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

Saturday, March 8, 2014

week ending Mar 8

FRB: H.4.1 Release--Factors Affecting Reserve Balances--March 6, 2014: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Fed’s Lockhart: Taper on Course Barring Major Downturn - Federal Reserve officials will likely want to revamp their guidance about the future path of interest rates if Friday’s jobs report shows the unemployment rate has fallen to 6.5%, Atlanta Fed President Dennis Lockhart said Thursday. The central bank has said it would not consider raising short-term interest rates from near zero until the jobless rate falls to 6.5%. Economists surveyed by Dow Jones expected the report will show unemployment reached that level in February. “In a way, the 6.5% becomes irrelevant once we pass it, and in all likelihood we need to update our forward guidance,” Mr. Lockhart told reporters.“My preference is for a framework statement that is more qualitative in nature,” he added.  “How we do that is something the committee will decide,” Mr. Lockhart said, referring to the central bank’s policy making Federal Open Market Committee, which next meets March 18-19. Earlier Thursday, New York Fed President William Dudley said in a Wall Street Journal interview that the 6.5% threshold is “obsolete” and he would advocate scrapping it at the meeting.

Fed Watch: Tapering is Sooo 2013 - New York Federal Reserve President William Dudley had a sit down with the Wall Street Journal in which he provides some key insights into Fed thinking. First, regarding the tepid pace of data, it's the weather:Mr. Dudley said that he still expects, "the economy should do better" relative to last year, growing at around 3% this year. He said, however, it appears very likely that harsh weather slowed economic growth in the first quarter to under a 2% annual rate.See also this Wall Street Journal report on weak February retail sales. As expected, the Fed will dismiss soft numbers as an artifact of the cold. (although I think the acceleration at the end of 2013 was less than meets the eye to begin with). That means the pace of tapering is not going to change at the next meeting. But guess what? Tapering is not really data dependent in any event. It is more appropriately described as "outlier dependent":"If the economy decided it was going to grow at 5% or the economy decided it wasn't going to grow at all, those would be the kind of changes in the outlook that I think would warrant changing the pace of taper," Mr. Dudley said Thursday.How this is really any different from a fixed time-line is beyond me. If the range of acceptable outcomes to justify tapering is anywhere between 0 and 5% growth, the FOMC statement can be reduced by simply admitting that asset purchases are on a preset course. As I have said many times, the Fed wants out of the asset purchase business. It's all about interest rates now:Mr. Dudley affirmed that nothing's changed when it comes to the short-term interest rate outlook. He said "we have a long time to go before we have to think about raising short-term interest rates." Sometime in 2015. The weaker the data, the deeper into 2015 is the first rate hike, all else equal.

Yellen Says Fed Still Missing Its Goals - The Federal Reserve is still falling short of its goals of controlling inflation and fostering full employment, Fed Chairwoman Janet Yellen said Wednesday.  “The economy continues to operate considerably short of these objectives,” Ms. Yellen said during a ceremonial swearing-in event held more than a month after she took over as Fed chief. “I promise to do all that I can, working with my fellow policymakers, to achieve the very important goals Congress has assigned to the Federal Reserve.” Beyond that, she did not make detailed comments on the current outlook for the U.S. economy or Fed policy, or veer from the messages she delivered in congressional testimony last week. Ms. Yellen pledged to build on her predecessor Ben Bernanke‘s legacy of communicating more clearly and making Fed policy more transparent. “Such communication is vital in a democracy and especially important for the Federal Reserve, which relies on the confidence of the public to be effective in carrying out its mission,”

Fed’s Lockhart: New Interest-Rate Guidance Coming Soon - Federal Reserve officials will likely want to revamp their guidance about the future path of interest rates if Friday’s jobs report shows the unemployment rate has fallen to 6.5%, Atlanta Fed President Dennis Lockhart said Thursday. The central bank has said it would not consider raising short-term interest rates from near zero until the jobless rate falls to 6.5%. Economists surveyed by Dow Jones expected the report will show unemployment reached that level in February. “In a way, the 6.5% becomes irrelevant once we pass it, and in all likelihood we need to update our forward guidance,” Mr. Lockhart told reporters following a speech at Georgetown University. “My preference is for a framework statement that is more qualitative in nature,” he added. “How we do that is something the committee will decide,” Mr. Lockhart said, referring to the central bank’s policy making Federal Open Market Committee, which next meets March 18-19. Earlier Thursday, New York Fed President William Dudley said in a Wall Street Journal interview that the 6.5% threshold is “obsolete” and he would advocate scrapping it at the meeting.

Fed Watch: Fed Talk Shifts to Higher Rates -- With the end of asset purchases in sight (and assuming activity does not lurch downward) Fed officials will increasingly turn the discussion toward raising interest rates. It is not as if the anticipated time line has been any secret. The Fed's forecasts clearly show an expectation of higher rates in 2015 with the exact timing and pace of that tightening dependent upon each participant's growth and inflation forecast. Fed officials would want to clearly telegraph such a move well in advance. Hence they will pivot from talk of sustained low rates to raising rates. Of course, we would expect hawks to be first in line, as they have been. For instance, Philadelphia Federal Reserve President said last week (via the Wall Street Journal):“Most formulations of standard, simple policy rules suggest that the federal funds rate should rise very soon–if not already,” Mr. Plosser told a conference sponsored by the University of Chicago‘s Booth School of Business. Such warnings from Plosser are not new. More notable is San Fransisco Federal Reserve President John Williams' interview with Robin Harding at the Financial Times. Williams is generally seen as a dove, but he was also was one of the first to telegraph the end of asset purchases. Williams on the forecast: In his own economic forecast, Mr Williams said, the Fed will raise interest rates in the middle of next year with the unemployment rate at about 6 per cent, inflation at 1.5 per cent and “everything moving in the right direction”.“At that point if we don’t start to adjust monetary policy there’d be a risk of overshooting,” he said. “You don’t wait until you’re at full employment before you start to raise interest rates from zero.”  There is a lot to think about in those two paragraphs...

How Unconventional Are Large-Scale Asset Purchases? - New York Fed - The large-scale asset purchases (LSAPs) undertaken by the Fed starting in late November 2008 are widely considered to be a form of “unconventional” monetary policy.     One of these unconventional policies is the purchase of assets (mostly Treasury securities and agency debt and mortgage-backed securities) through large-scale open market operations. These large-scale asset purchases have been undertaken in three waves, commonly referred to as quantitative easing 1, or QE1 (announced in late November 2008), QE2 (announced in November 2010), and QE3 (announced in September 2012). The aim of these purchases is to put “downward pressure on longer-term interest rates . . . and help to make broader financial conditions more accommodative,” as explained in the October 30 statement of the Federal Open Market Committee (FOMC). In this respect, LSAPs have very similar objectives to conventional monetary policy: they are designed to trigger the same chain reaction across assets described above. The question we explore in this post is whether the financial chain reaction triggered by LSAPs has in fact been quantitatively comparable to the one that usually follows a reduction in the FFR. The chart below provides a sense of the answer, which is further articulated in the rest of the post.

Fed’s Bond Buys Aren’t as Unconventional as They Appear - The Federal Reserve‘s bond buys have much the same effect on financial markets, and therefore presumably on the economy, as interest rate cuts, New York Fed researchers argue in a blog post. The current round of bond purchases is aimed at lowering long-term interest rates in hopes of boosting asset prices and spurring more spending, investment and hiring. “We conclude that [bond buys] have effects on financial conditions that are very similar to  those of more conventional approaches to providing monetary stimulus; they move asset prices in the same direction and in roughly similar proportions,”  In particular, the researchers focus on reactions in the euro-dollar exchange rate and ten-year Treasury note yields around one conventional and one unconventional monetary policy move. They consider both Fed announcements as well as sudden changes in the economic outlook, finding “the relative reaction to conventional and unconventional policy is the same, at least in a statistical sense.”Does that mean that economic impact is also the same? Not necessarily, said the authors.But the following makes them confident that it probably does. “Changes in broad financial conditions are one of the main conduits through which monetary policy impulses are transmitted to the rest of the economy, which suggests that the macroeconomic effects of this unconventional policy might also be fairly conventional after all,” they conclude.

Fed’s Fisher Worried About Creating Financial Imbalances -- Federal Reserve Bank of Dallas President Richard Fisher warned Wednesday the U.S. central bank’s easy money policies may have created significant market imbalances, as he welcomed the Fed’s move to cut back on the pace of its bond-buying stimulus effort. “I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis,” Mr. Fisher said in the text of a speech prepared for delivery in Mexico City. “With its massive asset purchases, the Fed is distorting financial markets and creating incentives for managers and market players to take increasing risk, some of which may result in tears,” the official said. Mr. Fisher, who is a voting member of the interest-rate setting Federal Open Market Committee, has long opposed the Fed’s bond-buying effort. The central bank is currently in the process of winding the program down. The Fed is buying $65 billion per month in Treasury and mortgage securities. A number of officials have argued that as long as growth performs as they expect, the purchases will end by the close of the year. “Continuing to pare back on the amount of the Fed’s large-scale asset purchases is a good start and should be continued at a measured pace that leads to their complete elimination as soon as is practicable,” Mr. Fisher said. The central banker is confident the Fed will be able to tighten policy effectively in the future. “The FOMC will find practicable ways to normalize the Fed’s balance sheet,” he said. “I believe that practicable ways will be found to avoid inflationary pressures once the velocity of money returns to pre-crisis levels,” he added.

A Better Rule for Predicting Fed Policy - WSJ - Adding job growth to monetary policy models that rely on the unemployment rate alone make them better predictors of Federal Reserve policy over time, a Cleveland Fed paper released Tuesday finds. There is a perennial debate among economists, highlighted in Tuesday’s edition of Grand Central, about whether to pursue “rules-based” policies or opt for a more flexible approach. In particular, economists argue over whether the so-called Taylor rule– which prescribes how central banks should adjust short-term interest rates according to several economic variables–is appropriate, and which of its many incarnations tells the best story. Economists at the Cleveland Fed say the problem with Taylor rules is that they do not account for either economic growth or employment gains. If adjusted for that flaw, the authors say, the rule’s ability to predict the course of Fed actions over a prolonged period jumps to 67%, up from just 49% for jobless rate-based Taylor rules. In the two instances over the last three decades when the job growth-enhanced rule misses the mark, it “called for easier monetary policy than was actual policy,” the study says. Still, the economists recognize “20-20 hindsight is never fair.”  John Taylor, the Stanford University economist who first authored the policy rule in 1993, has argued that recent Fed policy has overstepped its boundaries and has been ineffective. But Fed officials such as Chicago Fed President Charles Evans have pushed back.  “Simple Taylor rules fail the strategic principle to express policy intentions clearly,” Mr. Evans said Friday in a speech.

NY Fed Boosts Reverse Repo Maximum Bid to $7 Billion - The Federal Reserve Bank of New York is boosting the maximum bidding size available to participants in a program now being tested to see if it can provide better control over short-term interest rates.The bank said Tuesday the maximum bidding size available to participants in the overnight fixed rate reserve repurchase agreement program, or “reverse repo” facility,  will rise to $7 billion, from $5 billion, starting with Wednesday’s operation. The New York Fed said the change has no monetary policy implications. The reverse repos take in cash from participating banks, money managers and other firms, in exchange for Treasury bonds offered overnight by the central bank. The Fed is testing the program through the start of next year. Officials are hoping the facility, which drains liquidity from the financial system, will be a valuable tool to set a floor under short-term rates when the time comes to tighten monetary policy. For a program in testing mode, the reverse repo facility has been in high demand. For much of this year, operations have been coming in around $100 billion a day–Tuesday’s totaled $66 billion. Market participants attribute the activity to a dearth of borrowing collateral in the broader repo market, where market participants go to finance their trading positions. It is possible the reverse repo operation size could increase due to the bidding size bump. That said, Fed officials have shown no sign they are unhappy about the level of usage, as the high levels of activity provide an important laboratory to see how this novel tool functions.

Risk Aversion, Global Asset Prices, and Fed Tightening - New York Fed -- The global sell-off last May of emerging market equities and currencies of countries with high interest rates (“carry-trade” currencies) has been attributed to changes in the outlook for U.S. monetary policy, since the sell-off took place immediately following Chairman Bernanke’s May 22 comments concerning the future of the Fed’s asset purchase programs. In this post, we look back at global asset market developments over the past summer, and measure how changes in global risk aversion affected the values of carry-trade currencies and emerging market equities between May and September of last year. We find that the initial signal of a possible change in U.S. monetary policy coincided with an increase in global risk aversion, which put downward pressure on global asset prices.

Wait Until Wages Start Rising - Paul Krugman - And then wait some more — a lot more. There’s a growing meme in discussions of monetary policy to the effect that we’re actually getting close to full employment, because the long-term unemployed don’t actually count in wage determination. Soon, this story goes, wages will start to rise, and so it’s time to get ready for monetary tightening. This is a terrible idea. For one thing, we can speculate all we like about the true state of labor markets, but we won’t really know until we start seeing solid wage increases. So why not wait until that happens? Now, you might say that it’s important to get ahead of the curve, lest inflation rear its ugly head. But this is in fact a case where you really want to be behind the curve. Look at what has happened to wage growth since the crisis began. The various series are noisy; I’ve followed Goldman Sachs in using principal components to take a weighted average of nonsupervisory wages, total compensation, and the employment cost index. Still a bit jumpy, but the picture seems fairly clear:

Fed Watch: Unemployment, Wages, Inflation, and Fed Policy - This post is not a grand, unifying theory of macroeconomics.  It is instead a quick take on two posts floating around today.  The first is Paul Krugman's admonishment to the Federal Reserve against raising interest rates before wages rise: So far, no clear sign that wage growth is accelerating. Even more important, however, wages are growing much more slowly now than they were before the crisis. There is no argument I can think of for not wanting wage growth to get at least back to pre-crisis levels before tightening. In fact, given that we’ve now seen just how dangerous the “lowflation” trap is, we should be aiming for a significantly higher underlying rate of growth in wages and prices than we previously thought appropriate. I don't think that you should be surprised if the Federal Reserve starts raising rates well before wage growth returns to pre-crisis rates.  I think you should be very surprised if the Fed were to do as Krugman suggests.  Historically, the Fed tightens before wages growth accelerates much beyond 2%:  Second, the Washington Post's Ylan Mui has this: But a funny thing happens once unemployment hits 6.5 percent: The behavior of inflation starts to become random, as illustrated in this chart by HSBC chief U.S. economist Kevin Logan.  I would take issue with the idea that inflation behavior becomes "random" at unemployment rates below 6.5%.  You need to consider this kind of chart in the context of expected inflation and expected policy.  If inflation expectations are stable, and if the Federal Reserve provides policy to ensure that stability, you would expect random errors around expected inflation.  Couple this with downward nominal wage rigidities, and you should expect the same even under circumstances of high unemployment.  Here is my version of the same chart:

Fed Watch: Upward Grind in Labor Markets Continues - The employment report for February modestly beat expectations with a nonfarm payroll gain of 175k, leaving the recent trends pretty much intact: Did the labor market shake off the impact of a cold and snowy winter? No. Aggregate hours worked turned over during the winter, sending the year-over-year gains southward as well: Looks like the weather was less about hiring, and more about people not being able to get to their jobs. The unemployment rate edged up: I suspect we are seeing something like we saw in late 2011 when the unemployment rate fell sharply and then moved sideways for a few months. If there is less excess slack in the labor market than Fed doves believe we should soon be seeing greater upward pressures on wages. Hints of this emerge in the acceleration of wage gains for production and nonsupervisory workers:  Note that this comes even as the number of long-term unemployed rose. I think there is a very real possibility - as was suspected long ago would happen - that persistently high cyclical unemployment we saw during the recession and its aftermath has evolved into structural unemployment.. Fed officials will be watching this issue very closely. It is the most likely reason we would expect to see the expected date of the first rate hike moved forward in 2015.  Bottom Line: The employment report indicates ongoing slow and steady improvement in the economy sufficient to generate consistent job growth and drive the unemployment rate lower. The report has no implications for tapering because tapering is on a preset course.  This one report by itself also says little about the first rate increase - still mid to late 2015. But watch the wage growth numbers and listen to the reaction of Fed officials. In my opinion, this is a key factor in the timing of rate policy. Traditionally, the start tightening prior or near to an acceleration in wages. The longer they stay still as unemployment falls and wage growth rises, the more nervous they will become that they are falling behind the curve. And they especially don't want to fall behind the curve given the size of their balance sheet. They talk a good game, but I think they are more worried about unwinding that balance sheet then they claim in public.

Thinking About Progress in the Labor Market - Atlanta Fed's macroblog -- Today's employment report for the month of February maybe took a bit of drama out of one key question going into the next meeting of the Federal Open Market Committee (FOMC): What will happen to the FOMC's policy language when the economy hits or passes the 6.5 percent unemployment rate threshold for considering policy-rate liftoff? With the unemployment rate for February checking it at 6.7 percent, a breach of the threshold clearly won't have happened when the Committee meets in a little less than two weeks.  I say "maybe took a bit of drama out" because I'm not sure there was much drama left. All you had to do was listen to the Fed talkers yesterday to know that. This is from the highlights summary of a speech yesterday by Charles Plosser, president of the Philadelphia Fed... President Plosser believes the Federal Open Market Committee has to revamp its current forward guidance regarding the future federal funds rate path because the 6.5 percent unemployment threshold has become irrelevant.  ... and this from a Wall Street Journal interview with William Dudley, president of the New York Fed:Mr. Dudley, in a Wall Street Journal interview, also said the Fed's 6.5% unemployment rate threshold for considering increases in short-term interest rates is "obsolete" and he would advocate scrapping it at the Fed's next meeting March 18–19. From our shop, Atlanta Fed president Dennis Lockhart echoed those sentiments in a speech at Georgetown University: Given that measured unemployment is so close to 6.5 percent, the time is approaching for a refreshed explanation of how unemployment or broader employment conditions are to be factored into a liftoff decision.

Employment-Population ratio - Lately, there has been a pretty remarkable consensus among macroeconomists that the labor market really is not doing well, despite lower unemployment rate. About 10 million people lost their jobs in the great recession,  and new employment has just about matched new people since then. The employment-population ratio -- red line -- hasn't budged. The 10 million aren't actively looking for work, so they don't count as "unemployed." Whether "discouraged" by persistent "lack of demand" or discouraged by high marginal taxes and social program disincentives, or bad match of skills and opportunities, take your pick, the consensus view on all sides has been pretty dim on the labor market.  I've seen about the same slide deck from Ed Lazear (Bush CEA chair) and Larry Summers (Obama adviser). Usually, employment and unemployment mirror each other, so it doesn't matter which measure you use. In Torsten's view, there is nothing the Fed can do about this. I agree. The Fed seems to secretly agree too. They talk about the employment-population ratio, but if they thought there were effectively 10 million unemployed and they could do something about it, they would not be even talking about tapering, they'd be talking about buying another $2 trillion of bonds and promising zero rates into the 7th year of the Hilary Clinton administration.

Fed Nominee Stanley Fischer Has a Citigroup Problem -- Last evening, the U.S. Senate Banking Committee made the unexpected announcement that it was postponing the confirmation hearing of Stanley Fischer to serve as Vice Chairman of the Federal Reserve Board of Governors. There are surely some veteran lawyers at the Securities and Exchange Commission (SEC) hoping the nomination of Fischer has been scuttled. The thought that Stanley Fischer, a former Vice Chairman of the serially corrupt Citigroup, could become Vice Chairman of the Federal Reserve, a regulator of mega banks like Citigroup, is not a source of comfort. Fischer was nominated for the post by President Obama, whose devotion to failing up on Wall Street regularly sets new heights. As if as on cue, news broke just yesterday that Federal prosecutors have issued grand jury subpoenas to Citigroup in a money-laundering investigation, a topic with which the bank is intimately familiar. During Fischer’s stint at Citigroup, from February 2002 through April 2005, he “amassed a personal fortune of between $14.6 million and $56.3 million” according to Bloomberg News. During that same period, Citigroup was repeatedly charged with fraud and embarked on its own exotic financial shenanigans that would end up collapsing the firm in 2008. On April 28, 2003, the SEC charged that the investment banking business of Citigroup, Salomon Smith Barney, issued “fraudulent” research on telecommunications companies to promote its investment banking business. The SEC noted in its complaint that “between 1999 and August 2002, when he left the firm, Grubman’s total compensation exceeded $67.5 million.”

The Inflation Obsession, by Paul Krugman -- Recently the Federal Reserve released transcripts of its monetary policy meetings during the fateful year of 2008. And, boy, are they discouraging reading. Partly that’s because Fed officials come across as essentially clueless about the gathering economic storm. But we knew that already. What’s really striking is the extent to which they were obsessed with the wrong thing. The economy was plunging, yet all many people at the Fed wanted to talk about was inflation. Matthew O’Brien at The Atlantic has done the math. In August 2008 there were 322 mentions of inflation, versus only 28 of unemployment and 19 of systemic risks or crises. In the meeting on Sept. 16, 2008 — the day after Lehman fell! — there were 129 mentions of inflation versus 26 mentions of unemployment and only four of systemic risks or crises.  Historians of the Great Depression have long marveled at the folly of policy discussion at the time. But it turns out that modern monetary officials facing financial crisis were just as obsessed with the wrong thing as their predecessors three generations before. What accounts for inflation obsession? One answer is that obsessives failed to distinguish between underlying inflation and short-term fluctuations in the headline number, which are mainly driven by volatile energy and food prices. Gasoline prices, in particular, strongly influence inflation in any given year, and dire warnings are heard whenever prices rise at the pump; yet such blips say nothing at all about future inflation. They also failed to understand that printing money in a depressed economy isn’t inflationary. I could have told them that, and in fact I did. But maybe there was some excuse for not grasping this point in 2008 or early 2009.

In Search of a Stable Electronic Currency - Robert Shiller - Bitcoin’s future is very much in doubt. Yet whatever becomes of it, something good can arise from its innovations — even if the results are very different from its current form or its numerous competitors. What I have in mind isn’t another wave of price speculation. Instead, I believe that electronic forms of money could give us better pricing, contracting and risk management. The central problem with Bitcoin in its present form, though, is that it doesn’t really solve any sensible economic problem. Nor should it substitute for banks and the governmental institutions that regulate them. They are reasonably effective institutions, despite their flaws, and should not just be scrapped and replaced by a novel electronic system.  Unfortunately, the Bitcoin success story has been tied intrinsically with instability, with excitement and envy for those who have become rich through investing in it — rich for a while at least, because the value of the electronic currency has fluctuated wildly. The instability of Bitcoin’s value in dollars is a measure of failure, not success. It means that any commerce using Bitcoin or its competitors would be buffeted by enormous inflation and deflation.  But if we go back to the electronic-money drawing board, we may conclude that Bitcoin has been focused on the wrong classical functions of money, as a medium of exchange and a store of value. Bitcoin offers a way of “mining” electronic coins that can replace our dollar bills and bank accounts. Yet there is no fundamental need for this. Money, as we’ve known it for decades, works quite well in these respects. It would be much better to focus on another classical function: money as a unit of account — that is, as a basic standard of economic measurement. Scientists spend a lot of time thinking about ways to improve systems of measurement. Business people should, too.

Q4 GDP Downgrades to a Measly 2.4%  - Q4 2013 real GDP was revised significantly downward from the original 3.2% to a weak, measly 2.4%.  Personal consumption expenditures was revised down over half a percentage point of GDP.  The original estimate for exports was also revised down over a quarter of a percentage point.  If the Q4 downward revision in consumer spending isn't bad enough, for all of 2013 annual real GDP was just 1.9%.  In 2012, annual GDP was 2.8%. 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 advance report and this Q4 GDP major component revision, along with their percentage point difference spread.  This next table below shows the percentage point spread breakdown of Q4 from Q3 GDP major components, along with their spread.  Consumer spending, C in our GDP equation, even with the revision is still over higher than Q3 PCE.  Durable goods appears to be significantly revised lower to 0.19 percentage points with motor vehicles and parts going negative.  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 even with revisions added almost a percentage point, 0.99, to Q4 GDP as exports grew much more than imports.  Even with the revisions this is still a surprise showing and America increasing their exports is a very good thing.  Needless to say economic activity does vary greatly from quarter to quarter so only time will tell if this is a trend.

Looking Backwards and Forwards with GDP - Since it's been a while since we last looked at GDP in the U.S., we thought we'd take this opportunity to look both backwards and forwards at it.  Let's look backwards first! Our first chart shows how the nation's Gross Domestic Product has evolved since the first quarter of 2012 and reveals how factors like the Fed's various Quantitative Easing (QE) programs, minor government spending cuts and President Obama's tax hikes have affected the nominal measure the U.S.' national income:  As we noted in our last installment, much of the organic growth in 2013-Q3 was literally the result of organic growth, as the U.S. benefited from bumper crops in almost every agricultural category! Along with what turned out to be optimistic production by U.S. automakers in that quarter, that growth then carried over into the fourth quarter, where much of the nation's 2013 agricultural bounty left for foreign markets, boosting GDP once again through higher levels of exports.  That organic economic growth is why the Federal Reserve believes it can safely taper its QE program's purchases of U.S. Treasuries and Mortgage-Backed Securities, since the economy would appear to be more capable of generating the growth needed to offset the negative effects of the fiscal drags upon it.  That's all well and good, but that's the past. Since we actually work in the future, it's tomorrow's GDP that holds more interest for us. Our second chart shows what we forecast for the not-yet-completed first quarter of 2014, in the real terms of constant 2009 U.S. dollars:

 The economic future of Americans – some arithmetic - American optimism is irrepressible and an enormous comparative advantage for the nation. Yet the actual economic experience of the median American has been rather disappointing in the past four decades, and there is pronounced pessimism among some economists about the medium term future. For example, Robert Gordon of Northwestern University, a very distinguished academic, specializing in long term economic growth, predicts that the real living standards of all but the top 1 per cent in the income distribution will barely grow at all in the decades ahead. Such a gloomy forecast may seem startlingly improbable to most people, but the historic experience of the vast bulk of the population has been no better than that since 1973. Over the whole of that period, median real household income has actually risen by only 0.1 per cent per annum.  There are three main reasons for this – the profits share in the economy has risen at the expense of labour income; the distribution of labour income has become much more skewed in favour of the top 1 per cent, so the median (mid point) of the income scale has grown far more slowly than the average; and the rate of growth of productivity has fallen sharply for most of the period, despite the growth of information technology. But Robert Gordon’s latest work goes even further, predicting almost no improvement into the indefinite future for the vast bulk of the population. Gordon’s key assumptions about the 25 to 40 years after 2007 are shown in Graph 1 and in Table 1 (scenario (1)). Future productivity growth (output per hour) is very subdued, partly because of declining educational standards, and partly because Gordon is sceptical about the impact of the IT revolution on productivity growth.

Fed's Beige Book: Economic activity increased at "modest to moderate" pace in Most Districts -- Fed's Beige Book: Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic. And on real estate:  Reports on residential housing markets were somewhat mixed. Many Districts continued to report improving conditions but noted that growth had slowed. Most of the Districts indicating otherwise attributed the slowing pace of improvement to unusually severe winter weather conditions. Home sales increased in Richmond, Atlanta, Chicago, St. Louis, and Dallas, while sales were down in Philadelphia, Cleveland, Minneapolis, and Kansas City. Boston and New York reported that the trend in sales for their Districts was mixed. New home construction increased in Richmond, Atlanta, Chicago, St. Louis, and Minneapolis, and remained flat in Kansas City, and was down slightly from the previous period in Philadelphia. Most Districts reported low levels of home inventories and indicated that home prices continued to appreciate. The outlook for sales and residential construction was positive in Boston, Philadelphia, Cleveland, Atlanta, and San Francisco.

Fed Beige Book: District by District Summary -- The Federal Reserve’s latest “beige book” report Wednesday said economic activity continued to expand across most of the U.S. from January to early February. The following are excerpts from a district-by-district summary of economic conditions.

US economy hampered by severe winter weather, Federal Reserve says - As parts of America are experiencing their worst winter in 30 years, the severe weather has taken its toll on the US’s economic recovery, the Federal Reserve said Wednesday. While cold weather and snow gripped much of the country in January and February, consumer spending was hit across the US, according to the Fed’s latest “beige book” report on the state of the economy; manufacturing and construction were also adversely affected. Weather was also cited as a contributing factor to softer auto sales in many areas. While the unseasonable cold did the most damage in agriculture, California’s record drought has also taken its toll on the state’s economy. The Fed said hiring had notably softened in regions of the country hit by the severe cold. But the rate at which temporary hires were being converted into permanent hires picked up, and the underlying recovery appeared to be continuing. “Many districts continued to note shortages for particular types of specialized, technical skilled labor, such as healthcare professionals and information technology workers. Atlanta and Dallas also noted shortages for freight truck drivers,” said the Fed. In total, the report mentions “weather” 119 times and “winter” 54 times, calling it extreme, harsh and severe. “Severe” appears 35 times in the report, “cold’ 31 times, “snow” 24 times, and “storm” 15 times..

Fed Watch: A Lackluster Start to the New Year - Incoming data has tended to disappoint. While weather impacts are taking part of the blame, I tend to think that part of the blame should fall on overly optimistic interpretations of data patterns at the end of 2013. In particular, the recently downwardly revised GDP numbers were less than spectacular abstracting away from inventory effects: Looking at real final sales, I see slow and steady, or even a modest softening, not magic acceleration. Similarly, aggregate hours worked never signaled a dramatic change in the pace of activity (unless, of course, one suspected productivity was was exploding): Slow and steady is also the underlying message of the most recent Beige Book: Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic. Also note that domestic demand will appear disappointing as long as trade is supporting the GDP numbers:

American Austerity, Charted Yet Again - Paul Krugman -- When you’re trying to track federal fiscal policy, a pretty good first cut is to focus on discretionary spending. For one thing, it is in fact the thing that has been moving a lot in recent years. Also, focusing on discretionary helps take out of the picture both spending rises driven by automatic stabilizers — like the slump-induced rise in unemployment benefits and food stamps — and spending driven by things like demography, as baby boomers hit retirement age.So here’s federal discretionary spending since the 2007 business cycle peak, compared with spending after the 2000 peak: If spending had tracked what happened under Bush II, discretionary spending would be about a third — or more than 2 percent of GDP — higher. Since there is good reason to believe that the multiplier is 1.5 or more, this would mean real GDP 3-plus percent higher, closing much if not most of the output gap, and probably an unemployment rate below 5.5 percent. In short, we would have had a vastly healthier economy but for the de facto victory of disastrous austerity policies.

$17.41 Trillion in U.S. Debt, like Stocks, at Record Levels - Total outstanding public debt is now at $17.41 trillion, according to the U.S. Treasury Department's latest daily statement. That's almost $1 trillion over last year's debt ceiling limit of $16.69 trillion. The public's total debt load will continue to climb, thanks to the suspension of the U.S. government's borrowing limit until March 16, 2015. At the current pace of overspending, U.S. debt should top $18 trillion within nine months. Despite the bull market in rising debt, the bond market has yet to panic because yields have fallen. The yield on 10-year Treasuries has calmly declined almost 12.6% since the start of the year and yields are hovering around 2.69%. Likewise, the yield on 30-year Treasuries has quietly moved lower around 9% toward a yield of 3.62%. Treasuries, at least for now, have been the temporary beneficiary of capital fleeing away from emerging markets and other "risk on" assets.

Obama aims to boost economy with $3.9 trillion budget for 2015 -- President Barack Obama sent Congress a $3.9 trillion budget Tuesday that would funnel money into road building, education and other economy-bolstering programs, handing Democrats a playbook for their election-year themes of creating jobs and narrowing the income gap between rich and poor. The blueprint for fiscal 2015, which begins Oct. 1, is laden with populist proposals designed to fortify those goals. It includes new spending for pre-school education and job training, expanded tax credits for 13.5 million low-income workers without children and more than $1 trillion in higher taxes over the next decade, mostly for the wealthiest Americans and corporations. ‘‘As a country, we've got to make a decision if we’re going to protect tax breaks for the wealthiest Americans or if we’re going to make smart investments necessary to create jobs and grow our economy and expand opportunity for every American,’’ Obama told students at an elementary school in the nation’s capital.  With an eye in part on job creation, $302 billion would be spent to upgrade roads, railroads and mass transit, with more money aimed at improvements at Veterans Affairs hospitals and national parks. Additional funds would be aimed at clean energy research, creating 45 public-private manufacturing institutes for spurring innovation and training workers whose companies have closed or moved.

An Obama Budget Big on Ideals, but With Small Chance of Passage - — President Obama on Tuesday sent Congress an election-year budget request that reflects Democratic ideals, emphasizing increased spending on domestic initiatives for education, public works and research paid for by ending tax breaks for the wealthy and some corporations, rather than continued budget cutting.Mr. Obama’s budget for the 2015 fiscal year that begins Oct. 1 is mostly a familiar volume that seeks, for the sixth time, to balance investments to help the economy and spread economic opportunities, against continued spending cuts and tax increases to continue reducing annual deficits. But the theme of this year’s budget reflects Mr. Obama’s call to have the nation address the growing inequality of incomes and economic opportunity.Republican opposition will again probably block most proposals, but Democrats hope the debate will sharpen the contrasts between the parties’ views of government’s role in society, to their political advantage.Continue reading the main story Gone are the concessions the president proposed to Republicans last year, as his second term began, to reduce future Social Security payments to arrest the projected growth of federal debt. Since Republicans refused to agree in turn to higher tax revenues, Mr. Obama returned to what the White House called “a more traditional budget presentation” – one embodying his wish list, however doomed it is in Congress.Democrats all but demanded that he do so, fearful that compromises on Social Security would further demoralize the liberal base when the party needs high turnout to withstand big losses in November. Given recent years’ spending cuts, tax increases and economic growth, the Obama budget projects the federal deficit will decline to $649 billion this year, and to $564 billion in 2015 – less than half in dollar terms of the deficit he inherited in 2009.

Obama’s 2015 Budget Hits Capitol Hill - Need some light reading? The President’s Budget for Fiscal Year 2015 came out yesterday. Obama’s $3.9 trillion fiscal blueprint includes about $1 trillion in new taxes, mostly on the wealthy and large businesses, to fund a combination of new programs and deficit reduction. Learn more (a lot more) about the  revenue proposals in the Treasury’s green book. Treasury Secretary Jack Lew will testify this morning before the Senate Finance Committee, while OMB Director Sylvia Mathews Burwell will do her part before the Senate Budget Committee.

Obama's budget: Help for workers, taxes for the rich - President Obama on Tuesday released a nearly $4 trillion budget proposal for 2015 that includes more generous tax breaks for working families while scaling back breaks for the rich. His budget, while not expected to be enacted by Congress, does offer the president's fiscal policy vision for the country.As expected, the White House says Obama's blueprint sticks to the topline spending limits already set by the House and Senate for 2015. But the plan also features a $56 billion growth and investment package that includes money for universal pre-K, infrastructure and job training. Obama proposes to pay for those initiatives through additional spending restraint and increased revenue. The White House Budget Office estimates that Obama's proposal overall would cut the annual deficit by 2024 to 1.6% of the size of the economy, less than half of where it's projected to be that year under current policies by the Congressional Budget Office. Related: Tax preparer horror stories But a key part of his budget is a series of tax changes designed to give a hand to low- and middle-income workers. To pay for those changes and to help reduce deficits, Obama, as he done repeatedly throughout his presidency, proposes to raise the tax burden on the rich. And many of his proposals are recycled from previous budgets. As he has called for before, Obama wants Congress to implement the so-called Buffett Rule, which would require people making over $1 million to pay at least 30% of their income, after charitable contributions, in federal taxes.

Obama Budget Tidbits- The Obama 2015 Budget is finally here with the usual fanfare of a thud, dud, not gonna happen political reality.  Earlier we received previews where the Obama administration finally dropped chained CPI from their proposals.  The 2015 budget proposed is $3.9 trillion dollars.  There are actually many good proposals in this budget, unlike many past years.  This time Obama isn't capitulating out of the box and it's about time.  After six years they must finally be learning writing a Republican platform in a Democratic budget doesn't mean it would still get passed. Obama is proposing to kill the carried interest loophole.  This is a tax trick which allows hedge fund managers, private equity managers and others to pay a 15% income tax bracket, as if their money were capital gains from stocks.  The tax trick which allows the super rich to treat income as investments is a huge reason some on Wall Street have gotten filthy rich.  There is another loophole on the table and that is by using corporate business entities by various individuals in order to shift their income into corporate profits and thus avoid paying taxes on that income.  Another huge income equality leveler is Obama's proposal to expand the earned income tax credit to 13.5 million low income wage earners who happen to not have children and make this expansion permanent.  Obama also proposes making permanent a $2,500 college tax credit.  Clearly this does not come close to covering college and if one has no money in the first place, not too useful.  There is also $602 million for a program to subsidize employment for those currently on welfare.  The budget also proposes international tax changes to curtail multinationals paying no tax anywhere.  Additionally there is change to stop companies increasing their foreign tax credit size by counting all foreign taxes owed, against corporate total income.  There is also $56 billion in financial crisis responsibility fees for big banks.One of the most important proposals is to raise the minimum wage to $10.10 an hour. 

Obama’s Calculations on the Deficit and Debt - On Tuesday, the Obama administration released an interesting if dead-on-arrival 2015 budget. The big message is that the White House wants to bolster support for the poor and middle class, paying for such measures with increased taxes on high-income households. But it also would accomplish one other big, big goal: It would set the country on a budget path to much smaller deficits and falling debt in relation to economic output. Here’s the relevant chart. So how does President Obama start to bring the debt down? Simple arithmetic: Smaller deficits fueled by increased taxes and reduced spending, along with the presumption of solid economic growth. Let’s compare President Obama’s suggested spending and revenue figures with the Congressional Budget Office’s best guess at how the numbers would turn out if policies remained static. Here are the spending figures in President Obama’s budget: The White House cuts outlays, relative to the budget baseline it uses in its report. In terms of entitlement spending, it picks up significant savings from Medicare. For instance, in 2020, it sees $1.2 trillion in spending on Social Security, $690 billion on Medicare and $439 billion on Medicaid. In the baseline, that’s $1.2 trillion on Social Security, $734 billion on Medicare and $440 billion on Medicaid.On the discretionary spending side, Mr. Obama expands domestic programs at the expense of defense programs. In 2020, his budget shells out about $583 billion for defense and $593 billion for nondefense programs – education, housing and so on. In contrast, the baseline shows $711 billion in military spending and $581 billion for nondefense programs. The White House also sees the government spending less on interest than the baseline scenario. For 2020, it sees $616 billion versus $635 billion. Match that with hundreds of billions in new tax dollars on the revenue side of the ledger, and you have much, much smaller deficits – meaning a debt that grows in absolute terms but shrinks relative to the size of the economy.

The President’s Budget: More Investment in Our Future is Needed - The President released his fiscal year 2015 budget stating that his goal is “to speed up growth, strengthen the middleclass, and build new ladders of opportunity into the middle class,” all while reducing budget deficits. There is much to like in the budget proposal. Mr. Obama wants to expand the Earned Income Tax Credit for childless workers, which will encourage work and reduce poverty. He also provides additional funds for child care, education, research, and infrastructure. To pay for this he proposes to eliminate various tax loopholes for hedge fund managers and multinational corporations. Seeing as how this budget proposal has virtually no chance of outmaneuvering the GOP blockade, its chief value is to demonstrate a vision of America that better addresses the core economic problems of the middle and working classes. And in this vein, the President’s budget could have been better. The Administration projects that budget deficits would increase from 3.1 percent of GDP in 2015 to 3.4 percent of GDP by 2024 in the absence of any policy changes (this is the baseline budget deficit, which is almost a current law baseline). Over the 10-year budget window, accumulated deficits would be about $7.0 trillion. The President is proposing a budget that would have deficits shrinking from 3.1 percent of GDP in 2025 to 1.6 percent of GDP by 2024; accumulated deficits would be less than $5.0 trillion over this period. Of the $2 trillion in deficit reduction, over 80 percent is due to increases in federal revenues and the rest is due to spending reductions.

Posturing from Weakness - President Obama’s 2015 budget proposes a number of tax increases that will mainly affect the rich. They include:

  • Limiting the tax savings on deductions to 28 percent of the deduction amount (and applying this limit to exclusions as well, such as the one for employer-provided health benefits)
  • Requiring a minimum 30% income tax on income less charitable contributions, which is intended to limit the benefit of tax preferences on capital gains and qualified dividends
  • Reducing the estate tax exemption from $5.34 million to $3.5 million and raising the estate tax rate from 40% to 45%
  • Eliminating tax preferences for retirement accounts once someone’s account balance is enough to fund a $200,000 annuity in retirement (simplifying slightly)

These are all good things, given the size of the projected national debt and the urgent needs elsewhere in society. But, of course, they have no chance of actually happening. If President Obama really wanted these outcomes, there was a way to get them. He could have let the Bush tax cuts expire for good a year ago, making high taxes on the rich a reality. Then, a year later, he could have proposed a middle-class tax cut and dared the Republicans to block it in an election year. (He could also have traded a reduction in the top marginal rate—from the 39.6% that would have resulted, not counting the 3.8% Medicare tax—for the reforms he is now proposing.)

Obama’s 2015 Budget Follows Long Tradition of Excessive Optimism - The budget for fiscal year 2015 (October 2014 through September 2015), just published by the White House, presents an optimistic prognosis for US fiscal health. Like all budgets, it looks ahead not just one, but several years. It projects that the budget deficit, expected to be 4.1 percent of GDP in 2013, will fall to 3.1 percent in 2015 and to 1.6 percent in 2024. According to its forecasts, the ratio of debt to GDP will peak in 2016 at 74.6 percent and then decline to 69 percent by 2014.Some of these results are supposed to result from changes in tax and spending policies, but most of them come from assumed improvements in the economy. Real GDP, which grew 2 percent year-on-year in FY 2013, is projected to rise to 3.1 percent in FY 2015. After that, the Office of Management and Budget (OMB) expects growth to slow a bit, but still to average more than 2.5 percent over the next ten years. This budget, like all budgets before it, assumes that there will be no recessions over its 10-year time horizon. However, if the projected steady growth of the economy does not materialize, neither will the deficit reductions. Unfortunately, budget history suggests that the OMB has a chronic tendency to look at the world through rose-colored glasses.  The following chart shows that from 2003 through 2013, White House proposals assumed economic growth in the budget year itself (labeled Year B in the chart) would be an average of 1.6 percentage points higher than it actually turned out to be. The bias in the projection for the year following the budget year (e.g., the projection for 2010 made in the budget message for 2009), shown as Year B+1 in the chart, the upward bias was 1.7 percentage points, and for the second year after the one being budgeted, B+2, the bias was 1.8 points. Not surprising, the biggest deviations were for the recession year FY 2009.

Obama’s Budget Cuts Millions From Financial Regulatory Agency - Real News Network video & transcript - Well, some progressives are saying that this is a great new budget that really changes the conversation on Capitol Hill. And in some ways that is true. There are some very good things proposed in this budget, including an expansion of the earned income tax credit to low-wage workers who don't have children, and including more investment in pre-K education--that's also very good.  But there are some troubling things about the budget which we shouldn't lose sight of. One is that it continues big increases in the defense budget. Of course, Obama has ended and is supposedly winding down two wars. We should in this kind of environment see a decline in defense spending and military spending. But instead this budget has increases in defense spending built right into it. So that's one disturbing thing.  A second is what it says about Obama's commitment to the Dodd-Frank financial regulation act. As you probably know, one of the big achievements of the Dodd-Frank law was to bring derivatives under regulatory purview for the first time, these weapons of mass destruction that contributed to the financial crisis. The Commodity Futures Trading Commission was tasked with overseeing this $400 trillion market, a vast expansion of its responsibilities. But in this budget, President Obama calls for a decline in the budget request that he had last year. Last year he asked for $315 million for the CFTC. The Congress only gave $215 million for this year. But instead of asking again for $315 million or even more, Obama is only asking for $280 million in his budget. And this has a lot of people outraged about why are you trying to cut this very important regulatory agency at a time when its necessary demands have increased three or fourfold.

What’s Not DOA in the Obama Budget -- It’s of course tempting to decry the President’s budget as “dead on arrival” but I wouldn’t be nearly so quick to go there.  To dismiss its content because it’s not going to become the nation’s budget is painting with far too broad a stroke.  Here are a number of ways that some of the ideas that administration trotted out today will be referenced in months and even years to come.

  • –Though the budget, wisely, proposes to spend beyond the too-tight caps in place from earlier budget deals, that extra $55 billion may well not see the light of day.  Still, while legislators, as part of the Murray/Ryan deal, agreed to top-line appropriation numbers, the President’s budget provides the White House’s recommendations as to how those spending levels should be spread across agencies and programs.  That blueprint will surely be in the mix when appropriators allocate discretionary spending.
  • –Increasing the amount of the Earned Income Tax Credit going to childless adults is an idea that’s been espoused by partisans on both sides of the aisle (see box on page 16 here) and I don’t think it’s going away (which is, of course, not the same as saying it’s going anywhere soon).  The fight will be over payfors, including closing the carried-interest loophole, which virtually no one defends—it’s awfully hard to provide a rationale for the favorable tax treatment of the earnings of private equity fund managers—but still remains in place.  But I’d bet that eventually, some version of what the President proposed today will become law.

Three Reasons Not to Ignore the Obama Budget -- For years now, the conventional response to any presidential budget has been to declare it “dead on arrival,” or sometimes “dead before arrival.”  Veteran budget wonk Stan Collender describes this year’s White House budget as “more dead on arrival than most.”That’s all undoubtedly true. But it doesn’t mean one should ignore the whole Obama budget. Here are three reasons why:

  • The annual appropriations dance. Unlike past years, Congress already has agreed on a ceiling for annually appropriated spending, which account for about 30% of all federal outlays. In the 1,438-page Budget Appendix  the White House explains in excruciating detail how it would divvy up that $1.15 trillion.  Congressional appropriations committees won’t take all the White House recommendations, but they won’t ignore them either. 
  • The earned-income tax credit.  Republicans and Democrats don’t agree on much these days, but there is a widening consensus that it’s foolish to limit the benefits of earned-income tax credit – which supplements the earnings of low-wage workers – to families with children.   Some influential Republicans- — including Sen. Marco Rubio of Florida (here)  and former Bush adviser Glenn Hubbard of Columbia University (here)  –  agree with the president that it makes sense to offer childless workers an incentive to work even at very low wages, and for the government to supplement their paychecks a bit.
  • Tax reform.  It’s not imminent, but both sides are putting more details on the table and that’s a necessary step towards actually doing something someday.  Mr. Obama’s budget repeats his proposals to limit the value of itemized deductions to upper-income taxpayers (whose get more of a dollar tax break because they are in higher tax brackets);  Mr. Camp proposed to do much the same thing

Democratic Celebrations Over Lower Deficits Are Misguided - The Treasury Department announced late last week that the budget deficit for fiscal 2013 was $680 billion—$409 billion lower than it was in 2012. The Obama Administration and its allies celebrated: “We are moving in the right direction,” a triumphant Treasury Secretary Jack Lew said in a statement. But these budget numbers are no cause for good cheer. If anything, they are a reminder of just how backwards our fiscal priorities have become. Yes, the budget deficit is falling at a remarkable pace, as you can see from this graph by Evan Soltas: And, at most times, smaller deficits are better than larger deficits. But this is not one of those times. Red ink flowed by the barrel after Obama took office, mostly because the government was spending madly to stop the country from falling into the next Great Depression. And according to the vast majority of economists, that was absolutely, positively the right thing to do: The economy would have kept shrinking if the government hadn’t pumped so much money into it. The deficit is falling now partly because the economy has started to recover, but partly because recent spending agreements, including the infamous budget sequestration, have reduced government spending. That’s slowing growth. The Congressional Budget Office estimated that austerity reduced economic growth by 1.5 percent last year and will do so again this year, although to a lesser extent thanks to the Murray-Ryan budget deal. (The Murray-Ryan agreement restored some spending that budget sequestration had cut.)

Obama's budget eyes $1 trillion hike in tax revenue — The budget President Obama unveiled Tuesday would raise more than $1 trillion over 10 years through changes in the tax code by closing loopholes, raising some taxes and cracking down on enforcement. But the budget also cuts taxes for some taxpayers, most notably an expansion of the Earned Income Tax Credit for 13.5 million low-income Americans beginning in 2018. Obama's budget contains 175 different revenue proposals, of which 28 are new in this year's budget. Among them:

  • • Expanding the Earned Income Tax Credit for workers without children. Currently, workers without qualifying children can claim the credit if they're ages 25 to 65 and make less than $14,790. Obama's proposal would expand the age range from 21 to 67 and the income limit for individuals up to $18,070 for individual taxpayers. The proposal would save taxpayers $59.7 billion over 10 years.
  • • Making owners of professional services firms pay a greater share of payroll taxes. Some sole proprietors, for example, take only a portion of their income as salary and the rest as corporate profits, allowing them to avoid Social Security and Medicare taxes. The proposal would raise $37.8 billion over 10 years.
  • • Excluding college Pell grants from income taxes, saving taxpayers $8.9 billion over 10 years. The proposal would expand eligibility for educational tax credits by not counting Pell grants as income.

Obama would boost collections by regulating tax preparers, increasing the enforcement budget by 7% and requiring more electronic filing. The proposed tax changes are part of Obama's insistence that deficit reduction come through both spending cuts and increased revenue. "The budget secures that revenue through tax reform that reduces inefficient and unfair tax breaks and ensures that everyone, from Main Street to Wall Street, is paying their fair share," Obama said in his budget message to Congress.

When Will They Ever Learn – Uncle Sam is not Robin Hood - Randy Wray - Memo to Obama: Don’t tie progressive spending policy to progressive tax policy. Each can stand on its own. Reported today in the Washington Post: Obama proposes $600 billion in new spending to boost economy.  President Obama on Tuesday unveiled an ambitious budget that promised more than $600 billion in fresh spending to boost economic growth over the next decade while also pledging to solve the nation’s borrowing problem by raising taxes on the wealthy,  Here’s the conceit: Uncle Sam is broke. He’s got a borrowing problem. He’s gone hat-in-hand to those who’s got, trying to borrow a few dimes off them. But they are ready to foreclose on his White House. Obama knows his economy is tanking. Five and a half years after Wall Street’s crisis, we still have tens of millions of workers without jobs. Even the best-case scenarios don’t see those jobs coming back for years. Obama will leave office with a legacy of economic failure. Belt-tightening austerity isn’t working. He wants to spend more, but he doesn’t have more to spend. He’s run up his credit tab at the local saloon and the bar-keep won’t pour another whiskey. So he’s got an idea: let’s take from the rich, and give to the poor, homeless and jobless. Robin Hood rides to the rescue. Look we all love Robin Hood. Almost no one outside the One Percenters disagrees with the view that the rich have too much. It is immoral. It is easy to argue that public policy ought to aim at reducing their income and wealth. And giving some to the poor. If you have any remaining doubt at all that the One Percenters deserve to be dispossessed of much of their wealth, take a look at this segment by Chris Hayes.   But why link this to Obama’s plans to spend more? You then automatically ensure that anyone against “soak the rich” schemes will oppose the Robin Hood plan to “take from the rich to give to the poor”. It is bad politics to put a poison pill into your stimulus bill. And it is bad economics, too. Doubly bad.

CBO Mix-And-Match - Paul Krugman - Floyd Norris makes a really good point in criticizing the Congressional Budget Office; he argues that the office’s latest budget projections aren’t consistent. CBO has marked down its expectations for future growth, but it hasn’t marked down its expectations for future interest rates. And that leads to excessive fiscal pessimism. Indeed. CBO seems to think, for some reason, that this represents the new normal:
but that this does not:
You can make the case that US long-term growth prospects have worsened substantially. But it’s hard to make that case without thinking that we will be at least flirting with secular stagnation, which will mean persistently very low interest rates.

CBO: Don’t Shoot the Messenger and Why They Face “Greenspan Risk” - All of the sudden there’s a spate of pieces casting a jaundiced eye in the direction of those pristine nerds over at the Congressional Budget Office:

  • –Dean Baker riffs off of a Zach Karabell piece enumerating big mistakes the agency has made in the past and how they’ve constrained policy advances.
  • –Floyd Norris makes a reasonable point re an inconsistency in the budget agency’s current projections (i.e., they project slower growth but higher interest rates); Krugman agrees.
  • –I weighed in the other day with a critique of their minimum wage job loss estimate; not that they got it wrong, but that their weighting of the evidence looked off to me and others.

I think the problem is actually less with CBO, whose work represents state-of-the-art economic thinking, while largely maintaining a non-partisan rep in a town where that’s really hard to do, and more with the economic thinking itself.  There’s a risk of shooting the messenger here.  (If you insisted, I’d come up with a different critique: their reports are increasingly impenetrable and difficult to digest; assumptions are increasingly hard to follow–you have to track back through links like a Dan Brown mystery novel; the reports don’t hang together like they used to–at least to my eyes, they increasingly read like a movie script written by a large committee).

Growth and Interest Rates: I Appear To Be Wrong - Paul Krugman -- In my last post I followed Floyd Norris in criticizing the CBO, which has marked down its estimates of future economic growth without marking down its estimates of future interest rates. I still think that’s a fair criticism. But I also offered a hypothesis: that interest rates fall more than one-for-one with slower growth, so that the crucial difference r-g — interest rate minus growth rate — actually falls, making debt easier, not harder, to handle.  So I’ve taken a quick and dirty look at US history, and it doesn’t seem to bear my hypothesis out. Here’s actual r-g — strictly speaking, interest rates minus the rate of growth of GDP over the previous year — since 1952:  Postwar US history broadly breaks into two eras: a fast-growth generation after World War II, and generally slower growth thereafter. If my hypothesis had been right, r-g should have been lower in the second era than the first. Well, it looks as if the opposite was generally true, even if you ignore the spikes around big recessions. I still think that a fall in g leads to a fall in r (as it did in Japan), so that the budgetary implications are weaker than CBO seems to think. But lower growth does appear to make debt harder, not easier, to carry.

FORGET THE 1% -- J.D. Alt - All this talk about the 99% versus the 1%? I say the easiest—and likely the most useful—thing to do is just forget the 1%. Write them off. Let them have their gated communities, their mega-yachts, their island retreats and off-shore bank accounts. What do we need them for?  For one thing, we DON’T need their money. Even if we could get it—which we can’t because they steadfastly refuse to use it for anything other than casino gambling in their private and secretive financial networks. We wonder why we have a “jobless recovery”? Does it have anything to do with the fact that such a large percentage of our “capital” has, for all practical purposes, been removed from the economy? Even when the 1% decides to invest some of their Dollars to manufacture or build something, they rarely decide to manufacture or build anything we really need—only things we really don’t need. Like strip-mines in the Bristol Bay salmon fishery, or pipe-lines across Nebraska’s freshwater aquifers, or rocket-planes for space-tourism. Thanks, but we really don’t need—or want—any of it. We’d much rather have fresh wild salmon (rather than the artificially colored hatchery-stuff) than more copper and gold, fresh water instead of tar-sands oil, and the good-old week-at-the-beach is just fine for a vacation. President Obama adds to our confusion by claiming we need to tax a bunch of the 1%’s Dollars in order to pay for a minimal laundry list of hodge-podge programs to train unemployed people to do jobs that don’t exist—and which the 1%, whether you tax them or not, have no intention of creating—ever. Why doesn’t the President just forget the 1% and start investing Sovereign Dollars (not tax Dollars, mind you) in the lower and middle economic strata he claims to care so much about? The 99% can have its own life—and a very good one to boot—if we’d just ignore the 1% and get on with the job of paying ourselves to build the things we really need.

Dave Camp’s pitch to overhaul U.S. taxes: An impossible dream? -- On Wednesday, U.S. Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, unveiled an ambitious plan to overhaul America’s complicated tax code. This is both a technical and a political feat.  The number of changes is immense — the table of contents listing the provisions runs for 8 pages.  The number of political enemies created is probably equally immense.  Unlike many previous Republican tax-rate-cutting proposals, Camp’s actually specifies how he would finance these changes.  This is vital, but it is not pretty. Here’s why:

  • First, the effective rates that people would face will be higher than they might look.  There is essentially a third bracket, at 35%, for those with high income.  The proposal would phase out a variety of benefits as income rises and impose surtaxes on high-income households.  These provisions raise revenue but they also raise the effective marginal tax rate to higher — and possibly significantly higher — levels compared to the “official” tax rates.  They also complicate tax planning and filing.
  • Second, the state and local income tax deduction would be eliminated.  Mortgage interest deductions would be restricted.
  • Third, Camp adopts President Obama’s proposal to limit the value of itemized deductions. Camp would cap them at 25%, slightly less generous than Obama’s proposed cap of 28%.
  • Fourth, literally, scores of targeted provisions are slated for deletion.  Lobbyists will howl, but this is what tax simplification looks like.
  • Fifth, there are some items that can only be described as budget gimmicks, such as an increased emphasis on Roth IRAs versus conventional saving incentives.  Because Roth IRA contributions are not deductible, a switch from traditional, deductible IRAs to Roths will raise revenue within the 10-year budget window, even though it reduces long-term revenue by even more.  Thus, what looks like a revenue increase is actually a long-term tax cut.  A number of other provisions, like phasing in the corporate tax rate cuts and reducing depreciation allowances have the same effect. They induce long-term budget shortfalls that are not accurately represented in the 10-year figures.

Hidden Taxes in the Camp Proposal - House Ways and Means Committee Chair Dave Camp (R-MI) has produced an impressive tax reform plan that eliminates most loopholes, deductions, and credits. But the plan also introduces a number of hidden taxes that push marginal rates—mostly for higher-income taxpayers—well above the advertised levels.  For some taxpayers, the effective tax rate under Camp’s plan could be as high as 67 percent, based on my analysis of the section-by-section description of the proposal.  On its face, the new tax schedule appears straightforward: three tax rates—10 percent, 25 percent, and 35 percent. The 25 percent rate starts at taxable income of $71,200 for couples ($35,600 for singles) and the 35 percent rate starts at “modified adjusted gross income” (MAGI) of $450,000 ($400,000 for singles). (MAGI is a broader definition of income than the more common AGI.)  But the plan also introduces a whole raft of new phaseouts and hidden tax rates. First, the 35 percent rate is marketed as a 25 percent base rate plus a 10 percent surtax that applies to a broader base of income (MAGI). This turns out to be important. The plan resurrects the 1960s era add-on minimum tax—the granddaddy of today’s uber-complex Alternative Minimum Tax. Effectively, the surtax can be thought of as an additional tax on certain preference items such as the value of employer-sponsored health insurance, interest on municipal bonds, deductible mortgage interest, the standard deduction, itemized deductions (except charitable contributions), and untaxed Social Security benefits. Although the list of preference items differs from the old add-on minimum tax, the idea is eerily similar.  Then there are the phaseouts, which all amount to hidden surtaxes.

The Macro Effects of Camp’s Tax Reform - When House Ways & Means Chairman Dave Camp rolled out his tax reform last week, the Joint Committee on Taxation evaluated its macroeconomic impacts. Using two different models, the nonpartisan JCT found the plan would boost gross domestic product between 0.1 percent and 1.6 percent over the next ten years, which would increase federal revenue by between $50 billion and $700 billion. That’s an important finding, particularly since JCT’s official estimate, ignoring macroeconomic effects, is that the plan would raise roughly the same amount of money as the current tax code (about $40 trillion over the next decade). But the analysis also raises big questions: How would Camp’s plan increase growth, and why is the range of estimates so wide? To start, remember that tax changes can affect both the demand and supply sides of the economy. On the demand side, lower taxes put more money in people’s pockets and thus encourage higher spending in the short run. You might not expect this to be much of a factor for Camp’s proposal, since it is revenue-neutral over the next ten years. But JCT believes that the combination of tax changes—tax cuts for households, tax increases for businesses—will, on net, boost demand. On the supply side, lower tax rates raise the net return to working, saving, investing, and risk-taking and thus encourage people to do more of them. However, lower taxes also mean people can achieve the same standard of living by working or saving less—what economists call an “income effect.” The net effect of tax rate reductions can thus go either way. But Camp’s plan eliminates tax breaks to pay for lower tax rates. Eliminating deductions and credits may improve the allocation of resources throughout the economy. It also works to offset the income effect from the tax rate cuts. On the other hand, a variety of phase-outs and bubbles raise effective marginal rates at some income levels. On net, the combination of all of these factors is estimated to encourage more economic activity.

Factbox: On U.S. tax reform, Obama and Republican rival on same page (Reuters) - U.S. President Barack Obama's call on Tuesday for an end to billions of dollars in tax breaks echoes a 979-page draft reform plan last week from Dave Camp, the top Republican tax writer in the House of Representatives. Given the gridlock in Washington, neither the Democrat Obama, who included the tax reforms in his fiscal 2015 budget, nor Camp, the Ways and Means Committee chairman, has much chance of success. The proposals differ significantly. Camp would eliminate scores of tax breaks while lowering tax rates for individuals and businesses. Obama proposes repealing fewer tax breaks and using the tax savings in part to pay for more aid to low-income workers. Obama's budget calls for increasing tax breaks for clean energy, benefits that Camp's plan would eliminate. But the overlap may one day form the basis for the first tax revamp since 1986. Here is a list of tax changes in the president's budget that Camp also highlighted for reform.

Camp Tax Reform Would Create New Challenges for States - House Ways and Means Chair Dave Camp’s recent tax reform plan would raise the cost of doing business for many state and local governments. Camp would repeal the deductibility of state and local taxes, including both property taxes and income taxes. He’d abolish tax-exempt private activity bonds. And he’d impose a 10 percent surtax on municipal bond interest for high-income households, a step likely to raise the cost of issuing state and local debt. But Camp’s plan also includes some less obvious changes that could increase state income tax revenues, especially for states that piggyback on the federal income tax. By limiting deductions—and thus boosting taxable income—Camp’s plan could also increase state income tax revenue, just as the Tax Reform Act of 1986 did. Here is a brief summary of the state and local provisions in Camp’s plan:

Tax Reform’s Hard-to-Find Payoff - “Tax reform” is like moms and apple pie – everyone is for it. That is because it means all things to all people – simplicity, fairness, faster growth, lower unemployment and tax cuts for almost everyone. Legislators love tax reform, too, because it provides so many opportunities for private meetings with tax lobbyists to discuss their concerns, at which campaign checks are usually exchanged. The lobbyists don’t mind because they get to write memos to their corporate bosses bragging about their “inside” access to congressional tax writers. In other words, it’s something of a game whose only purpose is to keep playing. There is seldom any pressing need to undertake a major reform, as opposed to a targeted tax bill to deal with some squeaky wheel. Such a squeaky wheel is a long list of so-called “extenders” – popular tax incentives that expired at the end of 2013 that almost everyone thinks will be enacted retroactively once the tax lobbyists have been sufficiently soaked of campaign cash for the year. The main problem with this game is that a few citizens out there don’t know it’s a game. They really believe tax reform is important and necessary and will materially improve their lives. The reality that previous reforms in 1969, 1976 and 1986 had virtually no discernible effect on the economy, living standards, fairness or simplicity has faded from memory, even among tax experts.

Tax Havens Make US and Europe Look Poorer than They Are, Exaggerate Size of “Global Imbalances” -  Yves Smith - One of the most important books published in 2011 was Nicholas Shaxson’s Treasure Islands. Shaxson, a veteran Financial Times reporter, gave some dimension and color to the inherently difficult-to-cover tax haven business, or what he called “offshore”. While it’s most famously associated with secret Swiss bank accounts and shady Caymans Islands corporations, the US and the City of London are at the apex of the offshore business, with Delaware corporations and Wyoming limited liability companies playing a significant role in the tax avoidance/secrecy game. It was understandably hard for Shaxson to put hard overall numbers on the extent of tax haven activity and its macroeconomic implications. Peculiarly, despite the importance of this topic, a pathbreaking paper published in 2013 The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors?  has received perilous little attention. Perhaps that’s because, among other things, it undercuts the Bernanke-flattering claim that “global imbalances” were a major driver of the financial crisis. The article works back from a long-established, well-known anomaly: international fund flow statistics don’t even remotely add up. Global statistics say, impossibly, that there are a lot more liabilities than assets, and in parallel, that more investment income is paid out than is credited. Zucman looks into the notion that tax haven holdings by wealthy households explain this behavior. From his abstract: I find that around 8% of the global financial wealth of households is held in tax havens, three-quarters of which goes unrecorded. On the basis of plausible assumptions, accounting for unrecorded assets turns the eurozone, officially the world’s second largest net debtor, into a net creditor. It also reduces the U.S. net debt significantly. The results shed new light on global imbalances and challenge the widespread view that, after a decade of poor-to-rich capital flows, external assets are now in poor countries and debts in rich countries.  Now think about that. With all the shift of wealth to the top 1% (now at around 40% in the US), 6% hidden away from the tax man is large in an absolute sense, and a significant percentage in the population wealthy enough to avail itself of these boltholes.

Where Have All the Lobbyists Gone? - On paper, the lobbying industry is quickly disappearing. In January, records indicated that for a third straight year, overall spending on lobbying decreased. Lobbyists themselves continue to deregister. In 2013, the number of registered lobbyists dipped to 12,281, the lowest number on file since 2002. But experts say that lobbying isn’t dying; instead, it’s simply going underground. The problem, says American University professor James Thurber, who has studied congressional lobbying for more than thirty years, is that “most of what is going on in Washington is not covered” by the lobbyist-registration system. Thurber, who is currently advising the American Bar Association’s lobbying-reform task force, adds that his research suggests the true number of working lobbyists is closer to 100,000. A loophole-ridden law, poor enforcement, the development of increasingly sophisticated strategies that enlist third-party validators and create faux-grassroots campaigns, along with an Obama administration executive order that gave many in the profession a disincentive to register—all of these forces have combined to produce a near-total collapse of the system that was designed to keep tabs on federal lobbying. While the official figure puts the annual spending on lobbying at $3.2 billion in 2013, Thurber estimates that the industry brings in more than $9 billion a year. Other experts have made similar estimates, but no one is sure how large the industry has become. Lee Drutman, a lobbying expert at the Sunlight Foundation, says that at least twice as much is spent on lobbying as is officially reported.

Private Equity Industry Floats Trial Balloon For “Get Our of Decades of Flagrant SEC Abuses for Free” Card -  Yves Smith -  In late February, Bloomberg stated that the SEC is “considering” forgiving decades of private equity firms acting as unregistered broker-dealers and possibly legalizing the practice going forward. In case you think this is not a big deal, as we explain later in the post, the SEC is in fact vigilant about enforcing these regulations, so this would be an unprecedented waiver of liability. And remember, private equity firms engage top securities law firms, yet as we’ve discussed in past posts, they’ve been remarkably open, one might even say brazen, about their misconduct. In other words, these violations aren’t in a grey area. The firms and their legal advisors knew exactly what they were up to, but apparently figured they’d see how long they could get away with it, and indeed, it has proven to be for quite a long time.  But notice the formulation of the Bloomberg story:The U.S. Securities and Exchange Commission is considering granting private-equity firms a reprieve after they collected billions of dollars in deal fees without being registered to do so, according to a person with knowledge of the matter. This article is based on a single source. And it’s very easy to guess who that single source is: one of the people pushing the SEC to treat decades of running roughshod over well-established, well-known securities laws as not even worthy of notice, much the less action. A group of excessively wealthy individuals is pressing for a “get out of our costly arrogance for free” card, when they of all parties can well afford to pay.  This is a classic Washington D.C. trial balloon, where a controversial or indefensible course of action is floated out to the press by an anonymous “knowledgeable insider.” The public relations plant’s purpose is to test whether opponents can muster the strength to make a big fuss, in which case the SEC bureaucrats can climb down from their position in favor of PE without ever having stuck their necks out.

Picking Up the Pace at the S.E.C. - Simon Johnson - In an important speech on Feb. 21, Kara Stein, a commissioner at the Securities and Exchange Commission since August 2013, laid out a powerful vision for how regulation should operate in the United States. She put much more focus on reducing unacceptable systemic risks and on cooperation between the S.E.C. and other relevant agencies. At the moment, some of her colleagues at the S.E.C. seem to lack sufficient drive in terms of deciding on crucial regulatory issues and pushing forward on them. Let’s hope the S.E.C. chairwoman, Mary Jo White, will agree with Ms. Stein that the pace of carrying out reforms needs to accelerate — and that important potential loopholes in the regulatory system need to be closed. As Ms. Stein emphasizes, the S.E.C. has become more forceful on enforcement in the last couple of years, and the organization should get appropriate credit for this change. The lack of sufficient enforcement before 2007 and immediately after the crisis of 2007-8 remains a stain on the reputation of the S.E.C. and, frankly, created a credibility gap that needs now to be overcome. (To be clear, I am not happy with enforcement in the financial arena more broadly, but I would put more emphasis on failings at the Department of Justice.) The S.E.C. is also an important writer of rules. And it is on this dimension that Ms. Stein stresses that there is unfortunately insufficient progress to report.  The Dodd-Frank Act requires that the S.E.C. work, through writing or amending, on more than 100 rules. A significant amount of this work remains to be done,

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.

Fed's Fisher raises concern over stock values -- Richard Fisher, president of the Federal Reserve Bank of Dallas, on Wednesday said he was concerned about "eye-popping levels" of some stock market metrics, and said the central bank has to monitor the signs carefully to make sure another bubble isn't forming. In his speech in Mexico City, Fisher said some indicators like the price-to-projected forward earnings, price-to-sales ratios and market capitalization as a percentage of GDP, are at levels not seen since the dot-com boom of the late 1990s. He noted that margin debt is pushing up against all-time records. "We must monitor these indicators very carefully so as to ensure that the ghost of 'irrational exuberance' does not haunt us again," Fisher said. While a few Fed officials have mentioned unease about stock prices, Fisher's comments are the most pointed to date. Fisher did not spare the bond market, saying that narrow spreads between corporate and Treasury debt "reflect lower risk premia on top of already abnormally low nominal yields." Fisher is a voting member of the Fed's monetary policy committee this year. He has been a strong opponent of the Fed's latest round of asset purchases.

A Standoff of Lawyers Veils Madoff’s Ties to JPMorgan Chase  - It remains one of Wall Street’s most puzzling mysteries: What exactly did JPMorgan Chase bankers know about Bernard L. Madoff’s Ponzi scheme? A newly obtained government document explains why — five years after Mr. Madoff’s arrest spotlighted his ties to JPMorgan and later led the bank to reach a $2 billion settlement with federal authorities — the picture is still so clouded. The document, obtained through a Freedom of Information Act request, reveals a behind-the-scenes dispute that tested the limits of JPMorgan’s legal rights and raised alarming yet unsubstantiated accusations of perjury at the bank. More broadly, the document highlights the legal hurdles federal authorities can face when investigating a Wall Street giant. Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers’ interview notes, the government document and other records show, hoping they would open a window into the bank’s actions. The issue gained urgency in 2012, according to the records, when the comptroller’s office conducted its own interviews with JPMorgan employees and discovered a “pattern of forgetfulness.” Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan’s lawyers. But JPMorgan, which produced other materials and made witnesses available to the comptroller’s office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege, a sacrosanct legal protection that essentially prevents an outsider from gaining access to private communications between a lawyer and a client.

JP Morgan/Madoff Case Puts Spotlight on Use of Lawyers as Investigation-Blockers - Yves Smith - Whenever a scandal of sufficient magnitude arises at a bank, it’s standard practice to hire an “independent” third party to conduct an investigation and give a report to senior management and the board. For instance, former Comptroller of the Currency Gene Ludwig, now head of Promontory Group, became the go-to person for this sort of report for rogue traders. It’s a great business because you get face time with the top people at the organization and get to charge handsome fees too.  I must confess I’d never focused on the notion that banks would hire outside law firms as a way to put a shield around the questionable activity, to impede regulators from getting to the bottom of criminal or merely potentially costly (in terms of litigation risk) conduct.* In the US, even though it is being nibbled at around the margins, attorney-client privilege, particularly as relates to business matters, is one of the areas that is still pretty much exempt from disclosure.  An important piece in the New York Times by Ben Protess and Jessica Silver-Greenberg, based on a Freedom of Information Act filing, shows that the Treasury Inspector General believed that JP Morgan had used attorneys to “investigate” its conduct in dealing with Bernie Madoff with the intent of impeding regulatory scrutiny and allowing staff to get away with perjury (in this case, the typical “I remember nothing” defense).  The reason this is such a striking charge is that, it comes from two of the most bank friendly parties, the Office of the Comptroller of the Currency and the Treasury Inspector General, to which the OCC escalated its belief that JP Morgan was using counsel to hide misconduct. If you recall. the Treasury Inspector General is considered to be one of the most spineless of all IGs. For something not to pass the smell test with the Treasury IG suggests it was pretty rancid. But they were not in a position to take it further, and the DoJ, which would be the agency that would have to go to the mat with JP Morgan. Cronyism? Reluctance to go mano a mano with a bank that would clearly throw lots of heavyweight law firm firepower at fighting back? Or simply bureaucratic “not invented here”?

Citi Paid $400 Million in Fake Invoices - As far as I can understand it from Citigroup's press release, which is not very far, here's how Oceanografia S.A. de C.V. took Citi's Mexican subsidiary, Banamex, for $400 million:

  • Oceanografia is an oil services company that, until recently, performed oil services for Pemex, the Mexican state oil company.
  • Oceanografia would perform some services and send Pemex a bill.
  • Pemex would be like, "thanks, we'll get right on this," and then put the bill in its files somewhere.
  • Meanwhile, Oceanografia would send another copy of the bill to Banamex.
  • Banamex would pay Oceanografia the amount of the bill (less some discount obviously), and then wait to be paid back whenever Pemex got around to paying it.
  • Oceanografia eventually realized that there was a more efficient system.
  • In the more efficient system, Oceanografia wouldn't perform oil services, or send Pemex a bill.
  • They'd just make up a bill, write some numbers on it, and send it to Banamex.
  • Banamex would pay it and wait, in vain, to be paid back by Pemex.

This went on for years? That to me is the oddest part. Oceanografia is -- somewhat obviously -- not a public company, but a random assortment of pseudo-comps suggest that typical accounts receivable turnover in the oil-services industry averages around three months

Yes, Virginia, Banking Contributes a Lot Less Value Than You are Lead to Believe - Yves Smith - One thing we’ve discussed repeatedly is that the activities of large banks, as presently constituted, are purely extractive. The reason is that they impose large costs on society as a whole in the form of periodic crises. Andrew Haldane of the Bank of England, using a simple back-of-the-envelope analysis, concluded that there was no way for banks to even remotely pay for all the damage they produce in terms of lost output. A mere 1/20th of a reasonable levy exceeded the entire market capitalization of all the major international banks. That sort of disparity between their worth as enterprises versus the losses they create means any intervention is justified to reduce the damage, including our preferred solution, regulating them as utilities. Nevertheless, the banks have been quite successful in perpetuating the myth that they are particularly, indeed, uniquely valuable. So it’s important to look at that claim: pray tell what to they contribute?  One oft-cited measure is their contribution to GDP. It’s worth remembering that that’s a statistical construction as opposed to directly measured. And should anyone be surprised that the official approach makes banking look bigger, and hence more valuable, than it really is? As Nick Dunbar explains: Consider the UK’s GDP figures for the fourth quarter of 2008, when the UK financial sector showed record growth, outstripping the contribution of manufacturing to the economy. This as at the same time as the sector required massive government bailouts, putting the UK economy into a tailspin. As Coyle points out, this absurdity means that something must be wrong.   The problem comes from the way financial services output is measured. While fee-based services (such as debt underwriting) are straightforward, most banking services are not explicitly charged to customers. As Coyle relates, the economists’ solution to this conundrum was an ugly acronym called FISIM, or ‘financial services intermediation indirectly measured’. This is calculated as the difference between the interest rate banks earn on loans or pay on deposits and a benchmark risk-free rate, multiplied by the outstanding loan balance. FISIM is recognised as the international standard for measuring bank contributions to GDP (See note 1).

A public option for banking -- There has been great interest in the idea of postal banking ever since the inspector general of the U.S. Postal Service released a white paper in January that went viral after Elizabeth Warren endorsed the idea. According to the proposal, the USPS would offer financial services, including a debit card much like Direct Express, to cater to the nearly 68 million Americans with limited or no access to a formal banking account. This idea is not new. In fact, the USPS used to run postal banks throughout much of the 20th century, and they are still popular internationally. Although these facts are widely reported, what often goes missing is that a version of the postal banking strategy is in play right now — Direct Express, run by the Treasury Department in partnership with Comerica bank. It currently benefits Geary and more than 5 million other people, and it’s an overwhelming success. To expand the program, either through the USPS or without it, is both sensible and crucial to providing economic security for all Americans.

Unofficial Problem Bank list declines to 566 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for February 28, 2014.  Busy week as the FDIC closed a couple of banks, provided an update on its enforcement action activities, and released industry results and the Official Problem Bank List for the fourth quarter of 2013. In all, there were 12 removals that dropped the unofficial list to 566 institutions with assets of $182.1 billion. Assets declined by $10.9 billion from last week with $4.5 billion coming from the update to assets through year-end 2013. A year ago, the list held 808 institutions with assets of $298.1 billion. The FDIC told us this week there are 467 institutions with assets of $153 billion on the Official Problem Bank List. The unofficial list has 99 more institutions and $29.1 billion more in assets. The difference is down from 130 institutions and $47.2 billion in assets last quarter. The differences have narrowed from 157 institutions and $65 billion in assets a year ago. In contrast, the official list had higher totals four years ago with 58 and $76.9 billion more in institutions and assets, respectively.

Fannie Mae, Freddie Mac: Mortgage Serious Delinquency rate declined in January - Fannie Mae reported Friday that the Single-Family Serious Delinquency rate declined in January to 2.33% from 2.38% in December. The serious delinquency rate is down from 3.18% in January 2013, and this is the lowest level since November 2008.  The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined in January to 2.34% from 2.39% in December. Freddie's rate is down from 3.20% in January 2012, and is at the lowest level since February 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".The Fannie Mae serious delinquency rate has fallen 0.85 percentage points over the last year, and at that pace the serious delinquency rate will be under 1% in about eighteen months. Note: The "normal" serious delinquency rate is under 1%. Maybe serious delinquencies will be back to normal in late 2015 or 2016

Fannie, Freddie, FHA REO inventory increased in Q4 - In their Q4 SEC filing, Fannie reported their Real Estate Owned (REO) increased to 103,229 single family properties, up from 100,941 at the end of Q3. Freddie reported their REO increased to 47,308 in Q4, up from 44,623 at the end of Q3.The FHA reported their REO increased to 37,977 in Q4, up from 37,445 in Q3. The combined Real Estate Owned (REO) for Fannie, Freddie and the FHA increased to 188,514, up from 185,505 at the end of Q3 2013. The peak for the combined REO of the F's was 295,307 in Q4 2010.This following graph shows the REO inventory for Fannie, Freddie and the FHA. This is only a portion of the total REO. There is also REO for private-label MBS, FDIC-insured institutions (declined in Q4), VA and more. REO has been declining for those categories. Although REO is down slightly from Q4 2012, REO has increased for two consecutive quarters - and is still at a high level. Note: The FHA reported that REO increased to 39,023 in January, so REO might increase further in Q1 2014.

Fannie, Freddie and FHA REO Inventory -- Note: The FHA has stopped releasing REO inventory on a monthly basis. I was able to obtain data for February as shown on the graph below. I'm still trying to get Quarter ending data from the FHA.  In their Q4 SEC filing, Fannie reported their Real Estate Owned (REO) increased to 103,229 single family properties, up from 100,941 at the end of Q3. Freddie reported their REO increased to 47,308 in Q4, up from 44,623 at the end of Q3. The FHA reported their REO decreased to 25,306 in February 2014, down from 32,226 in October 2013. The combined Real Estate Owned (REO) for Fannie, Freddie and the FHA decreased to 175,843, down from 180,286 at the end of Q3 2013 (note: FHA data is not for Quarter end). The peak for the combined REO of the F's was 295,307 in Q4 2010. This following graph shows the REO inventory for Fannie, Freddie and the FHA.

The foreclosure nightmare isn't over yet -- From Wall Street to Washington, the revival of the U.S. housing market has produced a huge sigh of relief as home prices and construction have rebounded. But for homeowners like the Moodys, the great foreclosure crisis has never ended. The Moodys missed a single mortgage payment in February 2009 after Paul injured his back, lost his job, and drew down his bank account faster than expected. Five years later, after wrangling with three different mortgage servicers, two foreclosure attempts, and more than a dozen different applications for loan modifications, the Moodys still haven’t come to a resolution. “You keep getting notices. Then we fight. Then we stay another 45 days,” says Kim Moody, 38, a letter carrier for the Postal Service. “It’s been like that for five years.” Kim is now in the process of relocating to Franklin, Tennessee, where she accepted a transfer for a better job with a regular route and hours. But her husband can’t move with the rest of the family until the mortgage mess is resolved for the cream-colored ranch house they bought for nearly $300,000 in 2004. “My hands are tied,” Paul says, sitting in the unfinished family room as his four-year-old daughter climbed onto his lap. “They wear you down, you just give up and surrender. Then they have the house. And then they flip the house.”

Wall Street Has Found Its Latest Dangerous Financial Product, Activists Warn: Housing and consumer activists warn that Wall Street is about to crash the housing market -- again. The activists said they are particularly concerned about the growing number of companies looking to issue bonds backed by rental properties -- bonds that a coalition of groups described as "eerily like" those mortgage-backed securities that helped fuel the last housing bubble. "We are poised to experience another crisis if federal regulators fail to recognize and take corrective action to address red flags that are all too familiar," more than 75 housing and consumer groups wrote in a letter Tuesday to federal bank and housing regulators.This time, gun-shy bankers are hard-pressed to give anyone but the most stellar borrowers a mortgage, said the groups, which include California Reinvestment Coalition and the National Consumer Law Center. Yet, home prices are rising again. That's because Wall Street investors with deep pockets and the ability to pay cash for homes are muscling out ordinary buyers in places hard-hit by the housing crisis, like Phoenix and Atlanta. Once these wealthy investors have bought the homes, they flip them into rentals -- often covering up large issues like plumbing and mold with cosmetic fixes. The letter demands "immediate federal intervention" to rebalance the housing market in favor of qualified borrowers who currently can't get affordable mortgage loans, and away from Wall Street and other cash investors who in some markets are buying nearly half of all available houses.

Mortgage Monitor: Mortgage Loan originations declined to the lowest point since Nov. 2008 -- Black Knight Financial Services (BKFS, formerly the LPS Data & Analytics division) released their Mortgage Monitor report for January today. According to LPS, 6.27% of mortgages were delinquent in January, down from 6.47% in December. BKFS reports that 2.35% of mortgages were in the foreclosure process, down from 3.41% in January 2013. This gives a total of 8.62% delinquent or in foreclosure. It breaks down as:
• 1,851,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,289,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,175,000 loans in foreclosure process.
For a total of ​​4,315,000 loans delinquent or in foreclosure in January. This is down from 5,208,000 in January 2013.This graph from BKFS shows percent of loans delinquent and in the foreclosure process over time. Delinquencies and foreclosures are moving down - and might be back to normal levels in a couple of years. The second graph from BKFS shows mortgage origination. From BKFS:  “In January, we saw origination volume continue to decline to its lowest point since 2008, with prepayment speeds pointing to further drops in refinance-related originations,” said Herb Blecher, senior vice president of Black Knight Financial Services’ Data & Analytics division. “Overall originations were down almost 60 percent year-over-year, with HARP volumes (according to the most recent FHFA report) down 70 percent over the same period. These declines are largely tied to the increased mortgage interest rate environment, which is having a significant impact on the number of borrowers with incentive to refinance. A high-level view of this refinancible population shows a decline of about 13 percent just over the last two months.

Mortgage Loan Originations Lowest Since November 2008, Down 60% Year-Over-Year, Cash Sales Strong -- Here are some bullet points from the latest Black Knight Financial Services (formerly LPS Mortgage Monitor) release on 3/4/2014.

  • Loan originations declined to the lowest point since Nov. 2008 (down 60% Y/Y)
  • Property sales remained relatively strong (total year 2013 was up 8.4% from 2012), supported by increased cash purchases (which accounted for more than 40% of Q4 sales)
  • HARP origination volume has declined significantly (down 70% Y/Y), with fewer existing loans now eligible for the program: approx. 709K vs. 2.3M in Jan. 2013
  • Home equity lending in 2013 was up 26% vs. 2012, but it's still down over 90% from 2006
  • HELOC performance in recent vintages is pristine (delinquency rates on HELOCs originated over the past 4 years have averaged just 0.1%), but new problem loan rates continue to rise for older lines that have begun to amortize (up 27% Y/Y)
“In January, we saw origination volume continue to decline to its lowest point since 2008, with prepayment speeds pointing to further drops in refinance-related originations,” "Overall originations were down almost 60 percent year-over-year, with HARP volumes (according to the most recent FHFA report) down 70 percent over the same period.  These declines are largely tied to the increased mortgage interest rate environment, which is having a significant impact on the number of borrowers with incentive to refinance. A high-level view of this refinancible population shows a decline of about 13 percent just over the last two months. 

Originations, refinanceable population both go nose down - Black Knight Financial Services' “Mortgage Monitor Report” observed a general decline in originations and in the overall “refinancible” population of both traditional and HARP-eligible borrowers, looking at data through the end of January 2014. The report also found a similar decline in associated loan origination volumes, which declined in both categories as well. “In January, we saw origination volume continue to decline to its lowest point since 2008, with prepayment speeds pointing to further drops in refinance-related originations,” said Herb Blecher, senior vice president of Black Knight Financial Services’ Data & Analytics division. “Overall originations were down almost 60% year-over-year, with HARP volumes down 70% over the same period.” That 60% decline in loan originations brought them to the lowest point since Nov. 2008. Still, property sales remained relatively strong – for the whole of 2013 sales were up 8.4% from 2012, but that was largely driven by cash purchases, which accounted for more than 40% of fourth-quarter sales alone. Most substantially, HARP origination volume declined 70% from the same time last year, with fewer existing loans now eligible for the program – about 709,000 now versus 2.3 million in January 2013. Separately, people are taking money out of their homes. The most recent data also marked 2013 as the first year in which home equity lending had increased since 2006.

CoreLogic: 4 Million Residential Properties Returned to Positive Equity in 2013 -CoreLogic ... today released new analysis showing 4 million homes returned to positive equity in 2013, bringing the total number of mortgaged residential properties with equity to 42.7 million. The CoreLogic analysis indicates that nearly 6.5 million homes, or 13.3 percent of all residential properties with a mortgage, were still in negative equity at the end of 2013. Due to a small slowdown in the quarterly growth rate of the Home Price Index, the negative equity share was virtually unchanged from the end of the third quarter of 2013. .. Of the 42.7 million residential properties with positive equity, 10 million have less than 20-percent equity. Borrowers with less than 20-percent equity, referred to as “under-equitied,” may have a more difficult time obtaining new financing for their homes due to underwriting constraints. Under-equitied mortgages accounted for 21.1 percent of all residential properties with a mortgage nationwide in 2013, with more than 1.6 million residential properties at less than 5-percent equity, referred to as near-negative equity. Properties that are near-negative equity are considered at risk if home prices fall. ... Over the past four years, more than 5.5 million homeowners have regained equity, reducing their risk of foreclosure and unlocking pent-up supply in the housing market.This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:  "Nevada had the highest percentage of mortgaged properties in negative equity at 30.4 percent, followed by Florida (28.1 percent), Arizona (21.5 percent), Ohio (19.0 percent) and Illinois (18.7 percent). These top five states combined account for 36.9 percent of negative equity in the United States." Note: The share of negative equity is still very high in Nevada and Florida, but down significantly from a year ago (Q4 2012) when the negative equity share in Nevada was at 52.4 percent, and at 40.2 percent in Florida.

Ocwen plans $2 billion in mortgage principal reduction - Ocwen Financial Corporation committed to continue its principal forgiveness modification programs to delinquent and underwater borrowers, totaling at least $2 billion over three years, the servicer said in an annual regulatory filing. The servicer entered a consent judgment agreement with the U.S. District Court for the District of Columbia on Feb. 26, approving the program and several other elements. The agreement was previously announced late last year. The modification program includes underwater borrowers at imminent risk of default and is designed to be sustainable for homeowners while providing a net present value for mortgage loan investors that is superior to that of foreclosure. Ocwen will not incur any fees other than operating expense, and principal forgiveness will be determined on a case-by-case basis. The agreement also revealed another noteworthy factor: Ocwen established a reserve of $66.9 million with respect to its portion of the payment into the consumer relief fund.

  TARP Funds Demolish Homes in Detroit to Lift Prices: Mortgages -  In Flint, once a thriving auto-industry hub, excavators with long metal arms and shovels have begun tearing down 1,500 dilapidated homes in an attempt to lift the housing market. The demolitions in this Michigan city of about 100,000 people are part of the stepped up efforts by officials in several Midwestern states to rid their blighted neighborhoods of decayed housing that’s depressing prices. The funding for the excavator work comes from a surprising source -- the Hardest Hit Fund of the Troubled Asset Relief Program, or TARP, created in 2008 to stabilize to the financial system. The $7.6 billion Hardest Hit Fund was intended to help troubled property owners avoid foreclosure and keep their homes. As foreclosures fall in most parts of the country, the fund is using the unspent $3.2 billion to remedy the crisis of abandoned homes. In Detroit alone, 70,000 dwellings, or about 19 percent of the total, may need to be torn down, according to the city.While demolition wasn’t explicitly part of the initial program, policymakers are right to use the money to remove decaying properties, “When a lot of these mortgage-relief programs were set up, demolition was not an acceptable use,” said Bostic, a former assistant secretary at the U.S. Department of Housing and Urban Development. “There are a number of places -- Detroit, Flint, for example -- where there are just far more houses than people to live in them.” 

MBA: Mortgage Applications Increase in Latest Weekly Survey - From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey Mortgage applications increased 9.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 28, 2014. ...The Refinance Index increased 10 percent from the previous week. The seasonally adjusted Purchase Index increased 9 percent from one week earlier. ... The seasonally adjusted Purchase Index was 6 percent higher than its level two weeks earlier, but was still 19 percent lower than the same week one year ago. Despite the increase observed this week, the Refinance Index is still 3 percent lower than it was two weeks ago. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.47 percent from 4.53 percent, with points decreasing to 0.28 from 0.31 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. he average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) decreased to 4.37 percent from 4.47 percent, with points increasing to 0.20 from 0.13 (including the origination fee) for 80 percent LTV loans.The first graph shows the refinance index. The refinance index is down 69% from the levels in May 2013. 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 17% from a year ago. The purchase index is probably understating purchase activity because small lenders tend to focus on purchases, and those small lenders are underrepresented in the purchase index - but this is still very weak.

Weekly Update: Housing Tracker Existing Home Inventory up 5.9% year-over-year on March 3rd -- Here is another weekly update on housing inventory ... There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then usually peaking in mid-to-late summer. The Realtor (NAR) data is monthly and released with a lag (the most recent data was for January).  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 5.9% above the same week in 2013 (red is 2014, blue is 2013). Inventory is still very low, but this increase in inventory should slow house price increases. 

Americans Shut Out of Home Market Threaten Recovery: Mortgages - First-time homebuyers hurt by rising prices and tougher credit standards are disappearing from the market, slowing the pace of the three-year recovery. The decline of these buyers, many of whom are young and non-white, also threatens to widen the wealth gap between owners, who benefit from appreciation, and renters, said Thomas Lawler, a former Fannie Mae economist.  “Potential first-time buyers weren’t able to take advantage of the high point in affordability and the low point in prices,” said Lawler. “So the wealth effect of the recovery hasn’t gone to what could have been new buyers.”   First-time homebuyers hurt by rising prices and tougher credit standards are disappearing from the market, slowing the pace of the three-year recovery.  First timers accounted for 26 percent of purchases in January, down from 30 percent a year earlier, according to the National Association of Realtors. This January’s figure is the lowest market share NAR has recorded since it began monthly measurements in October 2008.  The decline of these buyers has hurt U.S. sales, which fell 5.1 percent in January from a year earlier, according to NAR. While purchases rose 8.2 percent for residences costing more than $250,000, they fell 10.7 percent for homes worth less.

CoreLogic: House Prices up 12% Year-over-year in January - This CoreLogic House Price Index report is for January.  The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: Home Prices Nationwide Increased 12 Percent Year Over Year In January Home prices, including distressed sales, increased by 12.0 percent in January 2014 compared to December 2013. January marks the 23nd consecutive month of year-over-year home price gains. Excluding distressed sales, home prices increased by 9.8 percent year over year. ... Despite gains in December, home prices nationwide remain 17.3 percent below their peak, which was set in April 2006. “Polar vortices and a string of snow storms did not manage to weaken house price appreciation in January. The last time January month-over-month and year-over-year price appreciation was this strong was at the height of the housing bubble in 2006.”  This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 0.9% in January, and is up 12.0% over the last year. This index is not seasonally adjusted, so this was a strong month-to-month gain during the "weak" season. The index is off 17.3% from the peak - and is up 22.9% from the post-bubble low set in February 2012. The second graph is from CoreLogic. The year-over-year comparison has been positive for twenty three consecutive months suggesting house prices bottomed early in 2012 on a national basis (the bump in 2010 was related to the tax credit).

Trulia: Asking House Prices up 10.4% year-over-year in February, Price increases "Slowdown" - From Trulia chief economist Jed Kolko: What The Home-Price Slowdown Really Looks Like Nationally, asking home prices rose 10.4% year-over-year in February 2014, down slightly after peaking in November 2013. But the year-over-year change is an average of the past twelve months and therefore obscures the most recent trends in prices. Looking at quarter-over-quarter changes instead, it’s clear that price gains have been slowing for most of the last year: asking home prices rose just 1.9% in February – a rate similar to those recorded in January and December – compared with increases near 2.5% from July 2013 to November 2013 and over 3% from April 2013 to June 2013. The quarter-over-quarter change in asking prices topped out at 3.5% in April 2013 and now, at 1.9%, the increase is just over half of that peak. The 10 U.S. metros with the biggest year-over-year price increases in February 2014 all experienced a severe housing bust after the bubble popped. Why? After prices fell in these markets, homes looked like bargains to investors and other buyers. At the same time, price drops also spurred foreclosures, which forced many families to become renters. Price drops and stronger rental demand together create the ideal conditions for investors to buy and rent out single-family homes, which helped boost home prices.  In February, rents rose 3.4% year-over-year nationally. In 20 the 25 largest rental markets, February’s increase was larger than the year-over-year rent increase from three months earlier, in November. It appears the year-over-year asking price gains are slowing, but asking prices are still increasing. In November 2013, year-over-year asking prices were up 12.2%. In December, the year-over-year increase in asking home prices slowed slightly to 11.9%. In January, the year-over-year increase was 11.4%, and now, in February, the increase was 10.4%.

Why Housing Markets Are Heading South ... Again: In previous articles over the past two years, I have emphasized that a rising percentage of home buying has come from all-cash investors. I argued that this was not a sign of a housing recovery. Rather, it showed that the traditional housing market led by trade-up buyers purchasing with a mortgage was still on life support. Evidence is now widespread that rising prices in last year's hottest markets have caused investors to cut back their buying. In addition, the sharp rise in mortgage rates since FRB Chairman Bernanke's QE tapering remarks last May has had a huge impact on traditional home buyers. Since 1990, the Mortgage Bankers Association (MBA) has published an index of mortgage applications. It shows the direction of mortgage application activity, both for home purchases and refinancing. On February 26, the MBA announced that its index of purchase mortgage applications plunged to the lowest level since 1995. The report garnered little media attention, but it is extremely important. Let's take a good look at this index which I wrote about last year. The index figures are through the end of 2013 and were posted by the blog Calculated Risk. You can see that since it peaked during the bubble madness of 2005, the index has been on a steady decline. The only temporary uptick was in 2007 before the sub-prime collapse had really set in. Now we just learned from the MBA that it has collapsed to levels not seen since 1995, nearly 20 years ago. What does this alarming news tell us about housing markets? Plenty. Mortgage applications for purchasing a home are roughly 1/5 of what they were during the speculative madness peak nine years ago. The steady rise in the index from 1990 to 2005 was when housing markets were strong. Taking out a mortgage was the standard way in which the overwhelming majority of Americans bought a home.

For more people, the American Dream doesn’t include a home of their own - Homeownership, once a cornerstone of the American Dream, has taken a big hit in public esteem, according to a poll conducted by The Washington Post and the Miller Center at the University of Virginia. In the past three decades, the number saying owning a home is “very much” how they define the dream has fallen to 61 percent, down from 78 percent in a 1986 Wall Street Journal poll. That year, owning a home was as emblematic of the American Dream as being free to live any way one chooses. The change in making homeownership a priority has opened up fissures that did not previously exist. In the new poll, there are apparent differences between men and women, young and old, and renters and homeowners, with the former in each example less concerned about ownership than the latter. Just 54 percent of African Americans, who suffered disproportionately heavy losses during the foreclosure crisis, now say homeownership is very much a part of the American Dream, among the lowest of any demographic group, according to the Post-Miller poll. But of all of these groups, renters — some of whom, like Brown, endured foreclosures — have become the most ambivalent. In 1986, three out of four said it was a big part of the American Dream. But the number plummeted in 2013 to 52 percent of renters, who are now 15 percentage points less apt than owners to put homeownership on a pedestal. By last year, the accumulation of foreclosures and short sales had pushed the homeownership rate down to 65.2 percent from its all-time high of 69.2 percent in 2005. Some experts are forecasting that this year it will drop to 64 percent, a 20-year low.

First Time Home Buyer, What's That? -- For a recent article, Bloomberg Personal Finance asked me to comment on the scarcity of first-time home buyers in the housing market. To elaborate on my Bloomberg comments, I would add that the lack of first time home buyers is not a new phenomenon. This group of mortgage buyers has been underrepresented in the market for years, and you don't have to read tea leaves to figure out why:

  • Median income growth has been very weak
  • Majority of the jobs recovered in this cycle have been low wage paying jobs going to people 50 and over
  • Lack of liquid assets for a down payment and closing cost even for a 3.5% down payment loan is an issue
  • Parabolic rise in student loan debt since 2007
  • Living at home is financially more beneficial in this economy for some
  • Renting as an option has an appeal for those who aren't settled economically or not married with kids
  • Base salaries for college grads in some sectors isn't high enough to obtain mortgage debt
  • The bottom line is that unless we see income growth with more younger Americans working and more of those younger Americans with better base salaries, first time home buyers will continue to be shut out of the market, and this will continue to affect the overall housing recovery. See this illustration from the blog of professor Anthony Sanders of George Mason University:

    The Lagging Construction Sector in America -- Statistics showing spending on construction in the United States seem to be rising month after month, suggesting that the American economy is regaining losses experienced during the Great Recession, however, looking further back, it is quite apparent that the construction sector is still lagging behind.   From FRED, here is a graph showing the growth in total construction spending since end of the last recession: From its annualized low point of $754 billion in February 2011, total annual construction spending rose to $930 billion in December 2013, an increase of $176 billion or 23 percent, a rather impressive performance. Unfortunately, as you can see when you look back further in time, the current situation is far from stellar: Annual spending on construction reached a peak of $1.213 trillion in March 2006, $283 million or 30.4 percent higher than the current level. In fact, the last time that construction spending was as low as it currently is (other than when spending was declining during the 2009 - 2010 economic retrenchment) was back in November 2003, over a decade ago. Since total construction spending includes all sorts of residential and non-residential/public spending, let's drill down into the data to see where the problems lie. Here is a graph showing the total annual spending on private residential construction since 1993:Spending on residential construction hit a peak of $676 billion in March 2006 and began its painful decline to a low of $228 billion in June 2009, a drop of $448 billion or 66.3 percent.  Since then, spending on private residential construction has risen to $353 billion, an increase of $125 billion, however, spending is still $323 billion or nearly 50 percent less than it was at the peak.  You'll also notice a very prolonged period of time after the Great Recession when spending on residential construction was static; between March 2009 and December 2011, annual spending on private residential construction was stuck in the range of $225 billion and $255 billion, only beginning to show a sustainable rise at the beginning of 2012, nearly two and a half years after the recession "ended".

    Construction Spending increased in January - The Census Bureau reported that overall construction spending increased in January:The U.S. Census Bureau of the Department of Commerce announced today that construction spending during January 2014 was estimated at a seasonally adjusted annual rate of $943.1 billion, 0.1 percent above the revised December estimate of $941.9 billion. The January figure is 9.3 percent above the January 2013 estimate of $863.1 billion. Private spending increased in January, but public spending was down: Spending on private construction was at a seasonally adjusted annual rate of $670.8 billion, 0.5 percent above the revised December estimate of $667.5 billion. Residential construction was at a seasonally adjusted annual rate of $359.9 billion in January, 1.1 percent above the revised December estimate of $356.0 billion. Nonresidential construction was at a seasonally adjusted annual rate of $310.9 billion in January, 0.2 percent below the revised December estimate of $311.5 billion. In January, the estimated seasonally adjusted annual rate of public construction spending was $272.3 billion, 0.8 percent below the revised December estimate of $274.4 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 47% below the peak in early 2006, and up 57% from the post-bubble low. Non-residential spending is 25% below the peak in January 2008, and up about 39% from the recent low. Public construction spending is now 16% below the peak in March 2009 and up just about 3% from the recent low. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, private residential construction spending is now up 15%. Non-residential spending is up 9% year-over-year. Public spending is up 2% year-over-year.

    U.S. Construction Spending Up 0.1 Percent in January — U.S. construction spending showed a tiny increase in January as strength in housing helped to offset declines in nonresidential building and government projects. The Commerce Department says construction spending edged up 0.1 percent in January, significantly slower than an upwardly revised 1.5 percent gain in December. Home building was up 1.1 percent in January with single-family construction rising 2.3 percent and apartment building up 1 percent. However, there was widespread weakness outside of housing. Non-residential construction fell 0.2 percent and office building was flat, with bad weather likely a factor in the weakness. Total government construction was down 0.8 percent in January compared with December. Construction spending totaled $943.1 billion in January at a seasonally adjusted annual rate.

    Home construction - looking beyond the cold weather -- Recently we've had a visible slowdown in housing starts in the US, which has largely been attributed to the weather (see chart). USA Today: - Housing starts fell sharply in January for the second straight month as cold and stormy weather continued to batter the recovering housing market.  Starts of single-family houses and apartments fell 16% to a seasonally adjusted annual rate of 880,000 last month after declining dramatically in December, the Commerce Department said Wednesday. Extreme winter weather is largely blamed for both poor showings after starts jumped to their highest level in a year in November.But is there more to the sluggish construction data than freezing temperatures? If weather was the only factor, markets would be expecting a strong recovery in construction later in the year.  But as this chart shows, weakness in July lumber futures points to rather subdued expectations for home construction this summer. Some point to higher mortgage rates generating a drag on the overall housing market. The "taper-driven" spike in rates has definitely been unusually sharp, but mortgage rates have now stabilized below 4.5% - still quite low by historical standards.To understand the non-weather factors of the sudden slump in private construction, we want to go back to one of the key sources of improvements in housing back in 2012. It was the boost in household formation (see post) that kick-started the housing market. Now, to many economists' surprise, the number of households has stopped growing in recent months - detracting materially from housing demand. To be sure, home construction should improve in the coming years simply because of demographics. Home building in the US simply hasn't kept up with population growth in recent years. But the big improvements will only take place once we see substantial gains in household formation.

    Fed's Q4 Flow of Funds: Household Net Worth at Record High - The Federal Reserve released the Q4 2013 Flow of Funds report today: Flow of Funds. According to the Fed, household net worth increased in Q4 compared to Q3, and is at a new record high. Net worth peaked at $68.8 trillion in Q2 2007, and then net worth fell to $55.6 trillion in Q1 2009 (a loss of $13.2 trillion). Household net worth was at $80.7 trillion in Q4 2013 (up $25.1 trillion from the trough in Q1 2009). The Fed estimated that the value of household real estate increased to $19.4 trillion in Q4 2013. The value of household real estate is still $3.2 trillion below the peak in early 2006.This is the Households and Nonprofit net worth as a percent of GDP. Although household net worth is at a record high, as a percent of GDP it is still below the peak in 2006 (housing bubble), but above the stock bubble peak. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. This ratio was increasing gradually since the mid-70s, and then we saw the stock market and housing bubbles. The ratio has been trending up and increased again in Q4 with both stock and real estate prices increasing. This graph shows homeowner percent equity since 1952. Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008. In Q4 2013, household percent equity (of household real estate) was at 51.7% - up from Q3, and the highest since Q2 2007. This was because of both an increase in house prices in Q4 (the Fed uses CoreLogic) and a reduction in mortgage debt. Note: about about 30.3% of owner occupied households had no mortgage debt as of April 2010. So the approximately 52+ million households with mortgages have far less than 50.7% equity - and millions have negative equity. The third graph shows household real estate assets and mortgage debt as a percent of GDP. Mortgage debt decreased by $11 billion in Q4, after increasing slightly in Q3. Mortgage debt has now declined by $1.32 trillion from the peak. Studies suggest most of the decline in debt has been because of foreclosures (or short sales), but some of the decline is from homeowners paying down debt (sometimes so they can refinance at better rates).

    Household Worth in U.S. Climbs by $2.95 Trillion to Record - Household wealth in the U.S. increased from October through December, as gains in stock portfolios and home prices boosted Americans’ finances. Net worth for households and non-profit groups rose by $2.95 trillion in the fourth quarter, or 3.8 percent from the previous three months, to a record $80.7 trillion, the Federal Reserve said today from Washington in its financial accounts report, previously known as the flow of funds survey. More jobs, higher stock prices and improved home values have all helped consumers clean up their balance sheets in the years following the biggest recession since the Great Depression. Additional gains in the labor market and household wealth will be needed to give consumers the means to spend on goods and services, boosting economic growth.

    US household net worth increased to a new record high of $80.6T in Q4, fueled by stock market and housing gains - The Federal Reserve reported today the net worth of American households – the difference between the value of total household assets and total household liabilities – rose to a new all-time record high of $80.66 trillion in Q4 last year (see chart above). Here are some additional details and highlights of today’s report:

    • 1. Compared to the cyclical low of $55.71 trillion of household net worth in Q1 2009, US households have gained almost $25 trillion in wealth over the last four years, which by a factor of almost two has offset the staggering $13.4 trillion recession-related loss in household wealth that took place in the six quarters from Q3 2007 to Q1 2009 (see blue bars in chart).
    • 2. Household wealth increased by nearly $10 trillion over the most recent four quarters, from $70.86 trillion in Q4 2012 to to $80.66 trillion in Q4 2013, due to strong gains in stock market and housing values. On an annual basis, that $10 trillion increase marks the largest gain in household wealth in any one-year period in US history.
    • 2. Household wealth increased by almost $3 trillion during Q4 (October to December) last year (the third largest quarterly gain on record), led by a $1.318 trillion gain in corporate equities, a $349 billion gain in mutual fund values, and a $455 billion increase in the value of residential real estate owned by households.
    • 3. In Q4, the value of corporate equities owned by US households increased in value by more than 34% over the last year to a new record high of nearly $14 trillion. Likewise, the value of mutual fund shares owned by households increased over the year by almost 27% to a new record high of nearly $7 trillion.
    • 4. Adjusted on a per household basis (without considering wealth distribution), the aggregate household wealth of $80.66 trillion in Q4 of last year would translate into an average of just over $700,000 in assets (houses, stocks, bank accounts, etc.) owned per US household, free and clear of any debt.

    Q4 2013 'Flow of Funds' and Geopolitical - During Q4 2013, Total System Credit increased (nominal) $840bn to a record $58.991 TN, or 345% of GDP. On a percentage basis, total Credit expanded at a 5.8% rate during the quarter, up from Q3's 3.8% but still below Q4 2012's 6.2% pace. For all of 2013, system Credit expanded $1.750 TN, compared to the $1.882 TN increase in 2012. Total Corporate debt expanded $915bn, or 7.2%, to $13.622 TN. Non-financial Corporate debt expanded $783bn, or 9.0%, second only to 2007's $856bn. Total Non-Financial Debt (NFD) expanded nominal $629bn during Q4, a 6.1% pace, to a record $42.021 TN. NFD expanded $1.734 TN for all of 2013, down slightly from 2012's $1.882 TN increase. For comparison, NFD expanded $1.070 TN in '09, $1.472 TN in '10, and $1.376 TN in '11. During the past five years of so-called "deleveraging," NFD increased $7.296 TN, or 21%. On a seasonally-adjusted and annualized (SAAR) basis, total system Credit expanded $2.246 TN during Q4, the strongest pace since Q4 2012. At SAAR $1.394 TN, Federal borrowings were at the highest level in seven quarters and accounted for 62% of total system Credit growth. Total Corporate borrowings increased SAAR $948bn during Q4. Total Household debt expanded SAAR $49bn (0.4% rate), with non-mortgage debt expanding SAAR $166bn, largely offset by a SAAR $93bn contraction in mortgage borrowings. A notable market tightening of muni finance saw State & Local borrowings contract SAAR $145bn, or 4.9%. This was the steepest quarterly decline in municipal debt in years.

    Record 71% Of Household Net Worth Is In Financial Assets - Another quarter down, and another $3 trillion in net worth added. On the surface, the increase in household net worth to a record $80.7 trillion is good news. The problem is that with $2.5 trillion of thie $3 trillion purely thanks to an increase in financial assets, which as has been made quite clear over the past several years, benefit only the 1%, what the lede should say is "another quarter down, another $3 trillion added to the net worth of America's richest." Put another way: of the $94.4 trillion in total assets (gross, not excluding $13.8 trillion in household liabilities), a record 71% or $66.9 trillion, is in financial products. And now you know why the Fed can not possibly allow any hiccups on the road to trickle down Fed balance sheet nirvana. If only for the 1%.

    Personal Income increased 0.3% in January, Spending increased 0.4% = The BEA released the Personal Income and Outlays report for January:  Personal income increased $43.9 billion, or 0.3 percent ... in January, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $48.1 billion, or 0.4 percent. ... The change in the January estimate of personal income was affected by several special factors. Personal income in January was boosted by several provisions of the Affordable Care Act (ACA), which affected government social benefit payments to persons. In addition, personal income was boosted by cost-of-living adjustments to several federal transfer programs and by pay raises for civilian and military personnel. In contrast, the change in personal income in January was reduced by the expiration of Emergency Unemployment Compensation programs and by lump-sum social security benefit payments that had boosted December personal income. In summary, excluding all of these special factors, personal income increased $23.7 billion, or 0.2 percent, in January, in contrast to a decrease of $15.1 billion, or 0.1 percent, in December. ...Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in January, in contrast to a decrease of 0.1 percent in December. ... The price index for PCE increased 0.1 percent in January, compared with an increase of 0.2 percent in December. The PCE price index, excluding food and energy, increased 0.1 percent in January, the same increase as in December. On inflation, the PCE price index increased at a 1.2% annual rate in January, and core PCE prices increased at a 1.1% annual rate.  This is very low and far below the Fed's 2% target. The following graph shows real Personal Consumption Expenditures (PCE) through January 2013 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change.

    The Big Four Economic Indicators: Real Personal Income Less Transfer Payments - With today's release of the January Personal Income and Outlays, we can calculate Real Personal Income less Transfer Payments. But first, let's note that nominal Personal Income rose 0.3% in January, beating the forecast for a 0.2% rise. However, if we exclude Transfer Payments from the government, the MoM increase shrinks to 0.1%. And when we adjust for inflation using the quite conservative PCE Price Index, the MoM change is flat at one decimal place; at two decimal places we get a statistically insignificant 0.02% MoM change.  The chart and table below illustrate the performance of the Big Four and a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009. The latest data point completes the 55th month.The overall picture of the US economy had been one of a ploddingly slow recovery from the Great Recession. However, the data for the past two months have shown contraction. The general explanation in the popular economic press is that severe winter weather has been responsible for the bad data, and that we shouldn't read the slippage as the beginnings of a business cycle decline. As we can see in the illustration of the average of the Big Four since its 2007 all-time high, the rate of post-trough growth had been slower since February of 2012, although the 2012 end-of-year tax-strategy blip has obscured the trend slope over the past two years. The decline for two consecutive months is a phenomenon rarely seen outside proximity to a recession. If indeed unusually severe weather has been the dominant factor in two-month contraction, then we should see a rebound as winter abates.

    Blame It On The Weather? Personal Spending On Services Highest Ever In January -- Moments ago the BEA released the January personal income and spending data, which surprised to the upside on both sides: Personal Income rose 0.3% in January, on expectations of a 0.2% increase, while spending roared up by 0.4% well above the 0.1% expected. Great news right? Well, not exactly.  First the December spending data was revised from 0.4% to 0.1%, just as expected, following the big miss in last week's Q4 GDP revision. Second, of the $43.9 bilion increase in Peronal Income, some $29.8 billion, or over two thirds, was thanks to personal current transfer receipts, i.e., the government. But it was the personal spending breakdown that was truly surprising. One would think that based on a "bullish" take of the data, consumers opened up their wallets and purchased durable goods, such as TVs, gizmos, and what not, boost retailers top and bottom lines? Alas, that is not the case. The chart below shows the monthly increase in spending on durable and non-durable goods. Both declined.

    Incomes/Spending Rise On Weather And Gov't Benefits - The personal consumption and expenditure (PCE) data for January surprised to the upside by printing a 0.4% surge in expenditures and a 0.3% increase in incomes. This was much stronger than the expected 0.1% increase of expenditures and 0.2% rise for incomes. The immediate assumption is that the consumer is healthy and the economy is growing but the "devil is in the details" as usual. First, the impact of the extremely cold weather sent spending on utilities surging. This showed up as a sharp spike in "services" related spending to a record of $72 billion in the month of January. This increase also led to the fourth monthly decline in the personal savings rate to 4.3%, which is at the lowest level since March of 2013. Ian Shepherdson, chief economist at Pantheon Macroeconomics, validated this point stating: "Excluding the 11.3% leap in real spending on utility electricity and gas — cold weather boosted demand for heating energy — real spending rose only 0.09%, compared to the 0.19% Q4 average. The core problem for consumers remains the sluggishness of real income growth, which rose 0.3% in January but fell 0.2% in December. The trend is running a bit below 2% at an annualized rate, and with the saving rate still very low at just 4.3%, it is hard to see scope for sustained gains in spending in excess of income growth."  The problem of "real income growth" is the second point of this discussion. As shown in the chart below, more than 67% of the current increase in personal incomes came from "Government Social Benefits To Persons."  However, this is not a new phenomenon but an ongoing issue due to the long term deterioration of economic growth. The next chart shows both total government assistance, which is now at record levels, and social benefits as a percentage of real disposable incomes.

    It Turns Out That The "Harsh Weather" Is Actually Boosting The Economy --   What happened? Goldman explains.January nominal personal spending rose 0.4% (vs. consensus +0.1%). Both durable (-0.4%) and nondurable (-0.7%) goods spending fell on the month. Services spending rose a sharp 0.9%, the strongest gain since the bounce-back from the September 11 attacks in October 2001. Out-sized gains occurred in two categories of services spending: household utilities (+9.7%), boosted by colder weather, and health care (+1.6%) in light of enrollments in the Affordable Care Act exchanges. So there you have it: the first official confirmation that in addition to all its adverse impacts on employment, previously highlighted by everyone with a frontal lobe and even the CBO, in January Obamacare had a dramatic impact on US consumer discretionary impact. As in lowering it.  But far worse was "utilities", namely the "harsh weather", which was the primary reason for the surge in spending on non-discretionary services. Which also means far less spending on stuff one enjoys blowing money on, and far less revenues and profits by those same retailers whose seemingly infinite advertising budgets are what continue to send the social networking bubble to unseen highs.

    January Spending Was Driven by Health Care -- Dean Baker  There was a larger than normal jump in spending on consumer services reported for January. The Reuters article attributed this to weather driven increases in spending on heating. Actually the biggest rise in spending on services in January was for health care. The Commerce Department showed the annual rate of spending increased by $30.5 billion in January. This amounted to a 1.6 percent increase in spending compared with December. This is an extraordinary rate of increase, especially considering the slow growth in health care costs over the last five years. Most likely the increase was due to one time factors associated with the Affordable Care Act. It will matter hugely to the success of the program and the budget and the economy if this increase turns out not to be a one time increase.

    Obamacare Effects Account for Most of Income, Spending Increases -- The Affordable Care Act, President Barack Barack Obama’s signature health law, is already boosting household income and spending. The Commerce Department reported Monday that consumer spending rose a better-than-expected 0.4% and personal incomes climbed 0.3% in January. The new health-care law accounted for a big chunk of the increase on both fronts. On the incomes side, the law’s expanded coverage boosted Medicaid benefits by an estimated $19.2 billion, according to Commerce’s Bureau of Economic Analysis. The ACA also offered several refundable tax credits, including health insurance premium subsidies, which added up to $14.7 billion. Taken together, the Obamacare provisions are responsible for about three-quarters of January’s overall rise in Americans’ incomes. Of course, what the government gives, the government can take away. Case in point: The late-December expiration a federal program that provided extended aid to unemployed Americans reduced benefit payments $16.7 billion. Excluding special factors, the Commerce Department said personal income increased a more moderate $23.7 billion, or 0.2%, in January, after falling $15.1 billion, or 0.1%, in December. So it hasn’t been a very good winter for American households.

    The Latest on Real Disposable Income Per Capita -  This morning I posted my latest Big Four update, which included today's release of the January 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 January nominal 0.31% month-over-month is encouraging, after when we adjust for inflation, the real MoM change is a smaller 0.20%. The year-over-year metrics are more relevant than last month, now that the tax strategy blip is behind us. They are 3.28% nominal and 2.08% real.  The BEA uses the average dollar value in 2009 for inflation adjustment.  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 56.0% since then. But the real purchasing power of those dollars is up only 18.8%. Of the eight recessions since 1959, five started with a YoY number higher than the current reading. However, the volatility of Real DPI militates against putting very much emphasis on this metric. Suffice to say that we need this indicator to show continuing improvement in the months ahead.

    Important Message Retailers Are Sending Us about the Economy: Consumer spending in the U.S. economy is highly correlated to consumer confidence. If consumers are worried about the economy, they pull back on their spending. The Conference Board Consumer Confidence Index decreased by 1.63% in February from January. (Source: Conference Board, February 25, 2014.) And we see the corresponding pullback on consumer spending in weak U.S. retail sales. Macy's, reported a decline of 1.6% in revenue in its latest quarter—which includes the holiday season.  Sears Holdings Corporation reported a decline of 12.6% in revenues in its latest quarter. Yes, I know this company is having problems; but a drop in revenue of 12.6% for a retail giant like this—and during the holiday shopping season—is an indicator that consumer spending is very weak.   Target Corporation reported revenues fell by 3.8% in its last fiscal quarter. Best Buy Co., in a very similar situation. The company reported a decline of more than three percent in revenues for its latest quarter. And for the 12 months ended February 1, 2014, Best Buy's revenues fell 3.4%. The retailers I just mentioned are just a few of the many retailers that reported a decline in their revenues in the last quarter of 2013, which suggests consumer spending is in troubling territory.

    The U.S. Economy's Big Baby Problem - Last September, the U.S. government announced that our birthrate fell to "another record low" in 2012, following a long, steady slide since the Baby Boom after World War II. It goes without saying that, morally speaking, there's nothing wrong with this. It's natural, in a way. All over the world, birthrates tend to fall along with economic development, for numerous reasons including (a) the move away from a labor-intensive small-farm economy and (b) women's ascendance in the workforce, which uses time that used to be devoted to child-rearing. Families in richer countries tend to have fewer kids. In places like Japan and Western Europe, national populations are actually peaking. The thing about an increasingly childless economy is that it has major implications for consumption. Just look at this new data from a Gallup survey released today on the average daily spending of families. Even after you control for income, age, education, and marital status, families with young kids spend more every day. These are the sort of spenders you want in a weak economy following a great deleveraging.

    Student And Car Loans Account For 102% Of All New February Consumer Credit - Another month down, another month in which US consumers deleveraged by paying down their credit cards. Although that is not exactly correct: as we showed recently, the New Normal source of credit has nothing to do with revolving debt, or credit cards, or any other old normal notions, and everything to do with student debt, which is used for everything except paying for tuition. That, and car loans of course. Sure enough, in February, of the $13.7 billion in new loans created, $13.9 billion, or 102% of all, was there to fund student and car loans. And looking further back at the data over the past year, of the $172 billion in new consumer debt, a stunning 96% has gone to new student and car loans.

    Pace of Student Lending Shows Signs of Easing - The pace of student borrowing from the federal government slowed for the third straight year in January, an indication that a major driver of overall consumer debt may be decelerating. The increase in student borrowing in January, typically the top month of the year for education loans, was the smallest gain to start the year since 2010, according to Federal Reserve data released Friday. The January gain of $28 billion over the previous month was $1 billion below the increase posted in January 2013 and well off the all-time peak of $37 billion recorded in January 2011. The numbers are not seasonally adjusted. The latest figure could foreshadow a slowing pace federal student lending this year. A law change in 2010 made the federal government the primary issuer of student loans. That year federal education lending increased nearly 60%. The gains have eased each year since then. Overall, the total amount of federal student loans rose by 18.3% in 2013, a far less dramatic rise than the 27.3% increase in 2012 and the 36.1% increase in 2011. Still, the 2013 gain made student borrowing a significant factor pushing the overall increase in consumer debt, outside of home loans. Total consumer credit increased 6% last year. “Federal student loans have been the driving force behind consumer credit expansion,” said Barclays economist Cooper Howes. “We expect student loans to continue to push nonrevolving credit higher while revolving credit growth remains tepid.” The Fed data showed revolving credit, predominately credit cards, increased just 1.3% last year. In January, revolving credit declined slightly from the prior month. A narrowing of credit card debt is consistent with other measures of consumer spending. Retail sales fell 0.4% in January, according to a Commerce Department report issued last month.

    Big Oil Hooked Americans on Credit Cards - Credit cards were from the very beginning a product developed by faceless bureaucrats in extremely large oligopolistic industries fighting one another over who would control access to the American consumer. It’s an industry best studied through the lens of class, and not in the current style of narratives focusing on individual heroes. Most of the early hearings on credit cards involve oil companies and antitrust. This is because oil companies, like airlines, large retailers, and restaurants and hotel associations were attempting to corner the market in consumer credit. While today credit cards are a bank product, banks didn’t take a majority of the business until the 1980s. It was primarily oil companies that got the credit card business going, in the 1930s. Standard Oil of California, for instance, did a mass mailing of 250,000 cards in 1939, using early ‘big data’ (well not big data really but using early direct marketing) techniques and experiencing identity theft and fraud. They did this not to make money on credit, which wasn’t seen as a profit center, but to sell more oil at higher prices. Early credit card operations were about getting Americans comfortable with driving cross-country, and being able to buy gas conveniently everywhere.

    The Debt Bubble Expands As Auto Loan Amounts Hit A New Record - Is anyone surprised that the poorest and least credit worthy of Americans are being saddled with piles of debt in order to buy new cars? It’s not enough that a generation of our citizens will toil pointlessly to pay off more than $1 trillion of student loans, we may as well add some other form of debt burden on top of it. It’s hard to even imagine this is happening so shortly after the last credit bubble train wreck, but happening it is. Creative ways for people to purchase cars they can’t afford have been on our radar screen for some time now... Well the dancing has continued, and now we have Americans borrowing at all-time record levels to buy cars.

    A Depressingly Simple Explanation For The Weak Recovery -- Why is the economy so weak? It's simple: Inequality. Income gains for the 95% have been meager for a long time, but up until the crisis, households could take on debt to compensate. Now credit has been harder to come by, and so household buying power is limited.   Columbia Management has a great little note up reminding people of the basic force that's holding back the economy.  For decades, the top 5% have been accumulating an ever-increasing share of the national income in the U.S.:  The remaining 95% were only able to keep their buying power up by taking on more debt.  Lately that hasn't been an option.  They write:  While household debt dynamics appear to have stabilized and deleveraging is largely complete, income inequality can continue to rise in the U.S. and consumption remain depressed because wealthier households typically save a greater share of income and have a lower propensity to spend per dollar of income. In addition, permanently tighter lending standards have left many households unable to access credit or unwilling to do so. So it is both a demand and a supply story as it relates to credit. But the main point is that income gains have been mediocre for a broad swath of middle income households for some time, and borrowing temporarily masked the demand drag. In combination these factors have been a contributing factor to the slow recovery of U.S. consumption and economic growth.

    Late payments jump on subprime auto boom - A three-year lending boom to car buyers with spotty credit that helped push auto sales to a six-year high is starting to show signs of overheating. The percentage of loans packaged into securities that are more than 30 days late rose 1.43 percentage points to 7.59 percent in the 12 months ended Sept. 30, according to Standard & Poor's. That's the highest in at least three years, according to data released last week by the New York-based ratings company. "We're at this inflection point," S&P analyst Amy Martin said by telephone. "Now that they are opening the lending spigot, it's only natural that losses are starting to rise." Underwriting standards began to decline amid five years of Federal Reserve stimulus that set off a race for higher-yielding assets, spurring a surge in issuance of bonds tied to subprime auto loans. That breathed life into a car-finance business that had contracted in the wake of the credit crisis, attracting new lenders and private-equity firms such as Blackstone Group LP with cheap funding and high margins

    Welcome to the creditocracy, where your debt piles up forever --Last month, the Federal Reserve confirmed the ominous news. The decline in US household debt from sky-high 2008 levels has halted, and the figures are on the rise again – up by $241bn (or 2.1%) in the fourth quarter of 2013, following a smaller increase in the third quarter. Unlike auto loans, mortgages, and credit card balances, student debt never fell at all, and is fast approaching $1.2 tn. Economists seem to have decided that the “debt overhang” from the crash has now been resolved; not only is it safe to start borrowing again, it’s a must if we are to get back on track with GDP-driven growth. With aggregate debt still at a staggering $11.5tn, this is bad analysis and bad advice. As for reviving GDP business as usual, all the evidence suggests this kind of growth is a recipe for eco-collapse. Confronted with these exorbitant numbers, it’s natural to gripe that debts of such magnitude will never be paid off in our lifetimes. But that’s to miss the point. In a creditocracy – the kind of society we now live in – debts are not supposed to be paid down entirely, for the same reason that credit card issuers don’t want us to clear our credit card balance every month. Those who diligently pay up are derided in industry circles as “deadbeats”. The preferred customers are “revolvers,” who can’t quite make ends meet but who pay the monthly minimum along with penalties or late fees, ensuring a steady flow of revenue to banks. Creditors’ profits depend on keeping us in debt for as long as we live, and even beyond the grave in the case of parental co-signers for student debtors who die before they have performed less than an average lifetime of debt service. With household incomes stagnant or falling, elementary calculus tells us that fresh credit will be needed simply to service existing loans. Wage conflict was the great strife of the industrial era, but the struggle over debt is shaping up to be the frontline conflict of the years to come.  Each new surrender of a part of our lives to private debt-financing further consumes the fruit of labor we have not yet performed, in the form of compensation we have not yet earned. That is why, to put it bluntly, many household debts are a thinly disguised form of wage theft.

    The Fallacy of Financial Education - In White House Burning, there is a section on the rise and political influence of the conservative media. At one point, I looked up the top ten talk radio shows by audience. Nine of them were unabashedly right-wing, politically oriented shows. The tenth was Dave Ramsey. Ramsey has plenty of conservative elements: religion, moralism, glorification of wealth. But his show isn’t about conservative politics. It’s about personal finance. Ramsey is a huge success because—in addition to his charisma and marketing skills—he is peddling one of the huge but popular illusions of American culture: that people can become rich by making better financial decisions. He’s also one of the characters skewered by Helaine Olen in her recent book, Pound Foolish, which describes the fallacies, hypocrisies, and borderline-corrupt schemes of personal finance gurus like Ramsey and Suze Orman. It’s a fun read—a bit repetitive, but that’s largely because all personal finance “experts” are pushing a small handful of myths.* The “sham” of the financial literacy movement—the idea that all of our financial problems would be solved if Americans were better educated about money—is the subject of Olen’s article in Pacific Standard. More than a dozen states require personal finance classes in high school, even though the evidence is that they have no impact. In short, people who consume financial education behave no differently from people who don’t. There is a whole hierarchy of reasons for this. One is that people tend to forget what they learn in class—no matter what class you’re talking about. One is that at the moment of making the financial decision—say, to take out the subprime mortgage—anything they may remember from class is overwhelmed by the sales pitch of the mortgage broker sitting in front of them. One is that people make financial decisions on irrational grounds.

    Trimmed Mean PCE Inflation Rate -  Dallas Fed -- The Trimmed Mean PCE inflation rate is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE). It is calculated by staff at the Dallas Fed, using data from the Bureau of Economic Analysis (BEA).  Series description The Trimmed Mean PCE inflation rate for January was an annualized 0.6 percent. According to the BEA, the overall PCE inflation rate for January was 1.2 percent, annualized, while the inflation rate for PCE excluding food and energy was 1.1 percent. The tables below present data on the Trimmed Mean PCE inflation rate and, for comparison, the overall PCE inflation and the inflation rate for PCE excluding food and energy. The tables give annualized one-month, six-month and 12-month inflation rates.

    The Biggest Component Of CPI - Rent - Is Now The Highest Since 2008: What Does This Mean For Broad Inflation? - Even as the Fed laments that inflation as measured by either the hedonically adjusted CPI, or the PCE deflator measure (which on any given month is whatever a seasonal adjustment excel model says it is), is persistently below its long-term target of 2%, one component of the broader CPI basket has quietly continued risen to new multi-year highs. That would be the so-called owners’ equivalent rent (OER), which is the biggest component of the CPI, and measures imputed costs of renting one’s own home: it is currently the highest it has been since 2008. But what does this mean for broad inflation? Read on to find out why it is precisely the soaring rent, courtesy of the Fed's latest housing bubble, that means inflation will remain subdued for years to come.

    Bacon, Inflation, And "What Gets Measured Gets Managed" - Core inflation, which excludes the effect of food and energy prices and is how every self-respecting economist measures price increases, is up 8.75% over the past five years. However, as ConvergEx's Nick Colas notes, this is a poor indicator for the true cost of living for many Americans. Having scrubbed the data, Colas has found the top 10 items that appreciated the most from 2008 to 2013 and the 10 items that became substantially less expensive, according to the government's Consumer Price Index (CPI). The data is deceiving though, as the CPI's "hedonic quality adjustment" distorts the amount of money people actually spend. Even more importantly, Colas warns, things that have a relatively low weighting in the CPI and that people use selectively – such as healthcare and education – don't have a big impact on the core number, but represent considerable expenses for many Americans. Thus we must use caution when using one figure to make policy decisions for an entire nation, and consider what happens to inflationary expectations if and when the still-sluggish economic recovery finally finds second gear.

    What Inflation? Here Are The Various Components Of The CPI Basket - Earlier today we pointed out a curious divergence: while owner equivalent rent, the measurement of imputed costs of renting, has risen to the highest since the Lehman failure, total non-shelter core CPI continues to decline. What is notable is that OER amounts to 23.9% of the CPI basket - as such it is the single largest determinant of inflation as measured by the BLS. And yet everything else, hedonically adjusted of course, keeps falling. By how much? And do you agree with the BLS' estimates of inflation? To answer these not so important questions, here is the full CPI basket, broken down by weighings, and by annual change.

    Weekly Gasoline Update: Prices Continue to Rise -- It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, Regular is up four cents and Premium three cents -- the highest prices since last September.  According to, Hawaii is the only state with regular above $4.00 per gallon, now at $4.07. The next highest state average is California at $3.86. No states are averaging under $3.00, with the lowest prices in South Carolina at $3.13.

    Carmakers Say Sales Were Sluggish in Chilly February - Severe cold weather across much of the country stalled new-vehicle sales in February, even as sales of some trucks and sport utility vehicles remained strong, automakers reported on Monday.Overall sales were flat for the month, according to figures from Autodata Corporation. Automakers sold 1.2 million vehicles in February, the same as February last year, for an annualized rate of 15.34 million and below the 16 million vehicles the industry expects to sell this year.After a winter of lackluster sales, automakers remain optimistic that they will recoup lost winter sales in March and April, but some analysts say it remains an open question.Sales fell 1 percent at General Motors, the largest domestic carmaker, and 6 percent at Ford Motor, for a second straight month of declines. The Chrysler Group said its sales rose 11 percent, to 154,866 units, for its best February performance in seven years, in part on the strength of its Jeep brand, which gained 47 percent for the month. Chrysler also fared best in the pickup truck segment, reporting an increase of 26 percent for its Ram pickup. Ford said sales of its F-Series, the country’s best-selling vehicle, advanced 2.6 percent to 55,882 units, its best February in eight years.

    U.S. Light Vehicle Sales increase to 15.3 million annual rate in February - Based on an AutoData estimate, light vehicle sales were at a 15.34 million SAAR in February. That is up slightly from February 2013, and up 1.8% from the sales rate last month.  This was slightly below the consensus forecast of 15.4 million SAAR (seasonally adjusted annual rate).This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for February (red, light vehicle sales of 15.34 million SAAR from AutoData).  Weather had an impact in February, from WardsAuto: “Weather continued to impact the industry in February, but GM sales started to thaw during the Winter Olympic Games as our brand and marketing messages took hold,” Kurt McNeil, GM vice president-Sales Operations, says in a statement.The second graph shows light vehicle sales since the BEA started keeping data in 1967.

    Trade Deficit increased in January to $39.1 Billion - The Department of Commerce reported this morning: [T]otal January exports of $192.5 billion and imports of $231.6 billion resulted in a goods and services deficit of $39.1 billion, up from $39.0 billion in December, revised. January exports were $1.2 billion more than December exports of $191.3 billion. January imports were $1.3 billion more than December imports of $230.3 billion. The trade deficit was close to the consensus forecast of $39.0 billion. The first graph shows the monthly U.S. exports and imports in dollars through January 2014. Imports and exports increased in January. Exports are 15% above the pre-recession peak and up 3% compared to January 2013; imports are at the pre-recession peak, and up about 1% compared to January 2013. The second graph shows the U.S. trade deficit, with and without petroleum, through January. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $90.21 in January, down from $91.34 in December, and down from $94.08 in January 2013. The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012. The trade deficit with China was mostly unchanged at $27.84 billion in January, from $27.79 billion in January 2013. A majority of the trade deficit is related to China.

    U.S. factory orders, shipments fall in January (Reuters) - New orders for U.S. factory goods fell more than expected in January and shipments also slipped, adding to signs of a recent slowdown in manufacturing activity. The Commerce Department said on Thursday new orders for manufactured goods declined 0.7 percent. December's orders were revised to show a 2.0 percent drop instead of the previously reported 1.5 percent fall. Economists polled by Reuters had forecast new orders received by factories slipping 0.4 percent. Shipments of new orders fell for a second month in January. true Factory activity is cooling as businesses place fewer orders while working through stocks of unsold goods. Unseasonably cold weather, which has weighed on activity ranging from home building to hiring, is also a drag on manufacturing. Factory orders fell across most categories, with big declines in transportation, primary metals and electrical equipment, appliances and components. Orders for machinery also fell. Orders excluding the volatile transportation category rose 0.2 percent, reflecting gains in defense capital goods and in computers and electronic products.

    Markit final U.S. manufacturing PMI 57.1 - MarketWatch: The final reading of Markit's U.S. purchasing managers index accelerated to 57.1 in February from an initial "flash" reading of 56.7, the economic information firm said Monday. The index was well above the 53.7 reading in January. Readings over 50 indicate growth. The final reading for February was the highest level in almost four years. The report shows that output and new business picked up sharply. Volumes of new work increased at the sharpest rate since April 2010. Chris Williamson, chief economist at Markit, said the increase was in large extent a temporary rebound after bad weather disruptions in January. But he said the trend over the last three months was the strongest since May 2012.

    ISM Manufacturing index increased in February to 53.2 -- The ISM manufacturing index indicated faster expansion in February than in January. The PMI was at 53.2% in February, up from 51.3% in January. The employment index was at 52.3%, unchanged from 52.3% in January, and the new orders index was at 54.5%, up from 51.2% in January. From the Institute for Supply Management: February 2014 Manufacturing ISM Report On Business® "The February PMI® registered 53.2 percent, an increase of 1.9 percentage points from January's reading of 51.3 percent indicating expansion in manufacturing for the ninth consecutive month. The New Orders Index registered 54.5 percent, an increase of 3.3 percentage points from January's reading of 51.2 percent. The Production Index registered 48.2 percent, a decrease of 6.6 percentage points compared to January's reading of 54.8 percent. Inventories of raw materials increased by 8.5 percentage points to 52.5 percent. As in January, several comments from the panel mention adverse weather conditions as a factor impacting their businesses in February. Other comments reflect optimism in terms of demand and growth in the near term." Here is a long term graph of the ISM manufacturing index.This was above expectations of 51.9%.

    ISM Manufacturing Index Rises a Bit Above Expectations -- Today the Institute for Supply Management published its February Manufacturing Report. The latest headline PMI at 53.2 percent is an improvement over last month's 51.3 percent. Today's number was above the forecast of 52.0. Here is the key analysis from the report: Manufacturing expanded in February as the PMI® registered 53.2 percent, an increase of 1.9 percentage points when compared to January's reading of 51.3 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.  A PMI® in excess of 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the February PMI® indicates growth for the 57th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the ninth consecutive month. Holcomb stated, "The past relationship between the PMI® and the overall economy indicates that the PMI® for January and February (52.3 percent) corresponds to a 3 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI® for February (53.2 percent) is annualized, it corresponds to a 3.3 percent increase in real GDP annually."  Here is the table of PMI components.

    ISM Manufacturing PMI Bounce Back While Production Pummeled for February 2014 - The February ISM Manufacturing Survey somewhat recovered from last month's plunge.  PMI rose by 1.9 percentage points to 53.2%.  This range is really mediocre growth for manufacturing.  New orders did rebound with a 3.3 percentage point increase.  Yet production just completely imploded, the second month in a row.  Many blame the unusually bad weather and freezing cold.  As is, this still is a very mediocre report, but looks good next to last month's disastrous one.  This is a direct survey of manufacturers and every month ISM publishes survey responders' comments.  The actual survey comments were mainly about the weather. New orders is now 54.5% and picked up from last month.  This is range of the index implies moderate growth, nothing on fire with new orders. The Census reported January durable goods new orders declined by -1.0%, where factory orders, or all of manufacturing data, will be out later this month, but note the one month lag from the ISM survey.  The ISM claims the Census and their survey are consistent with each other and they are right.  Below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left) to the last release data available for the Census manufacturing statistics.  Here we do see a consistent pattern between the two and this is what the ISM says is the growth mark: A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders.

    ISM Rebounds "Stronger than Expected" But for How Long? - The ISM rebounded this month as noted by the February 2014 Manufacturing ISM® Report On Business®. Economic activity in the manufacturing sector expanded in February for the ninth consecutive month, and the overall economy grew for the 57th consecutive month, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®. Following the big downward surprise last month, today's release of the ISM Manufacturing report was stronger than expected. The consensus estimate was 52.0, the rebound was to 53.3.  Last month the expectation was a reading of 56. Instead the ISM Fell to 51.3 With the Largest Decline in New Orders in 4 Years.No doubt the weather was a factor in some of that plunge. Thus some of the rebound should have been expected. But how much and for how long?

    ISM Manufacturing Beats; Hovers Near 8-Month Lows - Following last month's massive miss on US manufacturing, ISM modestly beat expectations today (53.2 vs 52.3 exp.) but remains near 8 months lows. This is still the largest 2-month drop since August 2011. New orders rose but production plunged and employment was unchanged as inventories surged. Respondents fell back on blaming the weather with "conservative optimism" a standout. In addition, construction spending beat expectations in January (and December) so it seems the weather did not affect that?

    Vital Signs: Manufacturers Waiting Longer for Supplies - Another sign of weather’s drag on the economy is the delay businesses face when trying to get materials. The Institute for Supply Management’s February manufacturing report, out Monday, showed that delivery times lengthened sharply last month. The ISM’s supplier delivery times rose to 58.5, its highest reading since April 2011. Longer delivery times are usually a sign of production bottlenecks or shortages that prevent companies from getting the supplies they need in a timely manner. But this time, weather is the culprit. Cancelled flights, icy roads and slower trains are delaying supplies from getting through to manufacturers. As one respondent in the petroleum and coal industry told the ISM, “Bad weather hampering logistics across the country .” Warmer weather should allow the nation’s distribution system to return to normal. Until then, manufacturers will just have to wait.

    Vital Signs: Even the Big Apple Feels Mother Nature’s Bite - New York may be the city that never sleeps, but sometimes its service sector gets frostbite. That raises a risk to the non-manufacturing sector nationwide. The Institute for Supply Management’s New York chapter reported its business conditions index dropped sharply in February, falling to 57.0 from 64.4 in January. But the drag looks temporary. When asked about obstacles to conducting business, a net 50% of respondents pointed to abnormal weather, the leading answer for business impediments. ISM-NY says its top-line index is a good leading indicator to the monthly change in direction for the national ISM’s non-manufacturing business activity index (the proxy for production in the sector and a subcomponent of the top-line purchasing manager’s index). For instance, the indexes have moved in the same direction in six of the past eight months although not by the same magnitude. That link suggests Wednesday’s ISM report for non-manufacturers, mostly service providers, will show some slowing in its national business activity index from January’s 56.3. However, if as in New York, weather is hobbling business activity across the nation, then expect services and other non-manufacturing output to bounce back in the spring. Indeed, the ISM-NY’s six-month outlook index in February jumped to the highest reading since late 2010.

    ISM Non-Manufacturing Index decreases to 51.6 in February -- The February ISM Non-manufacturing index was at 51.6%, down from 54.0% in January. The employment index decreased sharply in February to 47.5%, down from 56.4% in January. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: February 2014 Non-Manufacturing ISM Report On Business® . "The NMI® registered 51.6 percent in February, 2.4 percentage points lower than January's reading of 54 percent. The Non-Manufacturing Business Activity Index decreased to 54.6 percent, which is 1.7 percentage points lower than the reading of 56.3 percent reported in January, reflecting growth for the 55th consecutive month and at a slower rate. The New Orders Index registered 51.3 percent, 0.4 percentage point higher than the reading of 50.9 percent registered in January. The Employment Index decreased 8.9 percentage points to 47.5 percent from the January reading of 56.4 percent and indicates contraction in employment for the first time after 25 consecutive months of growth. The Prices Index decreased 3.4 percentage points from the January reading of 57.1 percent to 53.7 percent, indicating prices increased at a slower rate in February when compared to January. According to the NMI®, ten non-manufacturing industries reported growth in February. The majority of respondents' comments indicate a slowing in the rate of growth month over month of business activity. Some of the respondents attribute this to weather conditions. Overall respondents' comments reflect cautiousness regarding business conditions and the economy." This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was well below the consensus forecast of 53.6% and indicates slower expansion in February than in January

    ISM Non-Manufacturing: Slowest Growth Since January 2010 - Today the Institute for Supply Management published its latest Non-Manufacturing Report. The headline NMI Composite Index is at 51.6 percent, down from last month's 54.0 percent. Today's number came in below the forecast of 53.5, which was also the consensus at The latest data point is the lowest since the January 2010 beginning of sustained expansion following the Great Recession. Here is the report summary: "The NMI® registered 51.6 percent in February, 2.4 percentage points lower than January's reading of 54 percent. The Non-Manufacturing Business Activity Index decreased to 54.6 percent, which is 1.7 percentage points lower than the reading of 56.3 percent reported in January, reflecting growth for the 55th consecutive month and at a slower rate. The New Orders Index registered 51.3 percent, 0.4 percentage point higher than the reading of 50.9 percent registered in January. The Employment Index decreased 8.9 percentage points to 47.5 percent from the January reading of 56.4 percent and indicates contraction in employment for the first time after 25 consecutive months of growth. The Prices Index decreased 3.4 percentage points from the January reading of 57.1 percent to 53.7 percent, indicating prices increased at a slower rate in February when compared to January. According to the NMI®, ten non-manufacturing industries reported growth in February. The majority of respondents' comments indicate a slowing in the rate of growth month over month of business activity. ." Like its much older kin, the ISM Manufacturing Series, I have been reluctant to focus on this collection of diffusion indexes. For one thing, there is relatively little history for ISM's Non-Manufacturing data, especially for the headline Composite Index, which dates from 2008. The chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.

    ISM Services Collapse To Lowest In 4 Years; Employment Worst Since Lehman -- ISM Services headline index collapsed to 51.6 (missing expectations of 53.5) to its lowest since February of 2010. We are sure many will proclaim this as "weather-related" but remember the strong performance of the Manufacturing print. Respondents worried about weather, Obamacare, and oil prices... as the employment sub-index crashed from 56.4 (highest since Nov 2010) to 47.5 (lowest since Mar 2010) - the biggest drop since Lehman! ISM Services Employment craters... And before you blame the weather, the Manufacturing and Services data do not converge on that opinion... Respondents worried about weather, Obamacare, and oil prices...

    Will the slowdown in US services sector reverse with warmer weather? -- In trying to assess the trajectory of the US economy, one is struck by the recent divergence between the manufacturing and the services sectors. Manufacturing in the United States has picked up steam recently in spite of some weather-related headwinds (see chart). The service sector on the other hand took a turn for the worse, which is negatively impacting the labor markets in this service-oriented economy (see story). A couple of key indicators point to slower non-manufacturing activity:
    1. The ISM non-manufacturing PMI came in at the lowest level in years. The detail behind the decline shows the big hit to employment in the service sector, which is what we see in the ADP private payrolls today.
    2. The Markit PMI measure paints a similar picture. Markit: - Adjusted for seasonal influences, the final Markit U.S. Services PMI™ Business Activity Index dipped sharply to 53.3 in February, from 56.7 in the previous month. Although the index was above the 50.0 no-change mark and signalled a solid pace of expansion, the latest reading was the lowest since October 2013 [US government shutdown] Most analysts blame this weakness in the service sector and the resulting softness in the labor markets on the weather.ISI: - There’s hardly a lamer excuse than weather, but that’s probably the case for ADP’s +139k for Feb. It presents downside risk to our best guess for payroll employment of +185k.  Markit: - With the exception of last October, when the government shutdown hit the economy, the service sector grew at its slowest rate since March of last year. This time, the extreme weather was to blame for the slowdown.  If that is indeed the case, as temperatures cimb, we should see a material rebound in service oriented businesses and therefore some big improvements in the jobs picture later this spring. That would mean more Fed taper and higher yields.

    Productivity in 2013 Matched 20-Year Low -- A downward revision to fourth-quarter productivity lowered the gain for all of 2013 to just 0.5%, the Labor Department said Thursday. The small increase ties with 2011 for the weakest annual improvement since 1993. Labor productivity, or output per hour, strengthened early in the economic recovery as businesses grew more efficient. The measure increased 3.1% in 2009 and 3.3% in 2010, to mark the best annual improvement since 2003. But gains have slowed considerably since, measuring 0.5% in 2011 and 1.5% in 2012. The recent weakness was most pronounced in nondurable manufacturing, a sector that includes the processing of food, chemicals and petroleum, as well as textile and paper production. Sector productivity slipped 0.1% last year because output improvements were more than offset by increased hours worked. The easing of productivity is a bit of a double-edged sword. The weak gains hold back the economy’s potential to grow. But it also could signal that businesses are finding it more difficult to meet demand with their existing workforce and equipment. If companies can’t squeeze more out of current workers, they might need to ramp up hiring and capital investment.

    Trade, Wages, and the Conventional Wisdom (or lack thereof) -   If you go around the country and talk to people about the economic struggles they face, many will identify global competition as a key explanatory factor.  But among economists and policy makers, it’s pretty widely held that those people just have it wrong.  They don’t understand a) the large extent to which they benefit from trade, and b) the tiny extent to which they’re hurt by it.  The conventional wisdom thus goes something like this: Everyone benefits from a larger supply of less expensive goods, which they pretty much take for granted: you don’t hear WalMart shoppers complaining about “the China price.”  But when the factory closes and moves abroad, even if it just displaces a few workers, the whole community sees it, feels it, and remembers it. I was reminded of this take upon reading this WaPo piece the other day, which mapped (literally—there’s a really interesting map in the piece) this CW onto the current politics of the trade debate, noting how the Obama administration’s trade agenda is being derailed by this dynamic. So, there’s an answer for why Obama supports the trade deals: They’re going to help Americans overall. And the traditional manufacturing jobs that will suffer — there aren’t that many of them around anymore anyway. The problem with all this is that it’s almost surely wrong.  There are at least two deep flaws in the logic. First, as economist Josh Bivens points out in an important paper on the impact of trade of broad swaths of the workforce, workers displaced by global competition don’t disappear.  They move from jobs in the tradable to the non-tradable sector: Second, as Bivens and others point out, a key determinant of the impact of trade on American workers.  Is the wage levels of the countries with whom we trade.  He emphasizes the impact of our increasing share of trade with low-wage countries, as that shift has had far reaching wage effects here. 

    Weekly Initial Unemployment Claims decline to 323,000 - The DOL reports: In the week ending March 1, the advance figure for seasonally adjusted initial claims was 323,000, a decrease of 26,000 from the previous week's revised figure of 349,000. The 4-week moving average was 336,500, a decrease of 2,000 from the previous week's revised average of 338,500. The previous week was revised up from 348,000. The following graph shows the 4-week moving average of weekly claims since January 2000.

    New Jobless Claims at 323K: A 26K Decline from Last Week - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 323,000 new claims number was a decline of 26,000 from the previous week's 349,000 (revised from 348,000). The less volatile and closely watched four-week moving average, which is usually a better indicator of the trend, was unchanged at 365,500, a decline of 2,000 from the previous week. Here is the opening of the official statement from the Department of Labor: In the week ending March 1, the advance figure for seasonally adjusted initial claims was 323,000, a decrease of 26,000 from the previous week's revised figure of 349,000. The 4-week moving average was 336,500, a decrease of 2,000 from the previous week's revised average of 338,500.  The advance seasonally adjusted insured unemployment rate was 2.2 percent for the week ending February 22, unchanged from the prior week's revised rate. The advance number for seasonally adjusted insured unemployment during the week ending February 22 was 2,907,000, a decrease of 8,000 from the preceding week's revised level of 2,915,000. The 4-week moving average was 2,927,750, a decrease of 14,750 from the preceding week's revised average of 2,942,500. Today's seasonally adjusted number at 323K came in well below the forecast of 338K.

    ADP: Private Employment increased 139,000 in February  -- From ADP: Private sector employment increased by 139,000 jobs from January to February according to the February ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis....Mark Zandi, chief economist of Moody’s Analytics, said, "February was another soft month for the job market. Employment was weak across number of industries. Bad winter weather, especially in mid-month, weighed on payrolls. Job growth is expected to improve with warmer temperatures.”This was below the consensus forecast for 158,000 private sector jobs added in the ADP report.   Note: ADP hasn't been very useful in directly predicting the BLS report on a monthly basis, but it might provide a hint. The BLS report for February will be released on Friday.

    ADP Employment Report Shows Job Growth Freezes Over ADP's proprietary private payrolls jobs report gives us a monthly gain of just 139,000 private sector jobs for February 2014.  January was revised downward significantly, from a solid 175,000 jobs initially reported to just 127 thousand for the month.  Moody's blames the weather for the poor showing, which probably is part of the reason.  Yet continued weakness in the job creation market would not be surprising as a trend.  This report does not include government, or public jobs.  The official BLS employment report for February will be released on Friday. ADP's reported jobs gains in just the service sector were 120,000 private sector jobs.  The goods sector gained were only 19,000 jobs with 14,000 of the goods sector jobs added being in construction.  Professional/business services jobs grew by 33,000, the largest gain this year. Trade/transportation/utilities showed the strongest growth with 31,000 jobs.  Financial activities payrolls lost -2,000 jobs.  Financial activities had the worse two month showing since January and February of 2011  Manufacturing only added 1,000 jobs.  Graphed below are the monthly job gains or losses for the five areas ADP covers, manufacturing (maroon), construction (blue), professional & business (red), trade, transportation & utilities (green) and financial services (orange).  As we can see January's figures are as bleak as February. ADP reports payrolls by business size as well.  Small business, 1 to 49 employees, added 59,000 jobs with establishments having less than 20 employees adding 32,000 of those jobs.  This is a terrible showing, well below the 71,000 average jobs added by small business in 2013.  ADP does count businesses with one employee in there figures.  Medium sized business payrolls are defined as 50-499 employees, added 35,000 jobs.  Medium business job growth was the lowest since April 2013.  Large business added 44,000 to their payrolls.   If we take the breakdown further, large businesses with greater than 1,000 workers, added 43,000 of those large business jobs, which means businesses with 500 to 999 employees only added 1,000 of those jobs. Below is the graph of ADP private sector job creation breakdown of large businesses (bright red), median business (blue) and small business (maroon), by the above three levels.  For large business jobs, the scale is on the right of the graph.  Medium and Small businesses' scale is on the left.

    ADP Tumbles: Huge Miss To Expectations, Prior Data All Revised Lower, "Winter Weather" Blamed  - More snow. That is the assessment of Mark Zandi and the ADP Private Payrolls, which just printed at 139K on expectations of a 155K print. But don't worry: the number was pre-spun for idiot consumption, as the 139K was actually an increase from the January 127K. What was not said is that the January number was a massive revision lower from the previously announced 175K. What will also not be said is that the December ADP print was revised lower from 227K to 191K and the November 289K was chopped off and revised to only 245K. Of course, both of those numbers were massive beats at the time, and have now become misses, but who cares: they have served their algo kneejerk reaction purposes. And while the data is complete garbage, and is obviously manipulated and goalseeked (as we have shown before), it should be welcome to the US to know that in February it generated a whopping 1,000 manufacturing jobs. But the punchline, certainly, is this from Mark Zandi: "February was another soft month for the job market. Employment was weak across a number of industries. Bad winter weather, especially in mid-month, weighed on payrolls. Job growth is expected to improve with warmer temperatures.”

    Vital Signs: Looking for Weather’s Chill on February Jobs Data -- Harsh winter weather continues to take a toll on the economic data. Automatic Data Processing said Wednesday that weather probably contributed to February’s tepid gain of just 139,000 new jobs in the private sector. The Institute for Supply Management also pointed to weather as one reason why the non-manufacturing sector slowed more than expected last month. Will weather drag down the Labor Department’s estimate of February nonfarm payrolls scheduled for release on Friday? Right now, economists expect payrolls increased 152,000. Good but not great. What’s important to the weather answer is how bad conditions were when Labor did its survey, which covers the payroll period including the 12th of each month. According to the National Oceanic and Atmospheric Administration data, snowfall amounts were high across much of the Pacific Northwest and states east of the Mississippi. Even the South experienced a freak snowstorm in the February 12th week, causing transportation disruptions, business closings and power outages. Even if the weather doesn’t skew the top-line payrolls change, Mark Zandi, chief economist at Moody’s Analytics that puts together the ADP report, says economy-watchers should also pay attention to the average workweek in February. A sharp drop in hours means workers could not get to work, a drag on output growth this winter.

    Economy added 175,000 jobs in February: The job market rebounded from a two-month slump in February as employers added 175,000 jobs, while the unemployment rate rose to 6.7% from 6.6%, the Labor Department said Friday. Economists surveyed by Action Economics estimated that 157,000 jobs were added last month. Businesses added 162,000 jobs. Federal, state and local governments added 13,000. Job gains for December and January were revised up by a total 25,000. December's were revised to 84,000 from 75,000 and January's to 129,000 from 113,000. Many analysts had predicted another month of tepid job gains after a survey by private payroll processor ADP showed businesses added just 139,000 jobs last month. A measure of service-sector employment also fell sharply in February and reports on housing, retail sales and factory output have been weak amid an unusually cold and stormy winter. Monthly job gains averaged 200,000-plus last fall before the adverse weather helped lower average gains to about half that in December and January. Yet some economists say other factors also have hurt the economy and labor market, such as a slowdown in business stockpiling after firms aggressively replenished shelves late last year.

    February Employment Report: 175,000 Jobs, 6.7% Unemployment Rate - From the BLS: Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. ... The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported. The headline number was above expectations of 150,000 payroll jobs added. The first graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring. This shows the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis. Employment is 0.5% below the pre-recession peak (666 thousand fewer total jobs). The third graph shows the unemployment rate. The unemployment rate increased in February to 6.7% from 6.6% in January. The fourth graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate was unchanged in February at 63.0%. This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics.

    February jobs report: surprisingly decent - In February 178,000 jobs were added to the US economy.  The unemployment rate rose slightly, up 0.1% to 6.7% . December and January were both revised upward by a total of +25,000.  Given the relatively poor data in a number of sectors that we have seen in the last couple of months, this was a surprisingly decent report - although there are a few cracks in the facade.  As usual, first, let's look at the more leading numbers in the report which tell us about where the economy is likely to be a few months from now. These were either positive or neutral.

    • the average manufacturing workweek was unchanged at  40.7  hours (but is down 0.3 hours from several months ago). This is one of the 10 components of the LEI.
    • construction jobs increased by 15,000. YoY 152,000 construction jobs have been added.
    • manufacturing jobs rose by 6,000.
    • temporary jobs - a leading indicator for jobs overall - increased by 24,400.
    • the number of people unemployed for 5 weeks or less - a better leading indicator than initial jobless claims - fell to 2,373,000, the second lowest post-recession reading compared with December's 2,255,000 low.
    • The average workweek for all nonsupervisory workers declined by -0.2 hours from 33.5 hours to 33.3 hours.
    • Overtime hours decreased from 3.4 hours to 3.3 hours.
    • the index of aggregate hours worked in the economy fell by -0.4 from  106.8 to 106.4. This is -0.8 off its post-recession high set four months ago.
    • The broad U-6 unemployment rate, that includes discouraged workers declined from 12.7% to  12.6%, a post-recession low.
    • The workforce rose  by 264,000. Part time jobs fell by -210,000.

    February Employment: 175K New Jobs, Employment Rate Ticks Up to 6.7% - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics:Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services and in wholesale trade but declined in information....  Severe winter weather occurred in much of the country during the February reference periods for the establishment and household surveys.  Today's report of 175K new nonfarm jobs was better than the forecast of 149K. And the unemployment rate of 6.7% was a tick above the expectation of no change at 6.6%. The BLS report specifically references Question 8 in its separate Employment Situation Frequently Asked Questions for a description of how bad weather impacts the data. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. This rate has fallen significantly since its 4.4% all-time peak in April 2010, but for the past 11 months it has been range bound between 2.8% and 2.3%, with the latest at 2.5%.

    Economy Adds 175,000 Jobs in February, Despite Bad Weather – Dean Baker - The establishment survey showed the economy added 175,000 jobs in February, in spite of the unusually harsh weather on much of the country. With modest upward revisions to the prior two months' data, this brings the 3-month average to 129,000. While this is considerably weaker than the fall months, weather has undoubtedly played a role in slowing job creation. (In contrast to the prior two months, February’s weather was unusually harsh.) The mix of jobs in February was somewhat peculiar with the professional and business services category accounting for more than half of the total (79,000 jobs). This was driven in part by an unusual jump in accounting bookkeeping services of 15,700 jobs, which partially offset a decline of 30,800 reported in December. While the more skilled portion of this sector (computer and management services) has been showing healthy growth, growth in the less skilled portion has been especially strong. Temp agencies added 24,400 jobs in February and 227,700 over the last year. Services to buildings (e.g. custodians) added 11,400 jobs last month and 66,700 (3.6 percent) over the last year. Manufacturing employment has slowed to a crawl. The sector added 6,000 jobs, with downward revisions bringing the three month average to just 6,300. There were downward revisions to retail with a loss of 4,100 jobs following a loss of 22,600 in January. In addition to the weather, this likely reflects changed seasonal hiring patterns. Health care employment remains on a slower track, with the sector adding 9,500 jobs in February bringing the three month average to 5,900. The government sector added 13,000 jobs, with gains at the state and local level offsetting the loss of 6,800 jobs. Non-postal federal employment is now down by 72,900 (3.5 percent) over the last year. The motion picture industry lost 14,100 jobs in February. Employment is down by 56,600 (15.5 percent) over the year, hitting its lowest level since June of 1995. Construction continued its upswing in spite of the weather adding 15,000 jobs. Unemployment in the sector is actually below pre-boom levels, with the unemployment rate averaging 12.6 percent in January and February compared with 14.0 percent for the same months in 2003. The average hourly wage for all workers increased at a 2.3 percent annual rate in the last three months compared with the prior three. Interestingly, wages for production and non-supervisory workers rose somewhat more rapidly, growing at a 3.3 percent pace over this period. This implies that less educated workers seem to be doing somewhat better in the current economy, the opposite of the skills shortage view that is widely being promoted.

    Nonfarm Payrolls +175,000, Household Survey +42,000; Unemployment Rate 6.7%  - Nonfarm Payrolls rose by 175,000 vs. a Bloomberg consensus expectation of 150,000. The employment change for December 2013 was revised up by 9,000 (from +75,000 to +84,000), and the employment change for January 2014 was revised up by 16,000 (from +113,000 to +129,000). The overall effect was a modest two-month upward revision of +25,000. Beneath the surface, things look worse again. The household survey shows a gain of employment of only 42,000 while unemployment rose by 223,000. February BLS Jobs Statistics at a Glance:

    • Nonfarm Payroll: +175,000 - Establishment Survey
    • Employment: +42,000 - Household Survey
    • Unemployment: +223,000 - Household Survey
    • Involuntary Part-Time Work: -71,000 - Household Survey
    • Voluntary Part-Time Work: -138,000 - Household Survey
    • Baseline Unemployment Rate: +0.1 to 6.7% - Household Survey
    • U-6 unemployment: -0.1 to 12.6% - Household Survey
    • Civilian Non-institutional Population: +170,000
    • Civilian Labor Force: +264,000 - Household Survey
    • Not in Labor Force: -94,000 - Household Survey
    • Participation Rate: +0.0 at 63.0 - Household Survey
    • In the past year the population rose by 2,257,000.
    • In the last year the labor force fell by 213,000.
    • In the last year, those "not" in the labor force rose by 2,253,000
    • Over the course of the last year, the number of people employed rose by 2,044,000 (an average of 170,333 a month)

    The population rose by over 2 million, but the labor force fell by over 200,000. People dropping out of the work force accounts for much of the declining unemployment rate.

    February Payrolls 175K, Beat Expectations Of 149K, Unemployment Rate Rises To 6.7% -- So much for the weather. As we warned earlier today, when we said that with everyone expecting a miserable print the only possible result would be a large "beat", sure enough that's precisely what happened. Breaking it down:

    • February payrolls: +175K, Exp. 149K, Last revised from 113K to 129K).
    • Household survey jobs added: 42K, far less than the Household survey.
    • Unemployment rate: 6.7%, Exp. 6.6%, Last 6.6%.
    • Labor participation rate: 63.0%, Last 63.0%
    • Private payrolls: 162K, Exp. 145K, Last 145K
    • Manufacturing payrolls: 6K, Exp. 5K, Previous revised from 21K to 6K

    Jobs Report, First Impressions: Payrolls Rise but so Does Long-Term Unemployment -- The nation’s payrolls grew by a greater-than-expected 175,000 last month, while the unemployment rate ticked up slightly to 6.7%, according to today’s jobs report from the Bureau of Labor Statistics.  In a report that has both good and bad news for the American workforce, February payrolls appeared to shake off analysts’ cold-weather concerns, adding a solid 175,000 jobs and revising job counts for the prior two months up by a total of 25,000.  Another notable positive in the February report was the 0.4% increase in average hourly wages over the prior month, and a 2.2% increase, year-over-year.  If this sticks, it will bring a bit a paycheck relief to many struggling workers. On the downside, the number and share of long-term unemployed increased last month, to 37% of the unemployed and 2.5% of the labor force, up from 2.3% in January.  Importantly, this increase is occurring after Congress has allowed extended unemployment insurance benefits to lapse. Though payrolls posted a decent number for February, it’s always important to average over a few months to get a clearer signal from the underlying trend.  Over the past three months, payrolls are up about 130,000 per month on average, compared to over 200,000 for the prior six months (see figure below).  It’s also worth noting that hours worked per week slipped a bit last month, though this is likely because some full-timers experienced weather-related schedule disruptions. For these reasons, and not withstanding February’s better payroll number, I remain concerned that the pace of job growth may have downshifted in recent months.  Yes, weather adjustments may have played a role in this downshift, but that is looking somewhat less the case as per incoming data (e.g., weather-sensitive construction was up 50,000 in January and 15,000 last month).

    Unemployment in February Remains Elevated Across the Board --The table below shows the current unemployment rate and the unemployment rate in 2007, along with the ratio of those two values, for various demographic and occupational categories. One thing that is immediately obvious from the table is that there is substantial variation in unemployment rates across groups. This is always the case—it was true in 2007, before the recession began, and it is true now. But the main point of the table is that the unemployment rate is between 1.4 and 1.7 times as high now as it was six years ago for all age, education, occupation, gender, and racial and ethnic groups. Today’s sustained high unemployment relative to 2007, across all major groups, underscores the fact that the jobs crisis stems from a broad-based lack of demand. In particular, unemployment is not high because workers lack adequate education or skills; rather, a lack of demand for goods and services makes it unnecessary for employers to significantly ramp up hiring. Weak demand for workers has kept wage growth very sluggish. Average hourly wages for all private-sector workers grew by 2.2% over the last year, which is just slightly higher than the rate of inflation. The economic link between high unemployment and low wage growth is straightforward; employers do not need to pay sizable wage increases to get and keep the workers they need when job opportunities are so weak that workers lack other options.

    Don’t Sweat the Rise in the Unemployment Rate - The U.S. unemployment rate ticked up to 6.7% but a broader measure of joblessness actually fell 0.1 percentage point to 12.6%, offering a hint of positive news. The main reason for the increase in the unemployment rate was a surge in the labor force — the number of people working or looking for work. The labor force jumped by more than half a million people in February. After seeing many months of people giving up looking for work, it could be an indication that more people are coming off the sidelines and back into the labor force. That development may be especially surprising given the expiration in extended unemployment benefits that hit at the end of last year. Some 1.3 million workers lost those benefits when the program expired, and many of them were expected to become discouraged and drop out of the labor force altogether. It appears that not only have most of those people remained in the labor force, but others may be joining them. Indeed the number of people unemployed for more than 26 weeks surged by more than 200,000. Sure, that could be due to people moving from 26 weeks to 27, but the labor market was pretty strong six months ago. Job growth was robust and the weekly measures of unemployment applications were at lows for the year. That suggests some of the discouraged long-term unemployed came back into the labor force. There’s more evidence for that in the drop in the broader unemployment rate. The measure, known as the “U-6″ for its data classification by the Labor Department, has dropped 0.5 percentage point in two months – to the lowest point in more than five years. That rate includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find. The ranks of discouraged workers and those part-time for economic reasons both fell last month. There were 755,000 discouraged workers in February, the lowest level since April 2009. Those discouraged workers aren’t counted as unemployed or part of the labor force because they didn’t actively look. Meanwhile, there were 7.2 million people working part time but who wanted full-time work. That is still high historically, but it’s at its lowest level since October 2008.

    Jobs Report Highlight: From Bad to Merely Sluggish - Here are highlights from the February employment report, which showed job growth picked up from the prior two months with an increase of 175,000 jobs.

    • From bad to merely sluggish:  The good news is the labor market picked up from the prior two months’ slow pace, and managed to do so during a month of snowy, wintry weather. But the increase hardly marks a burst of hiring. February’s job growth of 175,000 is roughly enough to keep up with the growing population. Growth still hasn’t returned to the average pace of about 200,000 logged between June through November.
    • Unemployment rate ticks up: The jobless rate, obtained from a separate survey of households, climbed to 6.7% in February from 6.6% in January—the first rise since December 2012. The number of unemployed Americans rose, but so did the number of employed Americans. One encouraging sign: the civilian labor force—including employed workers and those without a job but actively looking for work—increased by 264,000. That could be a sign Americans who had dropped out of the labor force began looking again, often a sign of underlying strength in the market.
    • Industries: The big gains came in professional and business services, which added 79,000 jobs, including 16,000 new positions in accounting and bookkeeping. The construction industry added 15,000 – a modest gain but encouraging nonetheless given the wintry weather may have slowed some projects. Job growth in mining and logging—another sector affected by weather–was flat, and manufacturing jobs were little changed. Jobs in food services climbed 21,000, but retail jobs slipped 4,000.
    • Stronger incomes: Workers’ incomes climbed at a healthy clip. Average hourly earnings for all employees climbed 9 cents to $24.31. Earnings were up 52 cents from a year earlier, or 2.2%.

    February 2014 Labor Report Review & Beveridge Curve notes  - Well, that's just about the way it usually goes.  I predicted a positive surprise, but I thought the report was slightly disappointing.  The market, however, appears to think it was a positive surprise. Here are updates of a few indicators I've been watching. Durations did not move in the direction I thought they would. Long duration unemployment actually kicked up a beat last month. I expect this to move strongly in the other direction over the next several months. Of course, there is some noise in this data. Next, is my estimate of the proportion of long-term unemployed workers who exit the unemployment category (more than 15 weeks) over a 3 month period. This indicator had moved strongly higher over the last couple of months, but this month, it pulled back. The trend should continue to move higher, though. Next is the year-over-year change in average wages. This continues to show strength. Average wages are accelerating, even as inflation remains low. This indicator is quickly entering territory that would normally be associated with rising interest rates. Finally, I want to address quits, job openings, and unemployment.  Scott Sumner linked to this post by Evan Soltas.  Evan's post includes this graph, comparing quits and unemployment.If I understand Evan correctly, he's addressing observers who believe that labor markets are in worse shape than the unemployment rate would suggest.  He's saying that since there is a pretty stable relationship between quits and the unemployment rate, the unemployment rate is probably a decent indicator of slack in the labor market.  I think Evan should take it even further.  The unemployment rate is understating tightness in the labor market.  Pro-cyclical labor policies, especially the highly extended unemployment insurance EUI) which has recently been retracted to normal levels, temporarily and significantly raised the natural unemployment rate by adding a sort of friction into the labor market that caused unemployed workers to re-enter employment more slowly. The addition of employable workers to the roster of the unemployed caused both the quits rate to fall and the unemployment rate to rise, relative to where they would have moved in a typical business cycle.

    Winter Polar Vortex Didn't Freeze The Unemployment Report - The February current population survey unemployment report is just plain weird and it is not due to weather.  First, the unemployment rate is an artificial 6.7%.  The unemployment rate increased by 0.1 percentage points due to more people being officially counted as unemployed.  Yet, the employment level is basically static, almost unchanged from last month, along with the labor participation rate.  The ranks of the employed has increased 1.8 million over the past year while the official unemployed has declined by almost 1.6 million.   This article overviews and graphs the statistics from the Employment report Household Survey and the labor statistics look almost frozen and static.  This survey does actually give an estimate of the people not working due to bad weather, the favorite thing to blame recently when economic statistics are horrific.  The household survey counts people not at work due to bad weather as employed.  The January to February change did jump in comparison to past years and was 339 thousand more  Yet the figure pales in comparison to the January to February 2010 and 2011 changes.  If people went to part-time hours for weather, that too is counted as part-time for non-economic reasons.  After seasonal adjustment, part-time also was not noticeably impacted by the weather.  Bottom line, in spite of people being sucked to the polar vortex from hell in February, in terms of the Household survey it had little impact.  The ranks of the employed increased by 42 thousand this month which is very low. .  The employed now tally 145,266,000 as shown in the below graph. Those unemployed stands at 10,459,000, a 223,000 increase from last month and a main reason why the unemployment rate ticked up by 0.1 percentage points.  Below is the change in unemployed and as we can see, this number normally swings wildly on a month to month basis generally.  A sudden increase in the ranks of the official unemployed for one month really isn't enough to indicate a trend. Those not in the labor force decreased by -94,000 persons.  The below graph is the monthly change of the not in the labor force ranks.  Notice the increasing swells and wild monthly swings.  Those not in the labor force has increased over two million in the past year.  These are not all baby boomers and people entering into retirement as we showed in this analysis of labor participation by age.

    Jobs Report Round-up -- Me old mate Heidi Shierholz has a neat table showing the ratio of unemployment rates from today’s report to those of 2007.  What I found revealing was the absence of an obvious pattern among the jobless ratios across age, occupation, education, race, and so on.  That suggests, as Heidi underscores, that it’s pervasive weak demand, not skills shortages driving the jobless rate.  If the latter were as big a deal as some people say, you’d see lower ratios among more highly educated workers and differences between higher pay/skilled occupations and lower ones. While Heidi correctly notes that overall average wage growth has been flat, over at the NYT Economix blog I point out that if you look at middle-wage workers, there’s a bit of an acceleration going on.  At the same time, inflation is decelerating.  Inflation hawks: draw in your talons.  This is a good trend that should be nurtured, not stomped on! Dean Baker notes this trend as well, and, getting back to the false skills shortage claims, points out that “…less educated workers seem to be doing somewhat better in the current economy, the opposite of the skills shortage view…”  (BTW, these observations should not be taken to imply that every employer everywhere can immediately find the worker they seek at the wage they want to pay…but re that, see this.) The White House has two neat charts showing weather impacts.  As I suggested earlier, the tick down in average weekly hours looks to be a function of a lot of weather-related work-schedule disruptions.  (They’ve also got an interesting look at what they call volatility of monthly job gains or losses, and tout positively its low level…hmmm…I’m not sure why this doesn’t just confirm we’re slogging along with steady but only moderate employment gains.

    Weather and the Jobs Report -- Rah, rah, rah. That was the dominant feeling among Wall Street analysts after the jobs report exceeded expectations despite the dismal winter we’ve been having. Employers added 175,000 jobs even though the week referenced in the jobs survey, Feb. 9 through 15, was perfectly nasty.  For many analysts, that answered the question of whether the weather was masking deeper troubles. “If the economy managed to generate 175,000 new jobs in a month when the weather was so severe,” wrote Paul Dales, the senior United States economist at Capital Economics, “once the weather returns to seasonal norms payrolls employment growth is likely to accelerate further.” Mr. Dales thought that snow and ice were clearly the culprits for the drop in retail employment. That segment lost 4,000 jobs in February and 23,000 in January, even after a seasonal adjustment for the end of the Christmas shopping spree.  Construction was more complicated. Last month, many economists pointed to an increase of 50,000 jobs in construction as proof that the weather was not a factor in the lackluster report. But David Crowe, the chief economist for the National Association of Home Builders, said employment was not heavily weather-dependent. To figure out if weather, and not just a loss of appetite on the part of homebuyers, is putting a damper on things, he compares housing starts, which require outdoor activity, to permits, which don’t. In January, he said, starts were down significantly, while permits had decreased only a small amount. . “In that starts figure, the West did not have much of a change,” Mr. Crowe said. “And that, of course, is the only region that hasn’t had abnormal weather that would stop construction. Starts in the West for single-family houses were actually up in January.” But some economists, even those who predicted a strong jobs report, were unconvinced that weather could be blamed for the winter wobble. “Keep Telling Yourself It’s the Weather” was the title of a note from Steve Blitz, the chief economist at ITG, written before the jobs report came out. Mr. Blitz said that industries like insurance and technical services were forecasting little growth for the year, and pointed out that even Internet-based retail sales were down in January.

    Bad Weather Did Affect Jobs Report and May Put Growth on Ice - The wicked winter’s effect on hiring remains unclear, but the unusually cold and snowy weather almost certainly prevented existing employees from working, according to Friday’s jobs report. And that trend could put first-quarter economic growth on ice. Average weekly hours among production and nonsupervisory employees fell to seasonally adjusted 33.3 hours in February, continuing a steady winter decline from 33.7 hours in November. The workweek among rank-and-file retail staff dropped to 29.6 hours—the lowest on records back to 1972. Weather appears to be the culprit. The Labor Department data showed 6.9 million Americans worked part time due to the weather last month. That is ten-times the number reported a year earlier and well above the February average of 1.5 million the past decade. The decline in hours worked “is going to take a little wind out of the economy’s sails,” said John Silvia, chief economist at Wells Fargo. The latest numbers confirm his forecast for 1.5% gross domestic product growth in the first quarter, a marked slowdown for the second-half of 2013. The reduction in hours for production employees is a double whammy for the economy. Those workers typically don’t get paid when they don’t work. That means not only were they not adding to output, but they also have less income, and therefore could reduce their own spending. The reduction in hours was particularly prevalent among retail workers. The workweek for production retail employees was below 30 hours for consecutive months for the first time since 2009. That could reflect closures of malls and other retail outlets due to weather and disruptions to transit systems that prevented many employees from commuting to work.

    Incomplete Recovery for Working-Age Men - Men between the ages of 25 and 54 are in their prime working years. Generally speaking, they’re too old for college and too young for retirement.In February 2008, 87.4 percent of men in that demographic had jobs.Six years later, only 83.2 percent of men in that bracket are working.This employment rate is an important indicator of the health of the labor market. I’ve written repeatedly that overall job growth has roughly kept pace with population growth since the recession. Nothing less; nothing more.Even so, the unemployment rate has steadily declined. In other words, fewer Americans are looking for work even though the share with jobs isn’t changing. Part of the reason is demographic. The Baby Boom is aging into retirement. Part of the reason is economic. People who can’t find jobs eventually give up.Focusing on working-age men is a way of judging how much of the problem is economic. The employment rate in this group reached a low point of 80.4 percent in late 2009, so the February rate of 83.2 percent represents real progress.On the other hand, it means the nation is not even halfway to a full recovery.

    Where The Jobs Are: More Than Half Of All February Job Gains Are In Education, Leisure, Temp Help And Government - As we showed moments ago, the scariest chart of today's nonfarm payroll report was the plunge in average weekly earnings. For those curious why US workers are unable to make any headway in obtaining higher wages, the following breakdown of just where the 175,000 (seasonally adjusted, because apparently now seasonal adjustments work again) February job gains were should provide some color. Unfortunately, as has been the case for the past several months, well over half the total job gains in February were in industries that pay the least.

    No Raise For You: Earnings Growth Drops To New Post-Lehman Lows -- In order to normalize for the weekly hours worked, we decided to look at the big picture which ignores hours worked, and average hourly earnings. So we looked at average weekly earnings. In February, this number was $682.65, down from $683.74 for production and nonsupervisory employees. However, the real impact of declining wages is seen nowhere better than in the annual increase in average weekly earnings. The chart below needs no explanation: when wage growth is at 1%, or half of the Fed's inflation target, you will not get any sustained economic recovery. And what if one looks at the average weekly earnings of all employees? Well, we just hit a new post-Lehman low. 5 years into the "recovery", weekly earnings growth is the lowest it has been in 5 years!

    Record Jobs For Old Workers; Everyone Else - Better Luck Next Month - We have long been pounding the table (certainly since mid-2012) that the US labor market has become a place where mostly older workers - those 55 and over - are hirable - something which has nothing to do with demographics, and everything to do with excess worker slack, and an employer's market to pick and chose those workers that are most qualified for a job since older workers have the same wage leverage as younger ones: none. February was merely the latest confirmation of just this.  The chart below shows the age breakdown of the various age groups of workers hired in the past month. The vast majority, or 239K of the job gains(according to the Household survey), once again fell into the oldest group, those aged 55-69. The core demographic, those 25-54, rose by a negligible 29K. Everyone else, i.e., those 16-24, saw a total of 153K in job losses.

    Vital Signs: Job Security Is On the Rise -- Fewer workers are up at night worrying about their jobs. The latest survey of U.S. consumers done by the Royal Bank of Canada shows households are feeling better about the economy at the start of March. One reason the RBC confidence index rose to 51.8 this month from 50.4 in February was a more upbeat view about employment. The RBC survey shows only 22% of consumers worry that they or someone in his household will lose a job or be laid off. That’s the lowest reading since RBC began asking about job security four years ago. Fewer job jitters are a positive for consumer spending. Workers who feel secure about their future paychecks are more likely to take on long-term financial commitments like mortgages, auto loans and credit-card payments. “It will be hard for consumer spending to accelerate if wage growth doesn’t accelerate,” . And pay raises are unlikely to increase by much until the demand for labor soaks up the vast number of unemployed and underemployed in the U.S.

    2 Million Americans Are Now Missing Out On Unemployment Benefits - The number of long-term jobless Americans missing out on federal unemployment insurance this week topped 2 million. Benefits ended for 1.3 million workers in December. Each week since then, another 70,000 Americans who would have been eligible have joined them. In a budget proposal released Tuesday, President Barack Obama called on Congress to restore the benefits as "a starting point in achieving opportunity and mobility," at a cost of $15 billion. The budget outline notes that 35 percent of the unemployed have been out of work six months or longer, a higher rate of long-term joblessness than at any other time Congress has dropped extended benefits. Democrats and Republicans have fought over reauthorizing the compensation, but a resolution seems unlikely as budget blueprints and foreign crises increasingly dominate lawmakers' attention.  Senate Majority Leader Harry Reid (D-Nev.) has said the Senate will vote sometime soon on legislation that would reauthorize federal benefits programs for six months. Even if the Senate passes a bill, however, there is no guarantee it would pass the Republican-controlled House of Representatives.  Unable to force a vote, Democrats on the House Ways and Means Committee, which oversees unemployment insurance policy in the lower chamber, put a ticker on their website that counts the number of people missing out on benefits. It crossed 2 million early on Tuesday.

    The cutoff in extended unemployment benefits by Congress wasn't just vile, it explains much of the economic weakness so far this year - Before getting to the main subject of this post, let me say that I consider it an act of moral depravity to have cut off extended unemployment benefits when both unemployment and underemployment remain so high.  There simply aren't enough jobs to absorb the millions of people who have looked for a job and cannot find one.  But cutting off extended unemployment benefits at the beginning of this year wasn't just vile, it is actually harming the economy.  It appears to be the primary additional factor beyond the unusually severe winter weather in the raft of relatively poor data we have seen so far this year.To begin with, let's quantify the scope of the lost benefits: Federal unemployment benefits that continue for 26 weeks after a person uses up the 26 weeks of state unemployment benefits ended Saturday, so now some 1.3 million people won’t be getting their $1,166 (on average) monthly check. By June, another 1.9 million will be cut off. It is believed that another 600,000 or so lost benefits in February, which  brings us to 2,000,000 people having lost unemployment benefits roughly equalling $1200 a month so far this year.  Simple multiplication means a loss of $2.4 billion in spending ability per month, or $28.4 billion for the whole of 2014.  It is ultimately estimated that about 4,000,000 people may be affected.  That's a loss of $56.8 billion annually.But it gets worse.  Let's stick with just the 2,000,000 people affected so far.  When a similar cutoff was being debated in 2011, the Department of Labor  noted that A study commissioned by the Labor Department under the Bush administration showed that for every dollar spent on unemployment benefits, two dollars are pumped back into the economy.This is because, as Business Week noted in an article in December, "the unemployed reliably spend that money, creating a multiplier effect in the economy." As a result, the Labor Department estimated that there would be a net negative effect of $62 billion in 2012 from a cutoff then.Applying the multiplier to the present situation gives $1200/mo * 2 million people * 12 months * 2 multiplier =$50-$60 billion loss in 2014.

    The End of Emergency Unemployment Compensation - Who Is It Hurting? - The loss of Emergency Unemployment Compensation (EUC) is starting to impact more and more unemployed Americans thanks largely to inaction by the Senate and the House.  Studies show how this impact will grow over the coming year, ultimately impacting millions of jobless workers. Let's open by looking at the benefits of EUC according to the White House:

    • 1.) 23.9 million workers have received extended UI benefits.
    • 2.) Roughly half of recipients have some college education.
    • 3.) 4.8 million recipients have a bachelors degree or higher.
    • 4.) Including the families of workers, nearly 69 million people have been supported by extended UI or just over one in four Americans.

    Here is a graph showing how the cumulative number of EUC recipients has slowed down somewhat since the inception of the program in 2008:  Even though the number of new EUC claimants has declined, growth in new claimants is still quite high, particularly considering that we are five years into the "recovery".  Here is a graph showing how the average length of unemployment is still at extremely high levels compared to all other recoveries:  In January 2014, an average unemployed American worker was jobless for 35.4 weeks, down from just over 40 weeks in late 2007.  Unfortunately, this is more than double the average of 15.2 weeks going all the way back to the beginning of 1948!  This suggests that the problem for long-term unemployed workers in the United States is only going to get worse as time passes unless an extension of EUC is passed.  According to the Centre on Budget and Policy Priorities, an estimated 1.3 million workers were cut off in December 2013 alone when the program expired.  This will grow to 3.2 million by June 2014 and 4.9 million workers by the end of 2014 as shown on this graph:

    White House: Jobless rate over 6 percent 'til 2017 - President Barack Obama's $3.9 trillion budget proposal for next year suggests the U.S. economic recovery that began in 2009 will continue to gain momentum over the next few years but that the unemployment rate won't fall to pre-recession levels of below 6 percent until 2017. The White House forecast that the budget deficit would fall from $649 billion in the fiscal year that ends Sept. 30 to $564 billion in fiscal 2015 and $458 billion in 2017. If the projections hold up, it would mark three years in a row of annual red ink below $1 trillion. The unemployment rate, which was 6.6 per cent in January, will continue to slowly decline over the next five years, stabilizing at 5.4 percent by 2018, the administration projected. That's down from a high of 10 percent reached during the 2008-2009 recession. The economic forecasts, included in the president's budget proposal for the fiscal year that begins Oct. 1, are generally in line with projections made by other government and private forecasters. However, the White House projects a 6.7 percent unemployment rate for 2015. While that's the same level as in the Blue Chip Consensus - an average of about 50 private-sector forecasts- it is more optimistic than the Congressional Budget Office, which projects 2015 unemployment at 7.1 percent.The administration forecast is based on assumed congressional approval of all of Obama's budget tax and spending proposals, an unlikely prospect.

    Here’s The Story About The Economy That Liberals Don’t Want To Hear -  For the most part, the "left" has been on the correct side of all the big economic policy debates since the economic crisis hit. Inflation has not been an issue at all, meriting exceptionally aggressive Fed policy. The public debt has also not been an issue at all, and attempts to cut spending have been completely counterproductive and damaging to the short and long-term health of the economy. Liberals were on the correct side of these debates. Conservatives were, by and large, not. You can get into debates about other issues (taxation, healthcare policy, trade, etc.) but the two ones above were the real biggies. But times change, and a gap is starting to grow between the liberal view of things, and how economists are seeing things. This is most evident in the view of the labor market. The liberal view is that there's tons of room for the Fed to be more aggressive in the pursuit of full employment. Meanwhile, economists are starting to come to the conclusion that the job market is not far from being "tight." More specifically, the view among more and more economists is that the headline unemployment rate (which is currently at 6.6%) is a fairly accurate gauge of the job market, and that various measures of long-term unemployment (and labor force participation) tell us very little.

    How to Raise Both Take-Home Pay and Tax Fairness - Budget watchers of differing political stripes have recognized that if there’s one idea from the President’s budget that might have some bipartisan legs it’s the proposed expansion of the earned income tax credit (EITC) for childless, adult workers. The EITC is a highly successful and politically popular antipoverty program that lifts the wages of low-income workers.  In 2012, these extra earnings helped to lift 6.5 million people, including 3.3 million children, out of poverty.  And research finds the program to be powerfully pro-work. But the credit has a hole when it comes to childless adults.  The average family with kids ends up with around $3,000 from the credit but for childless workers, the average credit amounts to less than $300.  Yes, families with kids need more resources, but it’s hard to argue the policy is “making work pay” for low-wage workers without kids. The President’s proposal would expand this part of the credit significantly, by both increasing the size of the subsidy and expanding the eligibility criteria to include more workers.  The figure below shows just how much that expansion would mean for two types of workers. For someone whose earnings put her at the poverty line—around $12,500—the credit would jump from about $170 to $840; a full-time minimum wage worker receives virtually no benefit from the current EITC, but under this proposal, her income would rise by $540.

    EITC completes Obama inequality agenda; GOP response is incoherent - Tuesday morning, President Obama put the final piece of his inequality agenda on the table. In releasing his 2015 budget, he calls for an additional $60 billion dollars in anti-poverty spending by expanding the earned income tax credit (EITC) for those without children, as well as making it eligible to younger and older workers. The earned income tax credit is a program that boosts the wages of low-income workers, particularly those with children, through the tax code. This expansion will benefit 7.7 million workers already getting the EITC, and allow an additional 5.8 million workers to take advantage of the program. With this proposal, President Obama has a full anti-inequality agenda. In turning to inequality as the generational challenge of our times, President Obama has emphasized three sets of problems. The first is runaway incomes at the top, which he has used to justify the need for financial regulations as well as higher taxes on the rich. The second is stagnating incomes in the middle, which health care reform is meant to challenge. And the last is economic insecurity at the bottom, which he’s focused on with a higher minimum wage, expanded Medicaid access, and now an expanded earned income tax credit. How have Republicans responded to the inequality challenge? They’ve really only put markers on the third challenge of poverty and low-wage work. However, a quick glance at their thinking shows that their current agenda is a mix of the impractical, inhumane, and incoherent compared to what liberals have on offer.

    The partisan divide over the Earned Income Tax Credit - President Obama’s new budget increases spending on and expands eligibility for the Earned Income Tax Credit, the largest and most successful government assistance program for the working poor. The much-praised House GOP tax reform introduced last week would cut the EITC, even though a House GOP report excoriating most federal assistance to the poor singled out the program for applause. This new partisan difference over the EITC – a program that in the past has been a rare source of bipartisan agreement – speaks volumes about Republicans’ newfound ambivalence toward the working poor. The EITC was created back in 1975 by Sen. Russell Long, who–despite being the son of populist Louisiana Gov. Huey “Every Man A King” Long – was fairly conservative. The idea was to use government assistance to reward work rather than indolence among the poor; you only got the money if you could show that you had worked. Welfare reform should have ended the partisan debate over welfare dependency. Instead, it merely shifted the goalposts. Previously, the GOP had praised the “deserving” (i.e., working) poor even as they excoriated the “dependent” (i.e., welfare-collecting) poor. But with Clinton’s abolition of long-term assistance and imposition of work requirements, it became more difficult to isolate a class of nonworking, government-dependent poor that Republicans could reliably scapegoat. So they gradually came to rebrand as “dependent” any low-income person who collected government assistance, even if that person also had a job. In effect, conservatives broadened their definition of “welfare” to the breaking point, including food stamps (most of which go to people with jobs), Medicaid (a benefit you collect only if you get sick), and even Pell Grants.

    Should we extend EITC to childless workers? --Jason Furmans says yes, here is one bit:Looking back at the history of poverty and the tax code in the last several decades reveals some important lessons for expanding opportunity and combating poverty going forward, including the value of having a pro-work, pro-family tax code. The most important new prospect in this area is expanding such an approach for households without children, a proposal that President Obama included in his 2015 budget, and an idea that is also being advanced across the political spectrum, from Senator Marco Rubio to Bush Administration economist Glenn Hubbard to Isabel Sawhill at the Brookings Institution. It becomes more analytical after that.  Here are some further basic facts about EITC extension.  Here is a 2009 study (pdf).

    Time to Try Compassion, Not Censure, for Families - Last week, President Obama returned to the theme of fatherless children. “I didn’t have a dad in the house,” Mr. Obama said while announcing a $200 million, five-year effort to help black youth. “And I was angry about it, even though I didn’t necessarily realize it at the time. I made bad choices.” But something important may be changing. The recent actions of the Obama administration suggest a subtle shift in the approach to these complicated social trends. On Tuesday the White House proposed to expand the earned-income tax credit — the government’s most potent antipoverty tool, which supplements the incomes of millions of poor working parents — to include workers who do not care for children. Often, this means absent fathers. The expansion — which the White House estimates would help an extra 13.5 million people work their way out of poverty — represents a sharp break from the mind-set of the “deserving” and “undeserving” poor that has hamstrung American public assistance from the beginning. Stripping moral condemnation out of social policy is essential to help dysfunctional families succeed. If the objective is to help poor, marginalized children and young people achieve better lives, it is time to get away from trying to reshape families into some platonic ideal and turn our attention to helping the kind of complicated families that raise children in today’s flawed world.

    That Billion Increase in the Earned Income Tax Credit Is Equal to 0.14 Percent of Spending -- Of course most NYT readers are well aware of the fact that the government is projected to spend around $48.5 trillion over the next decade, so they realized that President Obama's proposal to spend $60 billion more on the Earned Income Tax Credit is no big deal in terms of overall spending. That's why this NYT article saw no reason to put the number in any context. However for that tiny group of readers who don't have the total budget in their heads and may have thought this proposal would be a big deal in terms of federal spending, the CEPR Responsible Budget Reporting Calculator would quickly tell you that this spending amounts to 0.14 percent of projected spending. The piece also includes a quote from Harvard economist Nathaniel Hendren, saying "we’re rightly concerned about budget deficits." It would have been worth reminding readers that the efforts to lower the budget deficit have cost the country at least $5 trillion (@ $17,000 per person) in lost output over the last six years and kept millions of people from working. Some NYT readers may not realize the costs the country is enduring because some people like smaller budget deficits.

    Envy Versus Anger - Paul Krugman - Suddenly, or so it seems, inequality has surged into public consciousness — and neither the one percent nor its reliable defenders seems to know how to cope.  A case in point: this article by Arthur Brooks, the president of the American Enterprise Institute. Brooks is deeply worried about changing popular attitudes toward wealth: According to Pew, the percentage of Americans who feel that “most people who want to get ahead” can do so through hard work has dropped by 14 points since about 2000. As recently as 2007, Gallup found that 70 percent were satisfied with their opportunities to get ahead by working hard; only 29 percent were dissatisfied. Today, that gap has shrunk to 54 percent satisfied, and 45 percent dissatisfied. In just a few years, we have gone from seeing our economy as a real meritocracy to viewing it as something closer to a coin flip. And how does he see this sea-change in attitudes? Why, it must be about growing envy of the rich, which is a terrible thing.But the polling data don’t say anything about envy: when people say that they have lost their belief that hard work will be rewarded, they aren’t saying that they are envious of the rich; they’re saying that they have lost their belief that hard work will be rewarded. To the extent that people have negative feelings about the one percent, the emotion involved isn’t envy — it’s anger, which isn’t at all the same thing. Envy is when you have negative feelings about rich because of what they have; anger is when you have negative feelings about the rich because of what they do.

    The Hammock Fallacy, by Paul Krugman - Hypocrisy is the tribute vice pays to virtue. So when you see something like the current scramble by Republicans to declare their deep concern for America’s poor, it’s a good sign, indicating a positive change in social norms. Goodbye, sneering at the 47 percent; hello, fake compassion. And the big new poverty report from the House Budget Committee, led by Representative Paul Ryan, offers additional reasons for optimism.  This time, however, Mr. Ryan is citing a lot of actual social science research. Unfortunately, the research he cites doesn’t actually support his assertions. Even more important, his whole premise about why poverty persists is demonstrably wrong. To understand where the new report is coming from,... recall something Mr. Ryan said two years ago: “We don’t want to turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives.” ... What does scholarly research on antipoverty programs actually say? ... Mr. Ryan would have us believe that the “hammock” created by the social safety net is the reason so many Americans remain trapped in poverty. But the evidence says nothing of the kind. And there’s no puzzle why: it’s hard for young people to get ahead when they suffer from poor nutrition, inadequate medical care, and lack of access to good education. The antipoverty programs that we have actually do a lot to help people rise. For example, Americans who received early access to food stamps were healthier and more productive... But we don’t do enough... The reason so many Americans remain trapped in poverty isn’t that the government helps them too much; it’s that it helps them too little.

    We do not have to live with the scourge of inequality - Rising inequality is widely seen as a plague. But policy makers have been reluctant to take steps to reverse it, fearing that this would distort incentives and stunt prosperity and economic growth.  Yet economists are divided on the issue. Some emphasise the disincentives to work and invest that result from high taxes and transfers. But others have argued that redistribution need not be detrimental to growth. If progressive taxation is used to finance public infrastructure, or health and education benefits for the less well-off, it may actually contribute to economic growth. Sharing wealth more equally may actually help produce more wealth overall. That, anyway, is the theory. But does it work in practice? That is a question that my colleagues and I have set out to answer in recent research. We looked at recently assembled data on pre and post-tax inequality in a large cross-section of developing and developed countries. By comparing the two, we could work out how much redistribution takes place through the fiscal system in each country. We have two striking results. First, inequality matters, not only for its own sake but also because it makes an important difference to the level of economic growth. More unequal societies have slower and more fragile economic growth. It would thus be a mistake to imagine that we can focus on economic growth and let inequality take care of itself. Importantly, we established that growth is faster in more equal societies than in less equal ones, regardless of whether they have highly redistributive tax systems.  Second, we found little to suggest that a modestly redistributive tax system has an adverse effect on growth. True, there are some signs that highly redistributive tax systems – the top 25 per cent of our sample – may crimp economic performance. But the levels of redistribution seen on average in the broad cross-section of countries we looked at seem to have had negligible direct effects on growth.

    Minimum Wage Boost Would Cut Food Stamp Tab by $4.6 Billion --- Raising the minimum wage to $10.10 an hour would cut federal government outlays on food stamps by $4.6 billion per year, according to a study released Wednesday.  The estimate published by the Center for American Progress, a left-leaning think tank, is among the first to assess the effect of increasing the minimum wage on the Supplemental Nutrition Assistance Program (better known as food stamps). The study backs supporters who say the policy change would benefit not just low-wage workers, but also taxpayers by reducing government expenditures. The group’s analysis found that increasing the minimum wage to $10.10 from the current $7.25 rate would lower total food-stamp aid by $4.6 billion, or 6% of the program’s budget. “Our results show that a minimum-wage increase to $10.10 would reduce the need for 3.5 million people to support themselves on food stamps,” said Michael Reich, one of the study’s authors and an economist at the University of California, Berkeley. The reduced food-stamp aid tied to the higher minimum wage offsets the possibility that some low-wage workers could lose their jobs and qualify for additional assistance, the authors say. A separate report last month from the nonpartisan Congressional Budget Office found an increase to $10.10 per hour would reduce employment by 500,000 but lift 900,000 Americans out of poverty. The study released Wednesday underscores why many policymakers find an increase in the minimum wage so attractive. Unlike boosting welfare programs, raising the minimum wage doesn’t increase government spending, and in fact may reduce it.

    Minimum Wage Raise Would Reduce Food Stamp Spending By $46 Billion Over Decade: Report - -- If Congress hikes the minimum wage to $10.10 per hour and ties it to inflation, it could reduce federal spending on food stamp benefits by $46 billion over 10 years, according to a new report released Wednesday by the left-leaning Center for American Progress. Echoing a common liberal argument, researchers at the University of California, Berkeley found that by putting more income in low-wage workers' pockets, the higher minimum wage would cut back their reliance on public assistance, to the tune of $4.6 billion annually. That amounts to roughly 6 percent of current food stamp spending, or about a tenth of 1 percent of the federal budget.  Progressives said Wednesday that the CAP report shows why a minimum wage raise should be supported by many of the Republicans who currently oppose it, since those same lawmakers have called for cuts to the Supplemental Nutrition Assistance Program (SNAP), commonly known as food stamps. "Detractors of SNAP and the minimum wage increase can't have it both ways," Sen. Sherrod Brown (D-Ohio) said on a call with reporters hosted by CAP. While they decry a "culture of dependency," Brown went on, "these same elected officials oppose efforts to make sure hard work is rewarded with fair pay." Authored by Rachel West and Michael Reich, the CAP report adds a few more data points -- and talking points -- to the partisan debate on Capitol Hill over Democrats' proposal to boost the minimum wage. Bills in the House and Senate would raise the minimum wage from $7.25 to $10.10 per hour by 2015 and peg it to an inflation index so that it rises with the cost of living. The proposal would also eventually hike restaurant servers' tipped minimum wage, which has been $2.13 per hour since 1991, to 70 percent of the regular minimum wage.

    The Significance of the Minimum Wage for Women and Families -- Laura D’Andrea Tyson - Let’s start with a few statistics. The typical worker earning the minimum wage is not a teenager and is not male. She is an adult woman. Adult women are the single biggest demographic group among minimum wage workers, far outnumbering teenagers of both genders and men of all ages. Less than half of all workers are women, but they account for 75 percent of workers in the 10 lowest-paid occupations and about 60 percent of minimum wage workers. And most women earning the minimum wage are not teenagers, or wives who can rely on a spouse’s income. About three-quarters of female minimum wage workers are above the age of 20, and about three-quarters of these women are on their own. Many, of course, are working and taking care of children. Working families headed by women make up 22 percent of all working families but 39 percent of low-income working families. There are 7.1 million working families with children headed by women, and 58 percent of them are low-income. Sixty-five percent of the children in female-headed working families are low-income. One of every three families that are headed by a woman with no husband present lives in poverty, and about 48 percent of all children in single-parent households headed by women live in poverty. A woman working full time at the current minimum wage earns less than $14,500 annually – more than $4,000 below the poverty line for a mother with two children. Two-thirds of workers in jobs dependent on tips are women, disproportionately women of color. The tipped minimum wage is only $2.13 an hour and has been frozen for the last 21 years.  Throughout the 1980s, the tipped minimum wage stood at 60 percent of the regular minimum wage. But in 1996, the restaurant industry lobbying association managed to decouple the two rates, and the tipped minimum wage has been frozen in time, falling by more than 40 percent since then. In low-end restaurants, and even in more upscale places on slow days, many waiters are lucky to end up earning the regular minimum wage. And many restaurants require their servers to share a portion of their tips with other workers, like dishwashers and bus staff. In effect, many waiters end up subsidizing the wages of other workers, for the benefit of their employers.On top of that, unscrupulous restaurant owners sometimes illegally withhold tip money that flows through credit cards on the pretext of creating a “reserve” for errors by waiters.

    Highest Minimum-Wage State Washington Beats U.S. Job Growth -  When Washington residents voted in 1998 to raise the state’s minimum wage and link it to the cost of living, opponents warned the measure would be a job-killer. The prediction hasn’t been borne out. In the 15 years that followed, the state’s minimum wage climbed to $9.32 -- the highest in the country. Meanwhile job growth continued at an average 0.8 percent annual pace, 0.3 percentage point above the national rate. Payrolls at Washington’s restaurants and bars, portrayed as particularly vulnerable to higher wage costs, expanded by 21 percent. Poverty has trailed the U.S. level for at least seven years. The debate is replaying on a national scale as Democrats led by President Barack Obama push for an increase in the $7.25-an-hour federal minimum, while opponents argue a raise would hurt those it’s intended to help by axing jobs for the lowest-skilled. Even if that proves true, Washington’s example shows that any such effects aren’t big enough to throw its economy and labor market off the tracks.

    The Real Poverty Trap - Paul Krugman - Earlier I noted that the new Ryan poverty report makes some big claims about the poverty trap, and cites a lot of research — but the research doesn’t actually support the claims. It occurs to me, however, that the whole Ryan approach is false in a deeper sense as well. How so? Well, Ryan et al — conservatives in general — claim to care deeply about opportunity, about giving those not born into affluence the ability to rise. And they claim that their hostility to welfare-state programs reflects their assessment that these programs actually reduce opportunity, creating a poverty trap.  As Ryan once put it,we don’t want to turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives. In fact, the evidence suggests that welfare-state programs enhance social mobility, thanks to little things like children of the poor having adequate nutrition and medical care. And conversely, of course, when such programs are absent or inadequate, the poor find themselves in a trap they often can’t escape, not because they lack the incentive, but because they lack the resources. ...So the whole poverty trap line is a falsehood wrapped in a fallacy...

    Flimflam, The Next Generation - Paul Krugman - I took Paul Ryan’s measure almost four years ago, back when everyone in Washington was determined to see him as the Serious, Honest Conservative they knew had to exist somewhere. Everything we’ve seen of him since then has confirmed that initial judgment. When you see a big report from Ryan, you shouldn’t ask “Is this a con job?” but instead skip right to “Where’s the con?” And so it is with the new poverty report.  Give Ryan some points for originality. In his various budgets, he relied mainly on magic asterisks — unspecified savings and revenue sources to be determined later; he was able to convince many pundits that he had a grand fiscal plan when the reality was that he was just assuming his conclusions, and that the assumptions were fundamentally ridiculous. But this time he uses a quite different technique.  What he offers is a report making some strong assertions, and citing an impressive array of research papers. What you aren’t supposed to notice is that the research papers don’t actually support the assertions. In some cases we’re talking about artful misrepresentation of what the papers say, drawing angry protests from the authors. In other cases the misdirection is more subtle.

    The new Paul Ryan report on poverty and safety net programs - I read much of the document last night, here are a few comments:

    • 1. The so-called “war on poverty” has gone better than most of this document would appear to suggest, although this ends up being acknowledged in the appendix on poverty measures.
    • 2. High implicit marginal tax rates are a problem for poor families, but they receive too much attention in this report.  Those same high implicit rates never stopped higher earners, who at some point were (often) much poorer themselves. 
    • 3. There is an implicit ranking of programs as good or bad.  If a program is ranked as bad, there is a cataloging of its cost, but this is not compared to potential benefits, even granting that net cost is positive.
    • 4. Two things that work to cure poverty are immigration and cash transfers.  These points should be stressed more.  Collapsing families surely constitute an important issue, but reading the discussion of that topic yields precious little knowledge, not even “false knowledge.”
    • 5. Reading through the long list — the too-long list I would say– of programs, one really does get the feeling that a lot of them ought to be replaced by cash grants or pro-employment cash incentives, such as EITC.  But what else should we be doing differently?  If one insists that the point of the document is simply to list extant programs, so be it. 

    Overall this needed to be a lot better than it was.  The document has almost no vision, only a marginal command of the scholarly literature, and it is a good example of how the conservative movement is still allowing the poverty issue to defeat it and tie it up in knots.There are further criticisms here, not all of them convincing.  Paul Krugman had a few posts on the document too.

    Rep. Paul Ryan misused data to show poverty programs don’t work, say economists he cited - Rep. Paul Ryan (R-WI) misrepresented or misunderstood the data he cited in his exhaustive critique of the federal safety net, said some of the economists he cited in his 204-page report. The former vice presidential candidate relied heavily on academic research for his report, “The War On Poverty: 50 Years Later,” which was released Monday and noted the poverty rate remained stuck at 15 percent – the highest in a generation. “And the trends are not encouraging,” Ryan wrote. “Federal programs are not only failing to address the problem. They are also in some significant respects making it worse. Changes are clearly necessary, and the first step is to evaluate what the federal government is doing right now.” But some authors of that research said Ryan apparently left out or ignored statistics that showed federal anti-poverty programs worked exactly as they were intended, reported The Fiscal Times.

    Paul Ryan accidentally makes the case against means-testing - Instead of telling a story about the horror of welfare dependency, the Republican party’s chief budget guru may have accidentally given an argument against the conservative policy of means-testing welfare benefits. When a welfare program is means-tested, that means people can only access benefits if they demonstrate need. In the case of the federal reduced school lunch program, that means a family of four must to prove that its household income is no more than $43,568 per year [PDF] before their children can make use of the program. In other words, to get a free lunch for your child, you need to prove that your family is too poor to adequately feed him on its own. It’s not hard to see how that could be a bit humiliating, for both the parent and the child. Means-testing for parents can involve a lengthy, convoluted, and occasionally invasive application process. For children, receiving free school lunch is a marker of difference, a signal to your classmates that you’re one of the poor kids. There are two possible solutions to that problem. One is you can get rid of free school lunches entirely; but then you’re essentially taking food out of the hands of schoolchildren. Remember, the parents have already proven that they don’t have the resources to pay for their kids’ lunch every day. Taking a federal subsidy away from low-income families means they either have to let their children go hungry, scale back on other essential household purchases, or beg private institutions for charity.

    Let Them Eat Dignity - Paul Krugman - We’re getting reports about Paul Ryan’s performance at CPAC, the big conservative gathering — and they’re actually kind of awesome, in the worst way.  I mean, the caricature of Ryan and people like him is that they treat the hardships of poverty as if they were merely psychological, that they talk big about dignity while ignoring the difficulty of getting essentials like food and health care. Well, it’s not a caricature: Ryan says never mind having enough to eat, it’s about spirituality: “The left is making a big mistake,” Ryan predicted. “What they’re offering people is a full stomach and an empty soul. People don’t just want a life of comfort. They want a life of dignity, they want a life of self determination.” Um, yes, but how dignified can you be on an empty stomach? How much self-determination do you have? And who is supposed to value dignity over having enough to eat? Children. Ryan tells an anecdote about one sad child:  “He told Eloise he didn’t want a free lunch. He wanted his own lunch, one in a brown-paper bag just like the other kids,” he continued. “He wanted one, he said, because he knew a kid with a brown-paper bag had someone who cared for him. This is what the left does not understand.” And if the child’s mother can’t provide that lunch in a brown paper bag, then what?

    Paul Ryan and Scott Walker Come Out for Repeal of Federal Child-Labor Laws. Seriously! Seriously. --  Beverly Mann - Oh, my — not only was Paul Ryan’s hunger=dignity speech appalling on the merits, the anecdote he used to make his point was fake — a distortion of a real story with a completely different point.  I’m actually not happy with this discovery; the crucial point here should be that even if the story of the kid who wants brown bag lunches were true, it would be a terrible argument against school lunches and the social safety net in general. In a way it’s a bad thing to have the conversation shifted instead to Ryan’s failure to get simple facts right. Here’s what Ryan said yesterday in his speech to the CPAC convention, as related by New York Magazine’s Jonathan Chait: Ryan has a story from his fellow Republican, Eloise Anderson: “She once met a young boy from a poor family. And every day at school, he would get a free lunch from a government program. But he told Eloise he didn’t want a free lunch. He wanted his own lunch — one in a brown-paper bag just like the other kids’. He wanted one, he said, because he knew a kid with a brown-paper bag had someone who cared for him.” Anderson is a longtime anti-safety-net crusader and currently a member of Wisconsin Governor Scott Walker.  Ryan was paraphrasing testimony gave to the House Budget Committee, which Ryan chairs, last summer. I think the revelation that this Walker appointee gave fabricated testimony to a congressional committee–stunning, in itself–is a net plus, because it brings far more public attention than otherwise to the premise of this Walker appointee (and therefore of Walker himself) and Ryan: that children from poor families, including, presumably, infants and toddlers–these people want to kill the food stamp program, too–should work for their food.

    Into the Mouths of Babes - Paul Krugman - Oh, my — not only was Paul Ryan’s hunger=dignity speech appalling on the merits, the anecdote he used to make his point was fake — a distortion of a real story with a completely different point. I’m actually not happy with this discovery; the crucial point here should be that even if the story of the kid who wants brown bag lunches were true, it would be a terrible argument against school lunches and the social safety net in general. In a way it’s a bad thing to have the conversation shifted instead to Ryan’s failure to get simple facts right.  Still, I guess this is a further nail in the coffin of Ryan’s reputation as Serious, Honest Conservative. But I am of course a shrill bad guy, because I was guilty of premature anti-Ryanism — you weren’t supposed to figure out that he was a con man until 2011 or 2012.

    The Massive Policy Failure That Paul Ryan Wants To Emulate - Rep. Paul Ryan (R-WI) on Monday released a sweeping audit of the country’s anti-poverty programs, seeking to put his stamp on a second round of welfare reform. In detailing the history of these programs, he looked back fondly on the last time a welfare reform law passed: 1996. That was when the Aid to Families with Dependent Children (AFDC) cash assistance program was turned into what it is today, Temporary Assistance for Needy Families (TANF). “The creation of the Temporary Assistance for Needy Families program,” Ryan wrote, “is widely seen as the most successful reform of a welfare program.” He described the “revolutionary” changes it made: the transformation from a program where the federal government shares the costs of assistance to one where the government gives states a fixed block grant, the addition of stringent work requirements, the imposition of a five-year lifetime limit on receiving benefits, and the elimination of “the entitlement to federal cash assistance.” The idea that this transformation is a huge success would surprise many of today’s poor families. But it depends on how one defines success. “If they just threw everyone off the rolls, we could say no one needs cash assistance anymore, wow, what a success,” Greg Kaufmann, a senior fellow with Half in Ten, noted.

    States Make End Run Around Food Stamp Cuts - Connecticut and New York have found a way around federal budget cuts that played a central role in the massive farm bill passed this month: bump up home heating assistance a few million bucks in return for preserving more than a half-billion dollars in food stamp benefits. The moves by Connecticut Gov. Dannel P. Malloy and New York Gov. Andrew Cuomo -- with the possibility that more governors could follow -- cheer social service advocates who say the deep recession and weak economic recovery have pounded low-income workers and the unemployed who rely on heating assistance and food stamps.  An order by Malloy will spend about $1.4 million in federal energy aid, increasing benefits for 50,000 low-income Connecticut residents from $1 to $20 so they do not lose $112 in monthly food stamp benefits. It will preserve about $67 million in food stamp benefits. New York will spend about $6 million more in federal Low Income Home Energy Assistance Program funding to maintain food stamp benefits totaling $457 million.

    Those fighting region’s hunger are fighting each other  In the seemingly genteel world of food charity, hunger-relief advocates are perceived as big-hearted humanitarians all rowing in the same direction. But lately, as need increases while food supplies contract, people more accustomed to fighting hunger now battle among themselves - do-gooder vs. do-gooder. What's developing locally is a noisy quarrel between two altruistic camps: those who help the hungry in Chester County, and the hunger-relief behemoth, Philabundance, based in South Philadelphia and serving nine counties in Pennsylvania and New Jersey. Perceived as playing the gentleman's game of charity with aggressive Philly street rules, Philabundance is being excoriated by a Chester County legislator and a core of volunteers for moving food donated by local supermarkets out of the county and diverting it to slake Philadelphia's endless hunger. Some also say that Philabundance is hindering the growth of the Chester County Food Bank, founded by a scion of the Tylenol fortune in one of America's richest counties, plagued lately by skyrocketing poverty rates. Still others deride Philabundance for poaching food from fellow food banks - an accusation its executive director, Bill Clark, unequivocally denies. While Clark admits his hard-nosed, for-profit approach rankles the nonprofit world, he insists it's the only way to feed a region short on meat, vegetables, and hope. Just as "you wouldn't want the Red Cross to run the blood supply on good intentions alone," Clark said, it would be folly to manage food charity in anything other than a businesslike manner.

    U.S. Prison System Resembling Huge Geriatrics Ward -- One man breathes through a respirator. Another gropes on the nightstand for his dentures. Yet another calls out to a passing doctor that he cannot remember his own name. “I’m 69 years old. Without my cane I can’t stand. What do they expect me to do? Crawl through [the metal detector] on my hands and knees?” This may sound like a typical day at a home for the elderly but several independent investigations describe such scenes being played out in a much more unlikely place: in prisons across the United States that are now home to thousands of senior citizens. Due to unhealthy conditions prior to and during prison terms, the National Institute of Corrections (NIC) considers inmates over the age of 50 to be “aging”. By this calculation, there are some 246,600 elderly inmates in state and federal joints, a number that is expected to jump to nearly 400,000 by the year 2030, according to the American Civil Liberties Union (ACLU). A Human Rights Watch report entitled ‘Old Behind Bars’ says the number of prisoners aged 55 and older nearly quadrupled between 1995 and 2010, marking a 218 percent increase in just 15 years. With over 16 percent of the national prison population falling into the “aging” category, experts say the U.S. prison system is beginning to resemble a gigantic geriatrics ward, at massive economic and humanitarian costs to  society.

    Texas Turns Out to Be Not So Miraculous After All - Phillip Longman rocks like it's 2012 and relitigates the question of whether Rick Perry's so-called Texas Miracle is fact or fiction. He concludes that it's mostly fiction, and he makes a good case. Not a bulletproof case, but a good one. What's more, to the extent that Texas really does have a strong economy, he says, it's largely due to fracking, immigration from across the border, and a high birth rate. It's not due to low taxes—at least, not for most Texans: Texas does not have an income tax. But Texas has sales and property taxes that make its overall burden of taxation on low-wage families much heavier than the national average, while the state also taxes the middle class at rates as high or higher than in California....The top 1 percent in Texas have an effective tax rate of just 3.2 percent. That’s roughly two-fifths the rate that’s borne by the middle class, and just a quarter the rate paid by all those low-wage “takers” at the bottom 20 percent of the family income distribution. This Robin-Hood-in-reverse system gives Texas the fifth-most-regressive tax structure in the nation.Middle- and lower-income Texans in effect make up for the taxes the rich don’t pay in Texas by making do with fewer government services, such as by accepting a K-12 public school system that ranks behind forty-one other states, including Alabama, in spending per student. The chart below tells the tale (data here). Most Texans pay more in taxes than most Californians. But rich Texans pay a lot less. That's great for rich Texans, but not so much for everyone else.

    California Beats U.S. in Millionaires, Food-Stamp Users - Bloomberg: California Governor Jerry Brown, who decries a widening gulf between rich and poor, is campaigning for a fourth and final term presiding over a state that’s outpacing the U.S. in producing both millionaires and food-stamp recipients. The number of households with more than $1 million in assets gained 3.6 percent since the Democrat took office in 2011, compared with 3.5 percent nationally, according to Phoenix Marketing International’s Global Wealth Monitor. Food-stamp use rose 18.2 percent in the period, almost twice the nation’s 9.4 percent, U.S. Agriculture Department data show. Brown, 75, who signed a bill to raise California’s minimum wage to $10 an hour by 2016, goes before the state Democratic convention tomorrow unopposed after turning budget deficits into the largest surplus in more than a decade. California’s economic health improved more than 44 other states between the first quarter of 2011 and the second quarter of 2013, according to the Bloomberg Economic Evaluation of States. “We have an increase in poverty and high-end earners and a decrease in middle class jobs,”

    Survey finds many schools need repairs: More than half the nation's public schools need to be repaired, renovated or modernized, a survey released Thursday found. Getting these schools in good condition would cost about $197 billion, the National Center for Education Statistics said. That's $4.5 million per school, on average. The survey found that on average main school buildings were 44 years old. Schools that underwent a major renovation had the work done on average 12 years ago. Building replacements or additions were on average 16 years old. There were signs of upgrades, however, in some schools. Seventeen percent of public schools had major repairs, renovations or modernization work underway, while nearly 40 percent had these types of improvements planned in the next two years. School construction projects are funded in a variety of ways, depending on the state and locality. Many school districts have had to delay maintenance and construction projects because of slashed budgets during tough economic times. Even as states' revenues are rebounding, officials from the National School Boards Association said many states are still focused on other priorities.

    College Grads Taking Low-Wage Jobs Displace Less Educated - Jeanina Jenkins, a 20-year-old high-school graduate from St. Louis, is stuck in a $7.82-an-hour part-time job at McDonald’s Corp. that she calls a “last resort” because nobody would offer her anything better. Stephen O’Malley, 26, a University of West Virginia graduate, wants to put his history degree to use teaching high school. What he’s found instead is a bartender’s job in his home town of Manasquan, New Jersey. Jenkins and O’Malley are at opposite ends of a dynamic that is pushing those with college degrees down into competition with high-school graduates for low-wage jobs that don’t require college. As this competition has intensified during and after the recession, it’s meant relatively higher unemployment, declining labor market participation and lower wages for those with less education. The jobless rate of Americans ages 25 to 34 who have only completed high school grew 4.3 percentage points to 10.6 percent in 2013 from 2007, according to Bureau of Labor Statistics data. Unemployment for those in that age group with a college degree rose 1.5 percentage points to 3.7 percent in the same period.

    College, the Great Unleveler - More Americans than ever enroll in college, but the graduates who emerge a few years later indicate that instead of reducing inequality, our system of higher education reinforces it. Three out of four adults who grow up in the top quarter of the income spectrum earn baccalaureate degrees by age 24, but it’s only one out of three in the next quarter down. In the bottom half of the economic distribution, it’s less than one out of five for those in the third bracket and fewer than one out of 10 in the poorest. Private nonprofits, schools like Stanford or Vassar, list the highest “sticker prices,” but the average student pays less than half of full fare. Some nonprofits provide generous need-based aid to low- and middle-income students, supplementing their federal aid. Others devote their resources instead to merit-based aid, courting students with high SAT scores, typically from higher-income backgrounds. These colleges rise in the rankings, but they also provide a disadvantage to poorer students who would benefit from more need-based aid, who struggle financially to stay enrolled and who take out more student loans to do so. Nearly three-quarters of American college students attend public universities and colleges, historically the nation’s primary channels to educational opportunity. These institutions still offer the best bargain around, yet even there, tuition increases have bred inequality.  For those in the poorest fifth, costs at State U have skyrocketed from 42 percent of family income to 114 percent. The worst problems, though, occur at for-profit schools like those run by the Apollo Group (which owns the University of Phoenix), the Education Management Corporation or Corinthian Colleges. These schools cater to low-income students and veterans, but too often they turn hopes for a better life into the despair of financial ruin.

    Graphic of the Day: Is it getting close to time to redefine the term 'Public' University? - From the Chronicle of Higher Education:

    Should University Education be Free? - In recent years, the government has sought to increase the amount students pay for studying at university. In the UK, the government have phased out grants and introduced top-up fees. With tuition fees and rising living costs, students could end up paying £50,000 for a three year degree, and leave university with significant debts. Some argue this is a mistake. Charging for university education will deter students and leave the UK with a shortfall of skilled labour – and arguably this will damage the long term prospects of the UK economy. Furthermore, charging for university will increase inequality of opportunity as students with low income parents will be more likely to be deterred from going to university. Arguments for Free University Education:

    1. Positive externalities of higher education. Generally, university education does offer some external benefits to society. Higher education leads to a more educated and productive workforce. Countries with high rates of university education generally have higher levels of innovation and productivity growth. Therefore, there is a justification for the government subsidising higher education.
    2. Equality. There is also a powerful argument that university education should be free to ensure equality of opportunity. If students have to pay for university education, this may dissuade them. In theory, students could take out loans or work part-time, but this may be sufficient to discourage students from studying and instead may enter the job market earlier.
    3. Increased specialisation of work. The global economy has forced countries, such as the UK to specialise in higher tech and higher value added products and services. The UK’s biggest export industries include pharmaceuticals, organic chemicals, optical and surgical instruments, and nuclear technology. Therefore, there is a greater need for skilled graduates who can contribute to these high-tech industries.

    Should teachers of controversial issues disclose their opinions? - I’ve taught Contemporary Moral Issues most semesters for the past 22 years. It, or something like it, is a standard offering in Philosophy departments. It is not the most prestigious course – applied ethics basically – but it brings in students for general education requirements, and for most students will be the only sustained encounter they get to have with rigorous and dispassionate thinking about the moral aspects of policy and personal decision-making. In my department it has the largest share of student credits, partly because our Business School, for reasons best known to themselves, designates it as ne of the three classes (all taught exclusively by my dept) that meets the ethics requirement for their majors. [1] Standard topics include abortion, the death penalty, vegetarianism, duties to distant strangers, euthanasia, cloning – you get the idea. The course is typically taught in large lecture format – my classes are typically 160 or 80, but on many campuses 200-300 would be a normal size. For some of the issues I teach, it is not that hard to find out my views, if you really want to, and are a minimally competent googler. But I take a pretty hard line on the disclosure question. I don’t disclose my views about the issues I teach. Here’s why.

    How America's Great University System Is Getting Destroyed  - Well how do you indoctrinate the young? There are a number of ways. One way is to burden them with hopelessly heavy tuition debt. Debt is a trap, especially student debt, which is enormous, far larger than credit card debt. It's a trap for the rest of your life because the laws are designed so that you can't get out of it. If a business, say, gets in too much debt it can declare bankruptcy, but individuals can almost never be relieved of student debt through bankruptcy. They can even garnish social security if you default. That's a disciplinary technique. I don't say that it was consciously introduced for the purpose, but it certainly has that effect. And it's hard to argue that there's any economic basis for it. Just take a look around the world: higher education is mostly free. In the countries with the highest education standards, let's say Finland, which is at the top all the time, higher education is free. And in a rich, successful capitalist country like Germany, it's free. In Mexico, a poor country, which has pretty decent education standards, considering the economic difficulties they face, it's free. In fact, look at the United States: if you go back to the 1940s and 50s, higher education was pretty close to free. The GI Bill gave free education to vast numbers of people who would never have been able to go to college. It was very good for them and it was very good for the economy and the society; it was part of the reason for the high economic growth rate. Even in private colleges, education was pretty close to free. Take me: I went to college in 1945 at an Ivy League university, University of Pennsylvania, and tuition was $100. That would be maybe $800 in today's dollars. And it was very easy to get a scholarship, so you could live at home, work, and go to school and it didn't cost you anything. Now it's outrageous. I have grandchildren in college, who have to pay for their tuition and work and it's almost impossible. For the students that is a disciplinary technique.

    Colleges Straining to Restore Diversity - With the U.S. Supreme Court poised to rule on race-conscious college-admissions policies, University of California officials say they still struggle to meet diversity goals for their university system 18 years after state voters banned affirmative action. For that reason, UC officials filed a friend-of-the-court brief in the Supreme Court's review of a nearly identical ban at Michigan's public universities. "The UC experience is highly relevant," their brief said. Nearly two decades after the ban passed, "the University of California still struggles to enroll a student body that encompasses the broad racial diversity of the state." The takeaway from UC's experience isn't clear-cut. The percentage of admitted Latino and African-American resident applicants at the UC system's most competitive campuses in Berkeley and Los Angeles dropped to 12% in 2013 from about 46% before Proposition 209's affirmative-action ban was approved by voters in 1996. But several scholars—at UC and elsewhere—say the university has overstated the negative impact of Prop. 209, pointing to research that shows the number of minority students at UC overall has grown and these students' graduation rates have improved.

    Will MOOCs lead to the democratisation of education? - With all the recent discussion of how hard it is for journalists to read academic articles, I thought I’d provide a little service here and ‘translate’ the recent NBER working paper by Daron Acemoglu, David Laibson and John List, “Equalizing Superstars” for a general audience. The paper contains a ‘light’ general equilibrium model that may be difficult for some to parse. The paper is interested in what the effect of MOOCs or, in general, web-based teaching options would be on educational outcomes around the world, the distribution of those outcomes and the wages of teachers. It does this by starting with a model whereby different countries have different levels of student ability (at pre-school) that are correlated with different teacher skills (or available time/funding) across countries. That means that there is one country that is the ‘top of the heap.’ The assumption made is that the top country’s teachers are superstars and the web means that some of their skills can be transmitted to students around the world. The key model element, however, is what the teachers do. They do a number of tasks (think transmitting base information and reinforcement). The web technologies allow some of those tasks to be done at the skill level of the top country (base information) and free up the teacher time to allocate more of their energy to other tasks (reinforcement). This is a pure gift to education in all countries other than the top country. They get world’s best practice on some tasks and freed up teacher time on the rest. Of course, the top country gets none of these benefits as they already had the best. This is one tick for equality but the authors also show that the ‘bottom’ countries benefit the most from the boost and moreover, the ‘next to top’ country might actually have students out-performing the top country — think of a country just below the top country, they get a whole lot of almost top teachers freed up to devote their times to non-web tasks and in aggregate could end up outperforming the top country.

    How Colleges Could Get Rid of Fraternities - Fraternities offer their members opportunities for community service, friendship, and leadership. They also create environments that seem to breed hazing, binge drinking, and sexual assault. Universities have struggled to harness fraternities’ power for good and diminish their capability for evil, but so far little has worked. So what can universities do to stem the flow of fatalities, injuries, and sexual assaults at fraternities? Instead of threatening fraternities with everything from limited rush week activities to double secret probation, some think the solution is to end the reign of fraternities on American campuses altogether. Last month, Bloomberg’s editors called for college administrations to abolish fraternities. Caitlin Flanagan called for the “shuttering” of fraternities in a 2011 Wall Street Journal piece. Other writers have penned similar pieces. These articles take for granted that Greek life can be dethroned, but the reality is more complicated. It would take more than angsty editorials to push fraternities off of the American college campus. Fraternities and universities share a centuries-long history, a student body eager to find the collegiate promise land of keg-fueled parties, and a relationship that is, in many ways, mutually beneficial. If deaths, binge drinking, and sexual assault haven’t been enough to bring them down, what would have to happen to dismantle fraternities? Here are some possible scenarios:

    Is Start-Up Culture Derailing the MBA? -  By now, most in the startup community are well aware of the pervasive opinion that it’s best for wannabe tech entrepreneurs to bypass the MBA — not to mention years of climbing the corporate ladder — to get their hands dirty right away. After all, the thinking goes, the sooner you fail, the sooner you can start to succeed. Building a startup from scratch, winding it up and letting it go is the new MBA. Business school, meanwhile, has been relegated to the second tier, a place where math-oriented overachievers who don’t know what to do with their lives go to put off the real world.  It’s true that some startup founders find themselves more and more averse to hiring employees with a B-school background. Some argue that MBAs act entitled and lack company loyalty, but more commonly, the question seems to be one of speed: It’s hard to build a team primed to “move fast and break things” when you’ve got employees weighed down by hundreds of thousands in loans (and expecting to earn, on average, $153,000 a year).

    The Great Cost Shift Continues: State Higher Education Funding After the Recession - As student debt continues to climb, it’s important to understand how our once debt-free system of public universities and colleges has been transformed into a system in which most students borrow, and at increasingly higher amounts. In less than a generation, our nation’s higher education system has become a debt-for-diploma system—more than seven out of 10 college seniors now borrow to pay for college and graduate with an average debt of $29,400.1 Up until about two decades ago, state funding ensured college tuition remained within reach for most middle-class families, and financial aid provided extra support to ensure lower-income students could afford the costs of college. As Demos chronicled in its first report in the The Great Cost Shift series, this compact began to unravel as states disinvested in higher education during economic downturns but were unable, or unwilling, to restore funding levels during times of economic expansion. Today, as a result, public colleges and universities rely on tuition to fund an ever-increasing share of their operating expenses. And students and their families rely more and more on debt to meet those rising tuition costs. Nationally, revenue from tuition paid for 44 percent of all operating expenses of public colleges and universities in 2012, the highest share ever. A quarter century ago, the share was just 20 percent.2 This shift—from a collective funding of higher education to one borne increasingly by individuals—has come at the very same time that low- and middle-income households experienced stagnant or declining household income. The Great Recession intensified these trends, leading to unprecedented declines in state funding for higher education and steep tuition increases:

    Camp’s Plan to Consolidate Higher Education Tax Incentives -- The comprehensive tax reform plan recently released by House Ways & Means Committee Chair Dave Camp (R-MI) contains a noteworthy proposal to reform tax benefits for higher education. The plan would consolidate  three separate tax benefits for postsecondary students into a single credit that targets  low- and middle-income families with students enrolled at least half-time in undergraduate degree or certificate programs. Our current tax-based assistance for higher education is highly complex. In 2013, families with college students could benefit from the American Opportunity Credit (AOTC), Lifetime Learning Credit (LLC), or tuition and fees deduction. Eligibility for the three education benefits overlaps and families have to decide which incentive to claim for each student. This complexity may make it difficult for many families to take full advantage of tax benefits for higher education.  Camp would simplify tax-based assistance for higher education by making the AOTC permanent. At the same time he’d repeal the AOTC‘s less generous predecessor, the Hope Credit, which is currently scheduled to replace the AOTC in 2018.  He’d also repeal the LLC, and allow the tuition and fees deduction, which expired at the end of 2013, to die. Consolidating the incentives into a single credit would reduce confusion among taxpayers and could increase their use of education benefits. The Camp plan would also simplify education tax subsidies by eliminating a number of other education-related exclusions and deductions, the largest of which are the deduction for interest on education loans and the exclusion for employer-provided education assistance.  The proposal would also eliminate Coverdell education savings accounts which serve a similar purpose to tax-preferred 529 college savings plans, the exclusion for discharge of student loan indebtedness, the exclusion for tuition reductions by educational institutions to their employees, and the education expense exception to the penalty for early withdrawals from retirement accounts.  In addition to raising revenues, eliminating these exclusions and deductions makes the tax code more progressive since many of the benefits go to higher income families.

    Student Loans Are a Drag on the Economy --  A 23-year-old dentistry student in New York City, Rong excelled at one of the country’s top high schools, breezed through college and is now studying dentistry at one of the best dental schools in the nation.  But it may be a long time before he sees any rewards. He’s moved back home with his parents in and by the time he graduates in 2016, he’ll face $400,000 in student loans.  Rong isn’t alone. Across the U.S., students are taking on increasingly large amounts of debt to pay for heftier education tuitions. Figures released last week by the Federal Reserve of New York show that aggregate student loans nationwide have continued to rise. At the end of 2003, American students and graduates owed just $253 billion in aggregate debt; by the end of 2013, American students’ debt had ballooned to a total of $1.08 trillion, an increase of over 300%. In the past year alone, aggregate student debt grew 10%. By comparison, overall debt grew just 43% in the past decade and 1.6% over the past year. According to a December study by the Institute for College Access & Success, 7 out of 10 students in the class of 2012 graduated with student loans, and the average amount of debt among students who owed was $29,400. There’s no clear end in sight. “The total amount of student debt is growing basically at a constant rate,” Wilbert van der Klaauw, an economist with the Federal Reserve Bank of New York tells TIME. “The inflow is much higher than the outflow, which is likely to continue in the future as reliance on student loans for college is expected to remain high.”

    What Student Loans Are Really Used For: The Depressing Case Studies - Recall: "Robert Thomas Price Jr. borrowed about $105,000 for his tuition at Harrisburg Area Community College from 2005 and 2007, federal authorities say. It doesn’t cost anywhere near that much to study at HACC, though. So Price, 45, of Newport, is facing federal student loan fraud and mail fraud charges. A U.S. Middle District Court indictment alleges that Price spent much of the loan money on crack cocaine, cars, motorcycles, jewelry, tattoos and video games." At the time many derided this case study as an isolated example of fund abuse by an isolated individual. Nearly two years later, a study by the WSJ confirms what most have known: far from an isolated incident, "student" loans have become a primary source of funding for an every greater portion of the US population, and that when looking at total credit creation in the US economy, non-revolving student debt has as much if not more relevance than mere revolving credit, when it comes to determining how pays for what. Take Ray Selent, a 30-year-old former retail clerk in Fort Lauderdale, Fla. He was unemployed in 2012 when he enrolled as a part-time student at Broward County's community college. That allowed him to borrow thousands of dollars to pay rent to his mother, cover his cellphone bill and catch the occasional movie...  Tommie Matherne, a 32-year-old married father of five in Billings, Mont., uses roughly $2,000 in student loans each year to stock his fridge and catch up on bills. "We've been taking whatever we can for student loans every year, taking whatever we have left over and using it to stock up the freezer just so we have a couple extra months where we don't have to worry about food,"...

    California's $600 Billion Sinkhole - California’s next generation got some good news recently when Assembly Speaker John Perez called upon lawmakers to act this year to find a solution to the state’s largest fiscal issue -- the $80 billion unfunded liability of the teacher pension system. Perez cited one pressing reason for immediate action: the teacher pension debt is growing by $22 million per day. But there’s another reason that politicians in California never discuss: If they don’t act, the obligation will end up costing more than twice as much as it would if they took immediate action. That’s because, in the absence of action, the teacher pension debt will be subject to the same rules as a zero-coupon bond.  With a zero-coupon bond, the convenience of paying no interest for the first 29 years means you end up paying more than twice as much because of compound interest. When a corporation issues a zero-coupon bond, it must report (“accrue”) an interest expense on its books each year even though it doesn’t need to make any cash outlays to meet that expense. But state and local governments aren’t required to report such future obligations in their annual budgets. Because they get to use “cash-based” budgeting -- which reflects only cash that is spent -- governments don't need to show an expense for a zero-coupon bond until the single, final payment is made.

    Senate blocks Dems' bill boosting vets' benefits: (AP) — A divided Senate on Thursday derailed Democratic legislation that would have provided $21 billion for medical, education and job-training benefits for the nation's veterans. The bill fell victim to election-year disputes over spending and fresh penalties against Iran. Each party covets the allegiance of the country's 22 million veterans and their families, and each party blamed the other for turning the effort into a chess match aimed at forcing politically embarrassing votes. Republicans used a procedural move to block the bill after Senate Veterans' Affairs Committee Chairman Bernie Sanders, I-Vt., chided GOP lawmakers about their priorities. "I personally, I have to say this honestly, have a hard time understanding how anyone could vote for tax breaks for billionaires, for millionaires, for large corporations and then say we don't have the resources to protect our veterans," said Sanders, the measure's chief author. Democrats noted that more than two dozen veterans groups supported the legislation. But Republicans said they still favor helping veterans while also wanting to be prudent about federal spending.

    Buffett Says Pension Tapeworm Means Decade of Bad News - Public pension plans threaten the financial health of U.S. cities and states more than taxpayers realize, billionaire investor Warren Buffett said. “Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made,” Buffett wrote in his annual report to shareholders of Berkshire Hathaway. “During the next decade, you will read a lot of news –- bad news -– about public pension plans.” Obligations to retirees have weighed on governments from Puerto Rico to the bankrupt city of Detroit. Illinois lawmakers passed a bill last year to bolster the worst-funded U.S. state pension system. New Jersey Governor Chris Christie said last week that Detroit shows what could happen if his state doesn’t limit obligations to workers. “Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford,” Buffett said. “Unfortunately, pension mathematics today remain a mystery to most Americans.” The municipal bond market has defied prior warnings of disaster. Meredith Whitney, a former Wall Street bank analyst, in 2010 incorrectly predicted defaults totaling hundreds of billions of dollars. Buffett said that year that cities and states battered by the recession faced a “terrible problem” and might require a federal rescue.

    Reuters Writes About Our Suit Against CalPERS to Obtain Private Equity Data - Yves Smith -- We were surprised and pleased when a reporter from the Reuters publication peHUB, Chris Witkowsky, contacted us a couple of days ago about the suit we had filed against CalPERS, the California Public Employees Retirement Systems, over their refusal to provide us with information they had given to three Oxford academics who had used that data as the basis for a recently-published paper. As readers may recall, under the California Public Records Act (PRA), once an agency has given out a record to one member of the public, it has forever waived the right to claim any exemption from disclosing the records to others.So even though we were glad to have a well-known publication take interest (peHUB is widely read in the private equity industry), we weren’t certain how the piece would turn out, since the author would clearly talk to CalPERS and who knows how persuasive he would find them to be. This turned out to be as positive as I could have imagined, and I believe that was solely due to the fact that the position CalPERS is taking in trying to deny me the information is simply indefensible. Moreover, the reporter confirmed some things we’ve strongly suspected but could not prove.The article, Financial blog asks court to force CalPERS to release private equity data, goes through the background we recited in a post last week and in our court filing. The critical, and brazen part, is that CalPERS, after saying in writing on December 18, 2013, that they’d be sending us the information, reversed themselves on January 27, 2014 and tried claiming after conducting an “extensive search” that “CalPERS staff” had never given the researchers the data. We at first thought this was an effort to treat us like rubes, since we had asked for data provided by CalPERS, not data provided by “CalPERS staff”.  But under well-settled California law, actions taken by agents within the scope of their agency are imputed to the principal. Thus, even if as a matter of form, the data was provided directly by LP Capital or another CalPERS data repository to the authors of the Oxford study, it would still be disclosable under the PRA.

    “Retirement Security in an Aging Society,” or the Lack Thereof - James Poterba wrote up a very useful overview of the retirement security challenge in a new NBER white paper.  He provides overviews of much of the recent research and data on life expectancies, macroeconomic implications of a changing age structure, income and assets of people at or near retirement, and shifts in types of retirement assets. In the past, I’ve used the Federal Reserve’s Survey of Consumer Finances as my source for data about the inadequacy of many households’ retirement savings. Poterba has a new, perhaps even more stark snapshot:  Instead, it gives you the net worth of the 10th-percentile household by net worth, the present value of Social Security benefits for the 10th-percentile household by Social Security benefits, and so on. Still, it’s eye-opening. It says that 50% of households have personal retirement accounts worth $5,000 or less; 50% of households have other financial assets of $15,000 or less; and 50% of households have no defined benefit pensions. 30% of households have total wealth, not counting annuitized pensions, of $72,000 or less. As of late last year, a 65-year-old woman buying a life annuity with a 3% annual escalation clause would get 3.7% of her up-front payment per year (Table 15), so $72,000 in wealth would generate just $2,664 per year—and that’s assuming she finds a way to liquidate her home equity (often the main source of wealth for people in the low-to-medium wealth tiers). And these data are from the 2008 Health and Retirement Survey, so they are only partway down from the housing market peak of late 2006. These figures might not be so worrying if defined benefit and defined contribution plans turned out to be substitutes for each other—that is, if households without DC plans tended to have DB plans and vice versa. But that doesn’t seem to be the case.

    Elderly Women the Most Vulnerable, Social Security the Most Protective -- Social Security (and other social insurance programs like Medicare and Medicaid) has significantly helped reduce elderly poverty over the last several decades. The U.S. Census Bureau reported that 15.3 million elderly people would have been in poverty in 2012 without Social Security. That would have meant close to four times more elderly people in poverty. The figure below illustrates how declines in elderly poverty are directly associated with sharp increases in per capita Social Security expenditures—evidence that direct government transfers keep many people from falling below the poverty line. But Social Security, Medicare and Medicaid—as valuable as they are—do not provide a lavish lifestyle. Most of America’s 41 million seniors live on modest retirement incomes that cover just the costs of basic necessities and support a simple, yet dignified, quality of life. To highlight how official poverty measures may paint too rosy a picture of the living standards of America’s seniors,  my colleague Dave Cooper and I showed nearly half of the elderly population in the United States are “economically vulnerable,” defined as having an income that is less than two times the supplemental poverty threshold (a poverty line more comprehensive than the traditional federal poverty line). A data update to that analysis shows that 47.9 percent of the elderly are economically vulnerable.

    Another Way to Do the Math for Social Security Reform - The Obama budget released on Tuesday leaves out the President’s previous proposal to modify the formula by which Social Security benefits are adjusted for inflation, a change meant to improve the financial condition of the retirement program.  This is even though last year’s budget documents noted that “most economists agree that the chained CPI provides a more accurate measure of the average change in the cost of living than the standard CPI.” News reports indicated that Mr. Obama is still actually open to the idea in principle. But proposals favored by the president are put in the budget, even if like his various suggestions for higher taxes and more spending, they stand little chance of enactment. Projections from the Social Security Administration’s actuary indicate that the disability system faces a financing crunch in 2016, while the old age retirement program will be able to pay promised retirement benefits until 2035. With no change in the law, then, changes to Social Security will still take place, with current projections indicating that this would involve a reduction in benefits of 23 percent and rising for all retirees, both high- and low-earners.  The idea that people at the bottom should do better on net while the burden of adjustment falls on those with high lifetime incomes is common to Social Security reform proposals, including those previously put forward by Congressman Paul Ryan, the Republican from Wisconsin, and President George W. Bush.  Senator Tom Harkin, an Iowa Democrat, and Senator Elizabeth Warren, the Democrat from Massachusetts, among others, have proposed expanding Social Security benefits.  Implicit in the Harkin-Warren proposal to avoid benefit reductions is to eventually increase system revenues, (since otherwise benefits would be cut once system funding is inadequate.) And presumably Senators Harkin and Warren would do this in a progressive fashion by having the burden of higher taxes fall on people with relatively high lifetime incomes. This means that on net their proposal is broadly similar to that from the other side, with an improved outcome for low-income retirees and the net burden of adjustment falling on those with greater lifetime earnings. This is clear with a lifetime perspective.

    Georgia’s Republican Gov. Wants To Save Money By Not Allowing Poor People To Receive Emergency Care! - Governor Nathan Deal of Georgia called on Congress to repeal The Emergency Medical Treatment and Labor Act, a 1986 law requiring hospitals to provide emergency health care treatment to anyone who needs it. It requires hospitals to provide stabilizing care to anyone regardless of race, nationality, or ability to pay. Calling it an onerous law, Governor Deal says “it is costing way too much money and just let poor people die.” In case you have forgotten. Gov. Nate Deal is one of those Governors who rejected the PPACA expansion of Medicaid which would cover those too poor to pay. One other aspect of the PPACA which is not mentioned often, is it begins to cut payments to hospitals for uncompensated healthcare by patients as they would be covered either through the individual exchanges or Medicaid. Governor Deal has placed Georgia hospitals between a rock and a hard place by rejecting the Medicaid Expansion leaving many no other recourse but to close.  Seems the elderly Governor also blamed Meteorologists for failing to notify him of the coming ice storm recently. Unless he is loaded, thank goodness for Medicaid as it is the only provision which will supply Nursing Home care in case he becomes disabled to to Alzheimer disease.

    How A CBS Video About An Obamacare Victim Misled Millions – Part 2 (What the ‘Victim’ Revealed in Our Final Interview) -- This is a follow-up to Part 1 Why Are So Many Americans Confused About Obamacare? How a Video Produced by CBS’ Washington Bureau Misled Millions“Woman Battling Kidney Cancer Losing Company Health Plan Due To Obamacare.”  was the headline on a story that CBS’ Washington Bureau sent to its affiliates last fall.  CBS correspondent Susan McGinnis narrates the piece: “During the 10 years that Debra Fishericks has worked at Atkinson Realty, the company has provided group health insurance with manageable premiums,” McGinnis explains –“until owner Betsy Atkinson learned the policy would be terminated because it doesn’t meet the requirements of the Affordable Care Act.  “Debra has scoured the website looking for a new policy,” McGinnis adds, referring to, but “so far, she cannot afford the premiums.”  “They (premiums) just keep going up higher and higher when there is a pre-existing condition,” says Fishericks.  And she begins to cry.   I was astonished: I thought most people understood that, under the Affordable Care Act, insurers can no longer charge a customer more because she suffers from a pre-existing condition. Later, when I interviewed Fishericks, I realized that she honestly believed she was going to have to pay more for coverage because she had been diagnosed with cancer. Like a great many Americans, she didn’t understand how the ACA would protect her. Given how hard Obamacare’s opponents have worked to obscure the law’s benefits, I probably shouldn’t have been surprised.

    Health Care Agency Passes $1 Trillion Milestone - President Barack Obama's budget pushes Health and Human Services spending over $1 trillion for the first time, reflecting an aging population adding to the Medicare rolls, as well as expanded coverage for younger people through the new health law. Released Tuesday, the HHS budget for the 2015 fiscal year calls for just over $1 trillion, which budget officials said is a new milestone for the department. HHS runs Medicare, Medicaid and the insurance expansion in Obama's health overhaul law, which together provide coverage for about 1 in 3 Americans. Its growing prominence in the federal budget reflects the rise of benefit programs, which now account for more than two-thirds of all government spending. And the trillion-dollar HHS budget left out a significant chunk of spending: another $60 billion for tax credits to finance private coverage under the health care law was included in the Treasury Department's budget, since those benefits are delivered through the Internal Revenue Service. Overall, the HHS spending plan reflected a stay-the-course approach in an election year. It included some modest new proposals sure to please Democratic constituencies, such as expanded access to HIV and AIDS programs and initiatives to tackle mental health problems among younger people generally, and foster care youth in particular. It called for $1.8 billion to fund the coverage rollout under the health care law, much of which will go to new online insurance markets in the 36 states served by the website.

    Hello HillaryCare: ObamaCare Deadline Extended Beyond Obama's Term -- In what is becoming an epic embarrassment, the WSJ reports that the Obama administration announced today that consumers can keep insurance plans that don't comply with the federal health law for another two years, pushing a potential firestorm over cancellations and broken promises that "you can keep your health plan". As The Hill adds, the unprecedented move will protect vulnerable Democrats in the midterm elections by staving off a wave of cancellation notices and for some consumers, rather stunningly, Obamacare will not be in place for all Americans when President Obama leaves office. Sickeningly, the administration explicitly gave cover to 13 vulnerable Democratic lawmakers by saying the extension was developed in “close consultation” with those members.

    New O-Care delay to help midterm Dems - The Obama administration is set to announce another major delay in implementing the Affordable Care Act, easing election pressure on Democrats. As early as this week, according to two sources, the White House will announce a new directive allowing insurers to continue offering health plans that do not meet ObamaCare’s minimum coverage requirements.  Prolonging the “keep your plan” fix will avoid another wave of health policy cancellations otherwise expected this fall. The cancellations would have created a firestorm for Democratic candidates in the last, crucial weeks before Election Day. The White House is intent on protecting its allies in the Senate, where Democrats face a battle to keep control of the chamber. “I don’t see how they could have a bunch of these announcements going out in September,” one consultant in the health insurance industry said. “Not when they’re trying to defend the Senate and keep their losses at a minimum in the House. This is not something to have out there right before the election.”

    Health Care Policy and Marketplace Review: Extending the Obamacare Cancelled Policy Moratorium––One More Contortion in the Pretzel: The administration has confirmed that the individual policies that were supposed to be cancelled because of Obamacare can now remain in force another two years. For months I have been saying millions of individual health insurance policies will be cancelled by year-end––most deferred until December because of the carriers' early renewal programs and because of President Obama's request the policies be extended in the states that have allowed it. The administration, even today, as well as supporters of the new health law, have long downplayed the number of these "junk policy" cancellations as being insignificant. Apparently, these cancelled policies are good enough and their number large enough to make a difference come the November 2014 elections. As a person whose policy is scheduled to be cancelled at year-end, I am happy to be able to keep my policy with a better network, lower deductibles, and at a rate 66% less than the best Obamacare compliant policy I could get––presuming my insurance company and state allow it. But for the sake of Obamacare's long-term sustainability, this is not a good decision. The fundamental problem here is that the administration is just not signing up enough people to make anyone confident this program is sustainable.

    Obamacare Policies Change for 2015 to Add Flexibility - With midterm congressional elections bearing down, the government changed its regulation of Obamacare to give consumers and states more flexibility to decide on their health plans, insurers more time to sign up customers and taxpayers a chance to avoid more costs. The changes, announced yesterday by the U.S. Health and Human Services Department, will smooth enactment of the Patient Protection and Affordable Care Act, administration officials said. Republicans accused President Barack Obama of making them to help congressional Democrats survive an unpopular law. Americans with health coverage that predates Obamacare can stay on their plans for two more years, insurers will have an extra month to enroll customers next winter and states will get more time to decide whether to manage the law themselves, officials said. Also, a program aimed at covering financial losses for insurers will be adjusted to help ensure it doesn’t cost taxpayers, the Obama administration said. “These policies implement the health-care law in a common-sense way by continuing to smooth the transition for consumers and stakeholders and fixing problems wherever the law provides flexibility,” Kathleen Sebelius, the U.S. health secretary, said in a statement. Republicans have made clear they will try to make the troubled roll-out of the Affordable Care Act the defining issue of the November congressional elections, focusing on canceled plans, delayed features, the administration’s accommodations for insurers and employers and computer errors that prevented many Americans from signing up at the beginning last October.

    Insurers’ Obamacare Losses May Cost U.S. $5.5 Billion -- Health insurers such as WellPoint Inc and Humana stand to gain $5.5 billion next year to cover losses from Obamacare in a program the law’s opponents label a bailout.  The money, outlined in President Barack Obama’s proposed budget for the fiscal year that begins in October, is designated to help insurers who find the cost of the law higher than expected, based on the percentage of older, sicker people who sign up compared with younger enrollees.  Under the Patient Protection and Affordable Care Act, insurers who record a profit of 3 percent or more on their Obamacare business would put some of the gains into a government-controlled fund. Companies whose claims cost at least 3 percent more than their premium revenue can access the money.

    The Simple Solution to Obamacare's Employer Mandate Problems -- The employer mandate does accomplish much of the prime goal of reform. Most employers have incentives to continue to provide coverage, or expand coverage.  But the problems with the structure of the employer mandate are obvious. The law creates incentives for employers to keep workers’ hours under 30. It also establishes the potential for a business with a growing number of employees, when it exceeds the 50-employee threshold, to suddenly have to pay for health coverage. The existence of incentives to cut hours or limit employees does not at all mean that employers will adjust for them. The accusations that the ACA is creating a part-time economy are belied by the facts: part-time employment is going down as the economy accelerates. In addition, employers that are adding workers rapidly as their businesses grow are not going to stop expanding  – or establish dozens of very small corporations – to avoid paying for health coverage. Still, we are seeing examples of some employers, including public employers and universities, limiting workers’ hours to less than 30.  There is a simple solution, one that was included in the version of the ACA enacted by the House in 2009. Employers that decide not to provide health coverage for their employees would be required to pay a percentage of payroll as a tax to cover health care, just like employers do now for FICA (Social Security and Medicare). Instantly, the cliff impact is gone, both in terms of hours and number of employees. Employers could either provide coverage to all employees, or pay for health coverage in the same manner as FICA, a regular cost of adding an employee, with a marginal increase in cost for each hour someone works. There is no advantage to hiring someone for less than 30 hours or keeping under 50 employees.

    The Obamacare money under the couch -  The Obama administration is dropping some new hints about how it has moved money around to fund Obamacare without Congress — but not nearly enough to put the controversy to rest. Forced to reveal more details under a provision tucked in this year’s bipartisan budget deal, the Department of Health and Human Services declared Friday how it used Secretary Kathleen Sebelius’s authority to move about $1.6 billion in departmental funds around last year — the Cabinet secretary’s version of looking for change under the couch cushions and hitting the jackpot. But HHS didn’t say exactly how it spent the money, and it didn’t lay out the kind of detail Republicans sought. So now the Republicans will have to decide their next move, whether it’s just more records requests or new efforts to tie the Obama administration’s hands in future appropriations bills. And even though it will be able to get some money from fees on insurers’ selling plans on in future years, the Obama administration will still have to decide how it can keep Obamacare afloat if Congress keeps refusing to provide new funding. Here are the lessons from Friday’s report:

    Report: Medical studies still neglect gender differences - Scientists continue to neglect gender in medical research, endangering women's health by focusing on men in studies that shape the treatment of disease, a report released Monday says.  The lack of attention to sex differences occurs at all stages of research, from lab to doctor's office, says the Connors Center for Women's Health at Brigham and Women's Hospital in Boston, and the Jacobs Institute of Women's Health at George Washington University in Washington. Animal and human studies typically use male subjects and, even when females are included, researchers fail to analyze and report results by sex, the report's authors said. "We've got to do the work and change the way science is done and translated to clinical care," Paula Johnson, executive director of the Connors Center, said. "Until we do that, we are putting women's health at risk."

    One Third of Skilled Nursing Patients Harmed in Treatment - One-in-three patients in skilled nursing facilities suffered a medication error, infection or some other type of harm related to their treatment, according to a government report released today that underscores the widespread nature of the country’s patient harm problem.  Doctors who reviewed the patients’ records determined that 59 percent of the errors and injuries were preventable. More than half of those harmed had to be readmitted to the hospital at an estimated cost of $208 million for the month studied — about 2 percent of Medicare’s total inpatient spending. Patient safety experts told ProPublica they were alarmed because the frequency of people harmed under skilled nursing care exceeds that of hospitals, where medical errors receive the most attention.  The study by the inspector general of the U.S. Department of Health and Human Services (HHS) focused on skilled nursing care – treatment in nursing homes for up to 35 days after a patient was discharged from an acute care hospital. Doctors working with the inspector general’s office reviewed medical records of 653 randomly selected Medicare patients from more than 600 facilities. The doctors found that 22 percent of patients suffered events that caused lasting harm, and another 11 percent were temporarily harmed. In 1.5 percent of cases the patient died because of poor care, the report said. Though many who died had multiple illnesses, they had been expected to survive.

    Healthcare Triage: What kills us - Longtime readers of the blog will know some of this already, but should enjoy it nonetheless: One of the things that baffles me about people is how they completely misunderstand risk. Lots of my friends panic about things that have no real chance of killing them, but ignore the things that will. This can lead us to make irrational decisions, and sometimes irrational policy. What really will kill us? Watch and learn.

    Misuse of Antibiotics Fuels Fatal ‘Superbug’ Crisis - The drugs people have relied on for more than 70 years to fight bacterial infections, from everyday cuts to potentially deadly pneumonia, are becoming powerless due mainly to misuse. Consumer Reports has pointed to three main culprits for the weakening of antibiotic: doctors, patients and people raising animals for meat.  That misuse, which includes prescribing or using antibiotics incorrectly, breeds dangerous antibiotic-resistant bacteria, known as “superbugs,” that can’t be easily controlled. Alarmed by the worsening situation, health leaders are working to change how consumers use antibiotics. In a report released Tuesday, the national Centers for Disease Control and Prevention (CDC) urged hospitals to prescribe and administer antibiotics more sparingly and to track and prevent hospital-acquired infections more vigorously. The Food and Drug Administration wants the meat and poultry industry to cut back on the use of the drugs. And many medical organizations, as part of a program called Choosing Wisely, have highlighted situations in which the drugs are often overused. But experts say those efforts won’t be successful unless patients take part by refusing antibiotics when they aren’t necessary and taking steps to reduce their use at home.

    BBC News - 30,000-year-old giant virus 'comes back to life': An ancient virus has "come back to life" after lying dormant for at least 30,000 years, scientists say. It was found frozen in a deep layer of the Siberian permafrost, but after it thawed it became infectious once again. The French scientists say the contagion poses no danger to humans or animals, but other viruses could be unleashed as the ground becomes exposed. The study is published in the Proceedings of the National Academy of Sciences (PNAS).  Professor Jean-Michel Claverie, from the National Centre of Scientific Research (CNRS) at the University of Aix-Marseille in France, said: "This is the first time we've seen a virus that's still infectious after this length of time."  The ancient pathogen was discovered buried 30m (100ft) down in the frozen ground. Called Pithovirus sibericum, it belongs to a class of giant viruses that were discovered 10 years ago. The virus infects amoebas but does not attack human or animal cells. These are all so large that, unlike other viruses, they can be seen under a microscope. And this one, measuring 1.5 micrometres in length, is the biggest that has ever been found.

    Researchers find high-fructose corn syrup may be tied to worldwide collapse of bee colonies - Commercial honeybee enterprises began feeding bees high-fructose corn syrup back in the 70's after research was conducted that indicated that doing so was safe. Since that time, new pesticides have been developed and put into use and over time it appears the bees' immunity response to such compounds may have become compromised. The researchers aren't suggesting that high-fructose corn syrup is itself toxic to bees, instead, they say their findings indicate that by eating the replacement food instead of honey, the bees are not being exposed to other chemicals that help the bees fight off toxins, such as those found in pesticides.  Specifically, they found that when bees are exposed to the enzyme p-coumaric, their immune system appears stronger—it turns on detoxification genes. P-coumaric is found in pollen walls, not nectar, and makes its way into honey inadvertently via sticking to the legs of bees as they visit flowers. Similarly, the team discovered other compounds found in poplar sap that appear to do much the same thing. It all together adds up to a diet that helps bees fight off toxins, the researchers report. Taking away the honey to sell it, and feeding the bees high-fructose corn syrup instead, they claim, compromises their immune systems, making them more vulnerable to the toxins that are meant to kill other bugs.

    USDA is 'Endangering the Lives of Millions of Americans' - The U.S. government is in the final stages of weighing approval for an overhaul of regulations governing the country’s poultry industry that would see processing speeds increase substantially even while responsibility for oversight would be largely given over to plant employees. The plan, which was originally floated by the U.S. Department of Agriculture (USDA) two years ago, is currently slated to be finalised by regulators next month. Yet opposition has been heating up from lawmakers as well as labour, public health and consumer advocacy groups. On Thursday, over 100 such groups and businesses delivered a letter, along with nearly 220,000 petitions, to President Barack Obama, asking that the proposal be withdrawn. “The proposed rule puts company employees in the role of protecting consumer safety, but does not require them to receive any training before performing duties normally performed by government inspectors,” the letter states.

    Glyphosate, Hard Water and Nephrotoxic Metals: Are They the Culprits Behind the Epidemic of Chronic Kidney Disease of Unknown Etiology in Sri Lanka? - International Journal of Environmental Research and Public Health -  Abstract: The current chronic kidney disease epidemic, the major health issue in the rice paddy farming areas in Sri Lanka has been the subject of many scientific and political debates over the last decade. Although there is no agreement among scientists about the etiology of the disease, a majority of them has concluded that this is a toxic nephropathy. None of the hypotheses put forward so far could explain coherently the totality of clinical, biochemical, histopathological findings, and the unique geographical distribution of the disease and its appearance in the mid-1990s. A strong association between the consumption of hard water and the occurrence of this special kidney disease has been observed, but the relationship has not been explained consistently. Here, we have hypothesized the association of using glyphosate, the most widely used herbicide in the disease endemic area and its unique metal chelating properties. The possible role played by glyphosate-metal complexes in this epidemic has not been given any serious consideration by investigators for the last two decades. Furthermore, it may explain similar kidney disease epidemics observed in Andra Pradesh (India) and Central America. Although glyphosate alone does not cause an epidemic of chronic kidney disease, it seems to have acquired the ability to destroy the renal tissues of thousands of farmers when it forms complexes with a localized geo environmental factor (hardness) and nephrotoxic metals.

    Idaho gov. signs 'ag gag' bill into law - Idaho on Friday became the first state in two years to pass a bill aimed at stopping filming at farms and dairy producers. The bill, which animal rights activists often refer to as an “ag gag” bill, was created in response to undercover animal rights activists exposing animal abuse at one of Idaho’s largest dairy operations 2012. The bill was signed into law by Idaho Gov. C.L. Otter on Friday. The measure passed Idaho’s Senate earlier in February to the applause of agricultural representatives who said it would help ensure farmers’ right to privacy. But animal rights groups say the measure will have a chilling effect on investigations that attempt to expose wrongdoing on Idaho’s farms. Debate about laws governing filming on farms in Idaho started in 2012 when someone hired by Mercy for Animals got a job at a Bettencourt Dairies operation in Hansen and filmed workers caning, beating and sexually abusing cows.  The video was used to prosecute employees at the dairy, and it convinced Idaho’s dairy industry to create a worker training program to help prevent animal abuse. But it also set in motion a concerted effort by the dairy industry to make sure such embarrassing videos weren’t made in the state again.

    Rains Ease Calif. Drought, Make Wildfire Outlook Grimmer - The Drought Monitor update shows that more than half the contiguous U.S. — 53.47 percent — is abnormally dry or experiencing drought, with exceptional, or the most severe drought conditions affecting 1.57 percent of the country. For both figures, that’s less than 1 percent improvement over last week’s Drought Monitor. Most of the worst drought conditions are in Nevada and California. Nearly 95 percent of California is in drought and 22.37 percent of the state is experiencing exceptional drought. That’s slightly better than last week, when 26.21 percent of California was exceptionally dry. Credit: Climate Central Last week’s California storms tracked too far south to provide adequate moisture in many of the most important Sierra Nevada watersheds, focusing instead on the state’s coastal areas. “It was great for groundwater recharge, but it doesn’t do a whole lot for the water supply outlook,” Rippey said. “For agricultural areas of California, it’s really the Sierra Nevada that drives the agricultural irrigation.” For farmers, the storm helped ease the drought slightly, reducing irrigation requirements for drought-stricken crops and it may help winter grains and pastures bounce back, he said. “Unless we get more storms, we’ll still end up with a third consecutive year of drought,” Rippey said. “I think it’s almost a guarantee.” Some areas of California, including the Los Angeles Basin, need more than 20 inches of rain in the span of a month to end the drought. According to an updated estimate from a National Weather Service office in California, the odds of that happening are now 1-in-200.

    Beef: It’s What’s No Longer Affordable for Dinner -- At the start of 2014, U.S. ranchers had 87.99 million head of cattle, the lowest total since 1951. Long periods of drought in California and Texas are largely being blamed for the declining herd figures, so it’s not like the numbers should come as much of a surprise. Neither should rising beef prices hitting consumers and restaurants (and restaurant customers, of course). Analysts have forecast that beef prices will increase this year and for years to come. Other factors, including rising costs for fuel and feed and increased demand for beef in developing countries, have also helped push beef prices higher and higher. “Really, the story’s pretty simple, and it begins back in 2007, 2008,” Ricky Volpe, research economist at the U.S. Department of Agriculture, said in a Marketplace interview recently. “In both those years, we saw basically every macroeconomic factor that influences food prices start working in the same direction to start driving up food price inflation.” Regardless of the fact that rising beef prices make sense and shouldn’t really come as a surprise, shoppers and restaurant owners are being smacked with sticker shock lately when attempting to round up brisket, steaks, chuck, ground beef, and pretty much every other part of the cow. In the most recent Department of Agriculture report, the average retail price of fresh beef was measured at $5.04 per pound, up more than 50¢ over a two-year span and the highest price ever recorded.

    Weather Pushes Up World Food Prices - World food prices jumped in February, marking their sharpest climb since mid-2012, says the United Nations’s Food and Agriculture Organization Thursday, citing weather-related issues and higher demand. The Food and Agriculture Organization’s price index, which measures the monthly change in price for a basket of edible commodities, including grains, oils, dairy, and meat, averaged 208.1 points in February — that’s up 5.2 points from a slightly tweaked revision to January’s index of 202.9 points. While prices increased for all food groups except meat, sugar marked the sharpest rise, gaining 6.2%, and oils, also up 4.9%. “This month’s increase follows a long period of declining food prices in general. But it’s too early to say if this is a true reversal of the trend,” “The weather is probably a major force driving up prices for certain commodities like sugar or wheat, but brisk demand is also an important factor underpinning maize, dairy and oil prices”, FAO also raised its outlook for global grains production to a record high 2.515 billion tonnes, up a whopping 13 million tonnes from its previous forecast.

    Crop diversity decline 'threatens food security': Fewer crop species are feeding the world than 50 years ago - raising concerns about the resilience of the global food system, a study has shown. The authors warned a loss of diversity meant more people were dependent on key crops, leaving them more exposed to harvest failures. Higher consumption of energy-dense crops could also contribute to a global rise in heart disease and diabetes, they added. The study appears in the journal PNAS. "Over the past 50 years, we are seeing that diets around the world are changing and they are becoming more similar - what we call the 'globalised diet'," co-author Colin Khoury, a scientist from the Colombia-based International Center for Tropical Agriculture, explained.  "This diet is composed of big, major cops such as wheat, rice, potatoes and sugar. "It also includes crops that were not important 50 years ago but have become very important now, particularly oil crops like soybean," he told BBC News. While wheat has long been a staple crop, it is now a key food in more than 97% of countries listed in UN data, the study showed. And from relative obscurity, soybean had become "significant" in the diets of almost three-quarters of nations. He added that while these food crops played a major role in tackling global hunger, the decline in crop diversity in the globalised diet limited the ability to supplement the energy-dense part of the diet with nutrient-rich foods. Amid the crops recording a decline in recent decades were millets, rye, yams, sweet potatoes and cassava.

    Unfarming: The Way to Win a Million Dollars – Kay McDonald - A little while back there was an announcement that anyone who could solve the world’s dead zone problems like we have in the Gulf of Mexico here in the U.S., could win a million dollars. Instantly, I thought my ship had come in, because I knew the answers to the challenge right off the top of my head.  But then I caught the clincher “solutions must meet a suite of simultaneous and sometimes conflicting needs – from protecting water resources and near-shore ecosystems to ensuring the capacity and vitality of agricultural productivity” — at which point I gave up without trying. Appropriately, the contest comes out of Tulane University, based in New Orleans, Louisiana. For starters, how I’d love to see a minimum natural area bordering all waterways, scaled to the size of the waterway. But, why is it that when something makes such obvious sense, then, it just cannot happen? Look at this from George Monbiot excerpted from his lengthy rant against corporate agriculture yesterday over at The Guardian: We should turn the rivers flowing into the lowlands into “blue belts” or “wild ways”. For 50 metres on either side, the land would be left unfarmed, allowing trees and bogs to return and creating continuous wildlife corridors. Bogs and forests trap the floodwaters, helping to protect the towns downstream. They catch the soil washing off the fields and filter out some of the chemicals which would otherwise find their way into the rivers. A few of us are now in the process of setting up a rewilding group in Britain, which would seek to catalyse some of these changes. Fifty metres is only 164 feet. Along the mighty Mississippi, we should have at least 2-5 miles of natural forest and prairie land — so George is being really conservative in his baby step plan.

    ‘Serious problem’: 65-foot crack found in Columbia River dam - A massive crack in a major Columbia River dam poses enough of a risk of dam failure that Grant County authorities have activated an emergency-response plan. Officials said there is no threat to the public from the crack in the Wanapum Dam, which is just down stream from where Interstate 90 crosses the river.  But utility managers are lowering water levels a total of 20 feet because they fear the structure otherwise could endanger inspectors trying to get a better handle on how seriously the dam is damaged.“At this point we already know there’s a serious problem,” said Thomas Stredwick, spokesman for the Grant County Public Utility District (PUD). “We want to make sure the spillway is stable enough that inspectors are safe when inspecting it.” Earlier this week, an engineer noticed a slight irregular “bowing” above the spillway gates near where cars can drive across the dam.When divers finally took a look under water they found a 2-inch-wide crack that stretched for 65 feet along the base of one of the dam’s spillway piers.

    Dawn of the Dead Watershed: There are two types of aquifers: replenishable (a permeable layer of rock above the water table and an impermeable one beneath it) and non-replenishable (also known as fossil aquifers, no recharge) aquifers. Most of the aquifers in India and the shallow aquifer under the North China Plain are replenishable. When these are depleted, the maximum rate of pumping is automatically reduced to the rate of recharge or refill. For fossil aquifers - such as the vast U.S. Ogallala aquifer, the deep aquifer under the North China Plain, or the Saudi aquifer - depletion brings pumping to an end. About 20 percent of all cropland, or 277 million hectares, is under irrigation and irrigation multiplies yields of most crops by 2 to 5 times - irrigated agriculture currently contributes to 40 percent of the world's food production.   Yet we continue to let happen widespread surface and groundwater contamination that makes valuable water supplies unfit for other uses.One of the most injurious uses of our fresh water supply is Fracking. Hydraulic fracturing involves drilling a well then injecting it with a slurry of water, chemical additives and proppants. Wells are drilled and lined with a steel pipe that’s cemented into place. A perforating gun is used to shoot small holes through the steel and cement into the shale. The highly pressurized fluid and proppant mixture injected into the well escapes and create cracks and fractures in the surrounding shale layers and that stimulates the flow of natural gas or oil. The proppants (grains of sand, ceramic beads, or sintered bauxite) prevent the fractures from closing when the injection is stopped and the pressure of the fluid is removed.

    Thanks to Climate Change, You May Have to Kiss Coffee Goodbye -  Savor your morning cup of joe. If things continue the way they are, a day may come when coffee is nothing but a distant memory. Due to the worst drought in Brazil’s history, worldwide coffee prices have already risen but climate change won’t stop at that.  And just when science finally confirmed that the caffeine-filled brown liquid is good for you. The world is not going to run out of coffee next week. Analysts still estimate an increasingly tight global coffee surplus of less than 1 percent of total production through the remainder of the year. But the Brazilian drought is causing a significant pressure on global supplies, and when coupled with burgeoning demand from increasingly affluent consumers in Asia (and Brazil itself), that means prices are surging and that surplus could quickly become a shortage if the drought continues to intensify. Arabica coffee futures are up more than 50 percent in just the last two months in response. The current run on coffee is an example of the kinds of follow-on effects to be expected as the climate warms and rainfall patterns become more erratic. The ongoing lack of rainfall, coupled with record high temperatures across the whole of southeast South America during the current Southern Hemisphere summer, is just the kind of extreme weather event that’s been becoming more common over recent years.

    NOAA: El Nino Watch for Later this Year -- More as this develops.  Nobody knowledgeable is calling this for certain, but equally nobody looks forward to the effects of a strong El Nino. Capital Weather Gang:In a bulletin issued this morning, NOAA issued an El Niño Watch predicting a roughly 50% chance for development later this year. An “El Niño” is the abnormal warming of ocean temperatures in the eastern Pacific Ocean along the west coast of South America near Peru and Ecuador. It can have profound influences on weather patterns around the world.NOAA’s bulletin says “sea surface temperature anomalies have recently increased near the International Date Line” as well as “in the central and east-central equatorial Pacific,” and that “many dynamical models predict El Niño to develop during the summer or fall.” El Niño conditions are declared when the average sea surface temperatures in the eastern Pacific are at least 0.5°C above average for three consecutive months. These abnormally elevated sea surface temperatures allow for the atmosphere to warm and provide instability, leading to the development of thunderstorm activity.

    Obama Seeks to Boost Resilience to Climate-Driven Drought, Fires - President Barack Obama, who has vowed to make fighting global warming a focus of his remaining years in office, yesterday unveiled initiatives to mitigate what aides say are the effects of an already changing climate.  The proposals, spread throughout Obama’s 2015 budget blueprint to Congress, include an overhaul of the way the government pays for fighting wildfires, more money for satellites to track extreme weather and a $1 billion resiliency fund to help communities deal with heavier rainstorms, higher storm surges or more intense droughts. “We are beginning to recognize that the climate is changing, despite the efforts we are taking to affect the trajectory,” Gina McCarthy, the head of the Environmental Protection Agency, told reporters. “The president has great hope that the Congress will see the resiliency fund as having great impact on communities across the United States.” While scientists debate the link between the number and severity of droughts, hurricanes or wildfires and global warming, Obama and his advisers say the connections are clear -- and the impacts will grow even as they take steps to stop it. Last year, Obama announced new rules to limit emissions from power plants, the biggest source of carbon dioxide. He has also said he wants to secure an international accord to address the issue before leaving office.

    Climate Change Traps Deep Ocean Heat, Eliminating Ice-Free Antarctic Enclaves -- Researchers from the McGill University and University of Pennsylvania have discovered evidence that heat from the depths of the ocean is being trapped under the Antarctic ice shelf due to climate change. This in turn has effectively closed off a New Zealand-sized large, open body of water within the Antarctic’s Weddell Sea for the last four decades, according to the study.   Published on March 2nd in the journal Nature Climate Change, the researchers found that deep ocean heat is trapped under a freshwater lid — making it unable to melt the winter Antarctic ice pack as it used to. Satellite images from the mid-1970s, the first taken of the Antarctic during the polar winter, showed the huge ice-free region enclosed within the Weddell Sea ice pack. The open area, or polynya, remained open for three full winters before closing, a lasting phenomenon that was due to warm water rising up from miles below the ocean’s surface. The polynya did not reappear in nearly 40 years, and came to be considered a rare event by scientists.  However, in this new study, analysis of measurements made across the region over the last six decades show that the ocean surface has been getting less salty since the mid-20th century, thus preventing the freshwater from mixing with warm waters beneath and instead freezing over.  “Deep ocean waters only mix directly to the surface in a few small regions of the global ocean, so this has effectively shut one of the main conduits for deep ocean heat to escape,” Casimir de Lavergne, lead author of the paper, said in a statement from the university.

    Sea Level Rise Threatens The Statue Of Liberty And Hundreds Of Other Cultural Heritage Sites - Almost 200 cultural heritage sites, including the Statue of Liberty and the Sydney Opera House, could be compromised if global warming reaches 3 degrees above pre-industrial levels, a new report in Environmental Research Letters shows.  The research released Tuesday from Austria and Germany used both sea-level estimates for the next 2000 years and high-resolution topography data to compute which of the more than 700 listed UNESCO World Heritage sites would be affected by sea-level rise at different levels of sustained future warming. The report found that if warming reaches 3 degrees Celsius, sea level would rise six feet in the next 2,000 years, and 170 of those sites would be drowned.  “After 2000 years, the oceans would have reached a new equilibrium state and we can compute the ice loss from Greenland and Antarctica from physical models,” co-author Anders Levermann, from the Potsdam Institute for Climate Impact Research in Germany, told Red Orbit. “At the same time, we consider 2000 years a short enough time to be of relevance for the cultural heritage we cherish.”

    A Note On Climate Change Risk -  I believe the persistent, cold, snowy winter we've had in much of the United States (and similar events in Europe) is very likely due to the wavering, ever-more chaotic movements of the Jet Stream in the northern hemisphere. It appears that the Jet Stream has become unhinged because of growing heat imbalance between the Arctic and Earth's mid-latitudes. That is the view of Rutgers scientist Jennifer Francis. The circumstantial evidence supporting her hypothesis is starting to become overwhelming, although there is no "smoking gun'" which "proves" this theory. Thus there are dissenting scientists (like Kevin Trenberth) and the jury is said to be out on this one (see here, here, and here). Needless to say, the heat imbalance I spoke of is caused by human-caused global warming. Even if Jennifer Francis is wrong, it's clear that something very unusual has been going on in the last 3 or 4 years, not just in the United States but all over the world. We're seeing some very striking and extreme (not to mention damaging) weather patterns. Disregarding time scales, which are always confusing for humans, it is clear as far as the Big Picture is concerned that the shit is hitting the fan. And yet I continue to see the same climate change babbling which humans always engage in (Discover Magazine, February 4, 2014). And follow the links there-in if babbling is irresistable to you.

    Climate Change 'Very Evident,' So Let's Deal With It, World Panel Says -– The next report from the Intergovernmental Panel on Climate Change, an international group of scientists and government policymakers, will focus on managing the risks of a warming planet, according to the report's co-chair. "The impacts of climate change that have already occurred are very evident, they're widespread, they have consequences," Chris Field, a professor in the Department of Global Ecology at Stanford University and the co-chair of the IPCC working group drafting the report, said in a meeting with reporters Monday.  The fifth assessment report from the IPCC's Working Group II focuses on climate impacts, adaptation, and vulnerability. The final version of the report is due to be released on March 31, though reporters have already published a leaked early draft. The draft states that, within this century, effects of climate change "will slow down economic growth and poverty reduction, further erode food security and trigger new poverty traps.  "Field said the report will emphasize the need to minimize and manage the consequences. "The essence of dealing with climate change is really not so much about identifying specific impacts that will occur at specific times in the future, but about managing risks," he said. "I think if you look around the world at the damages that have been sustained in a wide range of climate related events, it's very clear we're not prepared for the kinds of event we're already seeing," said Field, referring to recent floods, droughts and other extreme weather. "That's not to say those are caused by climate change, but we're not prepared for the extremes we already encounter."

    International environmental agreements don’t work -- Economic theory predicts that international environmental agreements will fail due to free-rider problems, and previous empirical work suggests that such agreements do not in fact reduce emissions. This column presents evidence that the Basel Convention and Ban on trade in hazardous waste has also been ineffective. The authors find no evidence that Annex-7 countries that ratified the Ban slowed their exports to non-Annex-7 countries as the agreement requires.

    Climate policy robs the world’s poor of their hopes - Having failed to stem carbon emissions in rich countries or in rapidly industrializing ones, policymakers have focused their attention on the only remaining target: poor countries that do not emit much carbon to begin with. Legislation to cap US carbon emissions was defeated in Congress in 2009. But that did not prevent the Obama administration from imposing a cap on emissions from energy projects of the Overseas Private Investment Corporation, a US federal agency that finances international development. Other institutions of the rich world that have decided to limit support for fossil fuel energy projects include the World Bank and the European Investment Bank. Such decisions have painful consequences. A recent report from the non-profit Center for Global Development estimates that $10 billion invested in renewable energy projects in sub-Saharan Africa could provide electricity for 30 million people. If the same amount of money went into gas-fired generation, it would supply about 90 million people – three times as many. In Nigeria, the UN Development Program is spending $10 million to help “improve the energy efficiency of a series of end-use equipment … in residential and public buildings.” As a way of lifting people out of poverty, this is fanciful at best. Nigeria is the world’s sixth-largest oil exporter, with vast reserves of natural gas as well. Yet 80 million of its people lack access to electricity. Or consider Pakistan, where energy shortages in a rapidly growing nation of 180 million have led to civil unrest – as well as rampant destruction of forests, mostly to provide firewood for cooking and heating. Western development agencies have refused to finance a project to use Pakistan’s Thar coal deposits for low-carbon natural gas production and electricity generation because of concerns over carbon emissions. Half a world away, Germany is building 10 new coal plants over the next two years.

    Record-shattering 5,000 megawatt & 2,500 megawatt solar projects get green light in Indian state of Jammu and Kashmir - The largest solar power plant in the world is a California project 550 megawatts (MW) in size. Dwarfing that, the Indian state of Jammu and Kashmir has just given the green light to a 5,000 MW solar project and a 2,500 MW solar project. Granted, these projects will likely be composed of many separate solar power plants. Nonetheless, 7,500 MW is about three-fourths of the entire solar power capacity in the United States at the end of the 3rd quarter of 2013.These solar projects totaling 7,500 MW add on to a 4,000 MW solar "ultra mega" project that recently received a memorandum of understanding in another Indian state, Rajasthan. Again, a little simple math shows that these three projects together would have a power capacity surpassing all the solar power installed in the US. Staggering. Nonetheless, this doesn't come as a great surprise. India is looking to provide electricity to hundreds of millions of people currently without it in the coming years, and solar is already cheaper than diesel power there. Trying to avoid the construction of inflexible, dirty, expensive, centralized power plants (nuclear & coal power plants), India is jumping right into the clean energy age. As I discussed in an interview for CNBC and Harvard Business Review's "Energy Opportunities" series a few years ago, just as people in developing nations leapfrogged past landlines into the cellular age, they will leapfrog past 20th-century power plants into the wind and solar age.

    Dismantling Fukushima: The World's Toughest Demolition Project - IEEE Spectrum: A radiation-proof superhero could make sense of Japan’s Fukushima Daiichi nuclear power plant in an afternoon. Our champion would pick through the rubble to reactor 1, slosh through the pooled water inside the building, lift the massive steel dome of the protective containment vessel, and peek into the pressure vessel that holds the nuclear fuel. A dive to the bottom would reveal the debris of the meltdown: a hardened blob of metals with fat strands of radioactive goop dripping through holes in the pressure vessel to the floor of the containment vessel below. Then, with a clear understanding of the situation, the superhero could figure out how to clean up this mess. Unfortunately, mere mortals can’t get anywhere near that pressure vessel, and Japan’s top nuclear experts thus have only the vaguest idea of where the melted fuel ended up in reactor 1. The operation floor at the top level of the building is too radioactive for human occupancy: The dose rate is 54 millisieverts per hour in some areas, a year’s allowable dose for a cleanup worker. Yet, somehow, workers must take apart not just the radioactive wreck of reactor 1 but also the five other reactors at the ruined plant. This decommissioning project is one of the biggest engineering challenges of our time: It will likely take 40 years to complete and cost US $15 billion. The operation will involve squadrons of advanced robots, the likes of which we have never seen.

    Report: Navy Knew USS Ronald Reagan Was Seriously Contaminated By Fukushima - These sailors were sacrificed to clean up the mess wrought by incompetent and greedy management, and regulatory capture. Not only did we do this to them, we are pretending it didn't happen -- so we don't have to pay for their care. Many of them will die slow, painful deaths on the high altar of capitalism, A stunning new report indicates the U.S. Navy knew that sailors from the nuclear-powered USS Ronald Reagan took major radiation hits from the Fukushima atomic power plant after its meltdowns and explosions nearly three years ago. If true, the revelations cast new light on the $1 billion lawsuit filed by the sailors against Tokyo Electric Power. Many of the sailors are already suffering devastating health impacts, but are being stonewalled by Tepco and the Navy. The Reagan had joined several other U.S. ships in Operation Tomodachi (“Friendship”) to aid victims of the March 11, 2011 quake and tsunami.  Photographic evidence and first-person testimony confirms that on March 12, 2011 the ship was within two miles of FukushimaDai’ichi as the reactors there began to melt and explode. In the midst of a snow storm, deck hands were enveloped in a warm cloud that came with a metallic taste. Sailors testify that the Reagan’s 5,500-member crew was told over the ship’s intercom to avoid drinking or bathing in desalinized water drawn from a radioactive sea. The huge carrier quickly ceased its humanitarian efforts and sailed 100 miles out to sea, where newly published internal Navy communications confirm it was still taking serious doses of radioactive fallout.

    PBS Takes Us on a Terrifying ‘Post-Apocalyptic’ Tour Inside Fukushima -  Nuclear opponents are often criticized for using the term “apocalypse” to describe the triple meltdown/quadruple-explosion/endless-radiation gusher reality at Fukushima. But PBS has now penetrated where ordinary journalists may not tread—the interior of the most radioactive place on Earth. PBS reporter Miles O’Brien shows us for the first time some of the visual reality of what has actually happened to a six-reactor facility that has turned into a trillion-dollar catastrophe. Or, as PBS puts it, the nuclear “apocalypse” along the coast of Japan, daily pouring 300 tons of lethal isotopes into our ocean eco-system. This brave and fascinating excursion into Fukushima’s innards features footage of the infamous Unit Four spent fuel pool, where Tokyo Electric is trying to bring down extremely radioactive fuel rods whose potential killing power is essentially unfathomable.    Given the “State Secrets Act” banning Japan’s citizens from criticizing the government, O’Brien’s footage may be the last we see inside Fukushima for quite some time.

    A New Study Shows How Fossil Fuel Pollution Damages The Heart -- A new study has just added to the case that fossil fuel pollution helps drive up cardiovascular disease.  Burning fuels like coal and gasoline doesn’t just give off carbon dioxide. It also releases a cocktail of other pollutants — especially sulfur dioxides and various types of nitrous oxides, all key ingredients in the smog that sits in the atmosphere over highly polluted cities like Los Angeles or Beijing. There’s also been a long-demonstrated statistical link between that pollution and cardiovascular problems like heart disease. Now a new study out of the University of Washington Medical Center in Seattle, and published in the American Journal of Respiratory and Critical Care Medicine, may help describe just how that link works. The researchers looked at 3,896 patients and their exposure to nitrogen dioxide specifically, which gets released when power plants burn coal or a car burns gasoline. After estimating the outdoor exposure over the preceding year, they ran the patients through an MRI scanner to get a look at their heart. The researchers found that increased exposure to nitrogen dioxide went along with a roughly 5 percent increase in the mass of the heart’s right ventricle, as well as changes in the blood flow through the ventricle. “Although the link between traffic-related air pollution and left ventricular hypertrophy, heart failure, and cardiovascular death is established, the effects of traffic-related air pollution on the right ventricle have not been well studied,” said Peter Leary, the study’s lead author. “Greater right ventricular mass is also associated with increased risk for heart failure and cardiovascular death.”

    Natural Gas Set New Records In 2013 For Both Supply And Demand -- The heavily-hyped golden age of natural gas appears to have begun in earnest – at least in the United States – last year, according to new data released today by the U.S. Energy Information Administration. The EIA’s Natural Gas Monthly (NGM) report for February contains state and national‐level estimates of natural gas volume and price data through December 2013. In December 2013, monthly dry natural gas production reached a record high of 2,090 billion cubic feet (Bcf) and total consumption is a record for any month on record at 2,912 Bcf. Other key takeaways from the EIA’s new data on natural gas supply and demand for 2013 include:

    • Total dry gas production reached a record at 24,280 Bcf
    • Total consumption reached a record at 26,034 Bcf
    • Deliveries to commercial consumers were the largest ever reported at 3,289 Bcf
    • Deliveries to residential and industrial customers were at the highest levels realized since 2003
    • Deliveries to electric power consumers was the only sector that declined in volume from 2012 to 2013

    U.S. Hopes Boom in Natural Gas Can Curb Putin - The crisis in Crimea is heralding the rise of a new era of American energy diplomacy, as the Obama administration tries to deploy the vast new supply of natural gas in the United States as a weapon to undercut the influence of the Russian president, Vladimir V. Putin, over Ukraine and Europe. The crisis has escalated a State Department initiative to use a new boom in American natural gas supplies as a lever against Russia, which supplies 60 percent of Ukraine’s natural gas and has a history of cutting off the supply during conflicts. This week, Gazprom, Russia’s state-run natural gas company, said it would no longer provide gas at a discount rate to Ukraine, a move reminiscent of more serious Russian cutoffs of natural gas to Ukraine and elsewhere in Europe in 2006, 2008 and 2009.The administration’s strategy is to move aggressively to deploy the advantages of its new resources to undercut Russian natural gas sales to Ukraine and Europe, weakening such moves by Mr. Putin in future years. Although Russia is still the world’s biggest exporter of natural gas, the United States recently surpassed it to become the world’s largest natural gas producer, largely because of breakthroughs in hydraulic fracturing technology, known as fracking.  “We’re engaging from a different position because we’re a much larger energy producer,” said Jason Bordoff, a former senior director for energy and climate change on the White House’s National Security Council.  Over the past week, Congressional Republicans have joined major oil and gas producers like ExxonMobil in urging the administration to speed up oil and natural gas exports. Although environmentalists, some Democrats and American manufacturing companies that depend on the competitive advantage of cheap domestic natural gas oppose the effort, they have fallen to the sidelines in the rush.

    Capturing Methane Possible at Little or No Cost - The oil and gas industry can capture leaking methane gas at little or no cost over the long-term, according to a new study by the Environmental Defense Fund and ICF International Inc. The study suggests that leaking methane, which is a potent greenhouse gas, can be reduced by improved technology and equipment. The industry has resisted such a move because of its costs, but the study finds that the $2.2 billion cost would be offset by the capturing and selling the natural gas that is currently leaking.  The potential, according to EDF, is huge. The report argues that emissions-control technologies that are already proven can reduce methane emissions by 40% below their projected 2018 levels. Doing so would cost less than one cent per thousand cubic feet. This could be achieved by “shifting to lower-emitting valves, or pneumatics, that control routine operations, and improving leak detection and repair to reduce unintended methane leaks from equipment, also known as ‘fugitives,’” according to a press release by EDF. The industry could even save a combined $164 million per year.

    Shale, the Last Oil and Gas Train: Interview with Arthur Berman - How much faith can we put in our ability to decipher all the numbers out there telling us the US is closing in on its cornering of the global oil market? There’s another side to the story of the relentless US shale boom, one that says that some of the numbers are misunderstood, while others are simply preposterous. The truth of the matter is that the industry has to make such a big deal out of shale because it’s all that’s left. There are some good things happening behind the fairy tale numbers, though—it’s just a matter of deciphering them from a sober perspective.    In a second exclusive interview with James Stafford of, energy expert Arthur Berman discusses:

    •    Why US gas supply growth rests solely on Marcellus
    •    When Bakken and Eagle Ford will peak
    •    The eyebrow-raising predictions for the Permian Basin
    •    Why outrageous claims should have oil lawyers running for cover
    •    Why everyone’s making such a big deal about shale
    •    The only way to make the shale gas boom sustainable
    •    Why some analysts need their math examined
    •    Why it’s not just about how much gas we produce
    •    Why investors are starting to ask questions
    •    Why new industries, not technologies will make the next boom
    •    Why we’ll never hit the oil and gas ‘wall’
    •    Why companies could use a little supply-and-demand discipline
    •    Why ‘fire ice’ makes sense (in Japan)
    •    Why the US crude export debate will be ‘silly’

    Groups Call for Additional Records Related to Kasich Administration’s Plan to Promote Fracking -- Troubled by recent revelations about an internal memo drafted in 2012 in which the Ohio Department of Natural Resources (ODNR) outlined a plan to promote fracking in state parks, Food & Water Watch along with other groups sent a request today to Gov. John Kasich and the ODNR to release of additional records related to promoting the controversial method of oil and gas drilling. “Given the Governor and the General Assembly’s track record of ignoring our concerns with specific pieces of legislation, and ODNR’s repeated public comments that mirror messaging points and strategy laid out in the recently released memo, we do not trust that there will be a thorough investigation by the state into collusion with the industry,” said Alison Auciello, Ohio organizer for Food & Water Watch.  “The specific naming of organizations and legislators as opposition groups raises questions about how seriously the ODNR and the administration are taking their duties to protect Ohio residents over the interests of the oil and gas industry.” The communications plan identified state legislators and environmental organizations as “eco-left,” giving the impression that the ODNR is a PR firm for the oil and gas industry instead of a regulatory agency. While the administration initially denied knowledge of this document, an by the Sierra Club confirmed Gov. Kasich’s involvement. “Unfortunately, it seems that it's fallen upon the people of Ohio to ensure transparency and accountability of our state government and agencies," said Brian Kunkemoeller, conservation coordinator for the Sierra Club Ohio Chapter said. "Ohioans must get to the bottom of the plans regarding the wholesale of our public lands, and coercive propaganda plans by state officials to do so.”

    When “Job Creators” Create Lousy Jobs - Dan Fejes - One of the most interesting links I found while researching last week’s post on Teach For America was the item on how TFA hiring in Connecticut was denying job opportunities to local residents.  It occurred to me that the author was getting an on-the-ground look at a similar phenomenon I’ve observed with the oil and gas industry in Ohio (and presumably elsewhere): both TFA and fracking rely on short term, out of state labor. The degree to which this is happening makes aggregate reporting on job gains inadequate. Necessary but not sufficient. With fracking, for instance, the numbers are terrible – and what were considered dire warnings from activists a few years ago about the dubious economic benefits of it are now blandly accepted as conventional wisdom. Last summer the Plain Dealer reported that “employment levels increased by less than 1 percent in 15 eastern Ohio counties where the highest number of horizontal shale wells have been drilled.” Then it followed that up a few weeks ago with an article that painted a very rosy picture of a dismal reality: Jobs are going to migrant workers, and the main economic impact is bumping up business to the hotels and restaurants that serve them.  In the August PD article, note that we are once again just a step further down the resource extraction path away from JOBS: “Future job growth will depend on whether Ohio’s shale wells produce ‘natural gas liquids,’ or NGLs, which are used by industry and whether the price of ‘dry gas’ used for heating, power production and manufacturing increases beyond the current prices.” Meanwhile, an industry flack mumbles that jobs were never the point anyway: “I think the real indicator is sales-tax receipts that have grown in the eastern counties where this activity is taking place.” So the relevant question is, are meaningful jobs created? I’d say a meaningful job has three characteristics: It employs locally at a living wage for the long term. As I’ve written before the oil and gas industry would like the public believe fracking does all three, and will be an anchor for communities much like steel mills once were. The reality is far different.

    Marcellus Output Not Slowing Down -- The Marcellus Shale will continue to be the country’s biggest driver in the growth of natural gas production, according to a new report from Morningstar. The report, “Shale Shock,” concludes that despite years of phenomenal shale gas production, the Marcellus Shale is not slowing down. “The emergence of the Marcellus Shale—the vast gas-bearing rock formation in the northeastern United States—is a game-changer for the U.S. energy industry,” Mark Hanson, Morningstar’s strategist for energy equity research, said. The Marcellus has been at the heart of the shale gas “revolution.” Far from fizzling out, Marcellus output continues to climb. Production increased by 61% in 2013 from the year earlier. And by the end of next year, the Marcellus will account for nearly one-quarter of U.S. natural gas production, up from 20% currently. The region will be churning out 14 to 20 billion cubic feet per day in 2015.  While shale plays are often characterized by rapid initial decline rates, the gas industry in the Marcellus has been able to stem the tide through greater efficiency. Companies have been able to boost production on a per rig basis, and have also moved to 24-hour operations. At current production rates, the Marcellus could last between 30 and 75 years, according to the report.  Still, shale plays do decline quickly, and drillers will have to drill 1,000 new wells each year just to keep production flat. Morningstar projects the industry will be able to achieve that rate of drilling, with an expectation of 1,600 new wells drilled each year going forward.

    Los Angeles Moves Closer To City Fracking Moratorium - The Los Angeles City Council voted unanimously on Friday to advance a moratorium on hydraulic fracturing, also known as fracking, in the nation's second-largest city. The motion passed Friday instructs the city's attorney to draft new zoning regulations that would prohibit fracking and other oil- and gas-well stimulation techniques within city limits until fracking companies can provide city officials with assurances as to future water quality, and can "mitigate the effects on climate change, protect environmental quality and natural resources, promote community awareness [and] "allow government access to and testing of chemicals used." "This is about neighborhood safety, about public health and most of all, about common sense," Council Member Mike Bonin said in an emailed statement. Bonin co-introduced the motion last September with fellow member Paul Koretz. "We cannot continue to allow the safety of our neighborhoods to be jeopardized by dangerous drilling," Bonin added. Anti-fracking activists joined Bonin and Koretz in the Los Angeles City Hall rotunda on Friday after the council's vote.  The office of Los Angeles Mayor Eric Garcetti did not immediately offer any comment on the council's vote. Some of the active oil fields around Los Angeles are outside city limits, so the moratorium will not eliminate all fracking operations within Los Angeles County.

    Dirty Energy Money Behind the Push to Frack California -- A satirical online video featuring Gov. Brown (D-CA) was released yesterday by Oil Change International, highlighting the Governor's penchant for fracking and dirty energy campaign donations. The video is the latest from the Big Oil Brown campaign effort which is pushing for a ban on fracking in California.The video parody, Frack Water, portrays a Gov. Brown look-alike outside a southern California oil field accompanied by an oil industry representative in a shot-for-shot remake of the 2004 Stetson cologne advertisement starring Matthew McConaughey. Frack Water Cologne Commercial starring Jerry Brown as Matthew McConaughey - YouTube  In the video the narrator says, “In a land plagued by drought, one man stands tall … We won’t tell you what’s in it, but Big Oil Brown’s got it all over him … Jerry Brown’s frackwater. A fragrance that smells like a man … a man who doesn’t give a [bleep] about drought or climate change.”

    2011 Oklahoma Induced Earthquake May Have Triggered Larger M5.7 Quake  — In a new study involving researchers at the U.S. Geological Survey, scientists observed that a human-induced magnitude 5.0 earthquake near Prague, Oklahoma, in November 2011 may have triggered the larger M5.7 earthquake less than a day later. This research suggests that the M5.7 quake was the largest human-caused earthquake associated with wastewater injection."The observation that a human-induced earthquake can trigger a cascade of earthquakes, including a larger one, has important implications for reducing the seismic risk from wastewater injection," said USGS seismologist and coauthor of the study Elizabeth Cochran.Historically, earthquakes in the central United States have been uncommon. Yet in the year 2011 alone, numerous moderate-size earthquakes occurred in Colorado, Texas, Oklahoma, Ohio and Arkansas.  Many of these earthquakes occurred near waste-water injection wells, and some have been shown to be caused by human activities. The 2011 Oklahoma earthquake sequence included the November 6, 2011, M5.7 earthquake that ruptured a part of the Wilzetta fault system, a complex fault zone about 200 km (124 miles) in length near Prague, Oklahoma.  Less than 24 hours prior to the M5.7 earthquake, a M5.0 foreshock occurred on November 5, 2011.  That foreshock occurred near active waste-water disposal wells, and was linked in a previously published study to fluid injection in those wells.  The earthquakes have not been directly linked to hydrofracturing.

    Fracking Saves Water -- A common criticism of hydraulic fracturing (fracking) is that it wastes water. Los Angeles just became the largest U.S. city to vote to ban fracking. One of the main justifications was water conservation during the current California drought. L.A. Councilmember Mike Bonin said that fracking “uses excessive amounts of water in a drought.” Some lawmakers are even pushing for a statewide ban.   However, as the following table shows, fracking uses much less water than other energy sources. To produce one million British Thermal Units (MMBtu) of energy, natural gas from fracking uses an average of 1.25 gallons of water. Biofuels use over 2,500 gallons of water per MMBtu. If the concern of environmentalists is saving water, they should attack biofuels and synfuels.  Fresh water is necessary for fracking since it creates the clean fractures which allow oil and gas to flow upwards to the wellbore. As drilling technology has advanced, companies have begun using more recycled water and this trend is expected to continue.   It takes twice as much water to maintain a golf course for a month than to frack a natural gas well. Put another way, fracking a well only takes the equivalent of 4.5 Olympic swimming pools.

    America’s Fracking Boom Looks More Like a Blip From Europe - The fracking boom has progressed at breakneck speed across the U.S., with roughly one in 20 Americans now living within a mile of a well drilled since 2000. So, how much has the economy benefitted from this drilling surge? Not much, according to a report presented to the European Union Parliament last month, which found "no evidence that shale gas is driving an overall manufacturing renaissance in the U.S.”  The shale boom’s economic contributions are very narrow, inflating local economies in places where drilling is intense but generating little impact on the country’s overall economic growth, the Institute for Sustainable Development and International Relations, a French think tank, concluded. Although natural gas prices have fallen from their highs in 2008, benefitting consumers, those low levels are unlikely to be sustained and the U.S. is still expected to remain heavily reliant on importing crude oil, the researchers found. Even using very optimistic assumptions, the report said, the industry’s cumulative long term effect on America’s Gross Domestic Product (GDP) will be less than one percent. “Despite very low and ultimately unsustainable short-term prices of natural gas, the unconventional oil and gas revolution has had a minimal impact on the U.S. macro-economy,”   

    Report Exposes How the TTIP Could Expand Fracking in U.S. and Europe -- As the U.S. and European Union (EU) governments continue negotiating the Transatlantic Trade and Investment Partnership (TTIP), environmental organizations are growing more concerned about a loophole that could leave the door open for expanded fracking in both regions. According to a report released today from Friends of the Earth Europe, the Sierra Club, Corporate Europe Observatory and others, the pending TTIP contains language that could allow energy companies to take governments to private arbitrators if they try to regulate or ban fracking. Now, campaigners in Europe and the U.S. are fighting to eliminate such rights from the trade deal.  “Giving companies more rights as part of the EU-U.S. trade deal would undermine Europe’s growing resistance to fracking,"  "Energy companies must not be given the power to challenge democratically agreed laws that safeguard the environment and citizen health. "Put simply, this puts profits before people, democracy and the planet.”  The report, "No Fracking Way," states that the Investor-State Dispute Settlement clause would enable corporations to claim damages in secret courts or arbitration panels if they believe their profits are adversely affected by changes in a regulation or policy. Those companies could seek compensation through private international tribunals. U.S. firms or those with a subsidiary in the U.S. that invest in Europe could also use those rights to seek compensation for future bans or other regulation on fracking. The arbitrators are mainly set up for investment cases and not part of the normal judicial system, according to the report.

    Ash Spill Shows How Watchdog Was Defanged -  — Last June, state employees in charge of stopping water pollution were given updated marching orders on behalf of North Carolina’s new Republican governor and conservative lawmakers. “The General Assembly doesn’t like you,” an official in the Department of Environment and Natural Resources told supervisors called to a drab meeting room here. “They cut your budget, but you didn’t get the message. And they cut your budget again, and you still didn’t get the message.” From now on, regulators were told, they must focus on customer service, meaning issuing environmental permits for businesses as quickly as possible. Big changes are coming, the official said, according to three people in the meeting, two of whom took notes. “If you don’t like change, you’ll be gone.” But when the nation’s largest utility, Duke Energy, spilled 39,000 tons of coal ash into the Dan River in early February, those big changes were suddenly playing out in a different light. Federal prosecutors have begun a criminal investigation into the spill and the relations between Duke and regulators at the environmental agency. The spill, which coated the river bottom 70 miles downstream and threatened drinking water and aquatic life, drew attention to a deal that the environmental department’s new leadership reached with Duke last year over pollution from coal ash ponds. It included a minimal fine but no order that Duke remove the ash — the waste from burning coal to generate electricity — from its leaky, unlined ponds. Environmental groups said the arrangement protected a powerful utility rather than the environment or the public.

    Five More Duke Energy Power Plants Cited For Storing Coal Waste Improperly --The North Carolina Department of Environment and Natural Resources (DENR) on Monday cited five more Duke Energy power plants for not having storm water permits.  These citations follow two others issued Friday against the Dan River Steam Station in Eden, where, on February 2, 39,000 tons of coal ash were funneled through a broken storm water pipe under a coal ash pond and into the Dan River.  Duke Energy faces potential fines of $25,000 per day, per violation. Regulators say they are still in the process of assessing how coal ash is stored at all 14 of Duke’s sites in North Carolina. Coal ash is a toxic sludge left over from the burning of coal in old power plants.“It is shocking that Duke Energy was openly violating the most fundamental requirements of clean water laws, and discharging industrial storm water directly into the Dan River illegally,” Frank Holleman, senior attorney at the Southern Environmental Law Center told the Los Angeles Times.Duke has 30 days from the issuance of the violation notices to make its case to the DENR before fines are set.

    North Carolina's Duke-Paid Governor's State Environmental Stooge Attempts To Flim-Flam Coal Ash Spill Water Disaster  -- Did I mention that I received notice from my county government a few days ago to not drink, bathe in, wash clothes in, or just generally trust our public water supply? These are the culprits, and although many wags like to say that North Carolina deserves what it voted for, the Koch-funded campaigns of the legislative representatives were secret for a long time (credit is due to the Citizens United ruling by the U.S. Supreme Court). . . the day before assuming the leadership of the agency (N.C. Department of Environment and Natural Resources, or DENR), (John) Skvarla said he knew little about coal ash pollution, an issue dear to environmentalists in North Carolina. During the course of 2013, Skvarla’s agency interceded to stop multiple citizen lawsuits against Duke Energy for its mishandling of the coal ash, despite outcry from environmentalists. Last month, a facility owned by Duke Energy dumped tens of thousands of tons of toxic coal ash into North Carolina’s Dan River. Duke Energy — a $50 billion company that employed Pat McCrory for 28 years before he became North Carolina’s governor — initially played down fears that the water spilling from a compromised storm water drain was contaminated. Days later, North Carolinians would know the spill as the third worst of its kind in U.S. history.  I hope people outside of North Carolina understand what this means for the definition of "deregulation" in particular and "capitalism" in general. The Koch-paid, Republican-ruled North Carolina General Assembly has introduced dozens of ALEC-inspired (also Koch-funded) deregulation bills and approved all of Governor McCrory's ignorant, uneducated, or purposively lying appointees.

    Duke Energy Must Immediately Stop Polluting Groundwater In North Carolina, Judge Rules - A North Carolina county judge ruled Thursday that Duke Energy must immediately act to stop groundwater contamination coming from its 14 coal-fired power plants in the state. The ruling, issued by Judge Paul Ridgeway, directs Duke to come up with a plan to clean up sites that have been contaminated by leaking coal ash ponds, reversing a 2012 North Carolina Environmental Management Commission ruling that Duke wasn’t required to immediately clean up contaminated groundwater from its operations. That ruling was contested by multiple environmental groups more than a year ago, but the new ruling comes just over a month after about 35 million gallons of coal ash from a Duke Energy coal ash basin spilled into the Dan River. “The ruling leaves no doubt, Duke Energy is past due on its obligation to eliminate the sources of groundwater contamination, its unlined coal ash pits, and the State has both the authority and a duty to require action now,” D.J. Gerken, senior attorney at the Southern Environmental Law Center, said in a statement. “This ruling enforces a common-sense requirement in existing law – before you can clean up contaminated groundwater, you first must stop the source of the contamination- in this case, Duke’s unlined coal ash pits.”  According to the SELC, data collected over the years clearly shows that coal-fired power plants have caused groundwater contamination in the state, but until now, the state had maintained that it couldn’t take action against Duke until it figured out the extent of the pollution.

    Coal’s Comeback Year Runs into Trouble -  The U.S. coal industry is expected to have a comeback year in 2014, regaining some of the ground it lost in the electric power industry over the last 3 years or so. Low-cost natural gas shoved aside the coal industry, which has been plagued by rising costs and increasingly stringent environmental regulations. But the run up in natural gas prices since 2012 – especially since the beginning of 2014 – provides an economic lifeline for struggling coal businesses. Coal can compete once again, at least for the time being. That may be true as far as the economics go. But the coal industry has had a truly epic year so far in terms of environmental damage and bad publicity. The industry’s multiyear campaign to rebrand itself as “clean coal,” has achieved a certain level of success. Even President Obama has bought into this idea, if only to throw the industry a bone as his administration tightens the screws on air pollution. His latest budget calls for an increase in spending under DOE’s Clean Coal Research program.  But that rebranding has run into some serious trouble. Over the last two months, the coal industry seems like it can’t get out of its own way. First came the chemical spill in West Virginia that cut off water supplies to 300,000 people. Then Duke Energy leaked tons of coal ash and millions of gallons of contaminated water into the Dan River in North Carolina. Then there was a second toxic coal spill in West Virginia. Then Duke managed a second leak into the Dan River. It was almost as if coal companies in the two states were competing for headlines.

    State Dept Keystone Review Assumes 'Global Failure to Address Climate Change' -- As the deadline for public comment on the Keystone XL pipeline arrived on March 7, environmental groups told the Obama administration that the State Department's analysis of the project was based on flawed assumptions that clash with the nation's commitment to mobilizing global action against climate change.  In its final environmental impact statement (EIS) issued on January 31, the State Department asserted that no single project would have much effect on the growth of Canada's tar sands industry. It based its conclusions partly on business-as-usual projections that demand for oil and prices would rise amid continued worldwide inaction on global warming. The Natural Resources Defense Council said in wide-ranging comments that the EIS "makes a fundamental error by relying on energy consumption scenarios which assume a global failure to address climate change."

    While America Waits On Keystone Decision, A Different Tar Sands Pipeline Just Got Approved - While all eyes in America were turned to President Obama’s looming decision on the Keystone XL pipeline, Canadian regulators on Thursday approved their own, smaller version — a pipeline that would for the first time directly connect Alberta’s tar sands to Montreal. Canada’s National Energy Board have approved a proposal by Enbridge Inc. to allow the reversal and expansion of their Line 9 pipeline. The “reversal” means that the pipeline can now carry crude oil east rather than west. The “expansion” means it can now also carry tar sands oil from Alberta — the same type of oil that would be transported by the Keystone XL pipeline if approved.  With the reversal and expansion approved, environmentalists say the controversial tar sands oil can now be pumped almost to the New England border. This is because on one side, Enbridge’s Line 9 connects to a pipeline that carries tar sands. On the other side, Line 9 connects to a 236-mile-long line pump from Montreal to Portland, Maine. The National Resources Defense Council says that Portland connection has been targeted by the tar sands industry as a way for getting the oil into the United States via New England.

    Enbridge to Double Carrying Capacity of Line 3 Tar Sands Pipeline -- Late Monday evening, Enbridge announced plans for its largest capital project in history— a $7 billion replacement of its Line 3 pipeline. The existing Line 3 pipeline is part of Enbridge’s extensive Mainline system. The 34-inch pipe was installed in 1968 and currently carries light oil 1,660 km from Edmonton, Alberta, to Superior, WI.  While the Line 3 pipeline currently has a maximum shipping capacity of 390,000 barrels of light crude oil per day, pumping stations along the line have a much larger capacity (and can accommodate heavier oils). Enbridge plans to take advantage of this. Under the company's replacement plans, the new Line 3 pipeline will be widened by two inches, and built "using the latest available high-strength steel and coating technology." By the time it goes into service in 2017, Line 3 will ship 760,000 barrels of oil across the border every day, nearly double what it currently moves.   At the same time, the new Line 3 will be designated as "mixed service," allowing it to carry a variety of different types of oil from heavy to light. Line 3 will continue to operate at full current capacity during the construction period. All construction is expected to occur within the existing pipeline corridor.

    Two More Giant Tar Sands Pipelines Reach Milestones As Keystone XL Decision Looms -- Two massive pipeline projects with a combined value of $19 billion passed key hurdles this week — a striking reminder that the fight over Keystone XL is just the beginning of what promises to be a long debate over the future of the Canadian tar sands oil reserves.  The first giant west-to-east pipeline is from TransCanada, the same company that lays claim to Keystone XL. The company’s $12 billion Energy East pipeline would be the largest oil sands pipeline in North America, and on Tuesday filed its project description with Canada’s National Energy Board. Energy East would pump 1.1 million barrels of oil per day from Alberta’s tar sands to terminals in Montreal, Quebec City, and St. John, as well as for export across the Atlantic.  The second pipeline is from Enbridge Inc., which on Thursday got final approval for its Line 9 expansion project to bring tar sands to Montreal. But Line 9 isn’t their biggest approval this week. On Monday, the company announced it has received financial backing for its $7 billion Line 3 Replacement project. That project would replace an existing 46-year-old pipeline between Alberta and Wisconsin, and double oil flow from 390,000 barrels of oil per day to 760,000. Here’s a little bit more about each proposal.

    Lifting U.S. Crude Oil Export Ban Would Cook the Planet -- A new analysis published today by Oil Change International entitled, Lifting the Ban, Cooking the Climate, shows that eliminating existing regulations on crude oil exports could result in additional greenhouse gas emissions equivalent to 42 coal fired power plants. The analysis shows that allowing crude oil exports would eliminate a current price gap between the U.S. oil price benchmark and the global average. This increased price for U.S. crude oil on the global market would incentivize increased U.S. oil production on the order of 9.9 billion barrels between 2015 and 2050, adding more than 4.4 billion metric tons of carbon dioxide equivalent into the atmosphere. “Removing the crude export ban would be a disaster for the climate,” said Stephen Kretzmann, executive director of Oil Change International. “President Obama and the U.S. Congress need to stand up to Big Oil and defend the current regulations if he is actually serious about addressing our climate crisis.”

    Obama FY15 Budget Would Eliminate Oil Tax Breaks - President Obama released his fiscal year 2015 budget on March 4, a $3.9 trillion package that includes a range of wish-list items in an election year. Among other things, the budget calls for the elimination of a range of tax breaks that benefit oil, natural gas, and coal companies.  The tax breaks amount to $4 billion annually, and eliminating them is request that the President has called for multiple times over several years. Over ten years, if enacted, cutting the tax breaks would save $48.8 billion over ten years.  The budget also calls for $27.9 billion to fund the Department of Energy, a bump of 2.6% over last year’s funding levels. His budget did call for an increase in spending for DOE’s Fossil Fuel program, mainly focused on research for “clean coal” technologies.  As for renewable energy, the budget calls for a permanent extension of the production tax credit for wind power, which has suffered from on-again off-again treatment from Congress. It expired at the end of 2013 and was not renewed. If extended, it would cost $19.2 billion over ten years.  However, the budget has a near-zero chance of being implemented, at least without serious changes. The fossil fuel industry has repeatedly pushed back against the President’s plans, and with mid-terms looming, Congress will almost certainly reject the President’s plan. Moreover, many Senate Democrats that are up for reelection come from conservative states that support fossil fuel development, such as Mary Landrieu (D-LA) and Mark Begich (D-AK). Thus, as both parties prepare for the mid-term elections, it is unlikely that there will be major reforms to the tax code or radical changes in spending levels.

    Can The United States Rule The (Energy) World? - Geopolitical crises in Eastern Europe have been met with calls in the United States to use energy as a foreign policy tool. With U.S. Energy Secretary Ernest Moniz asking the industry to make a stronger case, however, it's domestic policies that may inhibit energy hegemony."The industry could do a lot better job talking about the drivers for, and what the implications would be, of exports," Moniz told an audience at the IHS CERAWeek energy conference in Houston.The Energy Information Administration said in its weekly report that gross exports of petroleum products from the Unites States reached 4.3 million barrels per day in December, the first time such exports topped the 4 million bpd mark in a single month.EIA said the United States is a net exporter of most petroleum products, but crude oil exports are restricted by legislation enacted in response to the Arab oil embargo in the 1970s. Kyle Isakower, vice president of economic policy at the American Petroleum Institute, said reversing the ban would help stimulate the U.S. economy and lead to an increase in domestic oil production by as much as 500,000 bpd. Current export polices, he said, are "obsolete."

    Proved Reserves of Fossil Fuels - Energy Realities - A Visual Guide to Global Energy Needs

    Oilprice Intelligence Report: Emerging Oil Venues Attracting Pirates: The recent hijacking of a ship off the coast of emerging oil darling Angola, and the apparent heist of $8 million in fuel, helps us trace how piracy on the high seas has shifted geographically and how it changes and adapts to new security efforts. A regional and Western security response has forced pirates to rethink their strategy, and they have repeatedly demonstrated that they are capable of moving with the times, so to speak. They’re no longer trading in people; they’re trading in oil, and their networks are highly complex. Nigeria’s efforts to thwart piracy have resulted in a shift of attacks further east into the Gulf of Guinea, off the coast of Ghana and Cote d’Ivoire, for instance. The Indian Ocean remains a pirates’ playground and their capabilities have metamorphosed along with improvements in security. This brings us full circle to the incident in Angola, which has the industry—and Angolan officials who are keen to portray their coast as safe from piracy—nervous. The metamorphosis has been fast and impressive. The first big response to the increased efforts to stymie piracy off the Somali coast was the introduction of “mother ships”—larger vessels that serve as a floating headquarters of sorts to give the pirates a greater geographical reach and mobility. The mother ship meant that the sneaky little skiffs go launch from further out in the Indian Ocean without needing to return to the shore to refuel or regroup during a hijacking operation. The Mother Ship would maintain a safe distance from the target vessel, and the skiffs returned when needed. The further navies push them from the coast, the more adept the pirates become at launching attacks from further into the Indian Ocean.

    Lingering U.S. Winter and Ukrainian War Could Spark Perfect Gasoline Storm -- The extreme winter weather pounding the eastern half of the United States is keeping many drivers at home. That means less demand along with lower prices at the pump compared to last year. Unless something gives, however, geopolitical issues in Ukraine could spell trouble for consumers, AAA said Monday. AAA reported a national average price for a gallon of regular unleaded gasoline in the United States of $3.46, a price that's 17 cents higher than the same time last month but 30 cents less year-on-year. The national average price for Monday, however, is the highest since Sept. 24 and marks the 24th straight day of increases.  Last week, the U.S. Energy Information Administration said the brutal cold this year impacted refinery and pipeline operations in the country.  Refineries in the U.S. Midwest closed down briefly in January when the so-called polar vortex brought sub-zero temperatures to the region and the National Oceanic and Atmospheric Administration reports temperatures in the eastern half of the United States should stay at least 30 percent below normal for most of the first week of March.  Despite winter's slow fade, Green said there have been no recent problems at refineries in the Great Lakes region, where gasoline prices tend to be more vulnerable to downstream issues than the rest of the country. On the geopolitical front, Russian President Vladimir Putin said he was protecting his national interests by sending troops toward Crimea, something NATO Secretary-General Anders Fogh Rasmussen said violated the charter of the United Nations. Green said crude oil prices were "jumping" Monday in response to the crisis because of Russia's influential energy presence.

    3 Gulf Countries Pull Ambassadors From Qatar Over Its Support of Islamists - Tensions between Qatar and neighboring Persian Gulf monarchies broke out Wednesday when Saudi Arabia, the United Arab Emirates and Bahrain withdrew their ambassadors from the country over its support of the Muslim Brotherhood and allied Islamists around the region.The concerted effort to isolate Qatar, a tiny, petroleum-rich peninsula, was an extraordinary rebuke of its strategy of aligning with moderate Islamists in the hope of extending its influence amid the Arab Spring revolts.But in recent months Islamists’ gains have been rolled back, with the military takeover in Egypt, the governing party shaken in Turkey, chaos in Libya and military gains by the government in Syria.The other gulf monarchies had always bridled at Qatar’s tactic, viewing popular demands for democracy and political Islam as dual threats to their power. The Saudi monarchs, in particular, have grumbled for years as tiny Qatar has swaggered around like a heavyweight. It used its huge wealth and Al Jazeera, which it owns, as instruments of regional power. It negotiated a peace deal in Lebanon, supported Palestinian militants in Gaza, shipped weapons to rebels in Libya and Syria, and gave refuge to exiled leaders of Egypt’s Brotherhood — all while certain its own security was assured by the presence of a major American military base.

    It Begins: Gazprom Warns European Gas "Supply Disruptions" Possible -- We had previously warned that Putin's "trump card" had yet to be played and with Obama (and a quickly dropping list of allies) preparing economic sanctions (given their limited escalation options otherwise), it was only a matter of time before the pressure was once again applied from the Russian side. As ITAR-TASS reports, Russia's Gazprom warned that not only could it cancel its "supply discount" as Ukraine's overdue payments reached $1.5 billion but that "simmering political tensions in Ukraine, that are aggravated by inadequate economic conditions, may cause disruptions of gas supplies to Europe." And with that one sentence, Europe will awaken to grave concerns over Russia's next steps should sanctions be applied.

    Ukraine Has Only 4 Months Of Gas Stocks Without Russia - Having explained the Ukraine "situation" in one map, it appears the inter-connectedness of Ukraine and Russia is becoming any increasingly problematic part of the current crisis. As Reuters reports, absent Russian gas, Ukraine's natural gas stocks can meet just 4 months of demand. The modest silver-lining is that the stocks are generally in the west of the country (away from potential Russian intervention) but it bears noting that Ukraine meets around half its gas demand through Russian imports (and Russia has cut supplies in the past). The situatio is not just energy though as Bloomberg notes, that Ukraine relies on Russia for about 30 percent of its global trade activity, compared with Russia’s 6 percent dependency on Ukraine. However, Ukraine has another big problem - while it would like $3bn in IMF loans, that will not even cover interest and principal payments through June...

    Europe’s Russia Gas Imports Jump to 3-Week High as Buyers Hoard - European utilities boosted imports of natural gas from Russia to the highest level in three weeks even as storage remains at record-high levels amid the mildest winter since 2007. Russia shipped 493 million cubic meters of gas to Europe, excluding the Baltic States, on March 3, the highest level since Feb. 10, Energy Ministry data show. Storage sites in the region are 47 percent full, 12 percentage points above the same time last year and the highest since at least 2008, according to Gas Infrastructure Europe, the Brussels-based lobby group. U.K. gas prices jumped the most in 29 months on March 3 as Russia took control of the Crimean peninsula in Ukraine, which transits about 15 percent of Europe’s use, before paring gains the next day after President Vladimir Putin said there was no immediate need for military action. Bulgaria and Serbia, which suffered shortages in the past decade amid disputes between Russia and Ukraine, are pumping gas into storage.  Russia’s intervention in Ukraine will boost LNG demand from European countries eager to diversify supplies, according to Sveinung Stoehle, the Chief Executive Officer of Hoegh LNG Holdings Ltd., which will deliver the first LNG import terminal in the former Soviet Union to Lithuania in August. The U.S. will begin LNG exports next year from Cheniere Energy Inc. (LNG)’s Sabine Pass facility in Louisiana, the first of six Energy Department approvals since 2010. There are at least 24 more projects pending clearance. The U.S. should "dramatically" expedite the approval of its gas exports to global markets, House Speaker John Boehner, an Ohio Republican, said March 4.

    Ukraine Won't Pay Russia For Gas, Has Billions In Obligations Due; Europe Promises Aid Money It Doesn't Have -  About an hour ago, the head of Russia's top natural gas producer Gazprom said on Wednesday that Ukraine had informed the company it could not pay for February gas deliveries in full, further adding to tensions between Moscow and Kiev. Alexei Miller said Ukraine's total debt to Gazprom for gas deliveries was nearing $2 billion. "Our Ukrainian colleagues informed us that they would not be able to pay in full for February gas deliveries," he told Russian President Vladimir Putin.

    How A Fight Over Natural Resources Is Quietly Driving The World’s Response To Ukraine - On Thursday, the fast-moving crisis in Ukraine took another surprising turn as the de facto authorities of Crimea, the semi-autonomous Ukrainian republic that is currently occupied by Russian forces, voted to become part of Russia. Ukraine’s interim prime minister, Arseniy Yatsenyuk, responded from Brussels, where he is currently meeting with European Union officials, “This so-called referendum has no legal ground at all … Crimea was, is and will be an integral part of Ukraine.” While Crimea has close ties to Russia and is home to both the Russian Black Sea Fleet and many Russian citizens, annexation would be a difficult task on several fronts. Crimea is dependent on Ukraine for a variety of resources, namely natural gas. For instance, a company that is a subsidiary of a Ukrainian-owned firm provides Ukraine with 65 percent of its gas.  Approximately 80 percent of Crimea’s water is imported from the North Crimean Canal and is used for Crimean agriculture and consumed by urban and rural areas alike.  Crimea also imports its high-speed internet and telephone services from Ukraine.  Ukraine is overwhelmingly dependent on Russia for natural gas, relying on its neighbor for 60 to 70 percent of its natural gas needs. That dynamic has been a key source of strife between the two nations for several years, with Russia raising the price it charges Ukraine for gas several times and even shutting off gas supplies over payment disputes.  Ukraine, teetering on the edge of bankruptcy, currently owes Russia upwards of $1.5 billion — a figure President Vladimir Putin said on Tuesday could rise to $2 billion if February’s gas payments aren’t received on time. “Russia has always used gas as an instrument of influence,” “The more you owe Gazprom, the more they think they can turn the screws.” Complicating the tug-of-war over Ukraine even more, Ukraine controls much of the network of pipelines that transport Russian gas to Europe. “More than a quarter of the EU’s total gas needs were met by Russian gas, and some 80 percent of it came via Ukrainian pipelines,” according to the Guardian.

    Ukraine: “Go West, Young Man” (or Dr. Strangelove’s Revenge) -  “Let them loot.” That is the demand of the West when its NGO subsidiaries firebomb government buildings, murder policemen and loot the arms depots of military forts. Kiev is the equivalent of Kosovo as a Slavic city-of-origin. Are we seeing a replay?  What would Dick Cheney (or President Obama for that matter) have done if Russian NGOs sponsored separatist movements in Texas, California or New England? How would US police have reacted against armed revolutionaries seizing the armory and throwing Molotov cocktails and bombs at public buildings, killing police, painting swastikas on Jewish houses and claiming vigilante justice? While this does not characterize all of the Ukrainian protesters, it does reflect a fair number of them. If this is Obama’s “reset” with Russia, he is resetting the Cold War by setting the neocons loose in the former Soviet republics. If there is one thing that the CIA has shown its competence in, it is in setting one ethnic group against the others – Sunni vs Shiite, Kurd against Arab, Persian against them all. When other countries seek to defend a multi-ethnic secular state, the US foreign office has backed the fundamentalists for nearly the past half-century in all cases. This should be the sub-text for reporting on the Ukrainian uprising that seems to have been carefully timed to coincide with Sochi.

    Some Perspective on Russian Intervention in the Ukraine -

    • 1) The journalists talking about anschluss are morons.  This is not Germany in the 30s, Russia is not going to try and conquer Europe.
    • 2) The Ukraine was part of Russia for centuries, and has been independent for about 20 years.
    • 3) The Russian Army is not the Red Army: it is not capable of conquering Europe.
    • 4) The Crimea is majority Russian already and had been part of Russia, yes, for centuries.
    • 5) Russia was NEVER going to allow Ukraine to kick them out of Sevastopol and the Crimea.
    • 6) Americans spent 5 billion dollars promoting the Ukrainian revolution.  That’s a lot of money.  Granted that the Ukrainian government was a corrupt bunch of thugs, Putin is not crazy to think the West fomented the revolution.  The West DID foment revolution.  There was fertile ground, but 5 billion dollars is not chicken feed.
    • 7) The West is not going to fight a war for the Ukraine.  Russia is.
    • 8) The East of Ukraine is still pro-Russia.
    • 9) What the Ukrainian parliament did with armed protesters standing over them is not, ummm, necessarily what they would have done without guns being waved in their general direction.

    Let’s You and Him Fight - Kunstler  - So, now we are threatening to start World War Three because Russia is trying to control the chaos in a failed state on its border — a state that our own government spooks provoked into failure? The last time I checked, there was a list of countries that the USA had sent troops, armed ships, and aircraft into recently, and for reasons similar to Russia’s in Crimea: the former Yugoslavia, Somalia, Afghanistan, Iraq, Libya, none of them even anywhere close to American soil. I don’t remember Russia threatening confrontations with the USA over these adventures.  The phones at the White House and the congressional offices ought to be ringing off the hook with angry US citizens objecting to the posturing of our elected officials. There ought to be crowds with bobbing placards in Farragut Square reminding the occupant of 1400 Pennsylvania Avenue how ridiculous this makes us look.  The saber-rattlers at The New York Times were sounding like the promoters of a World Wrestling Federation stunt Monday morning when they said in a Page One story:  “The Russian occupation of Crimea has challenged Mr. Obama as has no other international crisis, and at its heart, the advice seemed to pose the same question: Is Mr. Obama tough enough to take on the former K.G.B. colonel in the Kremlin?”   Are they out of their chicken-hawk minds over there? It sounds like a ploy out of the old Eric Berne playbook: Let’s You and Him Fight. What the USA and its European factotums ought to do is mind their own business and stop issuing idle threats. They set the scene for the Ukrainian melt-down by trying to tilt the government their way, financing a pro-Euroland revolt, only to see their sponsored proxy dissidents give way to a claque of armed neo-Nazis, whose first official act was to outlaw the use of the Russian language in a country with millions of long-established Russian-speakers. This is apart, of course, from the fact Ukraine had been until very recently a province of Russia’s former Soviet empire.

    Cold war over Ukraine? - Well, that was not a good move by US President Barack Obama to use that sort of patronising tone of his in the short address on Ukraine the other day. You know, hinting that America would not look kindly on Russia making any dramatic moves in response to the crisis raging over its western border and warning of possible "costs" of any military action. I hear Russian President Vladimir Putin was so angered by Obama's verbal exercise that he told his aides he has had enough of all that lecturing coming from Washington and other Western capitals, giving orders to start moving quickly, to respond to the request from the pro-Moscow Prime Minister of Crimea, Sergey Aksenov, to provide protection for the Russian speaking population from the new interim regime in Kiev.       Since then the Federation Council, the upper chamber of the Russian Parliament, has approved Putin's request to use military force on the territory of Ukraine in Crimea, in case the need arises, and even called on the Kremlin to recall the Russian ambassador to Washington. All of a sudden what looked like a manageable crisis in Ukraine from the point of view of the world suddenly started to resemble a serious Cold war style international stand-off, with a possible military conflict erupting in the south of Ukraine.

    Ukraine – some thoughts on who is playing for what - The US – or at least the Hawks in the US, like McCain, are happy to see Ukraine detached from direct Russian control and for it to split East/West – as I think it likely it will. Such a split will not be clean or free of violence. It will therefore present the opportunity to create a thorn in Russia’s side. In the immediate it presents problems for Russian gas exports to Europe. It doesn’t stop them, of course. There is still Nord Stream running direct into Germany. And South stream is still coming along. But it will dent Russian export profits and worry European markets and governments. But the benefits for America – at least in the minds of its hawks, don’t stop there. Nothing hurt Pentagon funding like the fall of the Berlin Wall and the end of the East/West German split. What size of military pork barrel might a new East West Ukraine split deliver? I think the Pentagon is delighted. I doubt AMerica will be as nakedly provocative as to built big new militray bases in a new West Ukraine. Though some will certainly think it only right and proper. But I would be amazed if they don’t create a few speical forces and intelligence sites – which will need defending!

    House Passes $1 Billion in U.S. Loan Guarantees to Aid Ukraine: The House passed a measure to allow $1 billion in loan guarantees sought by the Obama administration to help restore financial stability in Ukraine. The House voted 385-23 today under an expedited process to let the government guarantee private-sector loans to Ukraine. The bill, H.R. 4152, would allow previously appropriated funds to be used to cover the cost of the guarantees. The vote is a first step in Congress to assist Ukraine, which has been rattled by political crisis and a Russian military siege of Crimea. President Barack Obama said today the U.S. and its allies will keep raising pressure on Russia to back down in Ukraine. “We are well beyond the days when borders can be redrawn over the heads of democratic leaders,” Obama said at the White House. His administration today restricted visas for Ukrainian officials and others, including Russians, who it says threaten Ukraine’s sovereignty. Obama also authorized financial sanctions, clearing the way for escalating pressure. Russian President Vladimir Putin is “counting on the United States to sit back and watch him do and take whatever he wants,” House Speaker John Boehner, an Ohio Republican, said today at his weekly news conference. “The best thing that we can do is work with the administration, strengthen their hand to deal with what is a very difficult situation.”

    Aid For The Ukraine “Will Be Stolen” – Former Ukrainian Minister Of Economy  - Wolf Richter - Secretary of State John Kerry jaunted to Kiev on Tuesday and offered the newly installed Ukrainian government $1 billion in aid. EU Energy Commissioner Guenther Oettinger announced the same day that the EU would help the Ukraine pay its gas bill of about $2 billion, owed Russian state-controlled Gazprom. On Wednesday, the rest of the EU aid package was announced: €11 billion, contingent on the Ukraine’s inking a deal with the IMF and implementing tough reforms. The IMF is still working on its own aid package.. The new Ukrainian government, after discovering googly-eyed that there was nothing left in the treasury, that everything had already been pilfered or had otherwise evaporated, and that in fact there was nothing left to pilfer, had begged for €25 billion in aid, spread over two years.“In order to be saved, the Ukrainian economy doesn’t need 35 billion dollars or even 135 billion dollars,” retorted the former Ukrainian Economy Minister Bogdan Danilishin on his Facebook page. His comments were picked up by Valentin Mândrăşescu, editor of The Voice of Russia’s Reality Check and occasional Testosterone Pit contributor. And that aid money? It won’t do any good, Danilishin wrote. “It will be stolen anyway.” His alternative to throwing a ton of money at the Ukrainian government? They just need to check and evaluate all privatization deals made during the last years. All that which has been bought for a reduced price or illegally must be nationalized, or the difference must be paid to the state budget. All taxes that oligarchs have been exempt from for the last three years must be paid. He should know. He’d worked for former Prime Minister Yulia Tymoshenko from 2007 to 2010. In October 2010, he was arrested in the Czech Republic after the then new government had put him on Interpol’s wanted list for failing to show up for questioning by the Ukrainian police, which accused him of abuse of office. He later obtained political asylum in the Czech Republic, along with Olexander Tymoshenko, the husband of Yulia Tymoshenko who was rotting in a Ukrainian hoosegow (released recently by the new government). Everyone accuses everyone of corruption.

    Unicredit "Temporarily" Limits ATM Withdrawals In Ukraine - It appears the bank runs - or desparate dash for cash - in Ukraine have escalated. We noted that Russian banks had already limited access but now Unicredit has issued a statement "temporarily limiting operations on cash withdrawal in ATMs, in order to provide all the clients with an access to cash money." The decision, they stress, is a temporary one (like Cyprus capital controls?) and will be cancelled with the "normalization of the situation." Via Unicredit, UniCredit Bank has temporarily limited operations on cash withdrawal in ATMs, in order to provide all the clients with an access to cash money. According to the decision of the Management Board, the sum for cash withdrawal for one card is limited at the level of UAH 1500 per 24 hours. We are stressing that these measures are taken exclusively to provide all the bank’s clients with ATM service. For the same purposes, cash withdrawals at UniCredit Bank’s ATMs using cards of other banks is limited 500 UAH per day. This decision – is a temporary one and it will be cancelled in the nearest time with the normalization of situation. Besides, it does not involve operations in the trade networks. We bring our apologies for temporary inconveniences and hope for understanding.

    Putin Advisor Threatens With Dumping US Treasurys, Abandoning Dollar If US Proceeds With Sanctions - While the comments by Russian presidential advisor, Sergei Glazyev, came before Putin's detente press conference early this morning, they did flash a red light of warning as to what Russian response may be should the west indeed proceed with "crippling" sanctions as Kerry is demanding.  As RIA reports, his advice is that "authorities should dump US government bonds in the event of Russian companies and individuals being targeted by sanctions over events in Ukraine." Glazyev said the United States would be the first to suffer in the event of any sanctions regime. “The Americans are threatening Russia with sanctions and pulling the EU into a trade and economic war with Russia,” Glazyev said. “Most of the sanctions against Russia will bring harm to the United States itself, because as far as trade relations with the United States go, we don’t depend on them in any way.”

    Putin Adviser Urges Dumping US Bonds In Reaction to Sanctions – An adviser to Russian President Vladimir Putin said Tuesday that authorities would issue general advice to dump US government bonds in the event of Russian companies and individuals being targeted by sanctions over events in Ukraine. Sergei Glazyev said the United States would be the first to suffer in the event of any sanctions regime. “The Americans are threatening Russia with sanctions and pulling the EU into a trade and economic war with Russia,” Glazyev said. “Most of the sanctions against Russia will bring harm to the United States itself, because as far as trade relations with the United States go, we don’t depend on them in any way.” Glazyev noted that Russia is a creditor to the United States. "We hold a decent amount of treasury bonds – more than $200 billion – and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner,” he said. “We will encourage everybody to dump US Treasury bonds, get rid of dollars as an unreliable currency and leave the US market.” According to US Treasury data from the end of 2013, Russian investments in US government bonds total around $139 billion out of a total of $5.8 trillion of US debt held in foreign hands.

    So Russia is going to abandon the dollar as a reserve currency? Good luck with that one - I've already explained why meaningful trade and financial sanctions against Russia are a non starter – everyone would lose from such action. Europe would be pushed back into recession, Russia into financial meltdown. This is not the sort of self harm Europe is prepared to contemplate right now. Indeed, thanks to the indiscretion of a UK official, who was snapped going into Downing Street with his briefing documents on display for all the world to see, we know this to be the case. Trade and financial sanctions have already been ruled out. Whatever. This doesn't seem to have stopped the Russians threatening retaliatory action against the threat of the non sanctions. One possibility, says the Kremlin economics aid Sergei Glazyev, is for Russia to abandon the US dollar as a reserve currency, or to figure out a way to use a new payments system that was not reliant on US dollars for international transactions. Good luck with that one. I've written before about the inevitability of decline for the dollar as the world's major reserve currency, but this process is on a very long fuse and basically depends on China eventually displacing the US as the world's largest economy.  For instance, if you were looking to buy Singapore dollars with Russian roubles, you would typically first buy US dollars with your roubles and then swap them into Singapore dollars. The US dollar is also the pricing currency for virtually all commodity transactions, including crucially, oil. Repeated attempts to set up alternative pricing arrangements have all come to nothing.

    Why Russia no longer fears the West. It’s the offshore, stupid -If there’s one story you read today make it this one, from Politico Magazine. It’s triggered by the crisis in Ukraine, but it’s been a long time coming. The point of this short story is clear: Western leaders are waking up to the fact that Russia no longer fears or even respects them. Why? Well: “Russia thinks the West is no longer a crusading alliance. Russia thinks the West is now all about the money.” Quite so. More specifically, “Putin’s henchmen know this personally. Russia’s rulers have been buying up Europe for years. They have mansions and luxury flats from London’s West End to France’s Cote d’Azure. Their children are safe at British boarding and Swiss finishing schools. And their money is squirrelled away in Austrian banks and British tax havens. They have seen firsthand how obsequious Western aristocrats and corporate tycoons suddenly turn when their billions come into play.. . .they know full well it is European bankers, businessmen and lawyers who do the dirty work for them placing the proceeds of corruption in hideouts from the Dutch Antilles to the British Virgin Islands.”

    Ilargi: The Hubris Circus - As I was watching John Kerry land in Kiev today, and walk with his insane security detail to places where protesters were shot, only very recently, the lost PR war of 4 decades ago came to mind. G-d knows they’re still trying with all their might, just watch CNN, and read the WaPo, but it looks very much like a lost cause. The WaPo runs a long piece entitled Behind the West’s Miscalculations in Ukraine; the basic tenet is that the US left it to Europe to deal with Ukraine and Yanukovych, and the EU screwed up, so now John Kerry has to step in and they will never leave this kind of important project up the Europeans again. And granted, the EU probably didn’t do a great job either, but A) who would believe Washington would leave a project of the geopolitical magnitude of Ukraine up to others, and B) the article doesn’t name Assistant Secretary of State Victoria Nuland even once. While it’s very clear from recordings that she was pivotal in bringing “Yats” to power – she about hand-picked him – and keeping “Klitsch” out. If you’re the WaPo, and you run a long story on the “West’s Miscalculations in Ukraine”, but you neglect to mention the number one – public – US operative, then what does that say about Woodward and Bernstein’s legacy? For Peep’s sake, Nuland is walking in Kiev with Kerry on live TV as we speak, but you just ignore her in your article? The “Haircut In Search Of A Brain” Kerry (as Jim Kunstler adequately christened the Secretary of State) came traveling with the promise of a $1 billion loan to the self-appointed new Kiev government. He better make sure the documents are iron clad, in case “Yats” is outta there in a few weeks time and the next government refuses to pay up. That $1 billion number was what Yanukovych turned his back on in negotiations with Europe last fall, presumably when the absolutely full of themselves EU crew started attaching ever more IMF and World Bank conditions to it, and Putin had offered him $15 billion. Apparently, that took everyone by surprise, including the US as represented by Nuland and ambassador Pyatt. And now Kerry comes a-carrying the same $1 billion again, undoubtedly with more strings attached than a spinning wheel. The entire western circus is just drowning in its own hubris.

    Russia Has Upper Hand in Ukraine, No Meaningful Sanctions Coming  - Will there be any meaningful sanctions against Russia for invading Crimea? The answer is no, and a comparison to Iran will show why. It was easy enough to impose sanctions on Iran because there was no meaningful trade with Iran other than oil. And global oil supply can come from anywhere. Secondly, and unlike the US which has little trade with Russia, Germany, the UK, and other European countries do have meaningful trade with Russia.  Finally, Germany gets 30% of its natural gas supply from Russia. Impose severe sanctions and Russia can shut down those supply lines, most of which happen to run through Ukraine. Obama can pretend to put down a tough stance, but don't expect any meaningful reaction globally. Events are already firming up along those lines.

    Russia Threatens Retaliation To Sanctions, Announces Support For Crimean Referendum - It appears Obama's latest "one hour" conversation with Putin has just made things downshift from bad to worse. Moments ago Russia accused the European Union of taking an "extremely unconstructive position" by freezing talks on easing visa barriers that complicate travel between Russia and the EU over Ukraine. "Russia will not accept the language of sanctions and threats" and will retaliate if sanctions are imposed, the Russian Foreign Ministry said in a statement about agreements reached at an emergency EU summit on Thursday. And assuring that the imminent Crimean referendum due in just over a week will rapidly deteriorate the current detente was overnight news that Russia's upper house of parliament will support Crimea in its bid to join the Russian Federation, the speaker of the upper house of parliament said Friday. "If the people of Crimea decide to join Russia in the referendum, we, as the upper house, will certainly support this decision," Valentina Matvienko said at a meeting with Vladimir Konstantinov, his counterpart in the Crimean parliament.

    Russia sells off record $11.3 billion in foreign currency to prop up ruble - Russia sold a record $11.3 billion in foreign currency to support the ruble on March 3, the so called “Black Monday” when the ruble came under unprecedented pressure due to concerns about conflict in Ukraine, central bank data showed on Wednesday. The Russian central bank sold foreign currency to buy rubles and prevent the Russian currency from falling further, after the market reacted with panic to parliamentary approval for President Vladimir Putin’s request to allow military action in Ukraine.

    Ukraine crisis: Crimea MPs vote to join Russia - MPs in Crimea have asked Moscow to allow the southern Ukrainian region to become part of the Russian Federation. Parliament said if its request was granted, Crimean citizens could give their view in a referendum on 16 March. A government minister in Kiev said it would be unconstitutional for Crimea to join Russia. Crimea, a region whose population is mostly ethnic Russian, has been at the centre of tensions following the fall of Ukraine's pro-Moscow president. Pro-Russian and Russian forces have been in de facto control of the peninsula, which already enjoys a degree of autonomy from Kiev, for several days. The announcement from Crimea's parliament comes as EU leaders meet in Brussels to discuss how to respond to Russia's troop deployment on Ukrainian soil.

    Crimea Parliament "Accelerates Crisis", Votes To Join Russia -- While the world is convinced that Putin's Tuesday press conference was an admission of blinking to the west, the reality is anything but that, and hours ago Crimea's parliament voted to join Russia on Thursday and its Moscow-backed government set a referendum within 10 days on the decision in what Reuters said is a "a dramatic escalation of the crisis over the Ukrainian Black Sea peninsula." To be sure, the Crimea - which has an ethnic Russian majority - affiliation to Moscow as opposed to Kiev is well-known, yet still the sudden acceleration of moves to bring Crimea formally under Moscow's rule came as European Union leaders gathered for an emergency summit to seek ways to pressure Russia to back down and accept mediation. And now all Putin has to do is sit back and say the people have spoken and without spilling a drop of blood has effectively split the country in two parts, with the entire east of Ukraine, where pro-Russian sentiment also runs high - sure to follow Crimea. Just as we said from the very beginning.

    Russia Calls In $2 Billion Gas Debt as Ukraine Digs In on Crimea -- Russia said Ukraine’s natural gas debt climbed to almost $2 billion and signaled supplies may be cut, ratcheting up pressure on its neighbor as they scrap over the future of the Black Sea Crimea region.  Ukraine hasn’t made its February fuel payment and owes Russia $1.89 billion, according to gas export monopoly OAO Gazprom (OGZD), which halted supplies to Ukraine five years ago amid a pricing and debt dispute, curbing flows to Europe. Lawmakers in Moscow said they’d accept the results of a March 16 referendum on Crimea joining Russia as Arseniy Yatsenyuk, Ukraine’s premier, reiterated that his cabinet deems the vote illegal.  While racing to seal a bailout, Ukraine is struggling to keep hold of Crimea after pro-Russian forces seized control of it in the wake of Moscow-backed Viktor Yanukovych’s ouster as president. The standoff over the peninsula, once part of Russia and home to its Black Sea Fleet, prompted Western governments to threaten President Vladimir Putin with sanctions and Russia to underscore its clout as an energy supplier.

    Ruble hits new lows as Bank of Russia focuses on more "pressing" issues -- Capital outflows from Russia seem to be picking up steam.Bloomberg: - The share of foreigners on the 3.75 trillion ruble ($103 billion) government bond market declined to 22.7 percent on Feb. 1 from 23.9 percent at the start of the year. That’s the lowest level in 12 months, data on Bank Rossii’s website showed today. ... “February is expected to be no better,” Leonid Ignatyev, head of fixed income research at BCS Financial Group in Moscow, said in e-mailed comments. “And the beginning of March is going to be far worse because of the Ukraine conflict.” Overseas holdings of so-called OFZs have fallen 80 billion rubles from a peak on May 1 last year. Funds investing in Russian fixed-income securities had outflows of $3.85 billion from the start of May to March 5, or 10 percent of the assets they manage, Alexey Todorov, an analyst at OAO Gazprombank, said in e-mailed comments today, citing EPFR Global data. These outflows, combined with the central bank's "weaker ruble" policies and the Ukrainian tensions, are fueling the ruble sell-off. The ruble resumed its slide this week, hitting another post-devaluation low against the euro.

    China Declares War on Pollution - On March 5th China’s Premier Li Keqiang declared war on pollution, outlining significant steps the Chinese government will take to improve air quality. China has suffered from truly epic smog over the last two winters, choking its cities’ inhabitants and cutting off visibility. The pollutants in the air have surpassed hazardous levels, at times jumping beyond the index that measures particulate matter. "We will resolutely declare war against pollution as we declared war against poverty," Li Keqiang told the legislature, according to Reuters. The central government’s top concern has always been social stability, and the Premier’s announcement that China will take some drastic measures to improve the environment indicates that the government is beginning to worry that air pollution may spark unrest around the country. Among the measures the government will take, Li said the government’s focus will be on reducing particulate matter (PM 2.5 and PM 10). The government will shut down 50,000 small coal-fired furnaces in 2014, and overhaul power plants in high intensity industries. China will also reduce steel production by 27 million tonnes in 2014 – equivalent to the total output of Italy. Also, the government will look at reforming energy pricing in an effort to pave the way to greater use of renewable energy and nuclear power. The government also hopes to remove six million high-emissions vehicles from the nation’s roads.

    China Manufacturing Deteriorates Modestly, Demand "Weaker than Expected" - The HSBC Purchasing Managers’ China PMI Index shows modest deterioration of business conditions in February. Key points:

    • Both output and new orders decline for the first time since July 2013
    • Payroll numbers are cut at fastest rate since March 2009
    • Solid reduction of output charges

    Chinese manufacturers signalled reductions of both output and new business in February, leading to a moderate deterioration of overall operating con ditions. As a result, firms cut their staffing levels again in February and at the quickest pace in nearly five years. Meanwhile, input costs and output charges both declined at their fastest rates in eight months.  After adjusting for seasonal factors, such as the recent Chinese New Year festival, the HSBC Purchasing Managers’ Index™ (PMI™) posted at 48.5 in February, up fractionally from the earlier flash reading of 48.3 , and down from 49.5 in January. This signalled a moderate deterioration in the health of the Chinese manufacturing sector. February data signalled the first contractions of both output and new orders at Chinese manufacturers since July 2013. The rates of decline were moderate in both cases, and were linked by panellists to weaker-than-expected client demand.

    China's manufacturing, services sectors diverge in February (Reuters) - China's services sector regained some momentum in February but its manufacturing sector struggled, separate surveys showed on Monday, with the divergence adding to the difficulty in assessing the strength of the economy at the start of 2014. Data for the world's second-largest economy has been mixed, and the Lunar New Year holidays have made it harder to assess momentum. Weak investment and declining manufacturing PMI readings have been countered by surprisingly buoyant exports and bank lending. The official non-manufacturing Purchasing Managers' Index (PMI) rose to a three-month high of 55.0 in February, while the final Markit/HSBC manufacturing Purchasing Managers' Index fell to 48.5, its third straight decline. true That followed an official manufacturing PMI on Saturday which fell to an eight-month low of 50.2, just above the 50 level that separates contraction from expansion. "It's a domestic investment-led slowdown. You see exports strong, so external demand is fine," . "If the services PMI is to be believed, the service sector is not doing so bad, but ... the manufacturing, or the investment-heavy sector, not as well."

    Chinese Manufacturing PMI Slumps To 8-Month Low, Services PMI To 3-Month High; Goldman Admits Growth Decelerating - Chinese manufacturing PMI fell to an 8-month low holding barely above the crucial 50 level yesterday forcing Goldman to admit that "this signals further deceleration" in Chinese growth. All sub-indices showed signs of cyclical slowdown from January to February with perhaps the two most-critical ones - production and new orders - showing considerably larger falls than the headline index itself as we await this evening's HSBC print to confirm an average 'contraction'. China's Services PMI just printed at 55, up from 53.4, to a 3-month high led by a surge in the "expectations" sub-index. China Services PMI rose to 3-month highs... as new orders rose but the "expectations" sub-index jumped the most as hope trumps any current weakness as input prices slumped to 10 month lows.  Ahead of this evening's HSBC-version (which printed 48.3 Flash) of Manufacturing data, Goldman's summary is oddly (honest) pessimistic on China's Manufacturing industry... The latest PMI data is another piece of evidence of slowing activity growth since 4Q 2013. Data at the start of the year tends to be noisy in general, and unlike some other indicators taking the average of January and February PMI readings doesn't necessarily override the Chinese New Year distortions (this is because survey results can be affected by the timing of the survey which covers only a short period over several days within the month). However, the consistency of the signal is such that there is little doubt that growth has been weak and probably becoming weaker since the end of the year. We see risks to our 7.7% GDP forecast for 1Q tilted more towards the downside.

    China Composite Output and New Orders Both Fall for First Time in Seven Months - Sings of a global slowdown continue. The HSBC China Services PMI shows China Composite Output and New Orders Both Fall for First Time in Seven Months. HSBC China Composite PMI ™ data (which covers both manufacturing and services) signalled a contraction of private sector output in China, following a six-month sequence of growth. That said, the rate of reduction was fractional overall, as signalled by the HSBC Composite Output Index posting at 49.8 in February down from 50.8 in January. Staffing levels declined at manufacturing companies again in February and at the quickest rate in nearly five years. In contrast, service sector firms expanded their payroll numbers for the sixth month running. However, service sector firms were more cautious toward s taking on more staff, as the rate of job creation eased to a five-month low. Consequently, employment levels fell modestly at the composite level. Backlogs of work decreased across both the manufacturing and service sectors in February. Though only slight, it was the first reduction of work-in-hand at goods producers since July 2013. Meanwhile, outstanding business at service providers fell at a moderate pace that was the quickest in a year. As a result, unfinished business declined marginally at the composite level.

    China Composite PMI Slumps Into Contraction; 2nd Lowest On Record - This evening's small rise in HSBC's Services PMI (from 50.7 to 51.0) was not enough to revive the Composite (Services and Manufacturing) PMI into "growth" territory. At 49.65, this is the 2nd lowest print on record (beaten only by July 2013's 49.5 print). HSBC's Services data has consistently been lower than China's "official" data but this print (almost 4 points below that of the government's survey) is the biggest divergence in 14 months. China's HSBC Composite PMI drops into contraction...As the government's Services PMI is the most divergent from HSBC's in 14 months...

    China Sets 7.5 Percent Growth Target - China’s government promised sweeping reforms Wednesday to promote sustainable growth in its slowing economy by opening state-dominated industries to private investment, making its banks more market-oriented and encouraging consumer spending. In his first annual policy speech as China’s top economic official, Premier Li Keqiang said Beijing will encourage competition, ease exchange rate controls and improve access to credit for productive businesses. Li’s pledges were in line with Communist Party plans issued in November that call for promoting market forces and domestic consumption to replace a model based on exports and investment that delivered three decades of explosive growth but has run out of steam. The changes come as the ruling party tries to steer China to cleaner, more energy-efficient growth based on service industries and technology following the past decade’s blistering expansion. Growth last year tumbled to a two-decade low of 7.7 percent, due largely to government curbs imposed to cool a lending and investment boom. It was barely half of 2007′s explosive 14.2 percent rate. Li announced an official growth target of 7.5 percent for this year. That was unchanged from last year’s target and in line with growth forecasts by the International Monetary Fund and private sector analysts.

    China 7.5% growth goal difficult: PBOC ex-adviser - Meeting China's target of 7.5% economic growth this year will be challenging, but there is no need for a stimulus package yet, Li Daokui, a former adviser to the central bank, said on Wednesday. Mr. Li, a professor at Tsinghua University, was speaking on the sidelines of the opening session of China's parliament. He said a stimulus package would be necessary only in "unforeseen, extreme circumstances." China's premier, Li Keqiang, told the legislature that the government has set a target of growth of about 7.5% this year, following 7.7% expansion in 2013. Li Daokui said China needs to carry out both macro and micro economic reform policies in tandem. China has been seeking to boost the role of consumption in driving economic growth and reduce its reliance on exports and investment. The country is also trying to attract private capital to invest in state-owned enterprises, both to boost the companies' financial strength and to improve efficiency

    Beijing Plans to Spend $2.45 Trillion This Year. Here’s How -- China’s Ministry of Finance offered a slew of numbers on Wednesday describing how the country plans to spend its money this year. The 2014 budget will reach an eye-popping 15.3 trillion yuan, or about $2.45 trillion – maybe not as exciting as President Obama’s $3.9 trillion proposed budget, but not exactly chump change either. Where is it all going? You can spend the day poring through the numbers, as China Real Time did. Or the crack WSJ Art Department can put them in a format that makes sense to normal eyes. (It pays to have connections.) A quick glance tells you a few important things about China’s budget priorities:

    • The military, already a beneficiary of Beijing’s largesse, will get even more love this year.
    • Social spending isn’t far behind, in a nod to the rising expectations of China’s increasingly wealthy and educated population.
    • Affordable housing and the environment – two stated priorities of the Chinese government – saw spending fall last year. Beijing appears to want to change that.

    One big caveat to these numbers: China has changed the way it presents its spending on public security, one of the country’s biggest priorities amid rising public frustration over everything from pollution to the wealth gap to ethnic tension. In past years the number was even higher than defense spending. It isn’t clear exactly how the figure has changed.

    China $21 Trillion Debt Load Seen Swelling on ’14 Economic Plan -- China’s leaders spurred speculation they will allow the country’s $21 trillion debt mountain to inflate after refraining from cutting their annual economic- growth target. Analysts at Australia & New Zealand Banking Group Ltd. and Nomura Holdings Inc. said authorities will need to loosen monetary policy, after Premier Li Keqiang yesterday announced a goal of 7.5 percent growth, the same target as last year. Li said China will seek an “appropriate” increase in credit. Any easing would contrast with leaders’ efforts to rein in a $6 trillion shadow-banking industry and control the build-up of local-government debt that followed stimulus measures unleashed in 2008. Li is seeking to support growth amid three money-market rate surges in eight months and the threat of defaults of high-yield investment products and corporate bonds. “I had hoped that they would pay more attention to curbing the risks but instead they focused on growth,” said Dariusz Kowalczyk, Hong Kong-based economist and strategist at Credit Agricole SA. “They will just have to pay the price of higher leverage and once they start to deal with this in earnest, the costs of solving the issue will be bigger.”

    At China's NPC, Proposed Changes Include Bank Deposit Insurance -— China's proposed financial makeover for 2014 involves policies that would bring greater risks to a system that has grown used to bailouts and other government support, as Beijing tries to push its reform agenda without hindering growth.  The proposals were included in an annual work report by Premier Li Keqiang to the country's rubber-stamp legislature that is China's version of the U.S.'s State of the Union Address, though one that is rarely interrupted by applause and almost never by catcalls. Among the financial proposals, a measure to set up bank-deposit insurance was the most significant, UBS China economist Tao Wang said. "It should lay the groundwork to accelerate interest-rate liberalization and also make explicit that there are risks in the financial system," she said.  The changes would help banks price their loans according to the riskiness of the borrower rather than their political clout, economists argue, and make more capital available to private companies. The issue has been fraught because many Chinese investors figure that deposits in all financial institutions are implicitly guaranteed by the government. Other far-reaching proposals included measures to allow local governments to issue bonds and permit the yuan to fluctuate more widely, though the report before the National People's Congress offered few bold steps.

    Chinese Bond Default Rattles Markets; Harbinger of More Credit Woes? - Yves Smith - A corporate bond default should hardly be a headline dominating-event unless the default in question is of a particularly large concern, or is tightly coupled (as in could, Lehman-style, trigger more distress) or is a precursor of things to come. The sudden spell of worry in China over the RMB 89.8 million ($14.6 million) interest payment default by the comparative small fry Shanghai Chaori Solar has managed to focus attention on the fact that something has to give when authorities tighten credit after companies go on a leverage splurge. And in the case of Shanghai Chaori Solar, it managed to go from AA at the time of its bond issue to CCC before its default, an impressively fast two year decline.  The belief among Chinese enthusiasts has been that the banking system is so tightly controlled by the authorities that nothing all that bad can happen. But the reaction in the domestic credit markets says that faith is being tested. The authorities are not rescuing Shanghai Chaori Solar (unlike the expected default of an investment trust in late December, which again put domestic markets in a bit of a tizzy). The new issue bond market is effectively shut down, with four borrowers who had hoped to come to market suspending offerings. Walter Kurtz also notes that liquidity in the secondary bond market is also down, another sign of investor and dealer concern, and that banks are cutting back lending rather than stepping into the breach. So this is at least a credit squeeze, and may be the start of a full bore credit contraction.  The China bears for years have pointed to China’s remarkable (or reckless) credit growth, with more and more companies looking like classic Minsky Ponzi units, dependent on new credit to meet existing obligations. A real determination by the authorities to tighten will put the entire Ponzi sector under pressure, and investors (and one expects the authorities too) don’t have a great handle on where the dead, or perhaps more accurately, zombie bodies lie. A new Bloomberg story, Zombies Spreading Shows Chaori Default Just Start, gives an overview. The troubling background is the degree to which credit has exploded since the crisis, with total debt of public non-financial companies rising from $607 billion at the close of 2007 to just shy of $2 trillion at the end of last year. And some are highly geared, with debt to equity ratios of over 200%.

    China replaces US as No. 1 merchandise trader -  China replaced the United States as the world's largest merchandise trader in 2013, a milestone in the country's decades-long trade expansion path, the Ministry of Commerce said on Saturday. “According to the preliminary statistics of the World Trade Organization Secretariat, China was the leading merchandise trader in 2013. China's merchandise trade totaled US$4.16 trillion in 2013 with exports reaching US$2.21 trillion and imports of US$1.95 trillion,” the ministry said in a statement on its website. The statistics matched the figures released by China's General Administration of Customs on Jan. 10. Data from the U.S. Commerce Department showed on Feb. 6 that U.S. combined exports and imports stood at US$3.91 trillion in 2013, about US$250 billion less than China's. In 2012, the U.S. was still the world's biggest trader in merchandise, with imports and exports totaling more than US$3.88 trillion. China closely followed, with merchandise trade totaling almost US$3.87 trillion in 2012, according to the WTO. In 2009, China became the world's largest exporter and second-largest importer.  China's foreign trade developed by strides in the past three decades, especially after its accession into the WTO in 2001. Trade expansion forcefully supported the growth of the world's second largest economy but also contributed to global economic development.

    If Chinese Cars Can't Sell at Home... ...what more abroad? There has been a certain fear factor--especially from less competitive European mass manufacturers alike Citroen/Peugeot, Fiat, Ford, Opel and Renault--that Chinese would be the next to undercut their already-dwindling sales with cheap products after the Japanese and South Koreans of the not-so-distant past. Moreover, it has been widely assumed that they would be at the forefront of China's forthcoming march into PRC-branded goods. Actually, no. Or at least not yet. In reality, Chinese cars are taking a beating at home from foreign automakers viewed as having more desirable nameplates. The current bone of contention concerns requiring foreign automakers to partner up with Chinese ones in selling vehicles in the PRC. The Chinese automakers are adamant that they will be wiped out if the foreign automakers are allowed to go it alone in China: Chinese brands will be “killed in the cradle” if the government allows foreign automakers to become more independent from their domestic partners in the world’s biggest car market, the country’s main auto group said. The China Association of Automobile Manufacturers voiced its warning yesterday as it reported that Chinese brands in January extended market-share losses, falling 4.9 percentage points from a year earlier to 38.4 percent, while foreign companies such as General Motors Co. (GM) benefited from record industry sales. Geely Automobile Holdings Ltd alone saw deliveries tumble 47 percent.

    Meanwhile, China Quietly Takes Over Zimbabwe - While the developed world is focusing on the rapidly deteriorating developments in the Crimean, China, which has kept a very low profile on the Ukraine situation aside from the token diplomatic statement, is taking advantage of this latest distraction to do what it does best: quietly take over the global periphery while nobody is looking. We learn that China has just achieved what every ascendent superpower in preparation for "gunboat diplomacy" mode needs: a key strategic airforce base, located in one time economic zombie, Zimbabwe, which incidentally just adopted the Chinese Yuan as a legal currency, and whose president just happens to be on China's payroll.

    China emerges as India's top trading partner: Study -  India's eastern neighbour China has emerged as its biggest trading partner in the current fiscal replacing the UAE and pushing it to the third spot, according to a study conducted by PHD Chamber of Commerce. India-China trade has reached USD 49.5 billion with 8.7 per cent share in India's total trade, while the US comes second at USD 46 billion with 8.1 per cent share and the UAE third at USD 45.4 billion with 8 per cent share during the first nine months of the current fiscal, the study revealed. The UAE was India's biggest trading partner in the 2012-13 fiscal. India's trade (exports and imports) with China was only of USD 7 billion in 2004 which rose to USD 38 billion in 2008 and to USD 65 billion in 2013.

    India Looks Set to Miss Growth Target -- Disappointing growth in the September-December quarter means India’s economy will likely fall short of even its reduced target for the year. The Ministry of Statistics and Programme Implementation last month projected gross domestic product growth of 4.9% for the fiscal year ending March 31. Until then, the Finance Ministry had been predicting growth of 5% or slightly more — down from a forecast of6.4% earlier in the year. Data Friday showed India’s economy grew 4.7% in the three months to December, after expanding 4.8% and 4.4% in the first two quarters of the fiscal year. That means the economy would have to grow 5.7% in the current quarter – highly unlikely — to hit the full-year mark of 4.9%.  “The economy appears to be at a standstill, both in terms of investments and consumption,” “The numbers have been very tepid, and it’s unlikely we’ll see much improvement soon.” Some economists already are writing off this quarter, as corporate and government decision makers are expected to delay big projects until after national elections that must take place by the end of May. Businesses are essentially in a holding pattern until they know the next government’s economic policies. Friday’s GDP data punctured hopes that strong agricultural performance after a good monsoon season would drive the recovery. Farm output grew  just 3.6% from a year earlier, below the 4.5% or more that economists were expecting.

    India’s Extreme Makeover -- India long was a favorite of international investors for its rapid growth rates, enormous market and promising demographic trends, but last summer’s taper tantrum exposed its Achilles’ heel: a yawning current-account deficit as the country imported and consumed much more than it could afford. That was fine as long as outsiders were willing to bridge the gap, but when the Fed’s taper talk raised the prospect of higher returns back home — and India’s own economic growth hit a rough patch – investors retreated en masse, sending India’s currency and markets plunging. Once a proud member of the BRICS club of most-promising emerging markets, India now found itself lumped in with the “Fragile Five” – developing economies whose poor fundamentals left them most exposed to swift and damaging outflows of capital. Fast-forward nine months. India still is struggling with elevated levels of inflation that have forced the central bank to raise interest rates a number of times despite poor economic growth. The policies it adopted to deal with the crisis have come down particularly hard on some sectors. But the current-account deficit has come down from about 6.5% of gross domestic product last year to just 0.9% now – a remarkable swing in such a short time. Investors have rewarded the change, buying Indian assets even as they sold out of other emerging markets during the most recent bout of market turmoil early this year. How has it accomplished this? Morgan Stanley’s Chetan Ahya explains.

    Indian Shadow Financier’s Custody Extended Over Refund Plan -- India’s top court yesterday extended custody of Subrata Roy, owner of the financial services group Sahara India Pariwar, until he presents an improved plan to refund $3.9 billion to depositors.  A two-judge panel at the nation’s Supreme Court in New Delhi also remanded two Sahara directors into custody until March 11, the next hearing in the case. Roy had surrendered to police on Feb. 28 after the court issued a non-bailable arrest warrant two days earlier for failing to heed its summons.  Roy needs to provide bank guarantees or something equally concrete before he will be released, the judges said. Repayment documents produced by Sahara in the last 1-1/2 years haven’t been verifiable, they said. “The court is communicating that promises are not good enough anymore,” Jitendra Nath Gupta, a former executive director at market regulator the Securities and Exchange Board of India, told Bloomberg TV India in Mumbai yesterday. “They have been very patient with Sahara for the last year and a half.”  Roy, who started collecting daily deposits of as little as 30 cents in 1978 and went on to build an $11 billion conglomerate, is fighting charges that his group failed to comply with a court order to repay 240 billion rupees ($3.9 billion). India’s market regulator in June 2011 faulted two of his companies for selling convertible debt without approval and ordered the money refunded.

    Driving Through the Data Fog - Economic data are by nature imprecise: Witness how often the initial readings need to be revised, in some cases significantly. But a confluence of factors early this year is making it particularly difficult to gauge the state of Asia’s economies. One key question is whether or not the region is seeing a long-promised export bounce from the recovery in developed economies. Ordinarily that would be fairly straightforward to assess – look at trade data for China and other key Asian exporters, import data for the United States, manufacturing purchasing managers indexes, inventory levels and the like. The problem is that data this time of year are always distorted by the Lunar New Year holiday observed in China and much of Asia, which can close factories for up to two weeks. Additionally, the timing of the holiday – which sometimes falls in January, sometimes in February and this year falls across both months – makes straight annual or monthly comparisons troublesome. On top of that, a particularly harsh winter in the United States has added a fresh layer of confusion. If exports to the U.S. are slower than normal, does it reflect an underlying shift in the patterns of trade, with consequences for Asian policy? Or are shipments merely delayed because of blizzards? There also are questions about the reliability of the data. When China’s exports jumped by more than 10% in January — far beyond expectations – many analysts saw it not as a sign of a trade revival but as evidence of over-invoicing by companies trying to circumvent Beijing’s strict capital controls and move money into the country. “With noise-to-signal ratios elevated” right now, JP Morgan said in a research report over the weekend, “it is hard to track trends in final demand.”

    Bernanke Urges Emerging Markets to Prepare for End of Fed Stimulus - Former U.S. Federal Reserve Chairman Ben Bernanke on Wednesday urged emerging-market countries to do more to protect themselves from the impact of an eventual end to the Fed’s economic stimulus efforts. Countries like South Africa in particular, with large trade and current account deficits, should try to rebalance their economies to appear more attractive to investors, Mr. Bernanke told a conference sponsored by South African insurer Discovery Ltd. “There’s some room there for emerging markets to take defensive action and improve their own macroeconomic policy, which is in their own interest as well,” Mr. Bernanke said. “It’s really a two way street here—both sides need to work together to find ways that will be of mutual benefit.” Mr. Bernanke ended his eight-tenure in charge of the Fed in January. His successor, Janet Yellen, has said that she plans to stick to Mr. Bernanke’s plan to gradually wind down the Fed’s expansive economic stimulus program.Though the cash injection in Treasury markets will continue, the message that Fed stimulus will eventually end has prompted investors to abandon some of the riskier bets they placed in a search for strong returns.Emerging-market currencies have tumbled as a result. South African assets have been among the hardest hit. Investors have pulled $2.5 billion out of South African stocks and bonds this year. South Africa’s currency, the rand, has dropped almost 20% against the U.S. dollar since Mr. Bernanke said in May that the Fed might pull back stimulus soon.

    Developed World Could be Hit Hard if EM Stumbles — Morgan Stanley - Plenty of ink has been spilled about how developments in the advanced economies affect what’s happening in emerging Asia – through the Fed taper, for example, or demand for Asia’s exports. In a new study, Morgan Stanley is turning the tables, asking how a shock in emerging markets would affect the developed world. Morgan Stanley doesn’t think any shock is imminent. But they say such a situation could emerge either via a “sudden stop” of funding to the more fragile emerging economies, or if China’s economy experiences a hard landing. Their conclusion? The impact on developed economies would be both more severe and more enduring than 15 years ago, when the Asian Financial Crisis sent shockwaves through world markets but economic growth in the developed world hardly skipped a beat. “Both growth and markets would probably take much longer to recover than they did in 1997-’98,” Morgan Stanley writes. An EM shock now would likely shave 1.4% per quarter off U.S. gross domestic product for the first four quarters, the bank estimates. The Eurozone and Japan would be hit even harder, with both likely to fall into recession, the report says.

    The Trillion Dollar Question: Who Owns Emerging Market Government Debt - IMF blog - There are a trillion reasons to care about who owns emerging market debt.  That’s how much money global investors have poured into in these government bonds in recent years —$1 trillion.  Who owns it, for how long and why it changes over time can shed light on the risks; a sudden reversal of money flowing out of a country can hurt.  Shifts in the investor base also can have implications for a government’s borrowing costs. What investors do next is a big question for emerging markets, and our new analysis takes some of the guesswork out of who owns your debt.   The more you know your investors, the better you understand the potential risks and how to deal with them. We compiled comparable and standardized estimates of the investor base of emerging markets’ government debt using the same approach we designed last year to track who owns advanced economy government debt. We use data from 24 emerging market countries and we’ve made it available for anyone interested in further research (Figure 1).  The data covers the period from 2004 through June 2013.

    Goldman discovers that money can buy respect - This week Goldman Sachs passed a milestone. A philanthropic foundation that the bank created six years ago to support poor women around the world has provided funding to its 10,000th female entrepreneur. This so-called 10,000 Women foundation also announced plans to team up with the International Finance Corporation, the lending arm of the World Bank, to create a $600m fund that would extend loans to 100,000 cash-starved female entrepreneurs. That could not just empower women but unleash a wave of new economic activity and boost growth. So, at any rate, a breathless press release from Goldman Sachs and the World Bank declared. Undoubtedly, part of the reason for this initiative is to apply some polish to Goldman’s tarnished public image. Beyond that, however, there are three points to note about this week’s move. First, the World Bank and Goldman Sachs are correct to point out that there is a pressing need to offer more entrepreneurial seed capital for women; the World Bank reckons there is a $300bn funding gap at present. Women who try to create companies are often unable to do so because they lack collateral or face legal obstacles. The second point is that Goldman seems as interested in earning the esteem of its own employees as that of the outside world. Lloyd Blankfein, Goldman’s chief executive, says that a big reason for the bank’s philanthropic endeavours is to improve employee “culture”; or, as a cynic might put it, to boost morale among bankers who are fed up with being bashed. In truth, this generosity does not cost very much – at least, not in relative terms. Goldman is putting $50m into the World Bank project; it was the fourth-largest corporate donor in the US in 2012, giving $240m to charity. Compared with last year’s employee pay pool of $13bn, however, its charitable giving is a mere droplet.

    Japan Base Wages Rise for First Time in Nearly Two Years --In a sign that the economic policies of Japanese Prime Minister Shinzo Abe may be starting to bear  fruit, the basic earnings of workers in the world’s third-largest economy rose for the first time in almost two years in January. Scheduled wages were up 0.1% from a year earlier, the welfare ministry reported Tuesday. That’s the first increase since March 2012 for wages, which have been on a declining trend since the late 1990s. While Mr. Abe’s policies have largely focused on pushing the Bank of Japan to do whatever it takes to end the over 15 years of deflationary pressure that have hobbled the economy, he has also leaned on Japan Inc. to boost the wages of its rank-and-file employees in order to create a virtuous cycle where higher prices and greater consumer spending drive economic activity. Over the past few months, a number of noteworthy companies have said that they plan to wage wages for workers once the country’s fiscal year commences in April. On Tuesday, Daiwa Securities, Japan’s second-largest broker, said that it would be raising salaries and extending the mandatory retirement age of its workers to 70 from 60. It said the steps were to help motivate employees and improve productivity. Japanese manufacturers, just about to wrap up their annual round of wage talks, have signaled they are ready to raise wages for the first time in years.

    Japan's monetary base hits new record high in February - Japan's monetary base jumped 55.7 percent in February from a year earlier to JPY 201.32 trillion (USD 1.98 trillion), marking an all-time high for the 12th straight month, the central bank said Tuesday. The monetary base, which comprises money supplied to the markets by the Bank of Japan (BOJ), including cash in circulation and commercial banks' deposits held at the BOJ's current accounts, also grew for the 22nd month in a row. An expansion in the monetary base has inflationary effect. Last April, the BOJ launched drastic measures to double the monetary base in two years, chiefly through the purchases of government bonds from financial institutions and money market operations, to overcome the country's deflation that has lasted for nearly 15 years and achieve the 2 percent inflation target in fiscal 2015. The central bank aims to increase the monetary base at an annual pace of about JPY 60-70 trillion (USD 590-690 billion). The BOJ board decided in February that the bank will maintain its massive monetary easing program and continue to conduct money market operations

    Japan Says Bitcoin Not a Currency - —The Japanese government officially said Friday that it doesn't consider bitcoin to be a currency and has no plans at present to regulate it as a financial product. As it tries to cope with the fallout from the bankruptcy of the Tokyo-based Mt. Gox exchange, the government said that the crypto-currency would be treated like other goods and services, with commercial sales of bitcoin itself and bitcoin-based transactions subject to sales tax. In addition, any gains on exchange rates will be taxed as well. "Any bitcoin transactions are taxable when they fulfill requisitions stated by laws on income tax, corporate tax and consumption tax," the government said in its statement, which came in response to questions over how bitcoins will be regulated. At the same time, the statement ruled out treatment of bitcoin as a currency or a financial instrument. "Bitcoin are neither Japanese nor foreign currencies and its trading is different from deals stated by Japan's bank act as well as financial instruments and exchange act," according to a document released by Prime Minister Shinzo Abe's cabinet. It also said that banks won't be allowed to offer bitcoins to their customers. But the statement also suggested that the government remains uncertain over how to deal with bitcoin, which aren't widely used in Japan even though Mt. Gox was itself the market leader with an 80% share of the trading at its peak. "There are no laws in Japan that clearly define bitcoin,"

    Bank of Japan Questioning When — or Whether — Exports Will Revive - One of the driving ideas of Abenomics was that a weaker currency would help boost Japan’s exports, breathing new life into the economy after years of slow growth – especially following the yen’s rapid appreciation since 2008. Massive monetary easing from new Bank of Japan Gov. Haruhiko Kuroda helped deliver the weaker yen. But nearly one year later, Japan is still waiting for the export bounce. A number of factors help explain why exports haven’t picked up – and why they may not do so, despite the weaker currency. Some of these factors may be temporary, like poor winter weather in the United States that’s seen as partly to blame for slow shipments from Asia generally. But some are more fundamental – like a move by Japanese companies to move jobs overseas, to take advantage of lower costs and be closer to their final customers. Sources close to the Bank of Japan tell The Wall Street Journal the issue may come to the fore at next week’s BOJ meeting, where board members are starting to question when – or even whether – exports will pick up. It may be time for the BOJ to downgrade its assessment, the sources say. If so, that would strengthen calls for the BOJ to announce new easing measures later this year. What form those measures would take is anyone’s guess. But it would be an implicit recognition that on one of its key policy calls, Abenomics so far has been wide of the mark.

    Are “Twin Deficits” Really the Key to Emerging-Market Vulnerability? - A new paper from the Federal Reserve Bank of San Francisco notes that not all emerging markets suffered equally in the taper-related selloff that began last May: Those with structural weaknesses in their economies suffered most of all.That’s hardly groundbreaking stuff: Suffice to say that babies conceived when analysts first began connecting those dots last summer are about ready to be born by now. Still, with emerging-market central bankers berating the Fed for being insensitive to their travails, it behooves the U.S. central bank to state that developing economies that live beyond their means, running up both fiscal and current account deficits, are laying their own trap in case of a “sudden stop” of external funds. That fact was so clear already last summer that the government of Malaysia, which was running a high fiscal deficit to finance key infrastructure projects, took extraordinary steps to keep its current account from falling into the red and avoid membership in that dubious circle.In the end, Malaysia managed to stay on the right side of the ledger. India and Indonesia, which did not, were punished harshly by investors and have had to raise interest rates sharply to address their imbalances — even as their slowing economies arguably could use more stimulus right now, not less. A new tool from Deutsche Bank’s Asia research team seeks to incorporate more factors into the equation – 16 in all. Their Asia Vulnerability Monitor looks at a country’s current account and debt levels (including household and not just government debt) as well as items such as real interest rates, reserves cover, pace of credit growth and FX valuation.  Their conclusion? The countries most at risk in Asia are Indonesia, Malaysia and even Singapore.

    Ryan Avent on why TPP is a good idea -- "Second, one of the stated ambitions of both TPP and the Trans-Atlantic Trade and Investment Partnership is reduction in non-tariff barriers, which in most cases add substantially more to goods costs than tariff barriers. According to estimates by the World Bank, for instance, American tariff restrictions on agricultural imports are relatively low on the whole, at just 2.2%. But the tariff equivalent of an all-in measure of restrictiveness, which takes into account non-tariff barriers, jumps to 17.0%. The all-in rates for many of the partners in TPP negotiations are substantially higher; Japan’s all-in tariff equivalent on agricultural imports is 38.3%. South Korea’s is 48.9%. Australia’s is 29.5%. Third, “implicit protection of services” does indeed impose additional costs. For instance, the cost to foreign providers of some crucial transport and shipping services within the American market is basically infinite. Services account for four times as much economic output as goods production in America but only around one-fifth of American trade. Many services aren’t tradable, of course; haircut tariffs will not be on the TPP agenda. But a growing array are. And rules on service trade have barely changed at all in two decades. TTIP and TPP (as well as the Trade in Services Agreement) are aimed at updating rules on services trade to make it easier to sell insurance, or financial and consulting services, or IT and environmental services, and so on, across borders. Now maybe these deals are “really about” intellectual property, and all-powerful Hollywood has convinced the government to expend a lot of time and effort setting standards for services trade, the better to provide a smokescreen for its own nefarious activities. But I doubt it." There is more here, useful throughout.  I would add that this is also a foreign policy initiative and it will, if successful, allow various smaller countries in the region to resist pressures from various larger countries in same said region.

    Is Japan Playing Ball with the US on the TransPacific Partnership? - Yves Smith  -- Earlier this week, the Nikkei Asian Review published At odds with US, Japan reaches out to other TPP partners. The title would lead you to believe Japan is working with other countries to strengthen opposition to the toxic, mislabeled trade deal known as the TransPacific Partnership.  The text of the article suggests otherwise, that Japan’s prime minister Abe will feel compelled to offer some concessions when Obama visits next month. On the surface, that would represent a significant shift. Readers may recall that our Japan-savvy commentor Clive parsed an article last December in Japanese from Fisco, which made clear that the Japanese doubted the deal would get done, and was extremely pointed by Japanese standards in saying that the US was refusing to negotiate on tariffs (and on other matters).  Agricultural tariffs are a big deal in Japan. The island nation has high tariffs, famously for beef and rice, and farmers are a important voting block. And tariffs are not resented domestically. Japanese prefer to eat and buy Japanese, and are generally leery of the quality of foreign products (and after America’s experience with the crapification of pretty much everything, they’ve got good reason to be concerned, even after allowing for the occasional product quality scandal). The Nikkei article explains the current state of play: the Japanese had hoped to conclude other bi-lateral trade deals with countries like Australia and New Zealand on the heels of wrapping up the TPP. But now that that looks to be in doubt, Japan is trying to ramp up talks on these stalled trade pacts (for instance the deal with Australia has been in the works since 2006). Here are the key bits of the Nikkei piece: U.S. Trade Representative Michael Froman has insisted that Japan must end all of its import duties.  But the two sides remained divided… To be in a better position to protect its five priority areas — rice, wheat, beef and pork, dairy products and sugar — Tokyo aims to wrap up negotiations with Australia and other TPP participants by the time Obama touches down. All of them are likely to make uncomfortable demands for tariff elimination — Mexico on pork, New Zealand on dairy products, and Singapore on chocolate. Japan will not agree to drop these tariffs but will consider lowering them.  Japanese farmers will fight even tariff reductions. Some LDP lawmakers fear this approach could run afoul of a parliamentary committee resolution promising to defend the five priority areas. Officials at the agriculture ministry are also wary. Support for exposing the farm sector to greater foreign competition is far from rock solid within Abe’s party or government.

    The TTIP and Globalization’s Corporate “Coordination” Master Plan (1 of 3) - In October 2012 the US Chamber of Commerce and BusinessEurope issued a joint manifesto on “Regulatory Cooperation in the EU-US Economic Agreement”. This was designed to provide the basic ideological framework for the upcoming TTIP/TAFTA negotiations, as well as the specific plan for what is variously being called regulatory cooperation or regulatory coherence. To best put it in historical context, I call it “coordination”, following the German term for this kind of ideological and organizational/strategic/tactical doctrine, Gleichschaltung. The basic idea is to fully formalize and rationalize the subservience of government regulatory bureaucracies to corporate bureaucracies, and to render the service of regulators on behalf of corporations systematically aggressive and proactive. To start with some definitions, as the terms are used in this and a few other documents I’ll be discussing. This is also what these terms mean for globalization and corporatism in general, and what they mean when used in the corporate media.

    The TTIP and the Corporate Coordination Master Plan 2 of 3 (GMOs) -- In part one I described the basic bureaucratic coordination plan the corporations propose to be enshrined in the TTIP and TPP. Here I’ll outline the basic demands of the GMO cartel. The three main sources I cite here are the “comments submitted” on the TTIP by the Biotechnology Industry Organization (which I’ll cite as BIO) to the US Trade Representative; the “response to consultation” on GMOs sent jointly by the BIO and its European counterpart EuropaBio (hereafter EB/BIO) to the EU-US High Level Working Group; and Testbiotech’s recent report on “Free Trade for High-Risk Biotech” (which I’ll call TBT).  The BIO commentary starts out with general principles for the biotech sector as a whole (including pharmaceuticals). There’s a constant drumbeat of begging for more corporate welfare (BIO 1,7), on account of how costly it is for the sector to develop its alleged innovations. There’s lots about how government procurement must always be at the highest proprietary price. There’s encomiums to how well central planning has been going so far (2, 13-14), a call for escalated coordination, and a wish list for the future (3,4,7) including the preemption of all laws, regulations, rulings, court decisions, which could in any way hinder the cartel. The USTR is to make the sector a priority (2,3) and establish a sectoral working group (5).  Anti-transparency and intellectual property “require priority attention” (5,6,7-8,9ff). Regulators are to keep all information secret except where corporations want something published. Conversely, biotech corporations are to have complete license to say whatever they want about their products without regulatory restraint. US and EU regulators are to be aggressive in supporting intellectual property prerogatives and policing violations.

    Markit Manufacturing Data Points to EU Growth -- Today Market released the final manufacturing numbers for the EU.  The report made the following general observation about the region: At 53.2 in February, the final seasonally adjusted Markit Eurozone Manufacturing PMI® came in above the earlier flash estimate of 53.0. Although indicating a modest slowdown in the rate of expansion from January’s 32-month high, this still confirmed that the manufacturing recovery had completed its eighth successive month.   Here is a graph of the relevant data:  I've circled the positive growth areas in green, which includes almost all the major countries surveyed, save for France, who's number is just barely negative 49.7. The real question posed by this data is this: is it enough -- in and of itself -- to begin pulling the EU economy into growth strong enough to begin lowering the very high unemployment rate of 12%?  According to analysis provided in the report, the numbers indicates industrial production should be growing at a 1% pace in the 1Q14, lifting GDP with it.  As I noted in my weekly international economic roundup, the EU still has some very negative economic numbers to overcome. 

    World-Wide Factory Activity, by Country -- Much of the world’s factory sector was expanding in February, expanding slightly from the previous month. A broad index of global factory activity, the J.P.Morgan Global Manufacturing PMI, came in at 53.3 in Febuary, up a bit from 53 in Januray and at its highest level since April 2011. A reading above 50 indicates expansion. Purchasing Managers Indexes showed activity expanding in most developed nations, though France and Spain were in contractionary territory. Emerging markets, such as China, Brazil, Russia and Indonesia, showed signs of struggle.

    The 33 countries waiting for a U.S. ambassador, in one map

    What You Should Know About Greece’s Present State of Affairs – An Update - Yanis Varoufakis - “It takes a passionate disregard for the truth to suggest that Greece is recovering.” That was my verdict last December upon being asked to comment on Greece’s rumoured recovery. Almost three months later, it is time for an update. The gist of today’s update is depressingly simple: Still, no sign of Greek-covery whatsoever. Indeed, every single indicator (including the ones that are presented as evidence of light at the tunnel’s end) points in a sadly negative direction…  Below I round up the official data (extracted from the Bank of Greece and Greece’s National Statistical Office reports), up to December 2013, with some glimpses into January 2014. I begin with the real economy (GDP, investment, employment etc.), then discuss the money market (money supply, loans to the private sector etc.), re-state the obvious about Greece’s public debt, allude to the sorry state of the privatization drive and, lastly, conclude with some less conventional statistics; statistics that one does not encounter in any ‘normal’ country.  According to the government and the troika, 2013 was the year the recession decelerated. It did no such thing. While it is true that, in real terms, the rate of shrinkage declined (see following diagram), the reality is less heroic. If we look at nominal GDP, a far more poignant statistic than real GDP in times of recession,[i] we shall be horrified to discover that the recession picked up speed in 2013, compared to the abysmal years 2012, 2011 and 2010. Indeed, as you can see from the figures below, whereas nominal GDP fell from 2011 to 2012 by a modest 1.1%, between 2012 and 2013 it shrank by a walloping 14%! In this sense, the Greek economy’s performance in 2013 was even worse than that of 2010 and 2011 – the first two years after Greece’s implosion.

    Greek Health Minister: "Cancer Not Urgent Unless In Final Stages" - "If you're sick in Greece, you have an expiration date," is the cheery message from Greece. As WaPo reports, while economists proclaim Europe is turning the corner, a look across the still-bleak landscape, from Greece to Spain, Ireland to Portugal, suggests a painful aftermath, where the plight of millions of Europeans is worsening even as the financial crisis passes with public health being hit in the most troubled corners of the European Union. Greece is the hardest hit and while Greek Health Minister Adonis Georgiadis is attempting to create a fund to help the most acute cases, his concluding remarks are chillingly blunt, "illnesses like cancer are not considered urgent, unless you are in the final stages.

    Cyprus passes bill to privatise utilities - The Cyprus parliament has approved legislation to privatise three state utilities on its second try. The minority centre-right government made concessions to Greek Cypriot unions seeking a bigger say in the sell-off process. Tuesday’s vote opens the way for Cyprus to receive the next €240m funding tranche from a €10bn bailout by the EU and International Monetary Fund after the collapse last year of the island’s two largest banks. The nationalist Democratic party’s (Diko) eight lawmakers backed the bill, even though they pulled out of a coalition government with the Democratic Rally party last week, citing differences over President Nicos Anastasiades’ handling of a new round of reunification talks with the island’s Turkish Cypriot community. Their support gave the government 30 votes in the 56-member house, reversing its defeat last week when five Diko deputies abstained. About 1,000 protesters gathered outside parliament while the bill was being debated, shouting, ”Our state is not for sale.”

    Cyprus bailout hit as privatisation bill fails: International efforts to bail out Cyprus' debt-laden economy have been thrown into doubt after its parliament rejected a key part of the plan. As part of the 10bn-euro (£8.25bn; $13.7bn) deal with the EU and International Monetary Fund, lawmakers have until 5 March to pass a bill allowing state firms to be privatised. But on Thursday, they threw it out, jeopardising the next tranche of cash. The government says it will re-submit the bill with some amendments. The deal was agreed in March last year in an attempt to stave off the collapse of Cyprus's banking sector and the wider economy. It included moves to restructure the banks, along with other measures such as tax rises and privatisations. Late on Thursday, the privatisation bill was narrowly defeated after parliament split 25-25 on the vote, with five abstentions. This meant the legislation failed to pass. The vote took place as hundreds of people opposed to privatisation staged a protest outside the parliament building.

    France Becoming Increasingly Euroskeptic: Poll Shows 52% of Workers Want to Leave the Euro, Only 34% of Workers Believe EU is a Good Thing - The following bullet points are from the French Ipos Poll: New French fractures, results and analysis of the Ipsos/Steria. Although a huge majority of French want to stay on the Euro, a majority of "workers" don't. Poll Conclusions:

    • 79% distrust the outside world
    • 72% have no confidence in the French National Assembly
    • 74% think journalists do not write about the real problems
    • 66% think there are too many foreigners in France
    • 63% say Islam is not compatible with values of French society
    • 84% think politicians act for personal reasons
    • 70% Want strengthening of national power away from EU (up 5 percentage points from last poll)
    • 33% want to exit the euro (up 5 percentage points)
    • 52% of workers want to exit the euro (up 8 percentage points)
    • 45% think membership in the EU is a good thing, 40% think it's bad
    • 34% of workers think membership in the EU is a good thing

    Near-Bankrupt Rome Bailed Out As Italy Unemployment Rises To All Time High, Grows By Most On Record In 2013 -- A few days ago, we reported that, seemingly out of the blue, the city of Rome was on the verge of a "Detroit-style bankruptcy." In the article, Guido Guidesi, a parliamentarian from the Northern League, was quoted as saying "It's time to stop the accounting tricks and declare Rome's default." Of course, that would be unthinkable: we said that if "if one stops the accounting tricks, not only Rome, but all of Europe, as well as the US and China would all be swept under a global bankruptcy tsunami. So it is safe to assume that the tricks will continue.  And just as expected, yesterday Rome was bailed out. As Reuters reported, Matteo Renzi's new Italian government on Friday approved an emergency decree to bail out Rome city council whose mayor had warned the capital would have to halt essential services unless it got financial help. The decree transfers 570 million euros ($787 million) to the city to pay the salaries of municipal workers and ensure services such as public transport and garbage collection. Renzi, under pressure from critics who say Rome is getting favorable treatment, attached conditions to the bailout. Rome must spell out how it will rein in its debt, justify its current levels of staff, seek more efficient ways of running its public services and sell off some of its real estate, the government decree said. Rome's finances have been in a parlous state for years and it has debts of almost 14 billion euros which it plans to pay off gradually by 2048

    Italy's sovereign debt explodes as economy shrinks in 2013 - Italy’s public debt hit a new high in 2013, soaring to a level not seen since the country’s statisticians began taking records. The debt exploded as Europe’s third-largest economy remained locked in recession. Italy's sovereign debt surged to 132.6 percent of gross domestic product (GDP) last year, up significantly from 127 percent of GDP in 2012, according to latest data released by the country's National Statistics Institute (ISTAT) on Monday. Within the 18-nation eurozone, only Greece had accumulated a higher overall debt mountain, ISTAT said. The debt explosion was linked to a drop in Italy's 2013 GDP, which shrank an annual 1.9 percent, ISTAT added, thus continuing the country's deep two-year recession. In 2012, the eurozone's third largest economy had decreased by 2.5 percent, suffering from the fallout of the sovereign debt crisis in the currency area. In spite of its economic weakness, Italy managed to keep its 2013 budget deficit down to 3 percent of GDP, which is exactly the limit allowed under European Union treaties. Moreover, the Italian economy slightly improved in the final quarter of 2013, growing by 0.1 percent. Nevertheless, unemployment remained steep, hitting its highest level in 37 years in January with a jobless rate of 12.9 percent. Unemployment is especially rampant among young people under the age of 25, among which 42 percent were without jobs.

    Lagarde: ECB must fight inflation with more stimulus -- A prolonged period of low inflation in the euro zone may derail the currency area’s fragile economic recovery and must be fought with additional monetary stimulus, International Monetary Fund chief Christine Lagarde said Monday.  Lagarde, who was speaking at a conference in Bilbao, northern Spain, said that while the European Central Bank already has taken a number of strong measures to help the euro area, “even further accommodative policies and targeted measures are needed to address low, below-target inflation and achieve lasting growth and jobs.” Annual inflation in the euro zone was 0.8% in February, according to European statistics office Eurostat, well below the ECB’s target of just below 2%. The ECB will meet Thursday to decide on interest rates for the area. Lagarde also said that Europe needs to complete its banking union and repair bank balance sheets, to reduce financial fragmentation within the euro area.

    Deflation and the ECB - The ECB says that there is no deflation risk in the Eurozone. Many people dispute this. Admittedly, headline CPI has been steady at 0.8% for the last three months, and core inflation (which excludes volatile things such as energy prices, which have been falling) is inching upwards. And January's M3 lending figures for the Eurozone as a whole, though horrible, do show a slight improvement over December. But this does not mean that there is no deflation risk.  But as is often the case, looking at Eurozone aggregates doesn't tell the full story. These charts from Natixis show the collapse of bank lending not only in periphery countries, but in Germany: In an economy where the money supply depends principally upon bank lending, a credit crunch will become deflation unless the money supply is expanded by other means. For the last year, the ECB has allowed monetary conditions to tighten as banks repaid LTROs. It has justified its inaction on the grounds that the credit crunch (and associated deflation risk) only applies in periphery countries, and is a recognition by banks of higher sovereign risk in those countries. Structural reforms, therefore, should over time reduce the sovereign risk, allowing real interest rates to fall and enabling banks to lend. But these charts show that lending is stagnant in Germany and France as well as the troubled Spain and Italy. Evidently, the credit crunch does not apply only in periphery countries.

    Euro Area — “Deflation” Versus “Lowflation” - iMFdirect -- Recent talk about deflation in the euro area has evoked two kinds of reactions. On one side are those who worry about the associated prospect of prolonged recession. On the other are those who see the risk as overblown. This blog and the video below sift through both sides of the debate to argue the following:

    • Although inflation—headline and core—has fallen and stayed well below the ECB’s 2% price stability mandate, so far there is no sign of classic deflation, i.e., of widespread, self-feeding, price declines.
    • But even ultra low inflation—let us call it “lowflation”—can be problematic for the euro area as a whole and for financially stressed countries, where it implies higher real debt stocks and real interest rates, less relative price adjustment, and greater unemployment.
    • Along with Japan’s experience, which saw deflation worm itself into the system, this argues for a more pre-emptive approach by the ECB.

    Lowflation and the Two Zeroes - Paul Krugman - The IMF blog has a terrific piece on the problem with low inflation in Europe. It’s the perfect antidote to the do-nothing voices insisting that there’s no problem, because we don’t see actual deflation yet.  Part of the IMF analysis concerns debt dynamics. They don’t put it quite this way, but I’d say that to have debt deflation — in which falling prices due to a weak economy increase the real burden of debt, which depresses the economy further, and so on — you don’t need to have literal deflation. The process begins as soon as you have lower inflation than expected when interest rates were set. It’s also noteworthy that inflation rates in the highly indebted countries are all well below the eurozone average (pdf), with actual deflation in Greece and near-deflation in the rest. So the debt deflation spiral is in fact well underway. Beyond that, the trouble with low inflation is that it exacerbates the problem posed by the two zeroes — the impossibility of cutting interest rates below zero and the great difficulty of cutting nominal wages.  I’d argue that if nominal interest rates were much higher — say, 4 percent — but the overall euro macro situation were what it is, with inflation clearly below target and unemployment very high, the ECB wouldn’t (and certainly shouldn’t) hesitate at all about cutting rates substantially. Meanwhile, the zero on wages is hugely important now. The fundamental issue here is that Spain (and other debtors) needs to reduce its wages relative to Germany, reversing the runup in relative wages during the bubble years. The argument some of us have been making for a long time is that it’s vastly easier if this adjustment takes place via rising German wages rather than falling Spanish wages — partly because of the debt dynamics, but also and crucially because it’s very hard to cut nominal wages.

    ECB May Repeat Japan Mistake That Triggered Lost Decade -- The central bank failed to sound a deflation alert.  “At present there is no reason to expect that overall prices will drop sharply and exert deflationary pressure on the entire economy,” policy makers wrote in their monthly report, signed off by the governor.  Within six months, Japan’s consumer prices excluding food began falling in a trend that would mark the next 15 years.  The concern now for economists from Barclays Plc to Morgan Stanley and JPMorgan Chase & Co. is that European Central Bank President Mario Draghi risks making the same mistake as the Bank of Japan -- publicly playing down a deflation threat -- and ultimately may have to introduce quantitative easing. Among a series of similarities between 1990s Japan and modern-day Europe: Weak economic expansion after a series of shocks? Tick. A reluctance by banks to lend? Tick. A rising exchange rate? Tick. A debatable monetary-policy stance? Tick.  “The risk of a Japanification of the euro area is high and rising,” said Joachim Fels, chief international economist at Morgan Stanley in London, who puts the odds of a price decline at about 35 percent. “Deflation wasn’t on Japan’s radar either.”  Mario Draghi, president of the European Central Bank (ECB), maintains the euro area isn’t turning Japanese, even as he accepts that soft inflation will linger and the International Monetary Fund warns his economy may be prone to deflation if it’s hit by a shock.  The Bank of Japan’s complacency hurt an economy that has slipped in size behind China’s as companies and consumers retrenched in anticipation of even cheaper prices. The country’s gross domestic product, unadjusted for changes in price, was 10 percent smaller last year than its 1997 peak.

    Wanted: German Inflation - The latest Eurostat release on inflation shows that the Eurozone, and the EU at large, keep flirting with deflation. This happens mostly because peripheral countries have near-zero inflation rates.  Strikingly, no EU country had, in January, annual inflation rates above the  2% ECB target (Finland and the UK stood at 1.9%). Deflation is a problem for debtors, who see the real value of their debt increase. It is a problem for macroeconomic policy (in particular monetary policy). But it is also a problem for rebalancing. The imbalances that built over the period 1999-2007 show up in diverging inflation rates and labour costs. Take the former, from Eurostat data:  I plotted CPI in Germany and in EMU peripheral countries, making 2000=100. From 2000 to 2008 all peripheral countries had higher inflation than Germany, and this led to a loss of competitiveness. The following table captures the widening of the gap in the years leading to the crisis. Now, one may think, as I do, that the eurozone problems are due to structural imbalances, an “original sin” of the single currency; or, as the Berlin View postulates, believe that the culprit is fiscal profligacy. But in both cases, no rebalancing can happen without the gap in prices and labour costs to be somehow closed. And here begin the problems, and the differences in the diagnosis may play a role. After an initial heavy blow due to the sharp contraction of world trade in 2008-2009, Germany was capable of exploiting the world recovery thanks to its export-oriented economy. Thus it is not a surprise if it was able to dictate the rules of the game to the peripheral countries in distress. It was after all a large and relatively successful economy, a creditor of the periphery, and it was  backed by EU institutions that are shaped by the neo-liberal principles that underlie the Berlin View. Thus, the burden of adjustment so far has been all but symmetric, falling exclusively on the shoulders of peripheral EMU countries. The result has been austerity, and deflation, as the figure above shows. In spite of this the differential is still remarkable, from the 5 points of Ireland, to the 20 of Greece.

    Political Union In Europe: Governance Of, By, And For The Elite  At the tail end of the week, a rather curious event took place in Madrid. Under the title “Project Europe”, it featured talks by a host of prominent Spanish, Portuguese and Italian speakers, including the current prime ministers of Spain and Portugal, Mariano Rajoy and Pedro Passos Coelho, and the recently deposed Italian premier Enrico Letta. The message from Southern Europe’s political elite was as clear as it was unified: the growth in “populism” — that is, any political movement that opposes the continued expansion of centralised power in Europe — represents a serious threat to the Union’s future. To stymie its influence, concerted efforts must be made to accelerate Europe’s march towards political union. “We pro-Europeans are lacking a dream,” said Letta. “The dream must be political union.” Letta’s sentiments were echoed by many of his fellow speakers, including the event’s organiser, Nicolas Berggruen. A dual American and German citizen, Berggruen is the billionaire founder and president of the private investment company Berggruen Holdings and the Berggruen Institute on Governance, a think tank that works on addressing governance issues. In recent years Berggruen has carved out an influential role in European politics, principally through his creation of the Council for the Future of Europe (CFR), a think tank whose membership list reads like a veritable Who’s Who of transatlantic politics, business and finance.

    Whither the Euro? - IMF Finance & Development, March 2014: The euro area economy is in a terrible mess. In December 2013 euro area GDP was still 3 percent lower than in the first quarter of 2008, in stark contrast with the United States, where GDP was 6 percent higher. GDP was 8 percent below its precrisis level in Ireland, 9 percent below in Italy, and 12 percent below in Greece. Euro area unemployment exceeds 12 percent—and is about 16 percent in Portugal, 17 percent in Cyprus, and 27 percent in Spain and Greece. Europeans are so used to these numbers that they no longer find them shocking, which is profoundly disturbing. These are not minor details, blemishing an otherwise impeccable record, but evidence of a dismal policy failure. The euro is a bad idea, which was pointed out two decades ago when the currency was being devised. The currency area is too large and diverse—and given the need for periodic real exchange rate adjustments, the anti-inflation mandate of the European Central Bank (ECB) is too restrictive. Labor mobility between member countries is too limited to make migration from bust to boom regions a viable adjustment option. And there are virtually no fiscal mechanisms to transfer resources across regions in the event of shocks that hit parts of the currency area harder than others.

    Will We Look Back on the Euro as a Mistake?  -- For the last few months, the euro situation has not been a crisis that dominates headlines. But the economic situation surrounding the euro remains grim and unresolved. Finance and Development, published by the IMF, offers four angles on Europe's road in its March 2014 issue. For example, Reza Moghadam discusses how Europe has moved toward greater integration over time, Nicolas Véron looks at plans and prospects for a European banking union, and Helge Berger and Martin Schindler consider the policy agenda for reducing unemployment and spurring growth. But I was especially drawn to "Whither the Euro?" by Kevin Hjortshøj O’Rourke, because he finds himself driven to contemplating whether the euro will survive. He concludes: The demise of the euro would be a major crisis, no doubt about it. We shouldn’t wish for it. But if a crisis is inevitable then it is best to get on with it, while centrists and Europhiles are still in charge. Whichever way we jump, we have to do so democratically, and there is no sense in waiting forever. If the euro is eventually abandoned, my prediction is that historians 50 years from now will wonder how it ever came to be introduced in the first place. To understand where O'Rourke is coming from, start with some basic statistics on unemployment and growth in the euro-zone. Here's the path of unemployment in Europe through the end of 2013, with the average for all 28 countries of the European Union shown by the black line, and the average for the 17 countries using the euro shown by the blue line.

    The ECB is irrelevant and the Euro is a failure - The latest money supply figures from the Euro area are awful.  M3 lending is particularly bad. The only components of M3 lending growth that are positive are residential mortgages and lending to governments, and those not by much: Turning to the main counterparts of M3 on the asset side of the consolidated balance sheet of Monetary Financial Institutions (MFIs), the annual growth rate of total credit to euro area residents was less negative at -1.7% in January 2013, from -2.0% in the previous month. The annual growth rate of credit extended to general government increased to 0.2% in January, from -0.7% in December, while the annual growth rate of credit extended to the private sector was less negative at -2.2% in January, from -2.4% in the previous month. Among the components of credit to the private sector, the annual growth rate of loans stood at -2.2% in January, compared with -2.3% the previous month (adjusted for loan sales and securitisation, the rate stood at -2.0% unchanged from the previous month). The annual growth rate of loans to households stood at -0.2% in January, compared with -0.1% in December (adjusted for loan sales and securitisation, the rate stood at -0.2%, compared with -0.3% in the previous month). The annual growth rate of lending for house purchase, the most important component of household loans, decreased to 0.5% in January, from 0.7% in the previous month. The annual growth rate of loans to non-financial corporations stood at -2.9%, compared to -3.0% in the previous month (adjusted for loan sales and securitisation, the rate stood at -2.9% in January, unchanged from the previous month). Finally, the annual growth rate of loans to non-monetary financial intermediaries (excluding insurance companies and pension funds) was less negative at -11.1% in January, from -12.2% the previous month.

    Bank Oversight: Europe Stressed by Approaching Stress Tests -- First, a detailed look at the quality of the banks' balance sheets will be undertaken. Then their resilience to potentially adverse market conditions will be tested. At the conclusion of the exercise, the ECB may require some financial institutions to make improvements and could even recommend that some banks be liquidated. "In my entire career, I have never seen anything like" the tests, says one long-serving bank head. Even if some banks are bound to suffer, the experiment could sound the all-clear the European financial world has long been waiting for -- a new beginning after seven tortuous years of crisis during which hundreds of billions of euros of state help flooded into the sector. Indeed, the ECB is still providing assistance in the form of emergency credit because banks don't trust each other. Were the ailing banks to in fact be eliminated and the rest granted a certificate of financial health, confidence could be restored and dependency on the ECB eliminated. Yet the project is also a risky one. Should the ECB prove too strict, it could destabilize a European banking sector that has only just begun to show the first signs of recovery. But if it isn't strict enough, or allows itself to be influenced by national interests, the ECB's credibility could be called into question. As such, the stress test will provide the first indication as to whether the ECB will in fact be able to adequately monitor Europe's banks. "We know that we have a single opportunity to establish our credibility and reputation," Danièle Nouy, head of the ECB's supervisory arm, recently told the Financial Times.

    Brussels plans fresh rules on executive pay - Shareholders in listed EU companies would set the pay gap between executives and average employee pay under draft Brussels reforms aimed at giving more clout and information to investors. While regulatory moves on shareholder scrutiny of pay have gained traction around the world, the European Commission proposal goes further than the US or UK by requiring a binding vote on a wider range of sensitive remuneration benchmarks. The draft proposal, due to be unveiled next month, gives shareholders responsibility to approve a remuneration policy for directors, which sets a maximum pay and bonus level. It also must include the envisaged ratio between directors’ pay and the average pay of the company’s full-time workers, as well as “an explanation of why this ratio is considered appropriate”. Brussels would, in addition, standardise how pay is disclosed and presented.

    UK patients’ data uploaded to Google servers, serious privacy concerns ensue - The National Health Service (NHS) of England has come under fire lately amid plans to share patient data with researchers and private companies, and today's revelation will only pile on the privacy concerns. The Guardian reports that the entire patient database for the NHS has been uploaded to Google servers. Patients' records -- including their addresses, hospital records and more -- were uploaded to Google's BigQuery analytics tool by management consulting firm PA Consulting, but it's unclear how the firm acquired the patient data in the first place. The fact that sensitive patient data has been uploaded -- to Google servers outside of the European Union, no less -- may be a huge breach in and of itself, but members of Parliament and patient groups are also questioning exactly how much data has been shared. PA Consulting said it produced interactive maps of hospital data, which implies that location info from patients' files was disclosed. And according to The Independent, patient information has been used by marketers to "target ads on social media." Clearly, there are many unanswered questions here, though more details are likely to emerge as the UK's Health and Social Care Information Center (HSCIC) investigates.

    RBS has lost all the £46bn pumped in by the taxpayer - Royal Bank of Scotland has lost all the money invested in it by the taxpayer six years ago when the lender came close to collapse. The bank has confirmed its total losses since its bailout have now drawn level with the £46bn pumped into it in 2008 in return for an 81pc stake. RBS made a loss last year of £8.2bn, its sixth consecutive annual loss, taking its cumulative losses to £46bn. The scale of the losses means that all the capital provided by the taxpayer has now been used up dealing with the toxic legacy assets on the bank's balance sheet. Losses at the bank came after it took a £3.8bn bill for customer mis-selling compensation and a £4.8bn impairment charge against the continued run down of its bad loans. Excluding these costs, RBS reported an operating loss for the year of £2.5bn, with profits from its retail and commercial business falling 4pc year-on-year to £4.1bn, while its markets division reported a 58pc fall compared to 2012 making a profit of £638m.

    Godzilla Banks are Good for You? - Fans of Japanese schlock fiction will be pleased to know that that old mega-favourite Godzilla is returning in 2014, to stomp on simulated cities in a cinema near you. And of course, he’s bigger and better: he’s now a couple of kilometres tall and probably weighs in the millions.  In Godzilla, there is a positive relationship between size and destructive capacity. Maybe Bank of England governor Mark Carney should attend the UK premiere, because he clearly needs to learn this lesson and apply it to his own bailiwick. If he can’t learn it from economics, then maybe he can learn it from the movies by analogy: finance is dangerous in part because, like Godzilla, it is too big. Instead, as Howard Davies — himself an ex-deputy governor of the Bank of England — observed in a recent Project Syndicate column, Carney seems almost to celebrate the prospect that the UK’s financial sector — now with assets four times the size of its economy — might grow to nine times the size of GDP if current trends continue. “Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050… the estimate was deeply unsettling to many. Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. The result was disastrous,” Davies said.

    BOE’s Haldane Calls for Bigger IMF Role in Safeguarding Financial System  - A senior Bank of England official on Wednesday appealed for the International Monetary Fund to be given a greater role in safeguarding the global economy and a bigger war chest to help countries in need. Andrew Haldane, the U.K. central bank’s executive director for financial stability, said in a speech at the University of Manchester that the IMF is the institution best placed to oversee the global financial system and spot problems as they crop up. “If anyone is to play this role as guardian, as the safeguard of the global financial system, it’s the IMF. To do that it needs money,” Mr. Haldane said. “The IMF does not have the fuel in the tank it needs to meet the prospective needs of countries.” Mr. Haldane sits on the BOE’s Financial Policy Committee, a panel that tackles threats to the stability of the financial system. It was set up in the U.K. in the aftermath of the financial crisis that tipped the world into recession in 2008. Similar bodies have been established in the U.S. and the euro zone. Mr. Haldane said the IMF should play a similar role at the global level, monitoring the movement of capital across the globe in an effort to identify potential risks, preferably as they happen.

    Dear George: Can we have Fed-style transcripts of UK monetary policy meetings, please? -- My twitter feed has been stuffed with commentary about the recently released Fed transcripts and debates about the performance of the key personalities on the FOMC. Apart from being great fun, it has only just struck me how useful these texts are in bringing the participants to life, and in holding them to account. In the UK, there are no transcripts. The MPC discussion is recorded pretty much verbatim by a small cadre of talented minute takers. And then there are subsequent meetings of MPC with the minute takers to determine what it is they want to have recorded about the meeting. The document describes itself as ‘Minutes’, but that term’s definition does not promise a verbatim report of the discussion, and the document does not deliver one. Dissent is drawn attention to, and it is very often possible to identify whose views are being referred to. But the participants don’t speak for themselves. And we don’t get to see how views got arrived at, the quality of insight used to support them, whether discussion progressed debates or not. There are considerable advantages to having a distillation of the discussion UK-style released promptly. It clearly helps the MPC manage the message it wants markets to take from the meeting, and give the appropriate context to the decision. The ‘what do we want them to think we said?’ model of minute-taking serves as a policy statement accompanying (with a small lag) the decision itself.

    Former Central Banker Admits "[They] Are Making It Up As They Go Along" - A few weeks ago, William White (former economist at the Bank of England, the Bank of Canada, and Bank of International Settlements) made a frank admission: "The analytical underpinnings of what we [mainstream economists] do are actually pretty shaky...I’m becoming more and more convinced that all of the models we use are basically useless... We’ve got the potential to do so much harm by not getting the creation of fiat credit and money right." Doctors at least have the Hippocratic Oath: first, do no harm. If only economists and central bankers had a similar ethic. But they don’t. So they continue ‘making it up as they go along’, as Mr. White suggests, applying failed ideas with impunity and continued authority to an unquestioning public.

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