hong Kong and the city’s reported decline in imports isn’t big enough to raise any red flags when compared to the difference earlier in 2013.  That’s because China records exports when goods leave, while Hong Kong waits 14 days after items arrive in port to record them as imports, Shen said.

The Empire’s New Asian Clothes – America’s Strategic Rebalance As Covert Retreat - Yves Smith - Yves here. This article provides perspective on Obama’s unseemly anxiety to push through the toxic trade deal known as the TransPacific Partnership. We’ve chronicled at some length how this is not in fact a “trade” deal but is designed to make the world safer and more profitable for US multinationals by strengthening intellectual property protections (helping Big Pharma, Hollywood, and technology firms) while providing for enhancement of the rights of foreign investors to bring cases against governments in secret arbitration panels for measures that would reduce expected profits. The effect of these investor provisions is to allow foreign companies to challenge labor protections and environmental and product safety regulations, facilitating a race to the bottom. Fortunately, word about the implications of this pact and its sister, the Transatlantic Trade and Investment Partnership, is getting out. Not only is there large-scale opposition among House Democrats, but today, conservative Republicans announced their opposition to what they call “Obamatrade,” even as Obama plans to make another push for the TPP in his State of the Union address this evening. But another reason for the TPP is that it is a crucial part of Obama’s “pivot to Asia” strategy. One of its aims is to isolate China by creating a trade bloc that excludes the Middle Kingdom. The article below helps explain why using non-military means to reinforce the US hegemony is even more important now.

Obama Downplays Trade Authority, Trans-Pacific Partnership: Fleeting Mention Doesn’t Even Reference Recently Introduced Camp-Baucus Fast Track Bill -- “Corporate interests were fiercely lobbying for President Obama to dedicate serious time in this State of the Union speech to pushing Fast Track and the Trans-Pacific Partnership in order to try to overcome broad congressional and public opposition to both, but instead he made only a passing reference that largely repeated his past statements. With almost no House Democratic support for Fast Track, a bloc of GOP “no” votes and public opposition making congressional phones ring off the hook, high-profile treatment of the issue was considered necessary to revive any prospect that Fast Track could be passed in this Congress.  “Opposition has been growing to the massive Trans-Pacific Partnership deal. Implementing this  NAFTA-on-steroids deal would undermine Obama’s efforts to battle income inequality. It would be like drilling a hole in a boat just as you are trying to seal the cracks that are letting the water in.”

Top Democrat puts Obama trade deals in doubt - President Barack Obama’s push to strike trade deals with the European Union and 11 Pacific Rim nations was put in jeopardy after the top Democrat in Congress quashed the idea of giving the White House congressional approval to negotiate the pacts. Harry Reid, the Senate majority leader, said he opposed legislation known as Trade Promotion Authority, which sets a swift timeline for trade bills and prevents amendments that would slow them down or modify their contents. More video“I’m against fast track,” Mr Reid told reporters, less than a day after Mr Obama had called for TPA in his State of the Union speech. “Everyone would be well advised just to not push this right now, ”he added. Mr Reid has often been sceptical of trade deals, and is wary of their potential to divide his party in a year of midterm congressional elections during which his control of the Senate is at risk.

Mirabile Dictu! Reid Tells Off Obama on Fast Track, Killing Toxic Trade Deals for 2014 - Obama made yet another pitch in State of the Union Address for his gimmies to multinationals known as the TransPacific Partnership and the TransAtlantic Trade and Investment Partnership. Today that idea went down in flames, at least as far as getting the deals done this year are concerned. From Huffington Post: “I’m against fast track,” [Harry] Reid told reporters Wednesday on Capitol Hill, before suggesting a fast-track bill introduced by Sen. Max Baucus (D-Mont.) may not get a vote. “We’ll see. Everyone knows how I feel about this. Senator Baucus knows, [potential backer] Sen. [Ron] Wyden knows. The White House knows.” Indeed, Reid cautioned the president and his allies to back off. “I think everyone would be well advised just to not push this right now,” the majority leader said. Although Reid was known to be opposed to fast track, it’s quite another matter for him as a Democratic Congressional leader to tell Obama to take a hike. I can’t recall such frontal and public opposition to an important Administration initiative before. This is really humiliating.  And it also checkmates Obama, at least for now. From the Wall Street Journal: Fast-track authority is seen as crucial to cementing a trade deal known as the Trans Pacific Partnership because of the reassurance it would provide negotiating partners in a last, tough round of talks. Other nations are typically reluctant to make trading concessions unless the U.S. can offer assurances that trading pacts won’t be amended or rejected at the last minute…. “You can kiss any new trade deals goodbye,” said Sen. John Cornyn (R., Texas.) “I think the majority leader’s focus is on the November elections and he doesn’t want to expose his vulnerable members to controversial votes.”

Trading Jobs for Ropes - Obama only briefly mentioned fast-tracking the Trans-Pacific Partnership (TPP) in last Tuesday's State of the Union speech, depicting the trade agreement as part of his bipartisan outreach to the GOP, while claiming it would boost U.S. exports. Rep. Keith Ellison of Minnesota, the chair of the House Progressive Caucus, asked, "How can you say on one hand you want to address income inequality, you want to make this economy work for everyone, and on the other hand, say you want trade promotion authority so you can pass these NAFTA-style trade deals? It doesn’t make any sense."The Republicans, on the other hand, wanted Obama to spend more time pushing it during the State of the Union. But if Obama is so enthusiastic about this proposed trade deal, then why hasn't he been touring the nation and fervently trying to pitch this snake oil to the American public?  Senate Majority Leader Harry Reid reiterated his position about fast-tracking this trade deal, suggesting the bill ( introduced by Senator Max Baucus, who is now the new ambassador to China) may be DOA in the Senate.And it's no wonder—this trade agreement has been described as NAFTA on steroids. Wikileaks has more details and updates on the TPP trade agreement.

Japan Sees Trouble Ahead as Trade Pact Stalls - U.S. Senate Majority Leader Harry Reid made clear his opposition to granting the Obama administration power to clinch trade deals with other countries, dashing hopes for an early TPP deal and leaving negotiations on hold at least until the U.S. mid-term elections are over in November. Few issues are as emotionally charged in Japan as the TPP, mainly because of the U.S. demand for opening up Japan’s highly protected rice industry.  Some economists point to a recent government estimate that economic benefits of the TPP would be about 0.66% of Japan’s gross domestic product–a sizable amount but not big enough to make it vital for Japan’s economSeey. But government officials say that its potential benefits stretched far beyond the economic boost.First, without market-opening pressure from the U.S. under the TPP talks, Prime Minister Shinzo Abe’s economic reform program could slacken. While Mr. Abe insists that reforms would proceed with or without the TPP, negotiations have served as a key driving force behind the reform programs.One senior government official wondered Thursday how the government would motivate farmers to action without a TPP-imposed deadline for tariff elimination. Japanese farmers have been long pressured to implement cost-saving measures, such as collaborating with each other and sharing equipment, but with tariff protection and generous government support remaining in place, farmers may lack incentives to do anything, the official said.

Furman Says White House to Continue Trade Push, Weighs In on Economic Questions - A top White House economic adviser on Friday said the Obama administration would continue to push Congress to approve fast-track authority for trade deals, saying that recent pushback by Senate Majority Leader Harry Reid (D., Nev.) wouldn’t derail their effort. White House Council of Economic Advisers Chairman Jason Furman also weighed in on a range of other topics, including the upcoming White House budget proposal, labor force participation, and complaints from some critics that the White House is trying to overwhelm the wealthy with tax increases.   Mr. Furman said Mr. Reid’s comments didn’t come as a surprise to the White House. He said the White House was continuing to negotiate trade deals with countries in Asia and Europe and that it was essentially for Congress to pass a law that lets the White House have an up-or-down in Congress on trade deals. This is known as trade promotion authority, or TPA. “You can’t negotiate those with our partners and you can’t implement [trade deals] here in the United States if we don’t have TPA… What’s important is that as [U.S. Trade Representative Michael] Froman is negotiating with the Europeans, negotiating with the Asians, negotiating with our other partners those agreements, that he can make it very clear to them that as we are asking for concessions from other countries, that we are going to be able to deliver and implement those agreements here in the United States. That’s why it’s so important to strengthen the hand of our negotiator in those agreements by having forward momentum and a path forward for TPA.”

Who Wins From Trade?  In his State of the Union Address, President Obama said that because “ninety-eight percent of our exporters are small businesses, new trade partnerships with Europe and the Asia-Pacific will help them create more jobs.” This suggests that small businesses will benefit most from trade, but that is not the case. In fact, two-thirds of U.S. exports are generated by multinational companies (domestic and foreign) operating in this country, as shown in the figure below. These massive firms also generated more than two thirds of U.S. imports and an even larger share of the job-destroying U.S. goods trade deficits.And therein lies the not so hidden underbelly of international trade and investment deals that the president has consistently refused to discuss: job displacing imports. A surge of imports from low wage countries has driven down wages for working people in the United States. In fact, imports are responsible for 90% of the growth in the college/noncollege wage gap since 1995. Those same multinational companies were the biggest supporters of trade and investment deals with Mexico, Korea and China, deals that have cost U.S. workers nearly four million jobs in the past two decades. Now, the multinationals are demanding that the president complete trade deals with nearly a dozen countries in Asia and Latin America (the TPP), and a new trade and investment deal with Europe (the TTIP) that will open our markets to goods made by millions of low wage workers in Eastern Europe.

Japan Trade Deficit 2013 Breaks Record -- Japan logged a record $112.07 billion trade deficit in 2013, up 65.3 percent from the previous record, set in 2012. A weakening yen, caused in part because of the Bank of Japan’s pledge to keep inflation below 2 percent, led to increased exports for the first time in three years, but these failed to outweigh mounting costs of imports, the Foreign Ministry said in its preliminary report on Monday. Increased energy demands, following the cessation of atomic power generation in the wake of the Fukushima crisis, was noted as a major factor in driving up imports, which jumped 15 percent compared to the year before.

Japan Posts Record $112B Trade Deficit in 2013 — Japan’s trade deficit surged to a record 11.47 trillion yen ($112 billion) in 2013 as the shutdown of nuclear power plants swelled the nation’s energy import bill. Provisional data Monday showed that exports rose 9.5 percent to 69.8 trillion yen ($680.9 billion), while imports jumped 15 percent to 81.3 trillion yen ($793.2 billion). Japan’s trade deficit in 2012 was 6.94 trillion yen. The deficit has been rising as costs for imports have surged with the weakening of the Japanese yen and increased purchases of foreign oil and gas. Japan’s nuclear reactors have been offline for safety and regulatory checks after the March 2011 earthquake and tsunami devastated the Fukushima nuclear plant. The largest shortfall, 13.2 trillion yen ($128.8 billion), was with the Middle East, source of the largest share of resource-scarce Japan’s imports of oil and gas. The weaker yen is a mixed blessing for Japan. It is boosting corporate profits due to higher yen-denominated income for companies that earn a large share of their revenues overseas.

Cash pours into Aussie joke virtual currency - Forget about bitcoin. The latest go-to cryptocurrency is called dogecoin, a digital denomination that began life less than two months ago as a jokey tweet made by 26-year-old Australian Jackson Palmer. But his joke has now taken on a life of its own. The total value of the market for dogecoin (pronounced dough-je coin) has just topped $US60 million ($68 million) and it has spawned a community comprising thousands of buyers, sellers, merchants, beggars, speculators and “miners”, the people who mint the money. This week, transactions worth a total of $US14 million were made, including one Chinese investor who bought $US5 million worth of the virtual currency. And on a daily basis dogecoin transactions are outstripping those in the more established bitcoin market, albeit for a smaller overall value.

Abenomics Fail: Japanese Auto Demand Drops Most In 3 Years -  Over a year after Shinzo Abe unveiled his devalue-the-currency three arrows plan to save his demographically-challenged and debt-riddled nation from a third lost decade... and aside from a stock market that soared as the currency collapsed - the Japanese people have little (or worse less) to show for it. As MarketWatch reports, Japan Automobile Manufacturers Association said Thursday that auto demand in Japan is expected to drop 9.8% in 2014 as the sales tax increase in April will dent consumer sentiment. The decline will be the first and sharpest drop in three years after auto demand remained nearly flat last year. It seems that 'recovery' will have to wait.

Is Abenomics Misguided? Officials Not Ready to Concede -- One of the basic premises of Prime Minister Shinzo Abe’s economic policy is that a weak yen is good for the economy, and will help revive Japan’s key export sector. Trade data out Monday showed that’s not happening.  The yen has fallen 18% against the U.S. dollar since Mr. Abe’s election in December 2012. But that has failed to light the expected fire under exports — trade by volume has remained stagnant — while it has boosted the cost of imports. Add it up and Japan just recorded its third straight trade deficit in 2013, including its second straight record deficit.  Some economists say it may be time to rethink Abenomics’ emphasis on a weak yen, or at least to ask if yen weakness has gone too far. But Japanese officials aren’t quite there yet.  The government is still betting that the cheap yen will eventually boost export volumes by making Japanese products more competitive pricewise, and that imports will naturally decline as they become more expensive, bringing trade back into balance.  By the government’s rationale, this process is just a matter of time: Perhaps Japanese manufacturers who ran up losses when the yen was so high haven’t wanted to cut prices yet — but they will soon. Meanwhile, the cost of imported goods has also risen: The cost of an iPad has gone up more than 10%, while imported German cars have become more expensive too. Government officials believe that will eventually curb demand for such items.  Still, the delay in seeing the promised benefits from a weak yen has led some private-sector economists to argue that Japan should stop striving to be an exporter of manufacturing goods — leaving that to low-wage economies like China — and focus instead on developing the service sector. But that won’t fly in the halls of government, where “monozukuri,” or craftsmanship, is seen as a revered part of the Japanese tradition.

Attitudes about Aging: A Global Perspective | Pew Global Attitudes Project: At a time when the global population of people ages 65 and older is expected to triple to 1.5 billion by mid-century, public opinion on whether the growing number of older people is a problem varies dramatically around the world, according to a Pew Research Center survey. Concern peaks in East Asia, where nearly nine-in-ten Japanese, eight-in-ten South Koreans and seven-in-ten Chinese describe aging as a major problem for their country. Europeans also display a relatively high level of concern with aging, with more than half of the public in Germany and Spain saying that it is a major problem. Americans are among the least concerned, with only one-in-four expressing this opinion. These attitudes track the pattern of aging itself around the world. In Japan and South Korea, the majorities of the populations are projected to be older than 50 by 2050. China is one of most rapidly aging countries in the world. Germany and Spain, along with their European neighbors, are already among the countries with the oldest populations today, and their populations will only get older in the future. The U.S. population is also expected to get older, but at a slower rate than in most other countries. Public concern with the growing number of older people is lower outside of East Asia and Europe. In most of these countries, such as Indonesia and Egypt, the proportion of older people in the population is relatively moderate and is expected to remain so in the future.

Economic Shifts in U.S. and China Batter Markets - The ascent of developing countries over the last decade has been fueled by two global trends: the steady rise of China and the willingness of the Federal Reserve to stimulate the economy. Now, with both trends starting to retreat, investors have been heading for the exits in markets as far removed as Buenos Aires, Istanbul and Beijing, with effects spilling over into the rest of the world. A decline this week picked up speed and spread around the globe on Friday, leading to the first sustained drop in United States stock indexes in 2014. The Standard & Poor’s 500-stock index fell 2.1 percent on Friday, to end its worst week since June 2012. But the damage is expected to be worse in places that have relied on demand for raw resources in China, whose economic advance is slowing. An index of Chinese manufacturing growth released on Thursday showed that the most important cog in the country’s economy, the world’s second-largest, was contracting for the first time in six months.  The damage has been particularly severe in countries that are already suffering from political instability, like Turkey and Argentina. Turkey’s currency fell to a record low against the dollar on Friday, a drop that will hit the purchasing power of everyone in the country.

A Teeny-Weeny Bit Of Taper, And Look What Happened - All heck broke loose in equities, after an already iffy start of the year, and Friday’s hair-raising plunge across the board left the Dow down 3.7% for the week. They got clobbered worldwide: in Asia, except China, in Latin America, in Europe – with Germany’s DAX down 3.6% for the week and Spain's IBEX 35 down 5.7%. And emerging markets, oh my! Equities plummeted. And outright bloodletting took over the currency markets. The Turkish lira dove, though the central bank tried to prop it up. Argentina, which is desperately lacking dollar reserves and might not be able to service its dollar bonds, simply threw in the towel and let the peso devalue, rather than blow more dollars that it didn’t have on slowing down the fall. BOOM – 13% of whatever wealth was tied up in the peso has evaporated. "Global emerging markets are now trading in full-blown panic mode," A teeny-weeny bit of taper, and look what happened. Now Wall Street is lining up at the Fed, whining! And the media are diligently reporting that "the jittery financial markets" might or would or at least should cause the Fed to revert to the halcyon days of full-blown no-room-for-doubt QE Infinity. They want the Fed to get on it, and pronto, and do so with redoubled efforts. Doesn’t the Fed get it?

IMF Warns Of Stimulus Taper Effects On Emerging MArkets - The International Monetary Fund is closely monitoring recent events in the world's emerging markets amid concerns that the withdrawal of monetary stimulus by the US will add to the turmoil caused by the sudden slump in Argentina. The IMF believes that the next phase of the gradual removal of stimulus to the US economy by the Federal Reserve, due later this week, could be the trigger for fresh turbulence in countries seen as vulnerable to capital flight, such as Turkey and Indonesia. Christine Lagarde, managing director of the IMF, told participants at the World Economic Forum in Davos that the so-called tapering by the US central bank was a potential problem. "This is clearly a new risk on the horizon and it needs to be closely watched," Lagarde said. "How tapering takes place, at what speed, how it is communicated and what spillover effects it has, particularly in emerging markets." Markets sold off on Friday after the Argentinian peso had its biggest one-day fall since 2002.

Nouriel Roubini: Mini Perfect Storm -  At the World Economic Forum in Davos this year, geopolitics took center stage, while concerns about the economy faded into the background. But the global market gyrations of the last two days are a reminder that big economic stories are continuing to play out. I talked to famed economist Nouriel Roubini to get his take on what's been going on recently, as well as the big, broader stories. He described the market events of the past week as a "mini perfect storm" due to the fact that we're seeing weak data in China, fresh currency market turmoil in Argentina, and a worsening chaotic situation in Ukraine, the combination of which has triggered this market response. He also touched on one of the other big themes of the year, which was the relationship between technology and inequality. Like others, he fears that without smart policy, the benefits of new technology will go to a very small part of the population, threatening capitalism itself. Our Q&A is below.

Start of a Global Currency Crisis? - In Emerging Market Contagion Spreads, I presented a viewpoint that emerging market currencies have been under pressure because of falling commodity prices.  Commodity exporter currencies such as the Australian dollar, Canadian dollar, and Brazilian Real have been under pressure for the same reason. In addition to the commodity collapse thesis, Pater Tenebrarum at the Acting Man blog throws Abenomics into the mix of possible causes of the Currency Massacre in Emerging MarketsBoth Venezuela (socialist worker's paradise) and Argentina (nationalist socialist paradise) have a problem with their foreign exchange reserves. In both cases it stems from trying to keep up the pretense that their currencies are worth more than they really are.  Since they have maintained artificial exchange rates – coupled with capital controls, price controls and other coercive and self-defeating economic policies – people have of course felt it necessary to get their money out any way they can. This includes making use of every loophole that presents itself, so that e.g. in Venezuela, so-called 'dollar tourism' has developed, whereby citizens travel abroad for the express purpose of using their credit cards to withdraw the allowed limit in dollars at the official exchange rate [then buy goods or bring back the cash to exchange on the black markets at much higher rates]. Now the governments of both Venezuela and Argentina have reacted – the former by introducing a 'second bolivar exchange rate' for certain types of exchanges, the latter by stopping to defend the peso's value in the markets by means of central bank interventions.  We cannot help thinking that all this upheaval is the prelude to a more serious denouement down the road – perhaps sooner than most people currently think.

It's like 1997 all over again - Since the sell-off of 2013, doom-mongers may argue, two things have got worse. First it has become even clearer that the rich world’s central bankers do not really known how to tame the beast they have created in the form of ultra-loose monetary policy. Ben Bernanke, the outgoing Fed chief, chairs his last policy meeting on January 28th and 29th. The Fed is expected to trim its bond purchases by a further $10 billion, to $65 billion a month. No doubt this will be accompanied by a torrent of elegant verbiage to show that the Fed is in command. But sceptics should look at Britain, where the newish central bank boss, Mark Carney, has abandoned the framework he put in place only half a year ago. It was supposed to govern the pace at which monetary policy would return to an even keel. The process of normalising central banks’ balance-sheets is going to be mighty unpredictable and disruptive. The second change for the worse is that the emerging world’s a recovery in exports looks tepid. The hope had been that as the Western world grew faster it would suck in more goods from emerging economies, helping them to improve their current-account balances and making them less dependent on foreign capital inflows. But the latest data are mixed on this front. In both Brazil and Turkey current-account deficits have widened since the summer. China’s exports grew 4% year-on-year in December, which was slower than expected. At every sign that China is in trouble investors run from emerging economies—it is one national economy that serves as both a proxy for Western appetite for exports and as a source of demand in its own right, particularly for commodities.

Emerging markets pray for Wall St. tumble (Reuters) - What struggling emerging markets need right about now is a big sell-off - in the U.S. Without a substantial downdraft on Wall Street, the Federal Reserve is highly likely to carry on trimming the amount of bonds it buys every month, continuing at its meeting ending on Wednesday by taking it down another $10 billion to $65 billion. That tapering will accentuate pressure on emerging markets, which have suffered substantial losses on currencies and securities with investors increasingly less interested in discriminating between the weak and the more stable. Weakness in emerging markets, and mixed U.S. economic data, have driven U.S. stocks down a somewhat paltry 4 percent or so from recent highs. While that leaves Wall Street lower than it was when the Fed commenced its quantitative easing rollback in December, there is little reason to believe it will prompt the U.S. central bank to stage an abrupt about-face, especially at Ben Bernanke's farewell rate-setting meeting. While that would immediately ease funding and market conditions for emerging markets, it would cost the Fed much in credibility, especially after it twice surprised investors in September and December about the timing of the taper.

The Ultimate High Cost and Collateral Damage of Quantitative Easing - Recently, the mainstream media has been noting the cracks that are starting to appear in the world's emerging markets and currencies.  A commentary by Guillermo Ortiz, former Governor of the Bank of Mexico looks at the challenges that the world's emerging markets will face as the Federal Reserve (and other central banks) return to "business as usual".  Here is the opening paragraph from his commentary which pretty much says it all: "Although all crises share common traits, each is very particular in its own way. At times the resolution of a crisis can create a new set of problems for which the original response is ill-fitted. In rare cases, these problems become as substantial as the original catastrophe and overlap with the recovery. In these circumstances, there is no rule- book to guide policy. The challenge then is to adequately prepare for the ensuing disruption. Such is the case of the current global conundrum. The unprecedented monetary stimulus, which flooded the global economy after the great financial crisis, now risks destabilizing the world economy and the international financial system if the appropriate policy measures are not taken to limit the potential costs of collateral effects from unconventional policies." (my bold)  Mr. Ortiz notes that the massive response to the global financial crisis has inflated the assets of the central banks of the G-4 nations to an unprecedented $10 trillion and are expected to add an additional $2 billion by the end of 2014.  To put these assets into perspective, here are the sizes of the central bank balance sheets in terms of their respective nation's GDP

More emerging market jitters: Midnight run - At an emergency meeting in Ankara at midnight late on Tuesday, January 28th, Turkey’s central bank abandoned its policy and jacked interest rates through the roof. The lira had fallen 16% against the dollar since the start of December, making it among the world's worst-hit currencies, along with those of Argentina and South Africa. On Monday, January 27th, the boss of Brazil's central bank, Alexandre Tombini, predicted that the “vacuum cleaner” of rising interest rates in the rich world would force emerging economies to follow suit. A few hours before the Turkish move the Reserve Bank of India (RBI) unexpectedly raised interest rates, too. After several years of easy money and booming growth, the emerging world is in struggling. Countries that have been complacent are being picked off one-by-one by markets, even as they scramble to defend themselves. High on the complacency roster is Turkey. A corruption scandal has engulfed Recep Tayyip Erdogan, the prime minister, who came to power in the aftermath of the last big financial crisis in 2001. The central bank has also pursued a fiddly approach to monetary policy, with multiple benchmark rates. The end result has been very loose policy. Its one-week repo rate (the closest thing it has to a policy rate) stood at 4.5%, and its average lending rate was about 7%. Both were below the inflation rate of 7.4%. Lax policy stokes too much demand, sucking in imports and widening the current-account gap. It also means the real returns investors get are too low to persuade them to own liras.

Going past what is sustainable… Another market failure - There are quite a few shifts happening in the global and domestic economy. I have been observing for the past week. So many people are getting confused. Here is a list of concerns…

  1. China is slowing down.
  2. Some emerging markets are facing capital outflows and are tempted to raise their central bank interest rates. Argentina is all over the news now, but we saw in early December here on Angry Bear that there was trouble brewing.
  3. Inflation exists in emerging markets leading to more temptation to raise CB interest rates.
  4. US stocks have sent a psychological message that their is serious concern for further advancement in the economy. Barry Ritholtz called it a 90/90 day, when more than 90% of the volume and 90% of the stocks are down.
  5. There are calls for more easing by the Fed. Case in point is this article by David Llewellyn-Smith called Will China stop Taper?
  6. On the other hand, there is pressure building in the US to raise the Fed rate as signs of economic growth appear. But inflation remains muted as rumors spread of its rise.

Central banks in emerging markets take action — Following a bout of market turmoil that’s weighed on their currencies, central banks in emerging economies are moving fast to contain the damage. Late Tuesday, Turkey’s central bank raised its key interest rate to 12 percent from 7.75 percent to try to stave off inflation and support the national currency, which has fallen sharply in recent weeks. The decision was taken at an emergency meeting the central bank called for after the currency, the lira, hit a record low. The People’s Bank of China on Tuesday injected more money into the country’s financial markets to ease strained credit conditions. India’s central bank unexpectedly raised interest rates to prop up its ailing currency. Much of the turmoil in global financial markets over the past week has been due to developments in emerging economies. Argentina suffered the most eye-catching fall in its currency amid concerns over the government’s economic policies. However, there are broader worries that emerging markets, which have been some of the fastest-growing in recent years, are particularly vulnerable at the moment. Among the key risks are China’s economic slowdown and the U.S. Federal Reserve’s decision to scale back on its monetary stimulus.

Turkey’s Central Bank Declares a Shock-and-Awe Rate Hike -- The bank raised interest rates to 12% from 7.75% at the conclusion of an emergency meeting convened late Tuesday night Ankara time to address the pummeled lira. This was far above the expected “emergency” rate hike; market consensus centered on a 2% rate hike. By going so much higher than expected, the central bank clearly was adopting a “shock and awe” maneuver to drive out a market assault. It seems to have worked, for now. The unanswered questions are whether this will be a permanent solution, and what effect it will have on Turkey’s economy.“Recent domestic and external developments are having an adverse impact on risk perceptions, leading to a significant depreciation in the Turkish lira and a pronounced increase in the risk premium,” the bank wrote in a brief statement. “The central bank will implement necessary measures at its disposal to contain the negative impact of these developments on inflation and macroeconomic stability.” This is the most extreme move the bank has made in the month or so that the lira’s been under pressure. It tightened policy at its last meeting, then intervened in the currency market last week. None of that drove away the bears. Now comes this move, which had an immediate impact: The lira jumped 2.6% against the dollar in a matter of minutes.

Rate Increases Fail to Stop the Bleeding in Emerging Markets - Surprise rate increases by central banks in embattled emerging markets have failed to conclusively stop the bleeding – and could even make matters worse for their economies.  Turkey’s central bank raised its benchmark interest rates by a sizable amount overnight Tuesday, and South Africa’s central bank delivered an unexpected rise overnight Wednesday. That follows similar increases in beleaguered markets like India and Brazil. Turkey’s radical move helped calm global markets Wednesday, but the relief was temporary: Markets resumed their selloff Thursday in the wake of the U. S. Federal Reserve’s decision to taper its bond-buying program by another $10 billion a month. Meanwhile, the impact of higher rates on emerging-market economies will not be so fleeting. Emerging-market central banks “are in a difficult situation,” said Tim Condon, head of Asia research at ING in Singapore. “It’s not clear that interest-rate hikes are the proper thing in this instance: They’re going to slow growth and slow government revenue but government spending tends to be stickier, so these moves may even exacerbate what’s at the root of the problem.” That, essentially, is deficits – in government budgets and current accounts. “Twin deficit” countries have borne the brunt of the selloffs that roiled emerging markets in the middle of last year and again at the start of this one. Rate increases are a double-edged sword: Swift moves in India and Indonesia to raise rates after last summer’s taper-related selloff helped improve the trade balance and restore investor confidence. But the cost has been a sharp fall in the growth rates that attracted investment in the first place. And there’s no guarantee that remaining imbalances won’t cause problems down the road.

EM sell-off gathers pace as investors pile on pressure - Emerging markets currencies succumbed to a fresh wave of selling on Wednesday despite a display of firepower from central banks, as investors piled pressure on policy makers to take tougher and more sustained action to restore confidence. In the space of 48 hours, central banks in India, Turkey and South Africa have moved to raise interest rates – with Turkey unveiling its new policy regime at midnight after recalling policy makers from as far away as the US for an emergency meeting. The decisions mean that all of the so-called “fragile five” – the countries viewed as most exposed to the Federal Reserve’s withdrawal of stimulus – have now tightened monetary policy to prop up their currencies. But a brief rally did not last, and Turkey’s lira finished the day at the level it had reached before the meeting, with analysts saying policy had not been tightened as much as initially appeared. South Africa’s rate rise – the first in nearly six years – was unexpected but failed to support the rand, which plunged more than 2 per cent. Yields on the sovereign debt of both countries rose and emerging markets equities were also hit, adding to pressures that have sent the MSCI emerging markets index down 6.6 per cent since the start of January. “The markets have that sinking feeling you get after you threw your best punch and the other guy is still standing there,” was the verdict from analysts at Citigroup. Underlining the pressure markets are now exerting on central banks, the sharpest falls were in currencies where the authorities appear unlikely to take action. The forint fell 1.4 per cent, reflecting a belief that political pressure will stop Hungary’s central bank raising interest rates. The rouble fell around 1 per cent, plunging outside its trading band for the second time this week: Russia’s central bank has been allowing it to weaken as part of a strategy to liberalise it fully by 2015.

Stormy times for emerging markets: It all goes back to the financial crisis. The waves now crashing on the shores of emerging economies such as Turkey and India are the result of the extraordinary policies pursued by central banks in the wake of the crisis and the process of returning to normal that is now underway, at least in the United States. Central banks in the rich world really pulled the stops out in an effort to prevent the financial crisis turning into a really severe downturn. Official interest rates were cut to almost zero. Still they thought it wasn't enough. Having hit what's called the zero bound for interest rates, some central banks wanted to do more. So we have quantitative easing, QE, which involves creating new money to buy financial assets. There will no doubt be debate for years about whether these measures made a great deal of difference. But whatever the reason, recovery appears to be taking hold in some developed economies. Of the large ones, the US has the most advanced recovery and so the  Federal Reserve has made a start on cutting back on the post-crisis policies. That is now causing instability for emerging market currencies. To see why, let's wind back a little to what happened when the policies were in full swing.

Emerging Markets - Emerging Crisis or Media Hysteria? -- Emerging markets are suffering significant capital flights out of their countries which is causing severe financial stress in various countries. We've seen this cycle many times over the last few decades in emerging market countries and the process looks something like this.

  1. An economic growth boom attracts foreign capital
  2. A positive feedback loop results in which rising foreign capital increases asset prices and furthers the economic boom which then attracts even more capital
  3. Inflows of foreign capital drive up the local currency and spur a consumption binge
  4. Growth becomes dependent on continued foreign inflows and is unsustainable
  5. Foreign appetite for the country becomes saturated and all that is needed is a change in sentiment to reverse the capital tidal flow
  6. Investors become spooked and a capital flight out of the country results
  7. This leads to a damaging positive feedback loop in which rising foreign capital outflows depress asset prices which depresses economic growth which leads to even more capital outflows and a declining currency
  8. A weakening currency leads to rising import inflation and causes central banks to intervene and raise interest rates to defend the currency
  9. This process continues until economic and financial imbalances are resolved

Investors pull $12bn from EM stock funds - The four biggest global stock markets recorded sharp losses in January for the first time in four years, as weeks of turmoil in emerging markets spread to the developed world. Stocks in the US, UK, Europe and Japan have not posted simultaneous declines for January since 2010 when the eurozone debt crisis was at its height, prompting investors to warn the inauspicious start did not bode well for the rest of the year. US central bank tapering and a slowing Chinese economy are likely to weigh heavily on sentiment. The spreading gloom was prompted by a mass exodus from the emerging markets with investors pulling money out of the developing world at the fastest rate since 2011. The biggest losers from the turmoil – most intense in the Turkish and South African currency markets – included big dedicated emerging market investment groups such as Franklin Templeton, First State and Ashmore. All three have suffered outflows and redemptions, according to investment managers. Mark Mobius, Templeton’s top fund manager, refused to be rattled despite the hit to his portfolios, insisting the dive in some of the emerging markets offered opportunity rather than danger for his funds. “We’re happiest when markets are down,” he said. “We want to take advantage of any declines in these markets.”

Talking Troubled Turkey, by Paul Krugman -- O.K., who ordered that? With everything else going on, the last thing we needed was a new economic crisis in a country already racked by political turmoil. True, the direct global spillovers from Turkey, with its Los Angeles-sized economy, won’t be large. But we’re hearing that dreaded word “contagion”... It is, in many ways, a familiar story. But that’s part of what makes it so disturbing: Why do we keep having these crises? And here’s the thing: The intervals between crises seem to be getting shorter, and the fallout from each crisis seems to be worse than the last. What’s going on?  ..  The larger point is that Turkey isn’t really the problem; neither are South Africa, Russia, Hungary, India, and whoever else is getting hit right now. The real problem is that the world’s wealthy economies — the United States, the euro area, and smaller players, too — have failed to deal with their own underlying weaknesses. Most obviously, faced with a private sector that wants to save too much and invest too little, we have pursued austerity policies that deepen the forces of depression. Worse yet, all indications are that, by allowing unemployment to fester, we’re depressing our long-run as well as short-run growth prospects, which will depress private investment even more.Oh, and much of Europe is already at risk of a Japanese-style deflationary trap. An emerging-markets crisis could, all too plausibly, turn that risk into reality.So Turkey seems to be in serious trouble — and China, a vastly bigger player, is looking a bit shaky, too. But what makes these troubles scary is the underlying weakness of Western economies, a weakness made much worse by really, really bad policies.

George Mangus Warns of Broad Impact of Emerging Markets Turbulence -- In the runup to the global financial crisis, George Magnus, who was then chief economist at UBS, was one of the most insightful commentators and was early to call how bad things might get. He’s best known for coining the term “Minsky moment” in early 2007, which he described as when “lenders become increasingly cautious or restrictive, and when it isn’t only over-leveraged structures that encounter financing difficulties . . The risks of systemic economic contraction and asset depreciation become all too vivid.”  Magnus returns and does not find much reason to be optimistic. In a comment today at the Financial Times, he discusses Turkey’s economic and political situation in some detail, and then discusses the potential for continued, widespread upheaval: Dependency on capital inflows, especially to finance rising local currency borrowing, makes these economies vulnerable to changing conditions in overseas markets. Credit cycles in China, Brazil and other countries are peaking. Commodity prices are falling from record highs….Just as China’s ascendancy had dramatic positive consequences for emerging markets, so its slowdown can be expected to have opposite effects. The challenge of pursuing important economic reforms without eroding the power of the Communist party, and of trying to slow down fast and often weakly regulated credit creation, are China’s principal concerns now. Rising bond yields, illiquidity and instability in financial markets are the early signs. The current crisis in emerging markets is still viewed by many as being just about Turkey. But the tequila crisis in 1994 was initially about only Mexico, the Asia crisis in 1997 about Thailand and the financial crisis of 2007-08 about US subprime lending. A crisis must make landfall somewhere. But the effects of the current storm will be felt beyond Turkey’s borders.

Is a New Economic Crisis at Hand? » TripleCrisis: AT the end of last week, several developing countries saw sharp falls in their currency as well as stock market values, prompting the question of whether it is the start of a wider economic crisis. The sell-off in emerging economies also spilled over to the American and European stock markets, thus causing global turmoil. Malaysia was not among the most badly affected, but the ringgit also declined in line with the trend by 1.1% against the US dollar last week; it has fallen 1.7% so far this year. An American market analyst termed it an “emerging market flu”, and several global media reports tend to focus on weaknesses in individual developing countries. However, the across-the-board sell-off is a general response to the “tapering” of purchase of bonds by the US Federal Reserve, marking the slowdown of its easy-money policy that has been pumping billions of dollars into the banking system. A lot of that was moved by investors into the emerging economies in search of higher yields. Now that the party is over (or at least winding down), the massive inflows of funds are slowing down or even stopping in some developing countries. The current “emerging markets sell-off” is thus not explained by ad hoc events. It is a predictable and even inevitable part of a boom-bust cycle in capital flows to and from the developing countries, coming from the monetary policies of developed countries and the investment behaviour of their investment funds.

World risks deflationary shock as BRICS puncture credit bubbles -- Half the world economy is one accident away from a deflation trap. The International Monetary Fund says the probability may now be as high as 20pc. It is a remarkable state of affairs that the G2 monetary superpowers - the US and China - should both be tightening into such a 20pc risk, though no doubt they have concluded that asset bubbles are becoming an even bigger danger. "We need to be extremely vigilant," said the IMF's Christine Lagarde in Davos. "The deflation risk is what would occur if there was a shock to those economies now at low inflation rates, way below target. I don't think anyone can dispute that in the eurozone, inflation is way below target." It is not hard to imagine what that shock might be. It is already before us as Turkey, India and South Africa all slam on the brakes, forced to defend their currencies as global liquidity drains away. The World Bank warns in its latest report - Capital Flows and Risks in Developing Countries - that the withdrawal of stimulus by the US Federal Reserve could throw a "curve ball" at the international system.

Reinhart and Rogoff: Great Recession may "surpass in severity" the Great Depression in many Countries - A new paper from Reinhart and Rogoff: Recovery from Financial Crisis: Evidence from 100 Episodes. Excerpt:  Examining the evolution of real per capita GDP around 100 systemic banking crises reveals that a significant part of the costs of these crises lies in the protracted and halting nature of the recovery. On average it takes about eight years to reach the pre-crisis level of income; the median is about 6 ½ years. ...Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging-market counterparts. The current phase of the official policy approach is predicated on the assumption that growth, financial stability and debt sustainability can be achieved through a mix of austerity and forbearance (and some reform). The claim is that advanced countries do not need to resort to the more eclectic policies of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. Now entering the sixth or seventh year (depending on the country) of crisis, output remains well below its pre-crisis peak in ten of the twelve crisis countries. The gap with potential output is even greater. Delays in accepting that desperate times call for desperate measures keeps raising the odds that, as documented here, this crisis may in the end surpass in severity the depression of the 1930s in a large number of countries.

Another Surprise From India’s Central Bank, But Probably the Last - Inflation near double digits, shaky economic growth, global and domestic volatility in capital flows: At least in the broad outlines, not much was new in the background to the Reserve Bank of India’s decision Tuesday to hike its policy interest rate by a quarter-percentage point to 8%. What was different this time was the RBI’s priority. Gov. Raghuram Rajan won’t say he’s targeting consumer-price inflation now, but with Tuesday’s statements he has made about as much of a commitment as a policy maker of his political savvy is likely to make. That means we have a great deal more certainty about how India’s central bank will be thinking over the next few months—even as the economic environment, both globally and within India, remains deeply uncertain. One thing to note: The rate hike shouldn’t have been as much of a surprise as it was. All 14 economists polled by The Wall Street Journal had expected the RBI to keep rates unchanged.Yet Mr. Rajan made clear at December’s monetary-policy review that the RBI would act if headline or core inflation didn’t fall in the next round of data. Headline inflation in the consumer price index dipped to 9.9% on-year in December from 11.2% in November. But core CPI inflation has been stuck at around 8%, with only modest abatement since last fall’s rate hikes. Hence, tighter monetary policy was necessary. The more important development in the central bank’s thinking since December was last week’s recommendation by an internal committee to move toward a formal CPI inflation target of 4%, plus or minus two percentage points. To ease into the new policy regime, the report says, the RBI should first follow a “glide path” to bring headline CPI inflation below 8% by January 2015 and below 6% by January 2016.

Rajan Warns of Policy Breakdown as Emerging Markets Fall - India central bank Governor Raghuram Rajan warned of a breakdown in global policy coordination after the Federal Reserve further cut stimulus, weakening emerging-market currencies from the rupee to the Turkish lira. Rajan, a former chief economist at the International Monetary Fund, called for greater cooperation among policy makers weeks before finance chiefs from the world’s top developed and emerging markets gather in Sydney. The Fed’s Jan. 29 statement made no mention of developing economies. “International monetary cooperation has broken down,” Rajan, 50, said yesterday in an interview in Mumbai with Bloomberg TV India, noting how emerging markets helped pull the global economy out of crisis starting in late 2008. “Industrial countries have to play a part in restoring that, and they can’t at this point wash their hands off and say we’ll do what we need to and you do the adjustment.”

Is RBI a Hawk, Dove, Owl or Just a Bank? -- In Tuesday’s quarterly monetary policy review, India’s central bank governor Raghuram Rajan surprised investors and economists by increasing the bank’s key lending rate, and called itself an owl. What have birds of prey got to do with the Reserve Bank of India ? Economists and analysts often refer to monetary policy as either hawk-like or dove-like, in their jargon.  A monetary policy that’s focused on raising interest rates to curb inflation is thought of as hawkish. Higher rates makes it difficult for companies to borrow money and can stymie economic growth.Ever since taking over as governor of the RBI  in September, Mr. Rajan has made controlling inflation a top priority, causing some to call him hawkish. He has increased the lending rate three times in five months. In contrast, when a central bank lowers interest rates, in a bid to boost economic growth, it is called “dovish”.  But on Tuesday, the RBI said it preferred to be thought of as a different bird – an owl, signifying wisdom and vigilance. The analogy was one of the most profound moments in the news conference. Owls are a rare breed in the economic aviary, and as far as we can tell haven’t been used to describe monetary policy in the past.

Goldhater: Can India Fix Its Current Account Deficit? -- It is generally well-known that India is a major market for the precious metal since many cultural traditions are based on it--especially as gifts. However, the substantial rise in gold prices in the past decade or so has served to increase India's current account deficit. How to control rises in the deficit, then? India has been busy slapping one tax on gold after another: India has a record high 10% import duty on gold and a rule that says 20% of all bullion imports must exit the country as exports.The subcontinent used to be the world's largest consumer of the precious metal until the government made three upward revisions to the import taxes on gold, to reign in a record current account deficit (CAD). The country's CAD could hover below the $50bn mark in the year to 31 March, 2014, a $20bn reduction from previous estimates. In the longer term, officials indicate that changing consumption and exchange patterns of gold will be affected less by government fiat and more by cultural changes away from prioritizing exchanges of the precious metal. According to RBI Deputy Governor K C Chakrabarty:: Speaking at a panel discussion on Gold and its status in India - at IIMB, he said gold intoxication [don't you just love that term?] is prevalent only to India, and society as a whole must work together to change mindsets. "Stop giving or taking gold as dowry and stop giving gold to temples," he advised. Maintaining that RBI has never stopped import of gold, he said: "Do not borrow money from banks to import gold." "Consumer has never benefitted from gold and gold has given a negative return world-wide, it is not an investment but a speculation," he added.

‘Humane’ homes for migrant workers delayed by planning system in Qatar -A new generation of "humane" homes for more than 50,000 migrant workers building Qatar's 2022 football World Cup facilities has been delayed in the Gulf state's planning system, the Guardian has learned. British consultants have been working with a US developer to build improved accommodation with health centres, shops, recreational areas and even psychologists' consulting rooms as an alternative to squalid and overcrowded conditions which are believed to contribute to a high death toll among migrant labourers. The project was due to open its first beds in April but that is not likely to happen now until at least July as the Qatar authorities have failed to agree a streamlined planning process to speed through delivery. The delay has been attributed locally to the emirate's slow bureaucracy. It comes after the Guardian revealed on Friday that 185 workers from Nepal had died in Qatar in 2013, sparking complaints from workers' rights groups that Qatar was failing to follow through on its pledges to take action.

The world’s rich stay rich while the poor struggle to prosper -  Dear Bill Gates, We have never met, but your annual letter (coinciding with your Davos speech) seemed to be addressed directly to me. Your aim is to critique books with titles such as “how rich countries got rich and why poor countries stay poor”, and I did write a book with almost exactly that subtitle. You go on to say “thankfully these are not bestsellers because the basic premise is false”. I am afraid you are right to say my book is not a bestseller, but wrong to say its premise is false.Taking the year 2001, I used two different measures of whether a country was rich: the market value of per capita output (a measure of productivity) and the average consumption of the inhabitants (a measure of material standard of living). The two rankings differ, though not by much; Switzerland had the highest productivity and the US the highest consumption. Using either measure to order the countries of the world, the distribution was U-shaped. There were about 20 rich countries (with about a billion people in total), many much poorer countries and few states in between. These intermediate states – such as South Korea and the Czech Republic – tended to be on a trajectory to join the rich list, a transition experienced in Japan and Italy a generation earlier. Rich countries operate at, or close to, the frontier of what is achievable with current technology and advanced commercial and political organisation. And when countries reach that frontier they tend to stay there, with Argentina the most significant exception. You suggest that this claim might have been true 50 years ago but not now. It is 10 years since my book was published and time to update the calculations. So I did, and established that the hypothesis remains true.

Strategic Africa: Why the U.S. and Europe are sending in the troops -- In the U.S. military's remarkably globalized world staff, officers deep in a special headquarters in Stuttgart, Germany, are organizing training missions over three continents all dedicated to one special place — Africa.  What's striking is that this far-flung and little noticed U.S. Africa Command —​ AFRICOM as it's called — has been on a roll at a time when the Pentagon is undergoing a big downsizing.But the move coincides with new thinking in Washington that big wars like Iraq and Afghanistan are far less likely in future, so it's now time to shift priorities towards preparing for smaller regional conflicts. This will require, the thinking goes, relatively small, fast-moving actions by units specially trained for working with local forces on a wide range of missions from counter-insurgency to backup support of UN and African Union peace missions.  No African nation has agreed to host the full U.S. command given all the security headaches that would entail. Which is why the HQ is in Germany, and many of the soldiers are training in mock-up African villages on the plains of Kansas.

Baltic Dry Index Collapses 50% From December Highs To 5-Month Lows - We are sure it's just a storm in a teacup; just a brief interlude before the IMF's ever-changing forecast for global trade growth picks right back up again and demand to ship dry goods surges back to the inventory stuffed levels of Q4. But, for now, the Baltic Dry Index (admired when it's rising, ignored when it drops) has collapsed by over 50% from its December highs and is back to August lows.

Bank Financing Played Big Role in Trade Collapse - If banks are less willing to finance international trade, less trade will take place. But the effects vary from country to country — when U.S. banks pull back credit, smaller and less-stable nations feel it more, according to recent research from the Federal Reserve Bank of New York. Those findings “suggest a role for trade finance in explaining the trade collapse in 2008/2009, in particular with respect to trade in small and high risk countries,” in  “No Guarantees, No Trade: How Banks Affect Export Patterns.” The two economists examined the trade finance activities of big U.S. banks, particularly letters of credit, which guarantee payments in international transactions. They found “that a reduction in the supply of letters of credit … has a large, causal effect on exports both in crisis and non-crisis times.” The effect isn’t uniform, though, with more significant changes in trade for smaller countries and those considered riskier by an Economist Intelligence Unit risk index. Trade finance probably “played a magnifying role” during the recent recession, when world trade relative to world gross domestic product fell by a fifth, They concluded that “while demand effects may explain most of the drop in exports and imports in large, developed countries, the findings in this paper suggest that trade finance can explain a sizable drop in trade especially in risky, developing countries. Therefore, through the letter of credit channel, the crisis may have spilled over to exports and imports to and from countries that were not directly affected by the financial crisis.”

"Is the falling exchange rate good news or bad news?" - I was on CBC radio yesterday morning for about 5 minutes, talking about the exchange rate. From this experience, and from previous similar experiences, this is what reporters want to ask: "Who gains, and who loses, from the fall in the exchange rate? For Canada as a whole, is the fall in the exchange rate good news or bad news?" And the answer they expect to hear is: "Exporters gain; importers lose. On the one hand it reduces unemployment; on the other hand it increases inflation." I don't think reporters are alone in looking at it from that perspective. Most non-economists are probably the same. But economists are uncomfortable answering that question. Let me try to explain why: The exchange rate didn't just fall. Something, call it X, caused it to fall. So when we ask "Is the fall in the exchange rate good news or bad news?", what are we really asking? You can't give a good answer if you are unclear on the question. We might be asking:
1. "Is X good news or bad news?"
Or, we might be asking:
2. "Given that X happened, should the Bank of Canada take action to prevent the fall in the exchange rate?"
To my mind, that second question is the useful one to ask. Because, even if we think we know what X is, and whether X is good news or bad news, if we can't do anything about X, that isn't very useful.

IMF Reform and Isolationism in Congress - A long-awaited reform of the International Monetary Fund has now been carelessly blocked by the US Congress.   This decision is just the latest in a series of self-inflicted blows since the turn of the century that have needlessly undermined the claim of the United States to global leadership.  The IMF reform would have been an important step in updating the allocations of quotas among member countries.  From the negative congressional reaction, one might infer that the US was being asked either to contribute more money or to give up some voting power.   (Quotas allocations in the IMF determine both monetary contributions of the member states and their voting power.)  But one would then be wrong.  The agreement among the IMF members had been to allocate greater shares to China, India, Brazil and other Emerging Market countries, coming largely at the expense of European countries.  The United States was neither to pay a higher budget share nor to lose its voting weight, which has always given it a unique veto power in the institution.

Bundesbank calls for capital levy to avert government bankruptcies -- Germany's Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help. The Bundesbank's tough stance comes after years of euro zone crisis that saw five government bailouts. There have also bond market interventions by the European Central Bank in, for example, Italy where households' average net wealth is higher than in Germany. "(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government's obligations before solidarity of other states is required," the Bundesbank said in its monthly report. It warned that such a levy carried significant risks and its implementation would not be easy, adding it should only be considered in absolute exceptional cases, for example to avert a looming sovereign insolvency.

IMF's Lagarde sees eurozone inflation "way below target" (Reuters) - Euro zone inflation is "way below target" and deflation is a potential risk for the bloc, International Monetary Fund Managing Director Christine Lagarde told the World Economic Forum in Davos on Saturday. In response, European Central Bank President Mario Draghi said the ECB stood ready to act if inflation went lower than forecast and reaffirmed that interest rates would remain low or go lower for an extended period of time. Asked about the possiblity of the ECB adopting quantitative easing policies such as the U.S., British and Japanese central banks had done, Draghi said: "I'm not saying it should be done or it shouldn't be done." The EU treaty prevented monetary financing of governments, he said. The ECB might be able to buy securitised bank loans if they could be packaged as asset backed securities in a transparent manner, which would require regulatory change, Draghi added.

Greece: signs of growth come as austerity eases -- It was nearly four years ago that the Greek government negotiated its agreement with the IMF for a harsh austerity programme that was ostensibly designed to resolve its budget problems. Many economists, when we saw the plan, knew immediately that Greece was beginning a long journey into darkness that would last for many years. This was not because the Greek government had lived beyond its means or lied about its fiscal deficit. These things could have been corrected without going through six or more years of recession. It was because of the "solution" itself.Four years later, Greece is down by about a quarter of its pre-recession national income – one of the worst outcomes of a financial crisis in the past century, comparable to the worst downturn of the US's Great Depression. Unemployment has passed 27% and more than 58% for young people (under 25). There are fewer Greeks employed than there have been at any time in the past 33 years. And real public healthcare spending has been cut by more than 40%, at a time when people need the public health system more than ever.The IMF is the subordinate partner in the "troika" (including the European Central Bank and the European commission) that has been calling the shots for the Greek economy these past four years, but it is the one in charge of putting numbers on the page. It repeatedly projected economic recoveries for 2011, 2012, and 2013 that did not materialise.Now the IMF is projecting economic growth for 2014. But this time they are probably, finally, going to be right. It is vitally important that we understand why.

Greek households lose 2.6 bln in disposable income in Q3 of 2013: Greek household disposable income fell by 2.6 billion euros, or 8 percent, in the third quarter of 2013 compared to a year earlier, according to data published by the Hellenic Statistical Authority (ELSTAT) on Monday. ELSTAT attributed the fall, which saw disposable income dropping to a total of 30.4 billion euros in Q3 last year, to a 9.9 percent year-on-year fall in employees’ compensation and 8.2 drop in social benefits.

France Unemployment Hits New Record High - France revealed on Monday tha the number of registered jobless rose to a record 3.3 million in December, belying President Francois Hollande's pledge to reverse the trend by the end of last year. The number of job-seekers rose by 10,200, the labour ministry said. If those holding part-time employment were taken into account the number of unemployed rose to 4.89 million, another record. Hollande, a Socialist who is under fierce pressure to tackle unemployment and with polls showing his approval ratings the lowest of any president in modern French history, claimed in November he had met his electoral pledge to halt the rise in joblessness by the end of 2013.. Despite the bleak figures, Hollande - who is currently in Turkey - said that unemployment had "stabilised" but added that "this is not enough."

French Unemployment At Record High: French unemployment hit a record high in December, data from Labor Ministry showed late Monday. The number of people registered as unemployed rose by 10,200 or 0.3 percent in December to reach 3.3 million, the highest since records began in 1996. From the previous year, unemployment increased 5.7 percent. President Francois Hollande had pledged to bring unemployment down by the end of 2013. He recently announced a "responsibility pact" to address current issues in public finances and economic growth. Ahead of the release, Hollande said, "Stabilization, which we have achieved, is not enough." Nonetheless, the labor ministry said the rate of unemployment slowed over the course of 2013. Around 177,800 people joined the jobless register in 2013, versus 283,800 in 2012.

Foreign Investment in France Fell 77% -- Releasing its first estimates for 2013 Tuesday, the United Nations Conference on Trade and Development said that while foreign investment in the European Union increased from 2012, inflows to France fell by 77% to $5.7 billion, extending a decline that began with the 2008 financial crisis and was briefly interrupted in 2011. Foreign investment was last lower in 1987, and as recently as 2007, it peaked at $96 billion.  By contrast, foreign investment in Germany almost quadrupled to $32.3 billion, while in Spain it rose by 37% to $37.1 billion. Foreign investment in Italy, Belgium, the Netherlands and Ireland also rose.Seeking to revive growth, Mr. Hollande earlier this month launched a "responsibility pact," which includes cuts to chronically high payroll taxes, seeking to repair relations with France's business community, which has voiced anger about climbing costs and alarm that it is losing ground to Germany.

Spain Misses Watered-Down Budget Deficit Targets Yet Again - When you are about to miss budget targets, the easy thing to do is lower the bar, again and again until you can hit them. Spain did just that, and still missed. Via translation from Libre Mercaado, please consider Spain Misses Budget Deficit Target for 2013.  Treasury announced a deficit of 5.44% of GDP in November, but official data elevate that number to 5.96%. Taking a December shortfall estimate into consideration, the deficit estimate is around 6.9% for 2013. Economy Minister Luis de Guindos, chose his words are very careful in this regard. Guindos said yesterday that the 2013 deficit would "converge towards the target of 6.5%", through improved tax collection and lower cost of debt (interest payments). The defict is not the only accounting chicanery. Tax data used to estimate GDP has little or nothing to do with reality. Accurately stated, the deficit would be around 5.96% of GDP to November, instead of the 5.44% announced by the Treasury, which is a deviation of 0.52% of GDP.  Also remember that until last June, the general government deficit target for 2013 was 4.5% of GDP and not 6.5%. The Government of Mariano Rajoy managed to smooth the path of fiscal consolidation after pressing insistently to Brussels. In any case, the final deficit figure will not be known, quite possibly until the end of 2014, after the successive and traditional budget and GDP revisions specific to the Spanish authorities, as usual.

Wolf Richter: No Wonder German Workers Drag Down Retail Sales – And Much Of The Economy - Not that 2013 was such a great year in Germany, economically speaking, with growth stalling out at a measly 0.4%, barely above the dreaded zero line. But it was a great year, nay, superb year, for extracting taxes from hard-working people. Tax collections by the Federal Government and the Länder (states), according to the Ministry of Finance, rose a combined 3.3% (in a stalling economy!) to €570.2 billion, the highest ever. Corporations got off easy: After years of “tax reform,” the coddled German multinationals, and maybe even the Mittelstand – those closely-held global niche players that are the official pride of Germany – had apparently soaring profits, and corporate income tax revenues soared in parallel 15.2% to … drumroll … €19.5 billion. A mere 3.4% of all taxes collected! OK, they also faced other taxes, about which they have been complaining vociferously for years, including their share of €39.4 billion in energy tax, €7 billion in electricity tax, and €1.2 billion in nuclear fuels tax. Consumers got whacked: revenues from the Value Added Tax (VAT) hit €196.8 billion – ten times the amount of corporate income taxes, and by far the largest component of all taxes. Individual income taxes jumped 6.1% to €158.2 billion – the second largest component. Workers also paid €14.4 billion in Solidarity Surcharge – a “temporary” tax to fund the bailout of East Germany after Reunification. They paid special taxes on tobacco, spirits, beer, and coffee. They paid taxes on motor vehicles. They paid big-fat taxes on energy. They paid taxes on income and consumption until they croaked.

The Low-inflationary Trap - Paul Krugman -- Dean Baker is, of course, completely right here. There isn’t a red line you cross when going from positive to negative inflation, with all sorts of bad things suddenly happening. What matters is inflation relative to the rate that best suits your circumstances. Since the euro area would clearly be best off with an inflation rate well above current levels, this is a disastrous report: To restate Dean’s points slightly, there are three reasons low inflation is bad for the euro area. First, the euro area as a whole remains depressed, with core interest rates near zero; falling inflation raises real rates, and deepens the slump. Second, many players in Europe, private and public, are burdened by an overhang of debt; inflation makes it easier to work down this debt, so low inflation makes things harder. Finally, Europe still needs large adjustments in relative wages, with wages in Club Med falling relative to wages in Germany; it’s much easier to do this via rising German wages than falling Club Med wages, so low inflation makes this much harder.And yes, Europe is very much in a trap. Inflation is falling because the economy is weak, and the economy is being weakened in part by falling inflation. That’s the Japan syndrome. It leads eventually to actual deflation, but to the extent that there’s a red line (or more accurately, an event horizon), it’s crossed when monetary policy starts being limited by the zero lower bound, which happened years ago.

The Eurozone’s “Nascent” Recovery --Bill Black -- On January 19, 2014 I posted a column entitled “Deflation: The Failed Macroeconomic Paradigm Plumbs New Depths of Self-Parody” that discussed the insanity of the Eurozone’s approach to “the threat of deflation.”  The EU’s troika cannot understand that deflation is produced by inadequate demand and that the way to prevent it is to use fiscal policy to fill the gap in demand rather than waiting for deflation to hit and then trying to check it through “quantitative easing (QE).” My January 25, 2014 column (“Spain Rains on Rehn’s Austerity Victory Parade: Unemployment Rises to 26%”) explained how a few weeks after the troika cited Spain as its success story proving the wisdom of austerity, unemployment in Spain – already above Great Depression levels – increased to 26%.The Eurozone has decided to ring out January with more bad news about the economy, but the New York Times and the Wall Street Journal both end their articles with claims that things are actually going pretty darn well. The NYT refers to the eurozone “recovery” as “nascent.” The reality of both news reports is that that they show that “recovery” belongs in quotation marks and that what the data actually “display” are “signs of future weakness.”

Beyond The Euro: The Left. The Crisis. The Alternative - Warren Mosler gave this talk in Chianciano, Italy, on January 11, 2014 at the Chianciano Conference entitled Oltre L’Euro: La Sinistra. La Crisi. L’Alternativa. In English: Beyond The Euro: The Left. The Crisis. The Alternative [Google translation]. The video is embedded below, but you have to listen to a realtime translation in Italian, which doubles the listening time. I thought this talk important enough to transcribe, if not deliciously subversive on the part of Warren Mosler who offers Italians a way to save their economy. The transcription follows below the video. Mosler describes how Italy (or any of the 17 EU countries that use the Euro) can leave the European Union safely if the EU persists, as it insists on doing, in impoverishing their country and citizens. The subheads in blue are mine, not Mosler’s, and are designed to assist reading. Some terms Mosler refers to in the body text relate specifically to the Italian economy, and I can’t identify them because I don’t know their Italian names.

Furious Backlash Forces HSBC To Scrap Large Cash Withdrawal Limit -- Following the quiet update that HSBC had decided to withhold large cash withdrawals from some if its clients - demanding to know the purpose of the withdrawal before handing over the customers' money - it appears the anger among the over 60 thousand readers who found out about HSBC's implied capital shortfall just on this website, has forced HSBC's hands.  The bank issued a statement (below) this morning defending their actions - it's for your own good - but rescinding the decision - "following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals." After all the last thing the bank, which over the past few years has been implicated in aiding an abetting terrorists and laundering pretty much anything, wants is an implied capital shortfall to become an all too explicit one.

First HSBC Halts Large Withdrawals, Now Lloyds ATMs Stop Working -- First HSBC bungles up an attempt at pseudo-capital controls by explaining that large cash withdrawals need a justification, and are limited in order "to protect our customers" (from what - their money?), which will likely result in even faster deposit withdrawals, and now another major UK bank - Lloyds/TSB - has admitted it are experiencing cash separation anxiety manifesting itself in ATMs failing to work and a difficult in paying using debit cards. Sky reports that customers of Lloyds and TSB, as well as those with Halifax, have reported difficulties paying for goods in shops and getting money out of ATMs. All three banks are under the Lloyds Banking Group which said: "We are aware that some customers are unable to use their debit cards either to make purchases or to withdraw money from ATMs. "We are working hard to resolve this as swiftly as possible and apologise for any inconvenience caused."

Why do bank IT systems keep failing? - IT systems at the high street banks have come under the spotlight again, as another week has seen another set off customers cut off from their cash – and experts say things are set to get worse as new technologies and regulation put more strain on companies' creaking systems. Customers of Lloyds Banking Group were the latest to be hit by payment problems, after a server failure meant that for around three-and-a-half hours debit card transactions were declined and ATMs up and down the country would not dispense cash. While not as catastrophic as the "glitch" which caused some customers of RBS's banking brands to go weeks without being able to access their accounts properly, it was another sign that ageing IT systems are in need of a serious overhaul. "The banks do have a problem, but it's not a new problem, and it's not an easy problem to fix, which is why it's taking so long," "In the old days these machines just had to run overnight in batch mode – it was like newspapers with just one edition – but now they have to deal with news that is being updated throughout the day. The users – us – are using internet banking, ATMs, we're spending money online. The reconciliation between what is going on in the background is the hard part, and the gulf is widening all the time." Ben Wilson, associate director of financial services for techUK, says some of the "legacy systems" at banks are 30-40 years old and were originally set up for branch banking, but "then they needed to be ATM-focussed, then there was online banking, then mobile banking". He says: "Banks have bolted on these changes because it is cheaper and less risky than starting from scatch, but every time you bolt on a change it becomes more complex."

GDP up 0.7%, business services and manufacturing strong - Gross domestic product rose by 0.7% in the final quarter of 2013, and by 2.8% on a year earlier. It is now almost back to its pre-crisis peak - now only 1.3% below it - and will be there by mid-year if quarterly growth continues at its Q4 pace. Manufacturing rose by 0.9% in the final quarter. There is no breakdown at this stage but the monthly figures suggest the strongest component of manufacturing is capital equipment. This and the fact that business services and finance were strong within a 0.8% rise in services (rising by 1.2% after a similar rise in the third quarter) suggests that this is not a recovery driven particularly by consumers. The surprise is the numbers was a 0.3% drop in the quarter for the construction industry, in which the surveys have been pointing to continued growth. Despite this, construction was up 4.5% on a year earlier. So a generally good number, although one that was fractionally below some pre-release estimates. The figures, of course, will be revised. More here.

Will the UK be the first to tighten? - The generally optimistic tone at Davos last week was rudely interrupted by a melt-down in emerging markets, triggered by concerns that the major central banks in the developed economies are contemplating an exit from easy money sooner than previously expected. The Fed will probably take its second step towards tapering next Wednesday and now seems to be on auto-pilot for the rest of the year. More surprisingly, the Bank of Japan sounded some cautious notes about the likelihood of further quantitative easing when fiscal policy tightens in April. Finally, the UK authorities, in the shape of “aides of the Chancellor”, hinted that a rise in short rates may be no bad thing this year. A significant shift towards tighter monetary policy in the developed world as a whole still seems extremely unlikely, given the deflation risks highlighted by the IMF last week. But the British case is now very intriguing and, after contradictory messages at Davos, also somewhat confused. Because of low productivity, the level of UK GDP continues to lag well behind the recovery from the Great Recession achieved in many other economies. But the remarkable recent surge in UK growth rates, along with a sharp fall in unemployment, means that the Bank of England now has to reconsider its entire monetary stance. With forward guidance now in murky waters, the markets will want greater clarity in the next Inflation Report in February.

The UK Doubles Down on Austerity: In news from Britain, George Osborne, the country's chancellor, or finance minister, recently announced a new round of austerity measures, totaling some $41 billion, including $20 billion in cuts to welfare over the next two years. Here's a little bit of what he had to say. (video and transcript)

Laffer and the Yeti -   In this recent post, I argued that Ed Balls’ policy of reversing the Conservatives’ 5p cut in the top rate of tax was pointless.  Balls had stated that the tax increase would be used to reduce the deficit, but research from both HMRC and the IFS suggests that such a small increase might make little or no difference to tax revenues. But this is not to say that higher taxes on the rich are necessarily a bad idea. Beliefs about the relationship between tax rates and tax revenues (the so-called Laffer curve) are largely unsupported by evidence. The Laffer curve is rather like the Yeti. There are stories of white shapes in the woods; there are strange depressions in the snow that could be footprints; there is even, apparently, some forensic evidence that a large bear-like animal exists somewhere in the Himalayas. But no-one actually knows what a Yeti looks like, because no Yeti has ever been found.   So it is with the Laffer curve. It seems obvious that 100% taxation would induce people to stop working, and indeed very high marginal tax rates due to benefit withdrawal do discourage the poor from working. But arguments from the IEA and others that a 5p increase in the top rate of tax would result in mass flight of talent, resulting in economic disaster, are unfounded. We have no idea what the Laffer curve looks like, let alone where the peak is. Opinions as to the “optimal” rate of tax on the very rich differ wildly, from 40% (IEA) to over 80% (Piketty and Saez). The IMF’s recent research suggests that there is scope for tax rises for the very rich in most countries and especially in developed Western countries, although they don’t go as far as Piketty & Saez.  But until someone proves conclusively that at some rate of tax, revenue generation ALWAYS reverses irrespective of other effects, the Laffer peak will remain mythical.

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