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

Saturday, May 24, 2014

week ending May 24

Bernanke says no need for Fed to shrink balance sheet: (Reuters) - The Federal Reserve does not need to shrink its $4 trillion-plus balance sheet by even "a dime" for it to normalize monetary policy when the time comes, former Fed Chair Ben Bernanke said on Monday. "The Fed has worked very carefully to figure out how to raise rates at the appropriate time," Bernanke told a monetary policy conference. "That will eventually happen - we hope it happens because that means the economy is going back to normal." When the Fed does tighten, he said, "you can have some bumpiness" as markets potentially react to the changes. But in all, he said, "it will be a fairly normal process." The Fed under Bernanke bought trillions of dollars of long-term securities to help boost the U.S. economy and keep deflation from taking hold. As the Fed exits from those extraordinary policies, Bernanke said, "There is absolutely no need or requirement for the balance sheet to go back to normal as monetary policy normalizes. The balance sheet could be kept where it is for a very long time if necessary."

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 22, 2014: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Does the Fed’s Balance Sheet Matter? - Along with their criticism of the Fed’s quantitative easing (QE) programs, many critics have pointed to the ballooning of the Fed’s balance sheet as a harbinger of a surge in inflation. The huge increase in the Fed’s total assets, for all Federal Reserve banks combined, is uncontested: from $2.9 trillion at year-end 2012 to more than $4 trillion at the end of 2013. . Ordinarily, such a large expansion in the Fed’s securities would be accompanied by an expansion in the money supply many times over (new money created to buy the securities, multiplied by an expansion of additional loans extended by the nation’s banks). But the post-crisis economy has been anything but normal. Bank deposits (or reserves) held at the Fed rose between year-end 2012 and 2013 by about $750 billion, or almost three-fourths of the increase in securities holdings. Altogether, bank deposits at year-end 2013 totaled $2.5 trillion (up to $2.6 trillion as of mid-May), a vast sum that banks were choosing to hold at the Fed at a measly .025% rate of interest rather than earning substantially more by lending those funds out, but with higher risk. Inflation hawks worry that the nation’s banks could suddenly change that calculus and start lending like mad, triggering a much higher rate of inflation. This worry places no faith in the Fed’s monetary policy committee members, or Federal Reserve Chairwoman Janet Yellen, to counteract a sudden sharp increase in lending that could lead to that result.   Of course, investors could react more swiftly than the Fed, responding to any sudden increase in lending by pushing up longer-term interest rates, in which case the market would self-correct, even without Fed tightening. Inflation hawks, who have been worried from QE’s inception in late 2008 about a nonexistent uptick in inflation, should put away their worry beads.

Fed's Williams 'gun shy' on shrinking balance sheet: WSJ (Reuters) - The Federal Reserve should defer any decision to allow its balance sheet to shrink until after it has begun raising interest rates from their current near-zero level, San Francisco Fed President John Williams told the Wall Street Journal on Wednesday. Williams' comments follow similar remarks by the influential head of the New York Fed, William Dudley. Together, the remarks are a strong signal the U.S. central bank is inclined to keep its $4-trillion balance sheet large for longer in order to minimize the risk of roiling markets. The Fed currently reinvests proceeds from maturing Treasuries back into its portfolio, and for years had said it would start normalizing rates by ending those reinvestments in a step that would precede its first rate hikes. Williams, like Dudley, said he worries that stopping reinvestments could disrupt markets, presumably by setting off a run-up in market rates that the Fed would view as undesirable. "I'm a little gun shy about removing the reinvestment thing and hoping everybody understands that represents no shift in the view on the funds rate," Williams told the Wall Street Journal.

Minutes of the Federal Open Market Committee, April 29-30 - FRB

FOMC Minutes: Monetary Policy Normalization Discussion  - From the Fed: Minutes of the Federal Open Market Committee, April 29-30, 2014 . Excerpt on Monetary Policy Normalization: In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, meeting participants discussed issues associated with the eventual normalization of the stance and conduct of monetary policy. The Committee's discussion of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon. A staff presentation outlined several approaches to raising short-term interest rates when it becomes appropriate to do so, and to controlling the level of short-term interest rates once they are above the effective lower bound, during a period when the Federal Reserve will have a very large balance sheet. The approaches differed in terms of the combination of policy tools that might be used to accomplish those objectives. Following the staff presentation, meeting participants discussed a wide range of topics related to policy normalization. Participants generally agreed that starting to consider the options for normalization at this meeting was prudent, as it would help the Committee to make decisions about approaches to policy normalization and to communicate its plans to the public well before the first steps in normalizing policy become appropriate. Early communication, in turn, would enhance the clarity and credibility of monetary policy and help promote the achievement of the Committee's statutory objectives.  Participants generally favored the further testing of various tools, including the TDF, to better assess their operational readiness and effectiveness. No decisions regarding policy normalization were taken; participants requested additional analysis from the staff and agreed that it would be helpful to continue to review these issues at upcoming meetings.

Key Passages: Read the Federal Reserve Meeting Minutes in Just a Minute - Minutes of the Federal Reserve’s April 29-30 meeting showed policy makers are still hoping for stronger economic growth in the second half of the year. The economic assessment of Federal Open Market Committee participants emphasizes the central bank is so far sticking to its forecasts. Here are some key excerpts from the minutes, with quotes in italics: “In their discussion of the economic situation and the outlook, meeting participants generally indicated that their assessment of the economic outlook had not changed materially since the March meeting. Severe winter weather had contributed to a sharp slowing in activity during the first quarter, but recent indicators pointed to a rebound and suggested that the economy had returned to a trajectory of moderate growth.” However, that passage is quickly peppered with a note of caution: “Some participants remarked that it was it was too early to confirm that the bounceback in economic activity would put the economy on a path of sustained above-trend economic growth. In general, participants continued to view the risks to the outlook for the economy and the labor market as nearly balanced. However, a number of participants pointed to possible sources of downside risk to growth, including a persistent slowdown in the housing sector or potential international developments, such as a further slowing of growth in China or an increase in geopolitical tensions regarding Russia and Ukraine.”  In addition, officials seem to have spent quite a bit of time discussing a flagging housing sector, which is key to the economic recovery from the Fed’s perspective.“Most participants commented on the continuing weakness in housing activity. They saw a range of factors affecting the housing market, including higher home prices, construction bottlenecks stemming from a scarcity of labor and harsh winter weather, input cost pressures, or a shortage in the supply of available lots.” On the policy front, there was agreement about reducing the pace of monthly bond purchases further in incremental, $10 billion steps. The Fed also had an extensive discussion about its plans for exiting its extraordinary low-interest rate policies. The strategy is still evolving as policy makers assess which tools might work best when the time comes to begin tightening monetary policy.

Don't Overthink The FOMC Minutes, Goldman Suggests: "There Were No Surprises" -- While everyone tries very hard to read between the lines of the Fed minutes with the consensus conclusion being that suddenly (as opposed to previously?) the Fed is confused about what the best exit strategy is, with words such as reverse repos thrown around for dramatic impact even though this topic has been around for nearly a year, the reality is that there was absolutely nothing market moving or material in today's report (which furthermore reduced the use of the word "weather" from 15 instances in March to just 8 in April although no mentions of El Nino just yet). Here is Goldman's FOMC minutes post-mortem confirming just this. "BOTTOM LINE: The April FOMC minutes contained no major surprises. There was no news on the likely date of the first funds rate hike or the pace of subsequent hikes, and participants' views on the economic outlook were unchanged. Participants discussed the exit strategy and were in favor of further testing of policy tools, but no new policy decisions were made."

FOMC minutes: rev-repo facility working how it should - Robin Harding summarises the discussion about the Fed’s exit strategy revealed in the FOMC minutes from the April meeting, when the committee also talked about the need for additional forward guidance. The takeaway is that some participants think it would be a good idea for Janet Yellen to clarify the language, introduced to the FOMC statement in March, that interest rates are expected to stay below normal even after inflation and unemployment return to near-mandate levels. Some participants also want more guidance on how long the maturing Treasuries on its balance sheet will be rolled over and the principal payments on MBS will be reinvested. Obviously this coincides with a recent speech by William Dudley and comments from John Williams, with both saying that rates should rise before reinvestments end. We interpreted these speeches and the minutes as simply another sign that the Fed is increasingly comfortable with the prospect of managing short rates in the future in concert with a large balance sheet. There will be tricky but, we think, solvable problems associated with financial stability in doing so, and the Fed is clearly aware of them. Our earlier posts included more detail about some of these complexities. Calibrating the spread between the interest paid on reserves and the reverse repo rate is particularly important. Dudley’s speech also elucidated some of these complexities, in addition to noting the benefits of being able to provide a short-term safe asset to non-banks. (More surprising was Dudley’s point that lifting rates was important to give the Fed more flexibility, which might be interpreted as an implicit admission that the Fed’s flexibility is limited at the zero bound.)

Fed Panel Has Begun to Address How to Gradually Raise Rates - Federal Reserve officials have gingerly begun to take on what will be their most difficult task over the next 12 to 24 months: determining how and when to gradually raise interest rates and return monetary policy to a more traditional path, even as they keep trillions in assets accumulated during the huge stimulus efforts of the last five years.Officials at the central bank are not anywhere near a final decision on tactics and strategy, nor do they have a definite date in mind, although most experts expect them to take their first step in raising short-term interest rates in mid- to late 2015.But the minutes of their meeting late last month, released on Wednesday, detail how the members of the Federal Open Market Committee, which consists of representatives of the Fed’s regional banks and the Washington-based Board of Governors, have begun grappling with lifting the interest rate that the Fed uses as its major policy tool from a current level close to zero.“Obviously, it is still a work in progress,”Nonetheless, the minutes suggested that the process is well underway. “This discussion marks the beginning of the post-crisis era,” he said. Mr. Hanson said that holding all those assets on the Fed balance sheet means huge reserves are sitting idle in the banking sector, which in turn makes it much more difficult to raise short-term rates using traditional tools when the Fed finally does decide the time is right to tighten monetary policy. At the April meeting, policy makers reviewed staff presentations that “outlined several approaches to raising short-term interest rates when it becomes appropriate to do so,” the minutes said.

Fed's Rate-Change System Up for Revamp - Janet Yellen's first big task as Federal Reserve chairwoman isn't deciding when to raise interest rates. It is deciding how. The Fed's old system for moving interest rates up or down looks increasingly unsuited for the postcrisis financial system, so officials are rewriting their strategy for replacing it.  In the past, the Fed changed its benchmark interest rate—the fed funds rate—by increasing or decreasing reserves. ... ..Since the crisis, the Fed has paid banks interest on the reserves they deposit with the central bank at a rate of 0.25%. When it comes time to raise rates across the economy, the Fed will lift this rate rather than altering the fed funds rate by changing the supply of reserves. The Fed could shed light on the subject Wednesday when it releases minutes of an April meeting at which discussions of the issue intensified.

Fed's experimental reverse repo program ramps up -  - Growth in US reserve balances (funds that banks hold at the Federal Reserve) has stalled recently. Part of the reason for the slower growth is of course the Fed's taper. Yet the Fed's balance sheet is still increasing, albeit at a slower rate. Which means that bank reserves should be growing as well, unless of course some reserves have been "drained".There are a couple of ways the Fed can drain the reserves: sell securities or take in deposits/borrow. It turns out that the Fed is doing the latter by borrowing overnight via reverse repo (RRP). The newly established Overnight Fixed-Rate Reverse Repurchase Agreement program that the Fed has been testing (discussed here) has become quite popular. There is a limit of $10bn per participant (here is the list of counterparties allowed to participate), with the Fed now rolling about $200 bn of reverse repo daily. The experimental program has been ramping up and some $200 bn has been drained from the reserves as a result.The demand makes sense because this program allows money market funds to earn overnight rates that are higher than treasury bills. Federal Reserve officials are signaling their support for employing this new tool as a way to control the overnight rates. Reuters: - Dudley said that "early evidence" shows that the Fed's new reverse repo facility  ... "would help strengthen our control over money market rates."  That's important, he said, because better control over short-term rates is likely to help the Fed keep a lid on inflation and inflation expectations. Under the facility, which the Fed has been testing for a year, banks, dealers, and money market funds effectively make overnight cash loans to the central bank, eliminating that liquidity from the system.

Fed’s Williams Says First Rate Hike Is Likely In Second Half Of 2015 -  Federal Reserve Bank of San Francisco President John Williams said Monday it will likely be more than a year before the central bank begins raising interest rates “Everything depends on what happens, but I don’t see it as appropriate given where inflation is, where the labor market is, given the various risks to the outlook, I don’t think it’s appropriate to start raising interest rates until the second half of next year,” Mr. Williams told reporters after a public appearance at the Bush Institute in Dallas, Texas. Many market analysts and participants expect the first Fed rate increase to come in mid-2015 or later in that year. Last week, St. Louis Fed President James Bullard said he expects the first increase to come at the end of the first quarter of 2015. Mr. Williams, who is not currently a voting member of the monetary policy setting Federal Open Market Committee, noted the Fed expects that when it begins to raise interest rates, it will do so gradually. He said his views on the outlook for central bank policy haven’t changed much in a while. While he recognizes the economy got off to a “bad” start in 2014 because of weather-related troubles during the winter, he sees a pick-up in growth and expects that the economy will likely grow around 2.5% this year.

Fed’s Dudley: No One Can Say When the First Rate Increase Will Be -  Federal Reserve Bank of New York President William Dudley said Tuesday it’s impossible to say when the central bank will start raising interest rates. “No one knows when the timing of liftoff is,” Mr. Dudley told the audience. When it comes to the first increase in rates, “how the outlook evolves matters,” the official said. His remarks before an economists’ group in New York came a day after San Francisco Fed President John Williams told reporters he thinks the first rate increase is likely in the second half of 2015 and several days after St. Louis Fed President James Bullard said he expects the first hike at the end of the first quarter of next year. Mr. Dudley also used his speech to give an update on how the Fed will conduct monetary policy when the time arrives to increase interest rates. He said that tests of a new tool the central bank may use to raise rates have gone well. But he said more study is needed before the Fed can make decisions about the best way forward. Mr. Dudley serves as vice chairman of the Fed’s policy committee. His views are highly influential, and usually line up closely with those of Fed Chairwoman Janet Yellen. He said market participants should watch to see how unemployment and inflation data are stacking up relative to the Fed’s goals to determine when the first rate increase is likely. Mr. Dudley said when the Fed does start raising rates, it will do so slowly and won’t raise them as much as it has during past recoveries. The Fed is likely to stop raising short-term rates at a point “well below the 4 [1/4]% average level that has applied historically when inflation was around 2%.”

Fed's Dudley: Expect Long Run Fed Funds Rate to be well below the 4¼ percent average level with 2 percent inflation -- An important speech from NY Fed President William Dudley: The Economic Outlook and Implications for Monetary Policy. A few excerpts on housing:  On the housing side, residential investment has stalled out over the past few quarters. Although I expected some slowing due to the rise in mortgage rates in the middle of 2013, the extent of the slowdown has surprised me given that the recent pace of housing starts—roughly 1 million per year—is far below what is consistent with the economy’s underlying demographic trends. I think housing has been weaker than anticipated because several significant headwinds persist for this sector. First, mortgage credit is still not readily available to households with lower credit scores. Second, some people are coping with higher student loan debt burdens that have delayed their entry into the housing market as first-time homebuyers. This, in turn, makes it more difficult for existing homeowners to sell and trade-up. Third, there may be some ongoing difficulties increasing housing supply. The housing downturn was very deep and protracted. It takes time to shift resources back into this area. Also, in some markets house prices still appear to be below the cost of building a new home. Thus, in those markets, it remains uneconomic to undertake new home construction. Although I expect that the housing recovery will resume, the pace will likely be slow, especially relative to past economic recoveries. On the Fed Funds rate:  I expect that the level of the federal funds rate consistent with 2 percent PCE inflation over the long run is likely to be well below the 4¼ percent average level that has applied historically when inflation was around 2 percent. Precisely how much lower is difficult to say at this point in time.

Fed Watch: Dudley Revisits Exit Strategy - Today New York Federal Reserve President William Dudley gave what was both an interesting and depressing speech. Interesting in that he provides some new thoughts on the exit strategy. Depressing in that he outlines a case for persistently low interest rates. One wonders why, given such an outlook, the Fed is so firmly focused on the exit strategy to begin with, rather than accelerating the pace of the recovery. Dudley tries to sound an optimistic note regarding the outlook, including dismissing the first quarter GDP report, but his optimism is tempered, very tempered: With the fundamentals of the economy improving and fiscal drag abating, I expect the economy to get back on to a roughly 3 percent growth trajectory over the remainder of this year, with some further strengthening likely in 2015. But, there remains considerable uncertainty about that forecast... Three percent growth is not exactly anything to write home about; the only thing exciting about 3 percent is that we just can't seem to get there. Dudley specifically notes weak capital spending and housing markets as key concerns. He senses that the capital spending issue is transitory, but housing less so: Dudley anticipates that the tapering process will continue, and thus turns his attention to the lift-off from the zero bound. Here he admits the reality of the situation. They really have no idea when the first rate increase will occur: We currently anticipate that a considerable period of time will elapse between the end of asset purchases and lift-off, but precisely how long is difficult to say given the inherent uncertainties surrounding the outlook.  Bottom Line: Dudley reinforces expectations that the low rate environment will persist long into the future. The data flow is not providing reason to think otherwise at this point; we would need to see higher inflation numbers coupled with real reason to believe labor market slack was rapidly evaporating, probably in the form of stronger wage growth. It remains interesting that the Fed does not view their own outlook as reason to accelerate the pace of activity. They seem relatively content to accept what they themselves acknowledge is a ongoing disappointment.

Kansas City Fed President Says Low Interest Rates May Have Consequences - Kansas City Fed President Esther George said Wednesday the Federal Reserve’s low interest-rate polices are having consequences as risks increase in some parts of the financial system. Ms. George, long a critic of the Fed’s program for stimulating the economy under former Fed Chairman Ben Bernanke, said elevated farmland valuations are one area where low-rate policies are playing a role in boosting asset prices. “Having rates for this low for this long is likely to have implications,” Ms. George said in response to questions from the audience at an Exchequer Club event here. “It probably is not today, [but] the longer that interest rates stay low, the greater that risk becomes for us.” The Fed had held short-term interest rates near zero since late 2008 and is buying billions of dollars of bonds each month to hold down long-term rates to encourage borrowing, spending, hiring and investment. The Fed will face a challenge in winding down the policies, she said, adding that “getting into this unconventional policy was uncharted waters and I can assure you that getting out of this will be equally experimental for us.” Ms. George said the Fed is monitoring a rise in farmland prices closely for potentially excessive leverage. “It is to me a demonstration of the desire to look for yield,” she said. She also noted the low-interest rate environment is putting pressure on the margins of community banks that the Fed supervises.

Fed’s Williams: Best to Raise Rates Before Ending Bond Reinvestment - Federal Reserve Bank of San Francisco President John Williams said Wednesday he’s inclined to delay any action that would allow the central bank’s balance sheet to get smaller until after the Fed has lifted interest rates for the first time. In a Wall Street Journal interview, Mr. Williams cautioned “we are not under any pressure to make these decisions now. We are not going to raise rates until next year,” most likely in the latter half of the year. That said, he believes the Fed needs to take into account the troubles it had last year when it first floated plans to wind down its bond-buying policy, and make sure markets understand what the central bank does with its bond holdings is entirely different than what it does with short-term rates. Mr. Williams was tackling the complicated series of steps the Fed will need to undertake when it decides to end its easy-money policy stance. The Fed is already on track to gradually wind down and end purchases of bonds that now grow its balance sheet by year end. After that, it is widely expected to hold the size of the balance sheet steady by investing the proceeds of maturing bonds into new securities, as it’s done since 2010. Allowing this reinvestment process to end makes monetary policy more restrictive of growth by making borrowing costs rise. Three years ago, the Fed, in a formal statement of its plans, said ending reinvestment would likely come before any move to push short-term interest rates beyond their current near zero levels. Indeed, the ending of the reinvestment process had been expected to be a key signal of the end of a monetary policy stance in place since the end of 2008.

Defending higher nominal Fed rates… response to Mr. Thoma -- Mark Thoma wrote that the Fed should not have already raised its nominal Fed rate. He wrote that justifications for already raising the Fed rate are misguided. Now I am one who is saying that the Fed should have already raised nominal interest rates for two reasons…

  1. Potential output is lower than people think which raises the Fed rate determined by the Taylor rule.
  2. According to the Fisher Effect, inflation will follow nominal interest rates when the Fed rate is held constant or bound within a tight range for a long time.

When potential output is lower, the output gap to full employment is lower. According to the Taylor rule, a smaller output gap leads to a higher nominal rate. As the output gap closes at full employment, the nominal rate should return to its long run normal rate.Thus I see that the Fed nominal interest rate would need to return to its “normal” level sooner. (Normal means natural real interest rate + expected inflation target, r + pe.) The normal nominal Fed rate is roughly 4%, based on a real natural rate of 2%, and the inflation target of 2%.  Here is how I see potential output (red line in graph)

Global Yields to 1%?: Global yields will be moving lower contrary to nearly every single pundit who has called for them to go higher since the 2008 Great Recession. What's truly amazing about today's yields, is that historically, say over the last 200 years, they are at or near historic lows. What's more, is that this seems to be the new normal. Just this past week, Ben Bernanke has indicated in comments to a group of investors that rates will be staying low for a considerable amount of time longer as economic conditions don't warrant tightening. The ECB has also hinted the same. With Japan's 10yr Bond now below 1.0% and pushing within 20 basis points of its 144 year history low, I would have to imagine we are heading very much in the same direction. What is driving yields lower is up for debate as there really is no clear consensus on why. Coming out of the recession of 2008, my knee jerk reaction was that rates had to rise as things gradually returned to a historic norm. What I mean by historical norm is 6.2%. That being said, the US 10yr Bond in its nearly 250 year existence has an average yield of 6.24% over that time span -- hence my knee jerk reaction that things can and should move back close to its historical average after dropping to historic lows. Today, I really believe we are establishing a new normal. Not to sound so cliché, but things truly are very much different, and I am almost certain that we will follow in Japan's path to yields closer to 1%.

U.S. Interest Rates: The Potential Shock Heard Around the World -- iMFdirect -- As the financial market turbulence of May 2013 demonstrated, the timing and management of the U.S. Fed exit from unconventional monetary policy is critical. Our analysis in the latest Global Financial Stability Report  suggests that if the U.S. exit is bumpy (Figure 1), although this is a tail risk and not our prediction, the result could lead to a faster rise in U.S long-term Treasury rates that impacts other bond markets. This could have implications not only for emerging markets, as widely discussed, but, also for other advanced economies. Indeed, historical episodes show that sharp rises in US treasury rates lead to increases in government bond yields across other major advanced economies. During the last five episodes when 10-year U.S. Treasury rates rose rapidly, bond yields rose, on average, by 73 basis point in Canada, 66 basis points in the United Kingdom, 60 basis points in Germany, and 36 basis points Japan, for every 100 basis point rise in the U.S. Treasury rate (Figure 2). We saw a similar effect when we looked at U.S. Treasury rates’ impact on emerging market local-currency bond yields, especially during the selloff in 2013.

Kocherlakota: Fed Doing a Bad Job Of Meeting Job, Inflation Goals -  Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Wednesday that the U.S. central bank is still failing to deliver on its employment and inflation goals. “We need to do better” to get very low inflation back up to the Fed’s target of 2%, while getting still high levels of unemployment down, the official said in a speech in Minneapolis. Mr. Kocherlakota is a voting member of the interest-rate-setting Federal Open Market Committee. Among central bankers, he has been most vocal about the need for continued aggressive action to help improve the economy’s growth. In recent remarks the official argued in favor of a stronger approach to help boost inflation back to target, and to get unemployment down more quickly. Raising interest rates more slowly would be one way to achieve a higher inflation rate, Mr. Kocherlakota said Wednesday in response to audience questions. Mr. Kocherlakota has supported the continuing wind-down of the Fed’s bond-buying stimulus program, which is being reduced in steady increments, amid broad guidance the effort will end by the close of the year. However, he told reporters it was unclear whether the program would end in December or earlier, such as October, and the uncertainty “bothers” him. “I feel like I should know,” he said. “It’s another signal that we’re not being as clear about our policy choices as we should be.”

The myth of the omnipotent central bank  -- "Inflation", said Milton Friedman, "is always and everywhere a monetary phenomenon". Upon this statement has been built three decades of faith in the omnipotence of central banks. As long as central banks get the money supply right, there will be no inflation. Or deflation.  Leaving aside the question of whether central banks really control the money supply at all in an endogenous fiat money system, it is clear to me that the control of inflation - in all its forms - is by no means so simple. Despite Friedman's statement, the forces that create inflation and deflation are in reality poorly understood. The delicate balance between supply and demand in a monetary economy is easily disrupted: shocks to supply or demand reverberate around the economy in a manner similar to a tsunami, overwhelming everything in their path and causing lasting devastation. The means by which shocks propagate themselves are a matter of considerable debate in economic circles. There is no agreement whatsoever on what the transmission mechanisms are, let alone how to manage them. And there can therefore be no basis whatsoever for the blind faith that central banks can at all times control inflation. Or growth, for that matter (I'm looking at you, NGDP-targeters). To be sure, central banks can limit the immediate effects of shocks. I am no fan of QE, but even I have to admit that its use by central banks around the world to prevent catastrophic debt deflation after the fall of Lehman was successful. But I would regard this as firefighting. Central banks were able to put out the bush fire caused by the fall of Lehman.  Flooding the place douses the flames, but it doesn't help new life to grow. On the contrary, it may actually drown it. Too much liquidity is as dangerous as too little.

Bernanke Says Central Bank No Engine of Inequality - Former Federal Reserve Chairman Ben Bernanke pushed back Monday against the argument that aggressive central bank action in recent years has boosted economic inequality in America. Mr. Bernanke, speaking at an event in Dallas, said the argument that Fed policy has fueled rising inequality is “a little exaggerated.” He was countering critics who say the Fed has been working at cross purposes when it comes to the issue of income and wealth disparities in the U.S. Numerous central bank officials have lamented the growing gap between the middle class and those in poverty, relative to the nation’s wealthiest citizens. But some critics say the Fed is a major contributor to such differences, pointing to the Fed’s low interest rate policies–particularly its bond-buying program, as the source of the trouble. Some of the most notable financial gains during the recovery have occurred in the stock market, where most U.S. households have no direct involvement or far less than wealthier ones. Most Americans’ financial well-being is instead tied to wages and home ownership, both of which have been under considerable pressure in recent years. The Fed’s policy of holding short-term interest rates near zero since the end of 2008 has also drawn criticism because of its impact on savings accounts, most notably those of senior citizens who had been counting on interest-related income in their retirement years.

Raising the inflation target: great idea, but not now -- In a recent paper, Paul Krugman, echoing a suggestion made by Olivier Blanchard, makes a compelling case for raising the inflation target in the US and other Western economies, to avoid the difficulties that would come with another episode at the zero lower bound [ZLB] to interest rates.  I wholeheartedly agree, but now is not the time. Why not?  Although core inflation in the US shows signs of rising, the Fed has not decisively won the battle to stave off risks of deflation.  And raising the target now would set them up to fail.  Right now the Fed needs a chance to regain its reputation for being able to deliver on-target positive inflation.Moreover, a rise in the inflation target now would mean another further protracted period where interest rates were held at the zero lower bound in order to send inflation higher [before rates eventually settled at the higher level that the Fisher equation would suggest would be associated with the higher inflation target].   What worries me about this is that such an economy would begin to look to a sceptical econometrician like one in a permanent liquidity trap, risking a fall in inflation expectations that would make such a conclusion self-fulfilling. Given the current balance of power in Congress, and the likely waning of the Obama Presidency as it heads into its final 18 months of office, raising the inflation target – if not achieving anything new of note in economic policy – would seem to be completely infeasible anyway.  And attempting it would risk reopening other discussions about the Fed’s monetary policy and other objectives that could end up leaving the Fed with a less well designed set of tools and objectives than currently.

Projecting a possible path for Inflation as the Fed rate rises  -- In a post yesterday, I presented a graph of how inflation moves with changes in the Fed rate. I want to explore the graph further, because at some point the Federal Reserve will start to steadily raise their nominal Fed rate. How might inflation respond when the Fed rate starts to increase? The orange line represents the short run movement of inflation to changes in the nominal Fed rate. As the Fed rate increases for example, inflation will react by decreasing. The blue line shows the long run equilibrium based on where the Fed rate will be at long run full employment, according to the Fisher effect. The long run Fisher effect is always underlying the short run movements.  The arrows show how inflation will move as the Fed starts to raise their nominal Fed rate. First it will decrease, then it will increase toward its Fisher equilibrium. The initial decrease of inflation worries many economists. So, can we be a little more precise on how inflation might move?  To answer that question, I use a system dynamics model in this video to show a projected path of inflation as the Fed raises the Fed rate by 0.25% per quarter.  The video shows that inflation will tend to stay below the Fed’s 2% inflation target as the Fed rate rises. Eventually, once the Fed rate has reached its target and sits still, then the Fisher effect more visibly moves inflation to its long run equilibrium.  For the most part, the Fisher effect is unseen like the undercurrents below the ocean surface.

Rogoff on negative rates, paper currency and Bitcoin - Ken Rogoff wades into the negative rate debate this month, in a paper that discusses the costs and benefits of phasing out paper currency — a topic previously explored by Willem Buiter and Miles Kimball (and of course Satoshi Nakamoto). Among his observations is the somewhat provocative point (at least judging by the replies on Twitter) that… Paying a negative interest rate on currency, or on electronic reserves at the central bank, may seem barbaric to some. But it is arguably no more barbaric than inflation, which similarly reduces the real purchasing power of currency. Meaning that a good bout of inflation could be just as good as a negative rate regime. That said, while Rogoff refers to Blanchard on that point, he ultimately concedes that negative rates may be much more effective in the long run: The idea of raising target inflation to reduce the likelihood of hitting the zero bound is indeed an alternative approach. Blanchard et al. point out that if central banks permanently raised their target inflation rates from 2% to 4%, it would leave them scope to make deeper cuts to real interest rates in severe downturns. Arguably, paying negative interest rates is a better approach if, as many believe, inflation becomes more unstable as the general level of inflation rises. Robert Hall (1983) argues forcefully that the central role of monetary policy should be to provide a stable unit of account, and in principle the ability to pay negative interest rates facilitates its ability to achieve this in today’s low inflation environment (For further discussion about the Blanchard plan see here.) In any case, this leads Rogoff to the dreaded subject of how best to substitute paper cash for electronic cash. As Rogoff notes, the key problem is the uniquely anonymous nature of cash, something which facilitates tax evasion and illegal activity all round. Electronic money may be private but it’s certainly not anonymous (and that applies to Bitcoin as well).

Rogoff Examines the Upsides of a Currency-Free Economy - Would getting rid of paper money give central bankers more room to maneuver? Harvard economist Kenneth Rogoff thinks so. In a new paper, “Costs and Benefits to Phasing Out Paper Currency,” Mr. Rogoff doesn’t take a position on the merits of replacing dollars or euros or yen with electronic currency. But he argues that doing so would make life easier for monetary policy makers hemmed in by the extraordinarily low interest rates of the post-recession economy. Since lowering nominal interest rates to nudge the U.S. out of the 2007-2009 recession, Federal Reserve policymakers have been “going through contortions trying to run monetary policy” while nominal interest rates are at or near zero,” Mr. Rogoff said in an interview. That’s because as long as there is paper currency, the Fed’s options are limited, a dilemma addressed in publications by Willem Buiter, Robert Hall  and Olivier Blanchard. The central bank can push rates perhaps a fraction of a percentage point below zero, but not much more. Central banks would have to convert electronic deposits into cash, which savers would likely start hoarding if rates tumbled. If individuals knew their paper currency were fast losing value due to “negative interest rates,” they would be inclined to hold on to cash, no matter how unwieldy that could become. But in an era of solely electronic currency, there would be no such limit on negative interest rates. Moving to electronic currency “doesn’t solve mankind’s macroeconomic problems, but it would solve this problem in central banking,” Mr. Rogoff said.

Fed is Behind the Curve on U.S. Economy, HSBC Banker Says - - The U.S. Federal Reserve will face a “credibility moment” in coming months as an accelerating U.S. recovery shows that the central bank has been too cautious in its outlook, HSBC’s global chief investment officer for fixed income said. In an interview Wednesday with The Wall Street Journal, Xavier Baraton said the U.S. economy is recovering more quickly than the dovish Fed is currently indicating. “The Fed is a bit behind the curve compared to how the U.S. economy is accelerating,” Mr. Baraton said. “It is more a credibility moment that the Fed may have in the second half of the year. Their prudent-or-dovish stance will be more contradicted by the data.” Mr. Baraton forecast that the 10-year U.S. Treasury yield –which lately has been plumbing seven-month lows around 2.50% — will rise to 3.25% by year-end. “In the second half of the year the U.S. economy will accelerate, and that will be much more visible to the point that, to stay credible, the Fed will have to be much more explicit about future rate hikes,” Mr. Baraton said. Recent Fed guidance suggests rates will remain low for longer, even as inflation and employment rise – though they’re in the midst of determining just how to raise interest rates when the time comes, as their former methods increasingly seem outdated.

What Q2 GDP Weakness Will Be Blamed On - As we entered Q1 2014, hope was high that this was it - this was the quarter when, with stocks at record higs, employment data improving and a confident Fed tapering, the US economy would reach escape velocity and back we could all go to "believing" in the futures once again. The 2.6% growth expected at the start of Q1 quickly evaporated into a -0.5% contraction in the economy due to "cold" weather in the winter. Of course, the Keynesian-hockey-stick believers have marked up their "been-down-so-long-it's-gotta-bounce-back" Q2 expectations to 3.3% growth... so what could go wrong. One glimpse at the following chart will explain it all - and it's the weather that will be blamed once again...(with 48% of the nation now in drought conditions).

Is Inequality Holding Back the Recovery? - “The biggest obstacle to a sustainable recovery,” according to the Levy Institute’s newest strategic analysis of the US economy, “is the inequality in the distribution of income.” In their latest, the authors begin with a familiar point: the Congressional Budget Office has been predicting fairly rosy economic growth rates for the coming years (rising to 3.4 percent in 2015 and ‘16)—rosy, that is, given the CBO’s expectation that government budgets will remain tight, and get even tighter, over this period (with the federal budget deficit shrinking to 2.6 percent of GDP by 2015). As Papadimitriou et al. point out, the only way to make these growth and budget forecasts both come true, assuming there are no significant changes in net exports (a safe assumption), is if the private sector substantially increases its indebtedness. There really isn’t any other option. If we don’t see a return to ballooning private debt-to-income ratios, then either government budgets will have to be loosened or we won’t get the growth rates the CBO is telling us to expect.Now, there are reasons to think that the reappearance of accelerated growth in private debt is unlikely (a theme the authors dealt with in their last US strategic analysis), but if it does happen, rising private debt ratios—which played the starring role in the financial crisis from which we’re still recovering—might destabilize the financial system. This is one sense in which maintaining tight government budgets over the next several years should not be portrayed, as it all-too-often is, as the “prudent” course of action. And the widening of income inequality over the last few decades makes these dynamics even more problematic. As the authors point out, the trend of rising inequality has gone hand-in-hand with mounting indebtedness among households in the bottom 90 percent of the income distribution:

Chicago Fed: Economic Growth Moderated in April - "Index shows economic growth moderated in April": This is the headline for today's release of the Chicago Fed's National Activity Index, and here are the opening paragraphs from the report: Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.32 in April from +0.34 in March. Two of the four broad categories of indicators that make up the index made negative contributions to the index in April, and two of the four categories decreased from March.  The index's three-month moving average, CFNAI-MA3, increased to +0.19 in April from +0.04 in March, marking its second consecutive reading above zero and its highest value since November 2013. April's CFNAI-MA3 suggests that growth in national economic activity was slightly above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year. The CFNAI Diffusion Index, which is also a three-month moving average, increased to +0.18 in April from +0.08 in March. Thirty-four of the 85 individual indicators made positive contributions to the CFNAI in April, while 51 made negative contributions. Thirty-seven indicators improved from March to April, while 47 indicators deteriorated and one was unchanged. Of the indicators that improved, 15 made negative contributions. [Download PDF News Release] The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity. I've added a high-low channel for the MA3 data since 2010. As we can see, the MA3 of the index hit the top of the channel in November of last year. It is now hovering near the mid-range of this channel.

Diagnoses and Prescriptions: The Great Recession: There’s a very interesting, albeit down-in-the-weeds, analytic debate brewing around a confluence of recent publications. Tim Geithner’s new book defends the interventions of the Treasury department he led to reflate credit markets (and I worked with the team on this back then). Mian and Sufi’s new book ... argues that Treasury got it wrong by not recognizing the extent to which debt burdens were restricting growth and intervening in ways to write off more debt...Dean Baker has long argued the problem was not just the debt overhang but the wealth effect’s sharp shift into reverse when the housing bubble burst. That’s similar to Main/Sufi except it implies that even had you forgiven the debt, consumption still would have tanked. Brad DeLong articulates an “all-of-the-above” theory, suggesting each of these analyses gets at one part of the problem but you need all of them to understand what happened.Here’s what I think..., you have to do everything you can to get the system back up. You have to reflate the credit system through both liquidity (as in the TARP) as well as Mian/Sufi-style principal reductions and cramdowns of mortgage debt that cannot realistically be serviced without sustained pain. The administration did a lot of the former and little (not none) of the latter. ... Dean’s point means that debt forgiveness and revived credit flows must be met with deep fiscal stimulus that lasts as long as needed. ... With the private sector still licking its wounds, absent committed stimulus there’s no reason to expect deleveraging, or even aggressive monetary policy, to trigger the growth needed to reach escape velocity. ... So I’m with Brad—all of the above. And let’s keep it real: the problem was not only that we didn’t do all of the above. It’s that even when we did the right things, we didn’t stick with them long enough. The

Demography and the Bicycle Effect - Paul Krugman  - When Alvin Hansen first proposed the concept of secular stagnation, he emphasized the role of slowing population growth in depressing investment demand (and his warnings were made moot by the postwar baby boom.) Modern discussions return to that emphasis: Japan’s shrinking working-age population looks like an important source of its problems, and slowing population growth in Europe and America are important reasons to believe that we may be entering a similar regime. But whenever I raise these points, I get questions from people who ask why I don’t regard slowing population growth as a good thing. After all, it means less pressure on resources, less environmental damage, and so on. What’s important to realize, then, is that slower population growth indeed could and should be a good thing — but that what passes for sound economic policy is all too likely to turn this potentially good development into a major problem. Why? Because under the current rules of the game, there’s a strong bicycle aspect to our economies: unless they’re moving forward sufficiently rapidly, they tend to fall over. It’s a pretty straightforward point. To have more or less full employment, we need sufficient spending to make use of the economy’s potential. But one important component of spending, investment, is subject to the accelerator effect: the demand for new capital depends on the economy’s rate of growth, rather than the current level of output. So if growth slows due to a falloff in population growth, investment demand falls — potentially pushing the economy into a semi-permanent slump.

Goldman's Hatzius: Rationale for Economic Acceleration Is Intact  - Excerpt from Goldman Sachs chief economist Jan Hatzius research: Sticking with Stronger  We currently estimate that real GDP fell -0.7% (annualized) in the first quarter, versus a December consensus estimate of +2½%. On the face of it, this is a large disappointment. It raises the question whether 2014 will be yet another year when initially high hopes for growth are ultimately dashed. Today we therefore ask whether our forecast that 2014-2015 will show a meaningful pickup in growth relative to the first four years of the recovery is still on track. Our answer, broadly, is yes. Although the weak first quarter is likely to hold down real GDP for 2014 as a whole, the underlying trends in economic activity are still pointing to significant improvement....The basic rationale for our acceleration forecast of late 2013 was twofold—(1) an end to the fiscal drag that had weighed on growth so heavily in 2013 and (2) a positive impulse from the private sector following the completion of the balance sheet adjustments specifically among US households. Both of these points remain intact.

Mexico’s Carstens: Don’t Play Games With U.S. Government Debt Limit - Mexico’s central bank chief said Monday he’s confident the U.S. government can pay its long-term bills, but he cautioned Congress to stop playing games with the government’s borrowing limit. The likely path of economic growth and the U.S. government’s ability to raise taxes “makes many of us confident that U.S. will be able to comply with its obligations” over coming years, said Augustin Carstens, governor of Mexico’s central bank. What is “scary,” he said, have been the periodic battles in Congress over the raising of the debt ceiling, the legal limit on the amount the government can borrow to pay for programs Congress has already authorized. There have been several times in recent years when many Republican legislators opposed raising the debt ceiling, raising the prospect that the U.S. government might run out of money to pay its bills, possibly including interest payments on Treasury debt. Mr. Carstens said these battles have frightened those outside the U.S., largely because until recently, there has never been a question about whether the U.S. government could and would meet its financial obligations. The creditworthiness of the government is “something you cannot play around with,” the central banker said.

The US budget deficit continues to shrink rapidly -- One of the most underappreciated econ stories right now is the fast-falling US budget deficit — thanks to higher taxes — which was over $1 trillion from 2009 through 2012. In February, the CBO was looking for a 2014 deficit of $514 billion. In April, CBO cut its forecast to $492 billion. But that number is still too high, according to Deutsche Bank. The bank is looking for a 2014 federal budget gap of $465 billion: Fiscal austerity—both spending  cuts and tax increases—largely drove the narrowing of the gap between  receipts and outlays. Federal outlays declined by -2.4%, and federal receipts,  which are dominated by tax revenue, increased by +13.3%. Of the $409 billion reduction in the deficit last year, approximately $84 billon was due to reduced expenditures and $325 billion was due to stronger revenues. We estimate that  a little over half (55%) of the revenue gain was the result of higher taxes, while  the rest was due to a more robust economy. Therefore, fiscal austerity made a  meaningful contribution to deficit reduction in 2013, but the contribution was  significantly skewed toward higher taxes rather than spending cuts.  … We tabulate a rolling estimate of the deficit (shown  below) by taking the difference between a 12-month rolling sum of receipts  versus outlays. Currently, this estimate is running at -$499 billion. The rolling  estimate has been shrinking roughly -$25 billion per month (six month  average); so if this continues, the deficit will be considerably smaller than the  CBO estimates.

Congress Is Blowing a Huge Opportunity to Rebuild America - David Dayen - The days of cheap borrowing have returned. Yields on the 10-year Treasury bond, a good benchmark for determining government borrowing costs, have fallen to the lowest level since last year’s government shutdown. Despite a severe reduction in uncertainty surrounding fiscal policy, and a generally positive trajectory on many economic indicators, including employment, the cost of borrowing remains stuck near historic lows.  Demand remains well below trend, the housing market has grown weaker, and inflation has not approached the Federal Reserve’s 2 percent target, a serious years-long problem (there’s little difference between the Federal Reserve missing at 1.5 percent inflation and missing at 2.5 percent).  In addition, while it’s hard for Americans to believe that America doesn’t drive all economic policy, many factors associated with low interest rates are external. Expected monetary easing by the European Central Bank, to avoid the risk of low inflation, has brought interest rates down throughout the world.  This confluence of factors has led to the re-emergence of the biggest bargain in America, an opportunity we have squandered amid years of low interest rates. Once again, we have a chance — perhaps the last chance — to use cheap borrowing to invest in priorities that will never be this affordable again. For example, taking advantage of low rates and enacting a large infrastructure program would actually save money in the long-term, while strongly supporting economic recovery right now.

What happened to the idea of the Great Society? - Fifty years ago, Lyndon Johnson unveiled his vision of the “Great Society”. This would be one in which no child would go unfed and no youngster unschooled; a society in which the ancient evils of racism and injustice would be combated; a society, above all, in which the state would deliver justice and opportunity. Most anniversaries pass unnoticed, and rightly so. But this one matters. The era of the Great Society was perhaps the last time Americans thought government could improve their lives. The 1964 election pitted Johnson against Barry Goldwater, an unapologetic advocate of a minimal state. Johnson won in a landslide. The 1960s were also the heyday of the European welfare state, first outlined by Fabians such as Beatrice and Sidney Webb. Their ideas at first failed to take flight in America. But after the Great Depression and the collectivist success of the second world war, state planning was finally in fashion. Today US politics is in a stalemate and the “big government liberalism” of Johnson is in retreat. Ever since the 1970s, when the Great Society began to lose its “wars” on poverty, crime and inequality (and North Vietnam), American voters have embraced conservatives such as Ronald Reagan, who said government was the problem, not the solution; and Democrats such as Bill Clinton, who proclaimed the era of big government over. Only one in 10 Americans trusts politicians to do the right thing, compared with 60 per cent in Johnson’s time.

Social Security under ‘Sustainable Solvency’: Debt & Deficit Revisited - The current Chief Actuary of Social Security is Stephen Goss and he contributed what may be the most valuable single piece you will ever read on Social Security financials. The article carried the title The Future Financial Status of the Social Security Program The abstract/teaser for the article starts out with this: The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood. To which I can only add “Boy Howdy!” Steve is perhaps best associated with the concept of ‘Sustainable Solvency’ which he describes as follows:  Sustainable solvency requires both that the trust fund be positive throughout the 75-year projection period and that the level of trust fund reserves at the end of the period be stable or rising as a percentage of the annual cost of the program. Well this requires some unpacking. Under current law the Social Security Trust Funds are considered ‘solvent’ if they have a Trust Fund balance equalling 100% of the next years cost at the end of a given actuarial period. Stronger versions of this would require that the Trust Fund meet this standard in every year of the period and/or that it be trending upwards at the end. That is Steve’s “stable or rising”. Well all that is reasonable enough, but what would it look like under standard budget scoring? Well the answer is either “kind of odd” or “mind-bending”. Which will be explored under the fold.

What Tim Geithner doesn’t know about Social Security is … shocking -Former Treasury Secretary Timothy Geithner's memoir, "Stress Test," is being picked apart fairly intensively by the Washington and Wall Street press gangs, who are busily retailing the book's snarks and slights. We're more interested in a nugget in which Geithner demonstrates that he didn't actually understand how Social Security works or its paramount importance to the way most Americans -- those who aren't rich bankers -- live. This is especially shocking because as Treasury secretary, Geithner served as an ex officio Social Security trustee. Here's the passage from the book: "I objected when Dan Pfeiffer [a senior advisor to the Obama White House] wanted me to say Social Security didn’t contribute to the deficit. It wasn’t a main driver of our future deficits, but it did contribute. Pfeiffer said the line was a 'dog whistle' to the left ... code to the Democratic base, signaling that we intended to protect Social Security." Geithner's anecdote already has been seized upon by the usual enemies of Social Security on the right to suggest that he, the lone truth-teller in the administration, was warned off Social Security "reform" for political reasons.  But let's get to the nub. Does Social Security "contribute to the deficit"? The answer is, bluntly, no. By law, it can't contribute to the federal deficit, because Social Security isn't allowed to spend more than it takes in. Those who claim -- as Geithner has at one point or another -- both that the program contributes to the deficit yet will be forced to reduce benefits to retirees once its trust fund is depleted are trying to have things both ways: The reasoning behind the threat of reduced benefits is that Social Security can't engage in spending money it doesn't have, i.e., deficit spending.

How do we prevent the next Tim Geithner? - mathbabe  - When you hate on certain people and things as long as I’ve hated on the banking system and Tim Geithner, you start to notice certain things. Patterns. I read Tim Geithner’s book Stress Test last week, and instead of going through and sharing all the pains of reading it, which were many, I’m going to make one single point. Namely, Tim was unqualified for his jobs and head of the NY Fed, during the crisis, and then as Obama’s Treasury Secretary. He says so a bunch of times and I believe him. You should too. He even is forced at some point to admit he had no idea what banks really did, and since he needed someone or something to blame for his deep ignorance, he somehow manages to say that Brooksley Born was right, that derivatives should have been regulated, but that since she was at the CFTC everybody (read: Geithner’s heroes Larry Summers and Robert Rubin) dismissed her out of hand, and that as a result he had no ability to look into the proliferating shadow banking or stuff going on at all the investment banks and hedge funds. Let’s put aside Tim Geithner’s mistakes and his narrow outlook on what could have been done better, and even what Dodd-Frank should accomplish, for a moment. It’s hard to resist complaining about those things, but I’ll do my best. The truth is, Tim Geithner was a perfect product of the system. He was an effect, not a cause. When I dwell on the fact that he got the NY Fed job with no in-the-weeds knowledge or experience on how banks operate, there’s no reason, not one single reason, to think it’s not going to happen again. What’s going to prevent the next NY Fed bank head from being as unqualified as Tim Geithner?

Treasury finds $2.3 Billion of Discrepancies in Alimony Deduction - The Treasury Inspector General for Tax Administration released last week a report detailing the discrepancies between alimony deductions taken and alimony income received. 567,887 tax returns recorded an alimony deduction in 2010, with those deductions totaling over $10 billion. In other words, this deduction is reasonably substantial. What Treasury found was that 47% of the alimony deductions claimed didn’t match up right with corresponding alimony income reported. In most cases, the deductor indicated the Taxpayer Identification Number (TIN) of a recipient who filed a valid tax return, but there was disagreement on amounts. In some cases, the deductor indicated a recipient who didn’t file a tax return, even though they should have in order to report (at a minimum) the alimony income. Finally, in a handful of cases, the TIN indicated by the deductor didn’t exist at all. The breakdown of these problem returns are as follows:

The Levin Brothers Want to End Tax Inversion, but the GOP Refuses -- The brothers Levin—Senator Carl Levin and Representative Sander Levin—are fed up with domestic companies merging with foreign firms to lower their tax bill, especially when the new entity’s business and management remains located in the United States. So on Tuesday, they introduced bills in the Senate and House respectively that would crack down on this tax-avoidance strategy, known as tax inversion. American companies have exploited this loophole by merging with foreign firms and transferring their official address to the foreign country. Under current U.S. tax law, if the American company transfers at least 20 percent of its shares to the foreign firm, it can avoid paying the 35 percent U.S. corporate rate. Instead, it would fall under jurisdiction of the foreign nation.  “It’s still the same American company, it just gobbled up some smaller company. They haven’t changed. They’re still managed in the U.S. They’re still doing most of their business in the U.S.” Companies have been using tax inversion to lower their tax bill more frequently in recent years, with 14 firms doing so since 2011, according to Bloomberg.  The Levin proposal, which mirrors one in President Barack Obama’s budget, would curtail this strategy by raising the threshold from 20 to 50 percent. In other words, foreign shareholders must own the majority of shares of the new entity for it to avoid U.S. taxes. To most people, that would seem fair. Under the worldwide tax system the U.S. has, if the majority of shareholders are based in the United States, then the company should fall under U.S. tax jurisdiction. But the Levin legislation, which has 13 Democratic co-sponsors in the Senate and nine in the House, is unlikely to find much support among Republicans.

To Lift the Poor, You Can’t Avoid Taxing the Rich - It’s tempting to think — and hope — that attacking inequality doesn’t mean we have to hurt those at the top. This idea has become a central response from conservatives to the current debate inspired by Thomas Piketty’s book and proposal for a wealth tax. “The question is how do we help people at the bottom, rather than thwart people at the top,” Greg Mankiw, the Harvard economics professor, recently asked. Veronique de Rugy of the Mercatus Center at George Mason University asked: “Why not try to increase access to capital for more people, especially for those in the bottom, rather than try to hammer the ones at the top?” And Martin Feldstein, perhaps the dean of conservative economists, argued that to reduce persistent poverty “we need stronger economic growth” rather than “the confiscatory taxes on income and wealth that Mr. Piketty recommends.”This argument isn’t a purely conservative one, either. Many liberals and moderates would no doubt prefer a kinder and gentler way to help the poor. But it doesn’t exist.The rising tide of inequality does more than create great economic distance between income classes. It also produces higher barriers to mobility. Increased investment in the poor’s economic opportunities and in their children, their health care, their housing and their education will be needed to overcome those barriers. To be more precise, there are three reliable ways to help or “lift” the bottom: subsidies that increase the poor’s economic security today; investment in their future productivity; and targeted job opportunities at decent wages. The first two are more closely related than you might think, because researchers are discovering that anti-poverty consumption programs such as nutritional and income supports have long-lasting benefits to children in families that receive them.

Financial Times Finds “Many” Errors in Piketty Analysis, Argues They Undermine His Thesis - Yves Smith - The Financial Times has managed to stir up a significant controversy involving Thomas Piketty’s widely-lauded book, Capital in the 21st Century. Unlike many economists, Piketty provided an online annex and his spreadsheets, which showed the sources he relied on. According to authors Chris Giles and Ferdinando Giugliano:An investigation by the Financial Times, however, has revealed many unexplained data entries and errors in the figures underlying some of the book’s key charts.These are sufficiently serious to undermine Prof Piketty’s claim that the share of wealth owned by the richest in society has been rising and “the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945”. Together, the flawed data produce long historical trends on wealth inequality that appear more comprehensive than the source data allows, providing spurious support to Prof Piketty’s conclusion that the “central contradiction of capitalism” is the inexorable concentration of wealth among the richest individuals.The article discusses the sorts of errors it found in more detail, including what look like data entry errors, unexplained one-off adjustments to data, weightings used in averaging different data sets, and inconsistent time periods used in comparisons. The pink paper argued that two major claims in Piketty’s book, that the concentration in wealth had increased after 1970, and that the share held at the top was greater in the US than in Europe, was absent when his data was corrected.  The Financial Times story had more of a “gotcha” tone that one expects to see in the mainstream media, and compared the mistakes to the famous spreadsheet errors in Carmen Reinhart’s and Kenneth Rogoff’s work on debt to GDP ratios. But at least so far, there is a key difference: only one other study had found results similar to the those claimed by Reinhart and Rogoff. By contrast, Piketty is far from alone in finding rising concentrations of wealth at the very top; Demos points out that a new study published by Garbriel Zucman and Emmanuel Saez paints a post-war picture similar to Piketty’s. Thus the FT’s assertion that their corrections of Piketty’s data show no increase in wealth concentration is an awfully bold claim, and will likely be scrutinized as much as the errors and possible methodological shortcomings that Giles found.

Piketty Pushes Back as His “Capital” Findings Come Under Fire - Real Time Economics - WSJ: The author of a bestselling work on economics has gotten tangled in his own spreadsheets. Thomas Piketty’s striking conclusions about income global inequality, which briefly catapulted his “Capital in the Twenty-First Century” to the top of the sales list, came under scrutiny Friday when the Financial Times published an examination of what it described as discrepancies in Mr. Piketty’s data. The newspaper claimed that a review of Mr. Piketty’s data, which he has made freely available online, didn’t support two important findings of his work: that wealth inequality has been on the rise in recent decades, and that such inequality is more acute in the U.S. than in Europe.The Financial Times found “mistakes and unexplained entries” in Mr. Piketty’s spreadsheets, according to an article about the investigation on the newspaper’s web site.In a letter posted on the FT’s website, Mr. Piketty, a professor at the Paris School of Economics, stood by the conclusions in his book. He agreed that the data set on which his research hinged certainly could be improved—and likely would be so over time. However, he wrote, he would be “very surprised if any of the substantive conclusion about the long run evolution of wealth distributions was much affected by these improvements.” “I am certainly not trying to make the picture look darker than it is,” he said in his defense. But if the FT or anyone else “produces statistics and wealth rankings showing the opposite” of the sweeping conclusions in his book, “I would be very interested to see these statistics, and I would be happy to change my conclusion!”

Conservative Reformers Still Don't Have a Plan for Wall Street - There’s a certain liberal fascination with the idea of conservative “reformers” showing up and recalibrating the Republican Party toward policies that would benefit working Americans and lead to potential bipartisan solutions. This fascination is on display in the reaction to the new Room to Grow report, available for free online, by the YG Network. Already being covered by liberals, this volume features various reform conservative writers addressing a range of innovative economic policy ideas, with the hope that Republicans lawmakers will pay attention. But if this is the best the new wave of conservatives can do on financial reform, it’s probably not the biggested worry that elected Republicans aren’t listening. The chapter that focuses on Dodd-Frank and the regulation of the financial markets after the crisis is by American Enterprise Institute’s James Pethokoukis. It’s billed as “financial reforms to combat cronyism,” but it offers little in terms of reform. The reformers should, at the very least, explain what they would repeal or replace in Dodd-Frank (a tension that exists with Obamacare as well), and this is left unclear. The problems start with Pethokoukis’s take on the story of what went wrong in the first place. But he also glosses over the key issues facing policymakers today. The general idea of attacking “cronyism” and promoting competition tells us nothing about what needs to be done, making it so this report is a poor guide to the actual ongoing debates happening in financial reform. And this silence on contentious matters is so deafening that it bodes poorly for any kind of genuine positive agenda for the right or bipartisan alignment with liberal reformers. Understanding where Pethokoukis goes wrong, however, can tell us why conservatives are going to have a hard time dealing with actual reform in the age of Dodd-Frank.

The record amount being borrowed by investors is a worrying sign for markets -- ‘Margin debt’ is the term used to describe money investors borrow from their stockbroker in order to buy shares. Naturally enough, when people feel bearish about markets, they tend not to borrow anything while, by the same token, the more bullish they feel the more they are inclined to borrow. As a result, margin debt levels are viewed by some as a way of gauging market sentiment. Keen students of behavioural finance may not be too surprised to learn that, over time, margin debt levels have tended to be at their highest just before markets crash while, just before markets take off, investors tend to have net cash in their trading accounts. According to the New York Stock Exchange (NYSE), which publishes monthly data on the subject, net debt currently stands at record levels. Now, in theory, investors could borrow money from their brokers and just let it sit in cash and the NYSE would still report that as a build-up of margin debt. To take this possibility out of the equation, therefore, a better way of considering the issue is to look at investors’ ‘free credit balance’, which – put simply – shows how much money they have borrowed specifically to buy shares. This is what Advisor Perspectives has done in the chart below, where the red areas indicate a negative credit balance – and by extension bullish sentiment. As you can see, there are three clear red spikes –some $130bn (£77.3bn) of borrowing as the tech bubble burst in 2000; almost $80bn just ahead of the credit crisis in 2007; and a record $180bn or so at the end of February 2014.

Wall Street Journal Exposes Possible Grifting by Private Equity Kingpin KKR and KKR Capstone - Yves Smith - So when does a related entity rise to the level of being an affiliate? That issue, sports fans, will likely determine whether the SEC will hit the private equity kingpin KKR with fines relative to its relationship with the consulting firm KKR Capstone, which works exclusively for KKR’s portfolio companies. A Wall Street Journal story digs into the economic and legal relationship between KKR and KKR Capstone. The article makes a persuasive case that their dealings are dubious from a fund investor perspective.  It is key to understand how important this story is. Although the SEC has been saber-rattling with surprising vigor about the extensive abuses it has unearthed in the private equity industry, it’s quite another matter to have a major media outlet describe what looks like misconduct at an iconic player. KKR was the first large-scale, institutional private equity firm and set many of the standards for the industry. A big factor its rise to leadership was its success in fundraising. That in no small measure depended on it being the first to systematically cultivate public pension funds as investors. Those investors now account for roughly 30% of total private equity fund commitments.  So what has the Journal revealed? Its charge is that KKR may be violating its agreement with investors by failing to share the fees of its captive consulting firm, KKR Capstone, with limited partners. The Journal managed to obtain the critical terms from a 2006 KKR limited partnership agreement. Those contracts, as we’ve discussed in previous posts, are treated as as state secrets by the private equity industry. Over the years, one of the few ways that the limited partners in private equity investments have pushed back against the numerous fees that private equity firms charge over and above their management fee and carried interest (the prototypical “2 and 20″) is by winning the concession that a certain percentage of those extra fees, typically 80%, be credited against management fees.

Siphoning Value through Captives: Private Equity and Securitization  - Yves Smith has a fascinating post about how private equity firms (which, as she notes in the comments is largely a polite rebranding of "leveraged buyout firms") charge fees for services provided by captive affiliates to their portfolio companies.  On some level none of it is anything so new--part of the LBO game has always been to suck out fees and dividends from the target company, while gambling that the target would be able to service the debt incurred for its acquisition.  Even if the target goes bankrupt, the LBO sponsor may have still made money because of the fees and dividends.  What I thought was really interesting here was to see the parallel with the private-label mortgage securitization market.   In securitization, as with private equity, investors have very limited ability to see into the financial details of the operations.  It makes it very difficult for investors to know if their economic agents—the servicers or the private equity firms—are siphoning away value.  Thus, RMBS investors lose out when servicers use captive insurers for force-placed insurance and captive property management company to winterize or sell a property--all at much higher than arms-length prices.  Those are costs that the servicer recovers and which reduce the RMBS investors' recovery.  Same deal with private equity--the sponsor has a contractual 2 & 20, but to the extent that funds are siphoned out of the portfolio companies through captive fees, the portfolio companies will be less valuable. 

Sutherland Explained in 1939 Why GM Killing Customers Isn’t Treated as “Real Crime” - Bill Black - The New York Times headline was dominated by a seemingly strong word:  “G.M. Is Fined Over Safety and Called a Lawbreaker.” As I will explain, however, the seeming strength of the label “lawbreaker” is undercut by the rest of the title, the text of the article, and the reality of the Justice Department’s refusal to apply the rule of law to powerful domestic corporations and their controlling officers. The first discordant note is the word “safety.” The article reports that GM, for the purposes of avoiding the expense of repairing a design defect that endangered the lives of its customers, covered up the defect and caused the death and injury of a number of those customers. The article does not report the (minor) cost of GM fixing its design defect. The article does not report on the number of people who were injured and killed because GM designed a defective ignition system, knowingly hid the defect from its customers and the government, and once it knew that its defective design was injuring and killing its customers GM deliberately covered up the existence of the defect and the cause of the easily avoidable injuries and deaths.   The second note of weakness in the title is the word “fine.” The only punishment is to the shareholders through a fine against GM. No officer was fined or sanctioned by the government. The article says that the paltry fine against GM was the largest the regulator could impose. The third note of weakness is not by the NYT, but by the government. The title does not use any of the words used to describe criminal prosecutions against elite corporate officers and corporations. The article does not even ask why the Department of Justice failed to prosecute the GM officers that led this sometimes fatal fraud. Did the safety regulator even make a criminal referral against GM or its (ir)responsible executives?  The fourth note of weakness applies to both the paper and the government. There is not a word in the article about the unethical nature of the conduct. It’s horrific to fail to discuss GM’s crimes, but it is beyond obscene to fail to discuss its moral implications.

Wolf of Wall Street Belfort Is Aiming for $100 Million Pay - Bloomberg: Jordan Belfort, whose memoir “The Wolf of Wall Street” was turned into a film by Martin Scorsese, expects to earn more this year than he made at his peak as a stockbroker, allowing him to repay the victims of his fraud. “I’ll make this year more than I ever made in my best year as a broker,” Belfort told a conference in Dubai today. “My goal is to make north of $100 million so I am paying back everyone this year.” Belfort, a motivational speaker, will use his earnings from a 45-city speaking tour in the U.S. to repay about $50 million to investors. That was his share of the fine, he said. U.S. stockbrokerBelfort spent 22 months in jail for money laundering and securities fraud in the 1990s after his Long Island-based Stratton Oakmont Inc. defrauded investors out of more than $200 million. That story was retold last year in a blockbuster film starring Leonardo DiCaprio. “After six months of putting all the profit from the U.S. tour into an escrow account, it will go directly back to investors,” Belfort said.

Banking Deaths: Why JPMorgan Stands Out -  In the past six months, five current workers and two former workers of JPMorgan Chase have died under unusual circumstances. Adding to the tragedy, all seven were in their late 20s or 30s and three of the deaths involved alleged falls from buildings – a rare form of death even during the height of the financial crisis in 2008. According to the New York City Department of Health, there were just 93 deaths resulting from leaps from buildings in Manhattan and boroughs during 2008 – a time when century old iconic Wall Street firms collapsed and terminated tens of thousands of workers. Those 93 deaths represented just .000011625 of the City’s population of 8 million. JPMorgan’s global workforce population is just 260,000. No other major Wall Street bank comes close in terms of young worker deaths over the past six months. Of equal concern, since December, the early deaths related to JPMorgan have been coming at a rate of one or two a month – almost like clockwork. The most recent was 27-year old Andrew Jarzyk, who went missing in the early hours of March 30, after leaving friends at a supper club in Hoboken, New Jersey to jog in preparation for an upcoming half-marathon. A month later, his body was recovered from the Hudson River in Hoboken. According to police, there were no signs of trauma to the body. Jarzyk was employed at PNC Financial at the time of his disappearance but had worked previously as a technology intern at JPMorgan.

Hubris at the Top: The Imperial and Tone Deaf CEO - There are lots of reasons to worry about America’s future. But one worry that we seldom hear discussed in any comprehensive way is the growing brand impairment resulting from the loss of Americans’ belief in their country’s sense of decency and the loss of credibility abroad from the too-big-to-discipline CEO – who, for better or worse, is acutely aligned with the corporate brand. Whether we like it or not, great corporate brands create jobs in America and tarnished brands result in job losses. There seems to be an intellectual disconnect in the thinking of the corporate Board of Directors who continue to lavish obscene pay on the discredited CEO and the reality that the corporate brand – the most valuable asset the corporation owns – is being severely diminished in the eyes of the consumer whose trust or distrust in that brand is central to the survival of the corporation. When we think of Goldman Sachs today, what comes to mind? It might be Lloyd Blankfein’s quip that he’s “doing God’s work.” Or the backdoor payments from taxpayers’ bailout funds to AIG that landed at the front door of Goldman Sachs to bail out their bets on credit default swaps. Or maybe the Abacus deal where Goldman concocted an investment product designed to fail and sold it to their own customers. Yesterday, at the JPMorgan shareholders’ meeting, CEO Jamie Dimon’s pay package was rubber stamped by shareholders at $20 million for 2013. Over the past 18 months, the bank has been charged with ever alarming amounts of crimes, including the unprecedented two-felony count charge for aiding and abetting the Bernard Madoff Ponzi scheme which devastated financial lives across America. The bank was given a deferred prosecution agreement and put on probation for two years along with $2 billion in fines.

Credit Suisse Pleads Guilty in Felony Case - Credit Suisse has done what no other bank of its size and significance has done in over two decades: plead guilty to criminal wrongdoing.In a sign that banking giants are no longer immune from criminal charges, despite concerns that financial institutions have grown so large and interconnected that they are too big to jail, federal prosecutors demanded that Credit Suisse’s parent company plead guilty to helping thousands of American account holders hide their wealth.As part of a deal announced on Monday, the Swiss bank met the demands, agreeing to one count of conspiring to aid tax evasion in a scheme that “spanned decades.” Credit Suisse, which has a giant investment bank in New York and whose chief executive is an American, will also pay about $2.6 billion in penalties and hire an independent monitor for up to two years. The rebuke from federal prosecutors as well as from the Federal Reserve and New York’s state banking regulator, Benjamin M. Lawsky, is intended as a blow against overseas tax dodging and the shadowy world of Swiss bank secrecy. The deal also signals a shift in prosecutors’ tactics. It is the most prominent bank to plead guilty in the United States since Drexel Burnham Lambert in 1989, and the largest to do so since the Bankers Trust in 1999, a bank a fraction the size of Credit Suisse.For Credit Suisse, other than the fines and the reputational stain of being a felon, the implications are likely to be limited. The bank may lose some clients but is otherwise expected to survive largely unscathed.

DoJ Does Victory Lap on Credit Suisse Guilty Plea on Single Criminal Charge - Yves Smith - Underwhelming sanctions against banks have become such a dog bites man story that they would normally seem to be beneath notice. However, the officialdom inched out a bit in wresting a guilty plea from the parent company of a bank, Credit Suisse, on a single criminal charge. Per the Wall Street Journal: The criminal charge filed Monday in federal court outlined a decadeslong, concerted attempt by Credit Suisse to “knowingly and willfully” help thousands of U.S. clients open accounts and conceal their “assets and income from the IRS.” Mr. Holder said the bank destroyed account records sent to the U.S. for client review, concealed transactions and “failed to take even the most basic steps to ensure compliance with tax laws.” The bank agreed to pay roughly $2.6 billion in fines, with $100 million going to the Fed, $715 million to the New York Department of Financial Services, and $1.8 billion to the Department of Justice. Credit Suisse will also appoint a monitor for two years subject to the approval of the DFS.  For the most part, the mainstream media is dutifully accepting the spin of the Department of Justice, that this case is significant by virtue of being the first plea of this sort made by a bank in over two decades. The fact that those intervening years saw regulators generally take a very hands off approach to banks, and that we had a global financial crisis with no measures of this sort taken against the perps somehow escapes mention. And let us also not forget that a mere three weeks ago, Jesse Eisinger ran an apology for the Department of Justice in the form of a New York Times Sunday Magazine that argued…hold your breath…that the DoJ was victim of having been too ambitious in the past. So what is noteworthy about the Credit Suisse guilty plea? As usual, no current senior officials were targeted. Pray tell, what is the deterrent value? The fines, which are more than the bank expected to pay, ultimately come out of taxpayer hides. Admittedly, there is a hue and cry in Switzerland for some heads to roll, but that would be an accidental by-product. As the New York Times notes:

Credit Suisse’s Guilty Plea: The WSJ Uses the Right Adjective to Modify the Wrong Noun -- William K. Black The Wall Street Journal has editorialized about Credit Suisse’s guilty plea in a piece entitled “If Credit Suisse really is a criminal, why protect it from regulators?”  More precisely, and confusingly, the full title is: “Holder Convicts Switzerland; If Credit Suisse really is a criminal, why protect it from regulators?” I’ll begin by responding to the WSJ’s weird claims about Switzerland.  Far from “convict[ing] Switzerland,” the U.S. Fed bailed out the Swiss Central Bank at the acute phase of the crisis (by making large unsecured loans to it in dollars) so that it in turn could provide dollars to its two massive, insolvent, and fraudulent banks (UBS and Credit Suisse).  The Treasury, with the support of Secretaries Paulson and Geithner, used AIG to secretly bail out not only Goldman Sachs but also UBS (to the tune of $5 billion).  The unconscionable deal was so toxic that the heads of each of the three U.S. financial regulatory agencies involved (Treasury, the Fed, and the NY Fed) deny that they had any involvement in the decision – it’s the Virgin Bailout. Once we get past the faux U.S. war on Switzerland meme, the WSJ does manage to ask a question that uses the correct word.  Unfortunately, it uses it to modify the wrong nouns.  The second part of the WSJ article’s title asks:  “If Credit Suisse really is a criminal, why protect it from regulators?”  “Really” is exactly the right word, but the accurate title would have been: “If the agency leaders were really regulators and DOJ’s leaders were really prosecutors why would they be protecting the senior bankers who led the frauds that caused the financial crisis from prosecution?”

Is Credit Suisse Really in Jail? - Credit Suisse’s guilty plea to a charge of tax fraud seems to be a major step forward for a Justice Department that was satisfied both before and after the financial crisis with toothless deferred prosecution agreements and large-sounding fines that were easily absorbed as a cost of doing business. A criminal conviction certainly sounds good, and I agree that it’s better than not a criminal conviction. But what does it mean at the end of the day? Most obviously, no one will go to jail because of the conviction (although several Credit Suisse individuals are separately being investigated or prosecuted). And for Credit Suisse, business will go on as usual, minus some tax fraud—that’s what the CEO said. A criminal conviction can be devastating to an individual. But when public officials go out of their way to ensure that a conviction has as little impact as possible on a corporation, it’s not clear how this is better than a deferred prosecution agreement. The reason for the kid-glove treatment, of course, is the fear that Credit Suisse is too big to jail. Otherwise, why would the DOJ have been so concerned to get regulators’ assurances that they would not pul Credit Suisse’s licenses? In fact, that’s the bank’s main defense against harsher punishment, since it’s clearly guilty, guilty, guilty.

Credit Suisse's plea is kabuki theatre. Big US banks are still getting off easy - Getting a bank on tax evasion is like getting Al Capone on tax evasion. It's a punchline that suggests with absolute certainty that bigger crimes are going to go unpunished.  Consider Credit Suisse, a giant international bank that on Tuesday pleaded guilty to one charge of conspiracy for helping wealthy Americans avoid taxes. It will pay a $2.6bn fine, which is triple the amount of money it had set aside. To be fair, the public image of the secretive system of Swiss banking, which has been the basis for plot lines in everything from James Bond to the Bourne films, is not too far from the truth: those banks are open only to the absurdly wealthy, and their promise of discretion is essentially their business model. The US government thinks the Swiss banks are helping rich people avoid taxes by fooling the IRS and filling out fake bank statements, and they're not entirely wrong: one colorful example involves a Credit Suisse banker who passed such fictionalized documents to a client in the middle of an issue of Sports Illustrated. Credit Suisse is taking the lash for being a linchpin of that system. So, if you're not a spy-movie buff, who cares? Because it's the biggest example yet of how misleading the theater of financial law enforcement can be. The Justice Department has a story to sell you here – that Credit Suisse's guilty plea is proof the government is getting tough on banks. Eric Holder, the attorney general, said Tuesday that the guilty plea proves "no bank is too big to jail".

“It’s total moral surrender”: Matt Taibbi unloads on Wall Street, inequality and our broken justice system - His relentless coverage of Wall Street malfeasance turned him into one of the most influential journalists of his generation, but in his new book, “The Divide: American Injustice in the Age of the Wealth Gap,” Matt Taibbi takes a close and dispiriting look at how inequality and government dysfunction have created a two-tiered justice system in which most Americans are guilty until proven innocent, while a select few operate with no accountability whatsoever. Salon sat down last week with Taibbi for a wide-ranging chat that touched on his new book, the lingering effects of the financial crisis, how American elites operate with impunity and why, contrary to what many may think, he’s actually making a conservative argument for reform. The interview can be found below, and has been lightly edited for length and clarity.

Save the Banks, Save the Economy? - Paul Krugman has an excellent column this morning hitting many of the same themes we discuss in our new book. As he puts it: In the end, the story of economic policy since 2008 has been that of a remarkable double standard. Bad loans always involve mistakes on both sides — if borrowers were irresponsible, so were the people who lent them money. But when crisis came, bankers were held harmless for their errors while families paid full price.And refusing to help families in debt, it turns out, wasn’t just unfair; it was bad economics. Wall Street is back, but America isn’t, and the double standard is the main reason.In some of the early reviews of our book, our argument is caricatured as saying we should have let the banks fail and we should have saved homeowners. We do not make such an extreme claim. In fact, we commend both Ben Bernanke and Tim Geithner for some of their policies that were directed at stopping dangerous runs in the banking system. We agree that bank runs threaten the payment system and the entire economy, and policies should be undertaken to prevent such runs. The problem we have with the Geithner view of the world is that it is far too extreme — it is a “save the banks, save the economy” view which has been thoroughly discredited in both the United States and Europe. The fact that Geithner still adheres to this view despite all the evidence to the contrary is truly remarkable.

How Big is "Too Big to Fail," Exactly? - For reasons I can no longer remember, I was put on the mailing list of the IMF. A recent message pointed me in the direction of a new staff publication concerning another contentious yet highly topical question: when exactly does a financial institution cross the threshold of becoming "too big to fail"? As the image taken above suggests, the largest of them have become even larger, although they have tapred off somewhat post-global financial crisis. There are undoubtedly policy implications for this question given the sheer size of money center banks in the US, UK or Switzerland. Or, even the various Landesbanks in Germany. Just think: if an IMF report said there was a threshold for becoming too big to fail (TBTF), you would expect all sorts of news reports touting the idea that big banks should be cut down to a certain size.   Instead we get a neither-here-nor-there answer. In other words, it's a Larry Summers response ("it depends") instead of a Nicolas Nassim Taleb one ("shrink 'em pronto). Anyway, to the paper's conclusion:  The risks of large banks are especially high when they have insufficient capital, unstable funding, engage more in market-based activities, or are organizationally complex. This, taken together with the evidence from the literature that the size of banks is at least in part driven by too big-to-fail subsidies and empire-building incentives, suggests that today’s large banks might be too large from a social welfare perspective. However, the literature also does not dismiss the case for the economies of scale in large banks (even though, in our reading of the literature, these economies are likely to be modest). As a result, “optimal” bank size is highly uncertain, and regulations that restrict outright bank size may be imprecise and difficult to implement. Optimal regulation of large banks should combine micro- and macro-prudential perspectives, and its tools may include capital surcharges on large banks (as in Basel III) and measures to reduce banks’ involvement in market-based activities and organizational complexity.

The Trade Finance Business of U.S. Banks - NY Fed - Banks facilitate international trade by providing financing and guarantees to importers and exporters. This is a big business for U.S. banks, but it has been difficult to estimate exactly how big due to a lack of data. In our recent New York Fed staff report, we shed some light on the size and structure of this market using information on banks’ trade finance claims available internally at the New York Fed. This post, the first of two, shows how trade finance has become more important in recent years, particularly with firms exporting to Asia. It also reveals that the size of the trade finance business varies widely across countries, with distance and shipping times from the United States being important factors. The second post will look at how trade finance is tied to country risk.

Why U.S. Exporters Use Letters of Credit - NY Fed - Banks play a critical role in international trade by offering letters of credit (LCs) that substantially reduce the risk faced by exporters. As we discuss in our recent New York Fed staff report, the use of LCs by U.S. exporters has been on an upward trend in recent years. Two reasons for this may be that firms rely more heavily on LCs in financing export sales when interest rates are low and when uncertainty in global markets is high. Furthermore, the use of LCs differs across countries. Specifically, LCs largely support exports to countries with intermediate levels of risk. This is likely because the fees for exports to higher-risk countries eventually become too substantial. Consider a trade between a U.S. exporter and a foreign importer. They have choices in how they settle the transaction. One option is for the exporter to produce the good and the importer to pay upon receipt (open account). Another is to have the importer pay first and the exporter produce the good after receiving payment (cash-in-advance). Finally, they can use a bank to facilitate the transaction with the exporter asking the importer to provide a letter of credit. The importer obtains an LC from a local bank which agrees to pay the exporter if the exporter documents that the goods have been delivered. Typically a bank in the country of the exporter confirms the LC obtained by the importer. The figure below shows in detail how a letter of credit works.

Widespread Signs of Credit Market Froth -  Yves Smith --- In the runup to the crisis, all it took was reasonably attentive reading of the Financial Times to discern that Things Were Going to End Badly. The big reason was that the pink paper did the best job of reporting on the credit markets of all the major financial outlets (Bloomberg did provide some corroboration).I’m getting a bad case of déjà vu from reading the Financial Times over the last week. And remember, this comes against a backdrop of a rise in investors willing to take on more credit risk out of desperation for yield. For instance, see this March Bloomberg story about subprime auto loans: 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 September 30, according to Standard & Poor’s. That’s the highest in at least three years, the data released last week by the New York-based ratings company show. Here are some of the stories showing the frothinesss in other markets: Bundled debt demand reaching levels of height of crisis, Financial Times, from Monday. This story discusses how investors are eager to invest in collateralized loan obligations, which are CDOs made of leveraged loans created mainly via private equity acquisition financing. Note that is not quite as bad as that sounds, since CLOs were merely badly damaged during the crisis just passed, while what are commonly described as CDOs, which were made from heavily subprime-related credits, had much less risk diversification and were much more prone to catastrophic failure (and fail they did).  We see the related phenomenon of investors throwing what little caution they had to the wind via compromising on investor protections. Two recent examples: Investors give up protection in ‘junk’ loans scramble Financial Times, today. Kroll rates Invitation Homes $1B single-family securitization Housing Wire, last Friday. Key section of the story on the latest Blackstone rental securitization:

CFPB Report Confirms Payday Lenders And Debt Collectors Are The Worst - For decades, payday lenders and debt collectors did their work while being largely ignored by federal financial regulators. And a new report from the Consumer Financial Protection Bureau, which recently gained oversight authority over the largest of these businesses, calls out many of the sketchy, sometimes illegal, practices some in these industries have been getting away with for far too long.  In its fourth Supervision Highlights report [PDF], the CFPB shines a light on its oversight of non-banking entities including payday lenders and debt collection agencies. From November 2013 to February 2014, regulators were able to return more than $70 million to 775,000 consumers through supervision activities. While that is a big win for consumers. The CFPB report found several inefficiencies related to the payday lending industry, including deceptive collection practices and the lack of oversight after contracting with third-party collectors.

Unofficial Problem Bank list declines to 502 Institutions - Here is the unofficial problem bank list for May 16, 2014.  Changes and comments from surferdude808:  As expected, the OCC provided an update on its recent enforcement action activity and the FDIC shuttered a bank this Friday. In all, there were seven removals from the Unofficial Problem Bank List leaving it at 502 institutions with assets of $161.2 billion. A year ago, the list held 770 institutions with assets of $284.1 billion. AztecAmerica Bank, Berwyn, IL ($66 million) was the seventh bank failure this year. Since the on-set of the Great Recession, there have been 58 bank failures in Illinois, which only trails the 87 failures in Georgia and 70 failures in Florida. Most likely, the FDIC will provide an update on its recent enforcement action activity in two weeks. Moreover, they will likely release industry results for the first quarter and refreshed problem bank list figures that week as well.

CoStar: Commercial Real Estate prices increased in Q1, Distress Sales just 10% of all sales  -- Here is a price index for commercial real estate that I follow.   From CoStar: Major Commercial Real Estate Price Indices Advance In First Quarter The two broadest measures of aggregate pricing for commercial properties within the CCRSI — the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index — each finished the first quarter of 2014 on a positive note. The U.S. equal-weighted index, which represents lower-value properties, has the most momentum in early 2014, with pricing up 4.2% for the first quarter of 2014 and 17.1% year-over-year. Meanwhile the U.S. value-weighted index, which is more heavily weighted toward larger, higher-value properties, has already recovered to within 5% of its prior peak levels. As a result, pricing gains in the value-weighted Composite Index have slowed, advancing by a more modest 0.5% for the first quarter and 10.1% for the year ending in March 2014.The percentage of commercial property selling at distressed prices has also fallen by more than two-thirds from the peak levels reached in 2011, to just 10% of all composite pair trades in the first quarter of 2014...The Multifamily Index continued to post steady growth, advancing by 7.8% for the 12 months ended March 2014, even though pricing in the Prime Metros Index has surpassed its previous peak set in 2007 by 10%. Pricing in the overall Multifamily Index is now within 8% of its pre-recession peak. This graph from CoStar shows the Primary Property Type Quarterly indexes. Multi-family has recovered the most, and offices the least.

Why Overhauling Fannie Mae and Freddie Mac Needs Congress --  Besides Congress, the key players are Treasury, which controls the financial backstop of Fannie and Freddie, and their regulator, the Federal Housing Finance Agency, which is running the conservatorship. FHFA Director Mel Watt said last week that the FHFA had the power to remove the companies from conservatorship. Before that could happen, FHFA would first have to let the companies build capital. This would require undoing the controversial 2012 amendment in which Treasury collects nearly all the companies’ profits as payment for their government backing. Changing this agreement would require Treasury’s approval unless a court rules that this so-called “profit sweep” is illegal. (Several investors have challenged the sweep as unconstitutional, and courts could rule later this year.) A huge piece of the puzzle: resolving the nearly $6 trillion in debt and securities issued by the company. These securities are treated with near-sovereign status—the Federal Reserve has bought more than $1.6 trillion in government-guaranteed mortgage bonds in its bid to stimulate the economy—thanks to the government’s open-ended support of Fannie and Freddie. That support throughout the downturn is the only reason that investors have continued to buy mortgage-backed securities, which has kept borrowing costs very low for American homeowners. Ending the conservatorship without dealing with that debt is likely a nonstarter for Treasury, since the very reason the U.S. took over the companies was to soothe uneasy bondholders. There are two hypothetical options here, says Mr. Parrott. Release the companies from conservatorship with a government guarantee of their debt, and release them without one. “Neither is economically viable,” he writes.

We Speak About Private Equity Rental Housing and SEC Problems on RT --  Yves Smith - Hope you enjoy this chat about private equity on the RT show Boom/Bust from Friday. We were on for two segments, with the conversation focusing on abusive practices by private equity landlords and their economic model (such as it is) for that business. We continued with a discussion of the conditions facing private equity firms in their traditional business of buying and selling companies, and the recent, remarkable SEC discussion about the high level of lawbreaking and serious compliance failure they are finding in regulatory exams. If you want to skip past the discussion of Deutsche Bank’s Las Vegas misadventures, our segment starts at around 3:45.  Due to time constraints, I could only discuss how the crisis and its aftermath has made the traditional private equity business more challenging than it has been for quite some time in passing. Lambert pointed out a Bloomberg article on Friday that provided additional detail.

Black Knight: Mortgage Loans in Foreclosure Process Lowest since September 2008 - According to Black Knight's First Look report for April, the percent of loans delinquent increased seasonally in April compared to March, but declined by 9.5% year-over-year. Also the percent of loans in the foreclosure process declined further in April and were down 36% over the last year.  Foreclosure inventory was at the lowest level since September 2008. Black Knight reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 5.62% in April from 5.52% in March. The normal rate for delinquencies is around 4.5% to 5%. The increase in delinquencies was in the 'less than 90 days' bucket.  The percent of loans in the foreclosure process declined to 2.02% in April from 2.13% in March.    The number of delinquent properties, but not in foreclosure, is down 207,000 properties year-over-year, and the number of properties in the foreclosure process is down 572,000 properties year-over-year.

Nearly 10 Million Mortgaged Homes are Still Underwater -- A new reports estimates some 18% of mortgaged homeowners are stuck with homes worth less than their debt, and that's an improvement over previous quarters A collapse in housing prices has trapped nearly 10 million U.S. homeowners in homes worth less than their mortgages, according to a new report by real-estate price tracking website, Zillow. The report estimates that in the first quarter of 2014, 18.8% of mortgaged homeowners were stuck in homes that would sell at a loss. That marks an improvement over the final quarter of last year when 19.4% of home mortgages were underwater and a significant improvement over the 2012 high of 31.4% — but still leaves nearly 10 million households struggling in negative equity. The report estimates that another 10 million homeowners have 20% or less equity on their homes, known as “effective negative equity” as homeowners can’t draw enough home equity to swallow the costs of selling the home and moving upmarket. Many home owners rely on home equity to fund the broker’s fees and meet the next home’s down payment.

Zillow 2014 Q1 Negative Equity Report | Zillow Real Estate Research: According to the first quarter Zillow Negative Equity Report, the national negative equity rate continued to decline to 18.8 percent, down 12.6 percentage points from its 31.4 percent peak in the first quarter of 2012. Negative equity has fallen for eight consecutive quarters as home values have risen. The national negative equity rate fell from 25.4 percent in the first quarter of 2013 and 19.4 percent in the fourth quarter, while the pace of annual home value growth slowed to 5.7 percent in the first quarter of 2014, from 6.6 percent at the end of the fourth quarter of 2013. However, more than 9.7 million homeowners with a mortgage still remain underwater (Figure 1). Moreover, the effective negative equity rate nationally — where the loan-to-value ratio is more than 80 percent, making it difficult for a homeowner to afford the down payment on another home — is 36.9 percent of homeowners with a mortgage. While not all of these homeowners are underwater, they have relatively little equity in their homes, and therefore selling and buying a new home while covering all of the associated costs (real estate agent fees, closing costs and a new down payment) would be difficult (Figure 2). Of all homeowners – roughly one-third of homeowners do not have a mortgage and own their homes free and clear – 13.2 percent are underwater.

Zillow: Negative Equity declines further in Q1 2014 -  From Zillow: Negative Equity Continues to Fall, Concentrated in Bottom Tier According to the first quarter Zillow Negative Equity Report, the national negative equity rate continued to decline to 18.8 percent, down 12.6 percentage points from its 31.4 percent peak in the first quarter of 2012. Negative equity has fallen for eight consecutive quarters as home values have risen. The national negative equity rate fell from 25.4 percent in the first quarter of 2013 and 19.4 percent in the fourth quarter, while the pace of annual home value growth slowed to 5.7 percent in the first quarter of 2014, from 6.6 percent at the end of the fourth quarter of 2013. However, more than 9.7 million homeowners with a mortgage still remain underwater. The following graph from Zillow shows negative equity by Loan-to-Value (LTV) in Q1 2014 compared to Q1 2013.  Figure 6 shows the loan-to-value (LTV) distribution for homeowners with a mortgage in 2014 Q1 versus 2013 Q1. The bulk of underwater homeowners, roughly 47 percent, are underwater by up to 20 percent of their loan value, and will soon cross over into positive equity territory. However they will still be effectively underwater, as they will not gain enough of a profit in the sale of their current house to pay the expenses and down payment associated with buying a new home. Almost half of the borrowers with negative equity have a LTV of 100% to 120% (the light red columns). Most of these borrowers are current on their mortgages - and they have probably either refinanced with HARP or the loans are well seasoned (most of these properties were purchased in the 2004 through 2006 period, so borrowers have been current for eight years or so). In a few years, these borrowers will have positive equity. The key concern is all those borrowers with LTVs above 140% (about 6.2% of properties with a mortgage according to Zillow). It will take many years to return to positive equity ... and a large percentage of these properties will eventually be distressed sales (short sales or foreclosures).

Housing debt still traps 10 million Americans -- Nearly 10 million Americans remain financially trapped by homes worth less than their mortgage debts — an enduring drag on the U.S. economy almost seven years after the housing bust triggered the Great Recession. During the first three months of this year, 18.8 percent of homeowners with a mortgage — 9.7 million — owed more on their loans than their properties would sell for, according to online real estate database Zillow. Though that was an improvement from the 25.4 percent figure of a year ago, the share of such "underwater" homeowners is about four times the historic average. An additional 18.1 percent of mortgage holders were "effectively" underwater: They had equity, but the proceeds from selling their home would be too low to recoup the sales costs and also put a down payment on a new property. The consequence is that few Americans are putting their homes on the market, thereby limiting the economic growth made possible by sales. Because of the shortage of homes being listed, bidding wars have inflated prices in parts of the country to levels that squeeze out many first-time and middle class buyers. The problem is most pronounced among starter homes with prices averaging around $100,000, 30.2 percent of whose owners are burdened by underwater mortgages, sometimes called negative equity. "The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come," said Stan Humphries, chief economist at Zillow. The share of mortgage holders with negative equity is projected to drop to 17 percent at the start of next year, according to Zillow. Several major U.S. metro areas are stuck with residents who have high rates of negative equity. In Chicago, almost 45 percent are underwater or effectively underwater. The rate is 53.1 percent in Atlanta, 50.6 percent in Las Vegas, 46.6 percent in Charlotte, 44 percent in St. Louis, and 43.2 percent in Tampa.

The Greenspan Housing Bubble Lives On: 20 Million Homeowners Can’t Trade-Up Because They Are Still Underwater -- One of the most deplorable aspects of Greenspan’s monetary central planning was the lame proposition that financial bubbles can’t be detected, and that the job of central banks is to wait until they crash and then flood the market with liquidity to contain the damage. In short, China didn’t “save ” America into a housing crisis; the Greenspan Fed printed America into a cheap debt binge that ended up impairing the residential housing market for years to come. In any event, for those Millennials who do manage to accumulate a down payment by the time they are in their early 30s there is precious little starter home inventory available.  The Greenspan mortgage debt serfs from the previous generation are blocking the way. Monetary central banking is an economy wrecker.  Here is just one more smoking gun of proof.

Lawler: Negative Equity Quiz - From housing economist Tom Lawler: Based on proprietary AVMs and available mortgage data, well-known private entities estimate that the percent of residential properties with mortgages where the owner of the property is in a negative equity position (estimated mortgage balance exceeds the value of the property) is:

  • A. About 10%
  • B. About 13%
  • C. About 19%
  • D. All of the above.
The “correct” answer, of course, is “D,” All of the above. The 10% estimate is from Black Knight Financial Services (formerly LPS), and is for March 2014. The 13% estimate (13.3%) is from CoreLogic, and is for Q4/2013. The 19% estimate (18.8%) is from Zillow, and is for Q1/2014. Zillow estimates that 10% of mortgaged residential properties have a current LTV of 120% or more. For Q4/2013, CoreLogic estimates that 5.1% of mortgaged residential properties had a current LTV of 125% or more. 

Lawler: Updated Table of Distressed Sales and Cash buyers for Selected Cities in April -- Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for selected cities in April.  Lawler writes: "Note the steep YOY decline in the short-sales share, and the significant increase in the foreclosure sales share of home sales in Florida." Total "distressed" share is down in all of these markets, mostly because of a sharp decline in short sales. Foreclosures are down in most of these areas too, although foreclosures are up in some judicial foreclosure areas and also in Las Vegas (there was a state law change that slowed foreclosures dramatically in Nevada at the end of 2011). The All Cash Share (last two columns) is mostly declining year-over-year.

MBA: Mortgage Refinance Activity increases as Mortgage Rates Decline - From the MBA: Refinance Applications Increase in Latest MBA Weekly Survey: Mortgage applications increased 0.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 16, 2014. ...The Refinance Index increased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. .... “Rates on conforming loans hit 6 month lows and jumbo rates hit 12 month lows. Refinance volume picked up somewhat as a result, but it still remains more than 65 percent below last year's pace. Purchase volume continues to run more than 10 percent below last year's pace." The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.33 percent, the lowest rate since November 2013, from 4.39 percent, with points decreasing to 0.20 from 0.22 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. The refinance index is down 73% from the levels in May 2013 (one year ago). As expected, with the mortgage rate increases, refinance activity is very low this year. The second graph shows the MBA mortgage purchase index. According to the MBA, the unadjusted purchase index is down about 12% from a year ago.

Dispute Arises Over Number of Mortgage Denials to Blacks -  The Mortgage Bankers Association, one of the nation’s most influential financial lobbying groups, made a startling claim this week about the access of black borrowers to credit.The association’s president, David H. Stevens, said that 56 percent of blacks who applied for a common type of mortgage were denied. When that figure was publicized, it set off a barrage of questions on social media. Since Mr. Stevens’s number was far higher than the mortgage denial rates for blacks that other analysts found, the association was pressed to provide a full accounting of its calculations.The association has answered some questions, but its conclusions remain murky. The discussion underscores one of the most pressing issues affecting the American housing market. Since the financial crisis, the government has dominated the mortgage market. Banks lend borrowers money to buy homes, but they turn around and sell most of the mortgages to investors, attaching a government guarantee of repayment in the process. The government gets paid for that guarantee, but it also requires that the borrowers meet certain requirements that aim to ensure that they can repay the loans. The big debate right now is whether those requirements are overly demanding, excluding certain types of borrowers from certain types of mortgages.And that debate has intensified as Congress has drafted legislation to replace the current government-dominated system.

Weekly Update: Housing Tracker Existing Home Inventory up 6.8% year-over-year on May 19th -- 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 March).  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. In 2013 (Blue), inventory increased for most of the year before declining seasonally during the holidays. Inventory in 2013 finished up 2.7% YoY compared to 2012. Inventory in 2014 (Red) is now 6.8% above the same week in 2013. Inventory is still very low - still below the level in 2012 (yellow) when prices started increasing - but this increase in inventory should slow house price increases.

CoreLogic on Housing: "Cash Sales Share Shows Clear Downward Year-Over-Year Trend" - From CoreLogic: Cash Sales Made up 40 Percent of Total Home Sales in February Cash sales made up 40.2 percent of total home sales in February 2014, down from 43.7 percent the previous year and 40.8 percent the previous month. Cash sales share comparisons should be made on a year-over-year basis due to the seasonal nature of the housing market , and by that measurement, the trend in cash sales is clearly down. Prior to the housing crisis, the cash sales share of total home sales averaged approximately 25 percent. The peak occurred in January 2011, when cash transactions made up 46.2 percent of total home sales. Reports that cash sales were up sharply in 2014 were incorrect. This fits with data from Tom Lawler. And a post from Sam Khater at CoreLogic: REO Inventory Rising Once Again After reaching a trough in August of 2013 of 375,000 properties, the number of real estate owned (REO) properties increased 15 percent to 430,000 as of March 2014 (Figure 1). The increase in REO properties was broad based, rising in 46 states. While the increase was moderate nationally, some states had large increases. Idaho led the way with the stock of REO properties nearly doubling between August 2013 and March 2014. Maryland had the 2nd largest increase in the number of REO properties, which increased 78 percent, followed by Nevada (up 70 percent), Oregon (up 47 percent) and North Dakota (up 42 percent)....This graph from CoreLogic shows the recent increase in REOs.

All-Cash Purchases Are A Huge Part Of The US Housing Market - Creditworthy homebuyers continue to be squeezed out of the housing market by those making all-cash purchases. Cash purchases accounted for 39% of total sales in Q1 2014, according to Morgan Stanley's Vishwanath Tirupattur. While this is up from the second half of last year, it is down from the highs of Q1 2013, Q1 2012, and Q1 2011.  In terms of absolute volume, cash transactions have fallen down 15% quarter-over-quarter and are at the lowest level since Q1 2009.   This is because "distressed transactions, which have a far higher share of cash sales than their non-distressed peers do, are down 58% from their peak in Q3 2009 and hit their lowest levels in Q1 2014 since Q4 2007," writes Tirupattur.  Surprisingly though, it turns out that even as distressed transactions have fallen, the share of cash purchases in distressed transactions is at all-time high. "Investors of distressed properties are not buying as many properties, but they appear to be using cash more often than ever," writes Tirupattur.  So what exactly is going on?  "In our view, the rise in cash share seems to be less a function of borrowers using cash in lieu of mortgage financing, and more a consequence of tight mortgage lending conditions suppressing overall transaction volumes," argues Tirupattur.  While it's getting easier for Americans to get mortgages, mortgage credit availability is still tight historically.

Median Home Price and Salary Required in 27 Major Cities: Tim Manni, the Managing Editor at, has a new commentary out entitled "The Salary You Must Earn to Buy a Home in 27 Metros". The opening tease is a question: "How much salary do you need to earn in order to afford the principal and interest payments on a median-priced home in your metro area?" The article is a must-read for anyone interested in US real estate trends and income demographics. Here is a slightly edited version of the Tim's table of the key data. I've rounded the dollar amounts to facilitate reading. Note that the data is sorted by the salary needed to finance the median priced home with a standard 28 percent "front-end" debt ratio and a 20 percent down payment:  How do these metropolitan area real estate costs stack up against each other and the US median household income? Here is a column chart to which I've added the latest Sentier Research data for the US median household income as of March 2014. The table above includes a column for the percent change from the previous quarter (Q4 2013). Here are the 27 cities sorted by the change. The range of the percent change is quite astonishing. I'll be keeping an eye on this series to see how these trends change over time. I highly recommend a look at Tim Manni's slide show of the 27 cities with additional details and city-by-city summary.

Plosser: Fundamentals of U.S. Housing Market Remain Sound -- The fundamentals of the U.S. housing market remain sound despite the recent slowdown in home sales, Federal Reserve Bank of Philadelphia President Charles Plosser said Tuesday. “Some express concern that the housing recovery in recent months is waning. I’m actually more optimistic,” Mr. Plosser said at a luncheon in Washington. “I think the fundamentals of housing are still sound, even though sales have leveled off. More importantly, prices…are still rising, even over the last three months. Now, if prices are rising and sales are falling, or at least stabilized, that suggests that it’s not just weak demand that’s causing the problem. It could be restrictions in supply.” Mr. Plosser cautioned that “we’ll have to wait and see” how the market looks later this spring and into the summer. The U.S. housing market has gained strength in recent years, but sales began to slow in mid-2013 amid rising borrowing costs and home prices. . The Fed's FNMA policymaking committee, in its April 30 statement, noted that “the recovery in the housing sector remained slow.” Fed Chairwoman Janet Yellen earlier this month flagged the housing slowdown as a potential concern, telling members of Congress that “readings on housing activity…have remained disappointing so far this year and will bear watching.” Mr. Plosser said on Tuesday the slowdown in sales has been partly due to rising mortgage rates, though he noted rates remain historically low. “The fundamentals of the housing market remain sound, including stronger household formation, better job growth and consumers with stronger balance sheets,” he said.

Dudley: Three Reasons Why Housing’s Recovery Will Be Slower - New York Fed President William Dudley offered his two cents Tuesday on why the housing sector’s contribution to the economy has “stalled out” over the past few quarters. While he said some decline in activity was to be expected following the jump in mortgage rates last year, “the extent of the slowdown has surprised me given that the recent pace of housing starts—roughly 1 million per year—is far below what is consistent with the economy’s underlying demographics,” he said in a speech Tuesday. Mr. Dudley outlined three headwinds that he said could keep housing from providing a bigger boost to the economy for a while.  First, Mr. Dudley said mortgage credit is still unavailable to borrowers with lower credit scores. Data from Goldman Sachs, for example, show that the share of homeowners who received loans last year and had credit scores below 620 was at a fraction of a percent, compared to around 13% in 2001, before credit standards were dramatically relaxed.Second, Mr. Dudley pointed to burgeoning student debt that had delayed the entry of new first-time home buyers. That could make it harder even for existing homeowners to sell their homes and trade up, slowing the traditional turnover of the housing market. Third, home prices may still be too low in some areas to justify new construction. “The housing downturn was very deep and protracted,” said Mr. Dudley. “It takes time to shift resources back into this area.” In some area, it remains “uneconomic to undertake new home construction,” he said. Others have noted that labor, land and supply costs for home builders have outpaced their ability to raise prices, leading builders to focus instead on putting up fewer homes that can attract higher prices.

Are Mortgage Credit Conditions "Tight"? - A statement in regards to credit condition in a Bloomberg article this morning on New Home Sales caught my attention and merits further investigation.  Here is the statement in question: "Builder optimism has eased as well, reflecting still-tight credit conditions and limited availability of lots. Confidence dropped in May to the lowest level of the year, according to a gauge of builder sentiment from the National Association of Home Builders/Wells Fargo." Let's investigate the claim of "still-tight credit conditions".graphs: Net Percentage of Banks Tightening Credit for Prime Mortgages. Net Percentage of Banks Tightening Credit for Subprime Mortgages.   Net Percentage of Banks Tightening Credit for Nontraditional Mortgages. Credit conditions for prime mortgages are anything but tight. There is tightening in the subprime arena, but after these price runups, there should be! There is some tightening in non-traditional loans but in general the claim of "still tight" mortgage lending is false.

Existing home sales rise in April for first time this year: Sales of previously owned homes rose nationwide in April as the housing market picked up some steam amid the spring selling season. Existing home sales climbed 1.3% from March to a seasonally adjusted annual rate of 4.65 million, the National Assn. of Realtors reported Thursday. That was the first gain this year, though it missed expectations slightly. The uptick from March came as the housing market has shown signs of cooling recently and sales declined. Would-be buyers have struggled to afford a home after prices surged last year. “Some growth was inevitable after sub-par housing activity in the first quarter, but improved inventory is expanding choices and sales should generally trend upward from this point,” Lawrence Yun, the trade group’s chief economist, said in a statement. But compared with April 2013, sales were still down 6.8%. Yun said there would probably be fewer sales this year than 2013, citing the poor first quarter. Inventory, meanwhile, expanded in April. There was a 5.9-month supply of homes for sale last month -- meaning if homes sold at their current pace, all properties currently on the market would be sold in that time period -- compared with a 5.1-month supply in March.

Existing Home Sales in April: 4.65 million SAAR, Inventory up 6.5% Year-over-year -- The NAR reports: April Existing-Home Sales Show Modest Improvement Behind Gaining Inventory Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.3 percent to a seasonally adjusted annual rate of 4.65 million in April from 4.59 million in March, but are 6.8 percent below the 4.99 million-unit level in April 2013. Total housing inventory at the end of April jumped 16.8 percent to 2.29 million existing homes available for sale, which represents a 5.9-month supply at the current sales pace, up from 5.1 months in March. Unsold inventory is 6.5 percent higher than a year ago, when there was a 5.2-month supply. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in April (4.65 million SAAR) were higher than last month, but were 6.8% below the April 2013 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 2.29 million in April from 1.96 million in March. Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer. The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory. Inventory increased 6.5% year-over-year in April compared to April 2013.

Existing Home Sales "Rebound": Headline Hype vs. Reality - This morning, headline news stories talk of a "rebound" in existing home sales and why rising inventory is good for the market.  Let's separate the hype from reality starting with the hype. Please consider Existing Home Sales Rebound, Inventory IncreasesU.S. home resales rose in April and the supply of properties on the market increased, suggesting the housing market was regaining its footing. The National Association of Realtors said on Thursday existing home sales increased 1.3 percent to an annual rate of 4.65 million units, marking the second increase in sales in nine months. Though an usually cold winter depressed activity, a dearth of homes for sale also stymied demand. Sales are expected to gradually trend higher for the rest of 2014 as job growth and the overall economy accelerate.And there is reason to be optimistic. The inventory of unsold homes on the market increased 6.5 percent from a year-ago and the median home price increased at its slowest pace since March 2012. Let's now compare the hype with the reality, starting with a pair of seasonally adjusted existing home sales graphs.There is absolutely nothing in the above charts that remotely suggests a reason to be optimistic or that housing is "regaining its footing". Moreover, the author failed to discuss interest rates, student debt, investor demand, or household formation. Here's the reality: Interest rates are up, prices are up, and affordability is down. Investor demand was a huge portion of the market, and rising suggests investors are more discriminating. Sales may increase in spite of those fundamentals, but virtually nothing suggests that outcome.

Existing Home Sales Miss; Worst Start To Year Since 2007 - After 6 months of missed expectations, last month's fragile beat of dismal expectations (even though it was the worst existing home sales SAAR in 21 months) provided just enough of a glimmer of hope to stoke more short squeezes in homebuilder stocks and strengthen the pillar of the US economic recovery. Now we are in April... the start of the key seasonal selling season... and existing home sales rose modestly MoM (but fell for the 6th month in a row YoY) and missed expectations. There is - simply put - no post-weather bounce.. and still NAR is blaming slow April sales being delayed due to Winter weather! This is the worst start to a year since 2007.

Higher Mortgage Rates Dragged Down U.S. Home Sales: San Francisco Fed -- The pronounced slowdown in U.S. home sales in the second half of 2013 was primarily caused by a rise in mortgage rates that made borrowing more expensive for potential home buyers, according to new research from the Federal Reserve Bank of San Francisco.The U.S. housing recovery has slowed over the last year. Sales of previously owned homes, a key indicator that accounts for the vast majority of home sales, hit a seasonally adjusted annual rate of 5.38 million last July, according to the National Association of Realtors. Existing-home sales have slumped since then, and in March were down 7.5% from a year earlier.Unusually cold and snowy weather across much of the country took much of the blame this winter, but the housing market hasn’t recovered much with the arrival of spring and the slowdown predated the arrival of harsh winter weather. But the slowdown did roughly coincide with a spike in mortgage rates that began in May 2013 as the Federal Reserve prepared to begin winding down its bond-buying program. The average interest rate on a 30-year fixed-rate mortgage rose from 3.45% that April to 4.37% in July, according to Freddie Mac, and was 4.2% last week.“Higher mortgage rates generally have a direct dampening effect on home sales, as buyers face constraints on the size of loans they can secure and on loan payments relative to their incomes,” San Francisco Fed senior economist John Krainer wrote in the paper released Monday. “Since individual incomes likely did not rise over this short period, and house prices continued to grow in most regions, the rise in mortgage rates was expected to have an unambiguous negative impact on sales.”

The housing market I: higher interest rates and prices have halted the recovery in single family homes: Based on the increase in interest rates last summer, by now I thought that housing in general would be down about -100,000 units a year. Although the housing market in general has slowed down, that hasn't happened, and the more volatile housing starts number showed a YoY increase of more than 20% YoY in April. When a forecast doesn't pan out as I expect, I try not to argue with the data. . In the case of housing, I think there is a complicating factor in the current forecast. . In this first installment I'll look at single family homes. In the second, I'll look at apartment. Finally, I'll take a look at the impact of demographics. As I'll show in a later installment, single family houses are particularly sensitive to interest rates. While there has been a spring rebound in housing permits and starts as a whole, that rebound has been entirely confined to apartments. In fact, the recovery in building single family homes ended at the beginning of January 2013. First of all, here is a graph comparing the permits for single family homes (blue) and multifamily (5 unit or more) structures for the last 5 years: Virtually ALL of the growth in housing permits in the last year has come from multi-family units such as apartments. Contrariwise, here are single family home permits (blue), starts (red), and sales (green). All of these have been normed to 100 as of January 2013: There has been virtually NO growth - zip, nothing, nada - in any of these measures of the market for the building of single family homes for the last 16 months.

The housing market 2: apartment construction is booming: If the construction of single family homes has completely stalled for the last 16 months, apartment and other multifamily construction is on a tear. Here's the same graph comparing single family permits with multiunit permits that I started yesterday's post with, showing that literally all of the improvement in homebuilding since then has been in multifamily units of 5 or more, typically apartments and condominiums: In contrast to single family homes, apartment/condo building has completely recovered to its pre-Great Recession level: In fact, as this above graph shows, more multifamily permits were taken out in April than at any point in the last 25 years except for 3 months. That is where the entirety of the continuing housing recovery is coming from. So let's look at the past relationship between interest rates and multiunit dwelling construction. Here are 4 graphs, in chronological order, spanning the last 50 years, comparing interest rates (red, inverted), and multiunit building permits. First, here's 1960's through late 1970's: Here's the 1980's through mid-1990's: Here's the mid-1990's until the Great Recession: and here's the last 5 years: While in general an increase in interest rates seems to correlate roughly with a deceleration if not decline in multiumit residential construction, the relationship is not nearly so strong as that between interest rates and single family home construction. At least in part that is because apartments and condos a frequently a substituted good. In times of economic stress, such as with the high interest rates of the late 1970s' and early 1980's, or when wages are squeezed. like the present, apartments and condos serve as a less expensive alternatives to the traditional single family home.

Concluding comments on the direction and importance of housing - Why do I spend so much time analyzing the housing market? Because every recession since World War 2 has started on average about a year or so after a downturn in the housing market. In the last couple of years, my analysis has segued from writing about whether and to what extent the economy was recovering, and focused increasingly on long leading indicators to see if there is evidence of deterioration. In so doing, I wanted to know, if housing leads, then what typically leads housing? And the biggest answer is, interest rates. I've been continually pointing out in the last half year that 16 of 21 times since World War 2, a 1% YoY increase in interest rates has led to a -100,000 decline in housing permits YoY. In 2001, it was only a -62,000 decline. On the remaining 4 occasions, typically there was an aspect of "buy now or be forever priced out" in the continuing increase in housing. It's fair to say that this past year has been somewhat of an exception as well. As I've documented in three posts this week, while the market for single family housing construction has indeed been brought to a halt by rising interest rates and rising prices, the boom in apartment and condo building has more than made up for it. Demographically the Millennial "echo boom" generation is in their apartment-living stage of life, and just in the early part of single family home buying, giving apartment construction in particular a tailwind (and driving up rents as well). The thing about apartment construction is, it is less economically sensitive to interest rates (because the developer, not the renter, is building the units). But apartments in particular have much less of a multiplier effect on the economy. Following construction, there are few if any interior and exterior improvements as might be made by homeowners, and subsequent purchases tend to be limited to refrigerators, furniture, and small appliances.

Freddie Mac: "Fixed Mortgage Rates Near Seven Month Low" -  It is looking more likely that we will see a headline sometime in June: "Mortgage Rates down year-over-year"!  From Freddie Mac: Fixed Mortgage Rates Near Seven Month Low Heading Into Memorial Day Weekend Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing showing average fixed mortgage rates moving lower for the fourth consecutive week with fixed mortgage rates hitting new lows for this year.   30-year fixed-rate mortgage (FRM) averaged 4.14 percent with an average 0.6 point for the week ending May 22, 2014, down from last week when it averaged 4.20 percent. A year ago at this time, the 30-year FRM averaged 3.59 percent.   Here is a graph of 30 year fixed mortgage rates - according to the PMMS® - for 2013 (blue) and 2014 (red). Mortgage rates jumped to 4.46% in late June 2013, and it is possible that rates will be lower in late June 2014 (currently 4.14%).

Why Housing Isn’t As Cheap as It Looks - A growing number of economists and policy makers are faulting last summer’s spike in mortgage rates for a broad slowdown in housing activity that began last fall. Sales of previously-owned homes edged up 1.3% in April to a seasonally adjusted annual rate of 4.65 million units, reversing four straight monthly declines. Sales were still 6.8% below their levels of a year earlier.  But wait a minute, you say. Isn’t housing still pretty affordable? Mortgage rates are still below 4.5%, rates that were unheard of before 2011. And home values, while up at least 11% over the last two years, are still well below their bubble-era peak. The National Association of Realtors’ housing affordability index shows that housing is still more affordable than anytime between the early 1990s and 2008. What’s not to like? The problem is that this picture of affordability assumes borrowers have down payments of at least 20% and that they’re able to qualify for the lowest mortgage rates. A new analysis from Goldman Sachs shows that for marginal borrowers, including many first-time buyers, the picture of affordability is only so-so. (The Journal raised a similar point in an Outlook column this past March.)“While focusing on the median family is one way of gauging housing affordability, another way is to focus on the marginal buyer who is arguably more relevant for determining house prices,” write Goldman economists. “Put differently, the prices that we observe should be determined by how much the marginal buyer is willing and able to pay.”Marginal borrowers differ from the median borrower in two key ways: Their incomes aren’t as strong, and their credit isn’t as good.

Larry Summers: Student Debt Is Slowing the U.S. Housing Recovery - Former White House adviser Lawrence Summers said Wednesday that student debt is slowing the housing recovery and the broader economic recovery, adding a prominent voice to the debate in Washington over whether Congress should reduce Americans’ student-loan burdens.  Mr. Summers, a Harvard University economist who previously led President Barack Obama’s National Economic Council, said high student debt is preventing households from spending money to fuel economic growth. Mr. Summers is the latest to weigh in on a debate about the economic effects of student debt, which has roughly doubled since 2007 to roughly $1.1 trillion, reflecting rising school enrollment during the weak job market along with higher tuitions. But other leading economists and academics have been unable to show a causal link between higher student debt and the weak economy. That’s largely because student debt enables many Americans to ultimately boost their incomes by going to college, a benefit to the economy.  “There was a time when student loans were an educational finance issue rather than a macroeconomic issue,” Mr. Summers said. But with the student-loan debt now exceeding the amount Americans owe on credit cards, student debt is now a macroeconomic issue, he said. He linked rising student debt to the low level of home purchases by first-time buyers.

This Chart Is The Fate of Housing In America As Student Loans Bankrupt A Whole Generation - Wolf Richter - Student loan balances soared 362% to $1.1 trillion since 2003, during a period when mortgage debt – including the effects of the current Housing Bubble 2 – rose “only” 65% to $8.2 trillion and credit card debt actually declined by 4.2% to $660 billion (chart). The burden of servicing that increasing pile of student loans is eating into other forms of borrowing and spending, such as the American classic, reckless consumption on credit cards, or the purchase of a home. And so the proportion of first-time buyers – the single most important sign of a healthy housing market – has been shrinking for years. Over 70% of the students who are sitting through a commencement speech this spring have student loans. They will start their career, if any, with an average student loan balance of $33,000. Every year, it gets worse. The Class of 2012 was the most indebted ever. Then the Class of 2013 took over that dubious honor, only to be trumped by the Class of 2014. Next year, the honor will go to the Class of 2015. Among the reasons for this fiasco: the way colleges are paid liberates them from both free-market and governmental constraints. They can charge whatever they want and get away with it because students can just go ahead and borrow it. Even noisy student protests with mass arrests trip up administrators only briefly. And through the student loan programs, designed with whatever intentions, the government is simply aiding and abetting colleges in extracting ever more money from the future lives of their students. The equation might not have gone so horribly awry if each class of graduates had seen their incomes skyrocket in line with their student debt. But that’s a crummy joke. Between 2005 and 2012 – the last year for which this data set is available – the inflation-adjusted average student loan balance of graduates under 30 years old has soared 35% while the median annual income adjusted for inflation for college graduates between 25 and 34 years old has declined by 2.2%. And this is what this torturous condition looks like:

BlackRock's Fink Warns Housing More "Unsound" Now Than During Last Bubble -- More than half a decade after the collapse, and with talking heads proclaiming the recovery as strong as ever and the Fed remarking on the housing market's foundational pillar to that recovery, BlackRock's CEO Larry Fink has a few words of warning for the exuberant - the US housing market is "structurally more unsound" today that before the last financial crisis. As the data comes in weaker and weaker, despite hopes for a post-weather bounce, the fact that the US housing market is "more dependent on Fannie and Freddie than we were before the crisis," is a problem for the US taxpayer and - unlike Mel Watt's 'free credit for everyone' approach to expanding the GSE's role, Fink says with strong underwriting standards, ownership of affordable homes can again become a foundation for American families. So Watt's easy 'Subprime 2.0' or Fink's hard 'American Dream'.

New Home Sales increase to 433,000 Annual Rate in April - The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 433 thousand.  March sales were revised up from 384 thousand to 407 thousand, and February sales were revised down from 449 thousand to 437 thousand. Sales of new single-family houses in April 2014 were at a seasonally adjusted annual rate of 433,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 6.4 percent above the revised March rate of 407,000, but is 4.2 percent below the April 2013 estimate of 452,000.The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales have bounced around recently, but have mostly moved sideways over the last year. Even with the increase in sales over the previous two years, new home sales are still near the bottom for previous recessions. The second graph shows New Home Months of Supply. The months of supply decreased in April to 5.3 months from 5.6 months in March. The all time record was 12.1 months of supply in January 2009.

New Home Sales Post Tepid April Bounce As Average, Median Home Price Drops From Year Ago -- Last month's dramatic miss of expectations for a modest post-weather pop in new home sales (having dropped 14.5% month-over-month) so it was inevitable that there would be a bounce. Modestly beating expectations, 433k annualized new home sales in April was only a 6.4% gain MoM thanks to the upward revision of the big miss in March. This 'recovery' remains well below the peak see in January - right in the middle of the worst weather impacted time in US history if one is to believe what the media is spewing. Before the 'housing recovery is back on track' meme gets going though, there is the fact that homes sold in the Northeast fell to the lowest since June 2012... as the average home price fell to $320,100 - the lowest since August 2013.

New Home Sales "Better, Not Strong", and Regionally Very Uneven - The Census Bureau Residential Home Sales report shows Sales of new single-family houses in April 2014 were at a seasonally adjusted annual rate of 433,000.  Sales are 6.4 percent (±15.9%) above the revised March rate of 407,000, but is 4.2 percent (±14.2%) below the April 2013 estimate of 452,000.Supply is 5.3 months at the current rate of sales.  Bloomberg reports Purchases of New U.S. Homes Increase by Most in Six Months but the details are interesting. Purchases of new U.S. homes rose in April by the most in six months as buyers began to respond to falling mortgage rates.  “The deep freeze is over and I think we can expect new home sales to continue to rise,”  “It’s better; it’s still not strong.”  New-home sales, which account for about 7 percent of the residential market, are tabulated when contracts are signed, making them a timelier barometer than transactions on existing homes.  New Home Sales by Region (in thousands). Take a good look at that last line. The surge in new homes is entirely in the Midwest. Didn't the Northeast have bad weather? Perhaps the bad weather lingered on in the Northeast. Alternatively, perhaps the Midwest was the most undervalued area. Regardless of reason, this huge distortion should not inspire much confidence.

Comments on the New Home Sales report -  The Census Bureau reported that new home sales this year, through April, were 148,000, Not seasonally adjusted (NSA). That is down 2.6% from 152,000 during the same four months in 2013 (NSA). This disappointing start to the year is probably mostly due to higher mortgage rates and higher prices. Mortgage rates were at 3.45% in April 2013 and increased to 4.34% in April 2014.  Also there were probably supply constraints in some areas and credit remains difficult for many potential borrowers. Note: There was a sharp increase in sales in the Midwest region in April, and that appears to be a bounce back from the severe weather.   In the Midwest, sales during the first four months are now essentially flat with the same period in 2013. Maybe sales will move sideways for a little longer, but remember early 2013 was a difficult comparison period. Annual sales in 2013 were up 16.3% from 2012, but sales in the first four months of 2013 were up 26% from the same period in 2012! This graph shows new home sales for 2013 and 2014 by month (Seasonally Adjusted Annual Rate). The comparisons to last year will be a little easier in a few months - especially in Q3 - and I still expect to see solid year-over-year growth later this year. And here is another update to the "distressing gap" graph that I first started posting several years ago to show the emerging gap caused by distressed sales. Now I'm looking for the gap to close over the next few years. The "distressing gap" graph shows existing home sales (left axis) and new home sales (right axis) through April 2014. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales.

New Home Prices: Almost 45% of Home over $300K, Less than 5% under $150K - Here are two graphs I haven't posted for some time ... As part of the new home sales report, the Census Bureau reported the number of homes sold by price and the average and median prices.  From the Census Bureau: "The median sales price of new houses sold in April 2014 was $275,800; the average sales price was $320,100."  The following graph shows the median and average new home prices.During the bust, the builders had to build smaller and less expensive homes to compete with all the distressed sales. With fewer distressed sales now, it appears the builders have moved to higher price points. The average price in April 2014 was $320,100, and the median price was $275,800. Both are above the bubble high (this is due to both a change in mix and rising prices). The second graph shows the percent of new homes sold by price. At the peak of the housing bubble, almost 40% of new homes were sold for more than $300K - and over 20% were sold for over $400K. The percent of home over $300K declined to about 20% in January 2009. Now it has rebounded to almost 45% of homes over $300K. And less than 5% of homes sold were under $150K in April 2014. This is down from 30% in 2002 - and down from 20% as recently as August 2011. Quite a change.

What Did Last Year’s Mortgage Rate Increase Do to Cool Housing Growth? -- A growing number of economists and policy makers have expressed surprise over the slow recovery of the housing sector in recent weeks, with many blaming some of the softness on the sharp and sudden rise in mortgage rates that began exactly one year ago, when then-Federal Reserve Chairman Ben Bernanke hinted that the central bank might begin to slow its bond purchases later in 2013. Measures of housing construction and sales have shown little growth from last year’s levels so far. By contrast, housing indicators at this time last year were notching significant gains when compared to 2012. Higher prices, low inventories, and harsh winter weather likely have contributed to weaker demand as well. New home sales in April rose 6.4% from March, and March’s initial reading was revised up by 6%, the Commerce Department said Friday. Still, sales for the first four months of 2014 are running 3.5% below the year-earlier levels. In a research report, Deutsche Bank economists quantify how last year’s mortgage rate increase curbed housing growth—and how that compared to past periods in which rates rose. The rise in rates was sharp by historical measures, write the Deutsche Bank economists, with the average 30-year fixed-rate mortgage rising by almost a full percentage point in two quarters, the sharpest rise since the late 1990s. They looked at eight other episodes over the last 40 years in which rates rose by a similar magnitude on a similar timeline. Their conclusion: Sharp spikes in mortgage rates tend to produce “extended periods of weakness in housing” that last several quarters historically. The current cycle hasn’t disappointed on that front. But they also find that most housing indicators have actually fared better in the recent episode relative to the historical experience.

"Generation rent" raising demand for multifamily housing - One of the reasons we continue to see negative signals from the US housing market (see post) is the weakness in the single family housing sector. The strong housing report yesterday was driven by surging apartment construction. That trend is expected to continue. Reuters: - The housing starts report suggested building activity would likely continue to rise for some time as permits to build homes jumped 8.0 percent to a 1.08-million unit pace in April, the highest since June 2008.  Permits for single-family homes, however, rose just 0.3 percent and continue to lag groundbreaking, suggesting single-family starts could decline in the months ahead. A survey on Thursday showed confidence among single-family home builders slipped to a one-year low in May.  In contrast, permits for multi-family housing soared 19.5 percent. Multi-family permits are running well ahead of starts, which could indicate delays in getting projects started. Permits for buildings with five or more units were the highest since June 2008 - [see Twitter postAmericans are adjusting to this new rental culture, as the number of single family housing starts falls to new lows relative to the total new housing construction.To be sure, home construction in the US is still far below what the nation will need in years to come and it's only a matter of time before the US faces the same type of housing shortage that exists in the UK (see post). But the so-called Generation Rent is in no hurry to go out there and get a mortgage and is willing to pay up for the mobility offered by rentals (forgoing mortgage tax deduction). Given the demand, apartment owners on the other hand are not shy about getting a mortgage for rental properties, as the proportion of multifamily mortgages continues to rise.

Apartments: Supply and Demand --   It was four years ago that we started discussing the turnaround for apartments. Then, in January 2011, I attended the NMHC Apartment Strategies Conference in Palm Springs, and the atmosphere was very positive. The drivers were 1) very low new supply, and 2) strong demand (favorable demographics, and people moving from owning to renting).  Demographics are still favorable, but my sense is the move "from owning to renting" has slowed. And more supply is now coming online. On demographics, a large cohort has been moving into the 20 to 34 year old age group (a key age group for renters). Also, in 2015, based on Census Bureau projections, the two largest 5 year cohorts will be 20 to 24 years old, and 25 to 29 years old (the largest cohorts will no longer be the "boomers").  Note: Household formation would be a better measure than population, but reliable data for households is released with a long lag.  This graph shows the population in the 20 to 34 year age group has been increasing.  This is actual data from the Census Bureau for 1985 through 2010, and current projections from the Census Bureau from 2015 through 2035. The circled area shows the recent and projected increase for this group.  From 2020 to 2030, the population for this key rental age group is expected to remain mostly unchanged. This favorable demographic is a key reason I've been positive on the apartment sector for the last several years - and I expect new apartment construction to stay strong for several more years.

Rent or Buy? The Math Is Changing - An analysis by The New York Times finds that in the country’s most expensive places, including New York, the San Francisco Bay Area and Los Angeles, buying a home again looks like a perilous investment, based on the relationship between their prices and rents or incomes. And in a longer list of areas, including Boston, Miami and Washington, prices have risen enough that buying is no longer the bargain it looked to be a few years ago.  The Times also created an online calculator that enables prospective buyers and renters to analyze their own decision. For example, for a typical person considering the purchase of a $500,000 house who expects to live there seven years, it might make more sense to rent if a similar place is available for $1,956 a month or less.“A lot of these coastal markets look overvalued compared to rents,” said Mark Zandi, the chief economist at Moody’s Analytics. “In these markets, it seems generally more attractive to rent than to buy, even as the national market is broadly well balanced.”

Intrinsic Value of Homes & Mortgage Payments - Here is a table of intrinsic home values, based on the present value of 50 years of rent payments.  All homes are based on $12,000 in net implied rent per year.  I am assuming that rent inflation equals the expected inflation portion of the discount rate, so the intrinsic value is completely dependent on the real portion of the discount rate.  The total nominal rates in these tables is a combination of the real and the inflation rates, so the nominal discount rate where inflation is 3% and the real rate is 5% is the same as the discount rate where inflation is 5% and the real rate is 3% (approx. 8% in both scenarios).Here are the monthly mortgage payments for the same home.  (I have assumed, for simplicity, that the mortgage interest rate is equal to the discount rate applied to future rent payments.)  The intrinsic value of the home is only a product of the real rate, but the mortgage payment is a product of the total nominal rate.  Since the mortgage payments happen sooner, on average, than the rent payments that create the home's intrinsic value, real rates affect the value of the home more intensively than they affect the size of the mortgage payments.  This has the odd effect of causing real rates and inflation premiums to have the comparatively opposite effect on mortgage payments.  Higher inflation causes higher mortgage payments, but higher real rates cause lower payments.So, the most expensive home, in terms of mortgage payments, is the home that has a 10% mortgage rate that is entirely an inflation premium.  But, the home with the lowest mortgage payment is also a home with a 10% mortgage rate - the home with no inflation and 10% real rates.  This is why viewing the housing market through the lens of nominal rates is incoherent.  It seemed coherent when inflation rates were high and volatile in the 1970's & 1980's, and inflation was the most influential element.  Then, other factors like cyclical and demographic demand factors would have been noticeable, and since inflation was very high in the 1970's when real rates were very low, the mitigating effect of those high mortgage payments on demand masked the valuation effects of real rates.

Housing Makeover Downsizes GDP Growth Outlook - - The housing bust and weak recovery have created a medium-run move away from single-family home ownership and toward rental apartments. The shift means home construction will add less oomph to gross domestic product growth. But the trend to smaller dwellings also lessens housing’s spillover impact on consumer spending. In short, what works in a McMansion doesn’t fit in a rental apartment. The latest evidence of the shift came in last week’s report on residential construction. Apartment construction is back to its boom-year levels, while single-family housing remains about 64% below its 2006 peak. “The aversion to ownership continues. While roughly 95% of single-family starts are built for ownership, new multifamily family construction is 90% rental,” wrote Alan Levenson, chief economist at T. Rowe Price, in a research note. “The compositional skew dampens implication for value-added in GDP, since the value of a typical multi-family unit is well less than half of its single-family counterpart.” The apartment/renting moves have two implication for consumer spending. First, less space means less stuff. Second, rental units typically aren’t fitted with high-end appliances and finishes. Looking at real spending for certain home goods, the data show annual increases in spending on items like appliances, furniture and window treatments are averaging less than they did during the boom years. That means that, like home construction, demand for home goods isn’t supplying the boost to economic growth that it did before the recession.

Employment Scars of the Housing Bust - One way to see the scars of the housing bust is to look at the unemployment rate today in counties that saw the biggest decline in house prices. As we argue in the book, such an approach actually significantly underestimates the impact of the house price-driven spending collapse. This is because even people living in areas that were not hit by housing lost their jobs when people living in areas where house prices crashed stopped buying goods. But even with this under-estimation, here is the picture we get: The unemployment rate in counties hit hardest by the housing crash is more than 3% higher in 2013 relative to 2006. The rise in the unemployment rate is twice as high as the rise in counties with the smallest decline in house prices. The housing crash has led to a large and persistent increase in unemployment. The evidence is undeniable.

Quarterly Housing Starts by Intent, and compared to New Home Sales - In addition to housing starts for April, the Census Bureau also released the Q1 "Started and Completed by Purpose of Construction" report last week.  It is important to remember that we can't directly compare single family housing starts to new home sales. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The quarterly report released last week showed there were 103,000 single family starts, built for sale, in Q1 2014, and that was below the 107,000 new homes sold for the same quarter, so inventory decreased slightly in Q1 (Using Not Seasonally Adjusted data for both starts and sales). The first graph shows quarterly single family starts, built for sale and new home sales (NSA). In 2005, and most of 2006, starts were higher than sales, and inventories of new homes increased. The difference on this graph is pretty small, but the builders were starting about 30,000 more homes per quarter than they were selling (speculative building), and the inventory of new homes soared to record levels. Inventory of under construction and completed new home sales peaked at 477,000 in Q3 2006. In 2008 and 2009, the home builders started far fewer homes than they sold as they worked off the excess inventory that they had built up in 2005 and 2006.Now it looks like builders are generally starting about the same number of homes that they are selling, and the inventory of under construction and completed new home sales is still very low.   The second graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.

AIA: "Contraction in Architecture Billings Index Continues" - From AIA: Contraction in Architecture Billings Index Continues The Architecture Billings Index (ABI) has reverted into negative territory for the last two months. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the [April] ABI score was 49.6, up slightly from a mark of 48.8 in March. This score reflects a decrease in design activity (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.1, up from the reading of 57.9 the previous month.  The AIA has added a new indicator measuring the trends in new design contracts at architecture firms that can provide a strong signal of the direction of future architecture billings. The score for design contracts in April was 54.6.  •Regional averages: South (57.5),West (48.9), Midwest 47.0), Northeast (42.9) [three month average] This graph shows the Architecture Billings Index since 1996. The index was at 49.6 in April, up from 48.8 in March. Anything below 50 indicates contraction in demand for architects' services.  This index has indicated expansion during 16 of the last 21 months. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions. According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction

Hotels: Occupancy Rate up 4.6%, RevPAR up 9.6% in Latest Survey - From STR: US results for week ending 17 May In year-over-year measurements, the industry’s occupancy increased 4.6 percent to 69.7 percent. Average daily rate increased 4.8 percent to finish the week at US$116.30. Revenue per available room for the week was up 9.6 percent to finish at US$81.10. ADR: Average Daily Rate, RevPAR: Revenue per Available Room.The 4-week average of the occupancy rate is solidly above the median for 2000-2007, and is at the highest level since 2000.   The following graph shows the seasonal pattern for the hotel occupancy rate for the last 15 years using the four week average.

It Wasn't Household Debt That Caused the Great Recession - Instead, in their just-released book, House of Debt, they argue that the Great Recession was the result of a sharp fall-off in consumption due to the unevenly accumulated household debt in the first six years of the 21st century. In that period, mortgage-credit grew more than twice as fast in neighborhoods with low credit scores than in neighborhoods with high credit scores, a marked departure from the experience of previous decades. When the housing bubble popped, the economic consequences were sharply magnified by the way debt was distributed across households and communities. How did this happen? Why did lenders suddenly shower less-creditworthy borrowers with trillions of dollars of credit? Mian and Sufi demonstrate this was enabled by the securitization of home mortgages by investment banks that did not seek federal guarantees from Fannie and Freddie—so called private-label securities, made possible by financial deregulation and the glut of cash in world markets in the wake of the Asian financial crisis of the late 1990s. That private-label mortgage-backed securities were at the core of the housing meltdown is no longer in doubt, but what Mian and Sufi bring to the debate is how an unequal distribution of debt magnified the economic risks—based on their path-breaking microeconomic research—and a new framework for considering who is to blame among policymakers for the still reverberating debacle. Unfortunately, the two authors don’t provide answers for why so many households took on so much debt, but they do paint a cautionary tale. This is a critically important contribution to the policy debate now raging over what Congress and the Obama administration should do in the way of reforms to the housing-finance industry.

US Consumer Price Inflation Accelerates in April but Inflation Expectations Remain Flat -- The Bureau of Labor Statistics announced this week that the U.S. consumer price index rose at an annual rate of 3.17 percent in April. That was the fastest rate in 10 months. Prices for gasoline, cars, and medical services helped push the index higher. The core CPI, which excludes volatile food and energy prices, rose at an annual rate of 2.87 percent, also a faster rate than in March. The Cleveland Fed publishes an index of expected inflation over various time horizons based on prices of Treasury Inflation Protected Securities (TIPS). As of April, inflation was expected to average 1.7 percent over the next five years, and 1.9 percent over the next ten years. Those rates were essentially unchanged from March. The Fed has set a target of 2 percent inflation, as measured by the deflator for personal consumption expenditures in the national income accounts. Because of differences in methodology, inflation as measured by the CPI tends to run about half a percentage point higher than as measured by the PCE deflator. Taking into account both current and expected inflation, then, we can say that inflation appears to be gradually approaching the Fed's target, but it is not there yet.

Poor Americans Direct 40% of Their Spending to Housing Expenses - Housing and food expenses absorb more than half of low-income Americans’ annual spending. Even the wealthiest Americans devote a sizable share of their spending to keeping a roof over their heads and food in their refrigerators. That’s according to the Labor Department’s latest survey of Americans’ buying habits. The consumer expenditure survey report released Friday contained data on spending from July 2012 through June 2013. On average, the report found, Americans upped their spending on food, transportation, health care, housing and “cash contributions” like child support payments and charitable donations. Overall, they spent 1.5% more compared with the previous 12 months, while average income ticked down 0.2%. But household budgets look quite different for the richest and poorest Americans. The bottom 20% in terms of income directed 39.6% of their spending to housing – including utilities, furniture and other related costs – and 16% to food. For the top 20%, 30.6% of their spending went to housing and 11.4% went to food.  On average, 33.1% of all consumers’ spending went to housing costs while 12.8% went to food. (Americans paying more than 30% of their overall income on housing “are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care,” according to the Department of Housing and Urban Development.)Wealthier Americans spent more on “personal insurance and pensions,” a category that includes life insurance and Social Security – 15.4% of their spending, compared with 2.1% for the bottom 20% of Americans.

The Meat Crisis Is Here: Price Of Shrimp Up 61% – 7 Million Pigs Dead – Beef At All-Time High - As the price of meat continues to skyrocket, will it soon be considered a "luxury item" for most American families? This week we learned that the price of meat in the United States rose at the fastest pace in more than 10 years last month. This is really bad news if you like to eat meat. The truth is that the coming "meat crisis" is already here, and it looks like it is going to get a lot worse in the months ahead. Could rapidly rising food prices cause civil unrest in the United States eventually? It won't happen today, and it won't happen tomorrow, but some day it might. Meanwhile, you might want to start carving out a significantly larger portion of the family budget for food for the foreseeable future.

Chart of the week -- The core PCE inflation rate has slowed down from 2% to 1% in two years. The chart above, from Bloomberg, shows the contribution to that decline of the inflation rate of different categories of personal consumption expenditures (vertical axis).  Health care services make the largest contribution to disinflation, about one third, in part because they have a large weight in the price index. This disinflation in medical services is thought to be a one-off, the result of lower Medicare reimbursements as part of the 2013 budget sequestration, and the expiration of patents on some drugs, which opened the floodgates to generic alternatives. The category with the sharpest deceleration, however, in inflation (horizontal axis) was clothing. That seems to be the continuation of a decades-long trend of declining prices of apparel, as the share of imported clothing increases and prices of those imports decline.

Booming Retail Sales Hide A Terrible Problem - The Endgame - Actual, nominal retail sales grew at the robust annual rate of 4.8% after posting the best April performance since 2009. But there’s a problem with that.  Forget the seasonally adjusted headline number of a gain of 0.1% which missed conomists’ expectations of a 0.3% gain. Seasonally adjusted data is fiction designed for mass consumption.  In reality, April is virtually always a down month versus March. The fact is that this April’s actual, not seasonally adjusted month to month decline of 1.1% was far stronger than last year’s April drop of 2.9%, and also much stronger than the 10 year average April drop of -2.1%. This April was a very good month in nominal terms. The 4.8% annual growth rate is smack in the middle of the growth rate range of the past two years. 4.8%. That’s nearly 5 times the rate of US population growth. It’s all good, right? That’s in total nominal terms. It includes inflation. It is heavily skewed by the spending of the top 10% of households in wealth. It is boosted by growing tourism revenue. It does not represent the average American household. The problem is that the average, real, inflation adjusted retail sales per capita, ex-gasoline 1, is growing far more slowly, and has not even recovered to the 2003 level. 2003, if you recall was at the bottom of a recession. Retail sales growth per capita has been stagnant for the past 11 years. This coincides with the well known data on real US household income which has been in a declining trend since 1998. The worst of that decline, by the way, occurred between 2007 and 2011, a period during which the Fed began offering free money to banksters, and printing money madly. And you think that’s a coincidence?

American Automobile Glut? Unsold Cars Are Piling Up - Some 3.27 million new cars are now sitting on lots across the U.S., more than there have been in almost five years, according to Automotive News. That’s a lot of cars—just enough to equip every man, woman, and child in the state of Iowa with a new vehicle, and just slightly less than the number of iPhones added to Verizon’s network last quarter. A year ago at this time, by contrast, there were 2.7 million vehicles lying in wait across the country; summer 2011 saw an inventory of about 1 million fewer cars.Inventory is a dirty word to most supply-chain managers. After all, it was a “just-in-time” factory system that helped Toyota (TM) muscle its way to the top of the industry, and there’s nothing timely about 3 million unsold cars. But there are a few, very real reasons for car executives to be confident. For one, interest rates are still relatively low and car loans are easy to come by, even for those with poor credit. There is pent-up demand because the 2008 recession spooked so many drivers into holding on to an aging ride for a little while longer.

LA area Port Traffic: Up year-over-year in April - Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for April since LA area ports handle about 40% of the nation's container port traffic. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic was up 0.9% compared to the rolling 12 months ending in March. Outbound traffic was up 0.6% compared to 12 months ending in March. Inbound traffic has generally been increasing, and outbound traffic has been moving up a little recently after moving sideways. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year). Imports and exports were up solidly year-over-year in April, and this was an all time high for exports for the month of April. Imports were close to the all time high for April (set in April 2006), and it is possible that imports will be at a record high later this year.

Markit flash manufacturing PMI moves higher in May - (MarketWatch) -- U.S. manufacturing picked up to a 3-month high in May, according to the flash purchasing managers index released by Markit on Thursday. The manufacturing PMI rose to 56.2 compared to the 55.4 in April. Readings over 50 indicate growth. Readings for output and backlogs saw accelerated growth, while new orders, new export orders and employment expanded at a slower pace than April. "This provides further confirmation that industry will aid a rebound in U.S. GDP in the second quarter, and other indicators from the survey suggest that the sector has plenty of momentum heading into the summer and beyond," said Paul Smith, senior economist at Markit.

US Manufacturing PMI Beats But Employment Slows To Worst In 2014 - Having hit cycle highs over 57 in February (in peak cold-weather season), US Manufacturing PMI appears unable to regain the positive momentum of that peak despite weather no longer being an issue. While the 56.2 print beat expectations of 55.5, with new orders improving, the all-too-crucial employment sub-index dropped to its slowest rate of expansion in 2014. Until just a few months ago when this macro indicator started to rise, it was seen as a secondary data item but once it started reinforcing the status quo believers trend it became crucial.

Growth in Tenth District Manufacturing Activity Expanded Solidly - The Federal Reserve Bank of Kansas City released the May Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that growth in Tenth District manufacturing activity expanded solidly, and producers’ expectations for future factory activity remained at healthy levels. “This was the third straight month of solid growth at factories in the region, following some weather-related weakness in previous months”, said Wilkerson. “More factories than in recent surveys were also able to raise selling prices.”  The month-over-month composite index was 10 in May, up from 7 in April and equal to 10 in March

The Industrial Revolution and open innovation - Much of today’s technology is powered by software that developers share freely. The leading Web server software (Apache), the leading smartphone operating system (Android), and most of the code of the leading Web browsers (Chrome, Firefox) are open source. Some people see these developments as evidence of a sharp break from the past: We have entered the Age of Open Innovation, in which inventors no longer keep their knowledge secret or locked up with patents. But, in fact, innovators shared knowledge extensively in the past. True, many textbooks and technology museums paint pictures of historical inventors jealously guarding their secrets. The Wright brothers, for instance, refused to let anyone see their airplanes fly for several years after their success at Kitty Hawk until they obtained a patent. But scholars have established that past inventors frequently shared their inventions and cooperated with one another in developing new knowledge. Indeed, prior to Kitty Hawk, even the Wright brothers freely shared the results of their experiments and their designs with an international network of aviation developers who had been exchanging knowledge for decades.

Just Released: What Kinds of Jobs Have Been Created during the Recovery? -- New York Fed - At today’s regional economic press briefing, we provided an update on economic conditions in New York, northern New Jersey, and Puerto Rico, with a special focus on the kinds of jobs that have been created in each of these places during the recovery. Led by New York City, economic activity has continued to expand in most parts of the region. As a result, a growing number of places have now gained back, or are close to gaining back, all of the jobs that were lost during the Great Recession. That said, not all the news was positive. Economic conditions appear to have weakened somewhat in northern New Jersey during the first few months of 2014, in part due to the harsh winter weather earlier this year. And a few places remain very weak. In particular, Binghamton, Elmira, Utica, and Puerto Rico have yet to see any meaningful jobs recovery. Although employment has now returned to levels seen prior to the Great Recession in the nation and in much of the region, the types of jobs created during the recovery are not the same as those that were lost during the recession. It turns out that during the recession, the vast majority of jobs that were lost in the nation and across the region were middle-skill jobs, such as construction workers, teachers, machine operators, and administrative support workers. These jobs have not come back during the recovery. In fact, upstate New York and Puerto Rico have continued to lose middle-skill jobs during the recovery, while there were essentially no changes in these jobs in New York City or northern New Jersey. What have grown are higher-skilled jobs—such as engineers, computer programmers, doctors, and financial analysts—and lower-skilled jobs—such as food service workers, retail clerks, health care aides, and child care workers.

Labor Force, Employment, and Population April 2008 vs. April 2014 --  I have two sets of interesting charts from reader Tim Wallace on labor force, population, and employment. This post shows the first set, a comparison of April 2008 to April 2104.  Since April 2008, the population in age group 16-24 rose by 3.6% but the labor force declined by 4.2%, and employment fell by 5.9%. Since April 2008, the population in age group 25-54 declined 0.8%, but the labor force declined 3.6%, and employment declined 4.6%. There are significant surges in Population, Labor Force and Employed in the 55-64 age group. Most employment growth is here. However, employment did not come close to keeping up with growth in population. Although the Population growth is high, the rate of growth for employment and for those in the labor force is much higher. More older people are staying working than retiring as in the past. The above charts post a rather dim view of the recovery since the start of the recession. In the core age 25-54 age group, the population is down 1,053,000 but employment is down a whopping 4,614,000. Thus, in the 25-54 age group, roughly 3,561,000 people are not working who should be working. The figure is higher if you include other age groups. Clearly things are not close to normal.

Weekly Initial Unemployment Claims increase to 326,000 -- The DOL reports: In the week ending May 17, the advance figure for seasonally adjusted initial claims was 326,000, an increase of 28,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 297,000 to 298,000. The 4-week moving average was 322,500, a decrease of 1,000 from the previous week's revised average. The previous week's average was revised up by 250 from 323,250 to 323,500.  There were no special factors impacting this week's initial claims. The previous week was revised up from 297,000. The following graph shows the 4-week moving average of weekly claims since January 1971. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 322,500. This was above the consensus forecast of 310,000.  The 4-week average is close to normal levels for an expansion.

New Jobless Claims at 326K, Higher Than Forecast -- Here is the opening statement from the Department of Labor:  In the week ending May 17, the advance figure for seasonally adjusted initial claims was 326,000, an increase of 28,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 297,000 to 298,000. The 4-week moving average was 322,500, a decrease of 1,000 from the previous week's revised average....  There were no special factors impacting this week's initial claims. [See full report],  Today's seasonally adjusted number at 326K was higher than the forecast of 310K. Here is a close look at the data over the past few years (with a callout for the past year), which gives a clearer sense of the overall trend in relation to the last recession and the volatility in recent months.

Jobless Claims And The Issue Of "Full Employment": Last week, the number of first-time jobless claims dropped below 300,000 which has not happened since before the onset of the financial crisis. Not surprisingly, the media and economic analysis exploded with commentary that this is a sure sign that the economic recovery is afoot. Such a recovery will lead to stronger employment, higher wages, rising interest rates and a continuation of the bullish stock market cycle. However, is that really the case? Historically, falling jobless claims have resulted in increased employment and is currently viewed as an important leading indicator of employment recovery. The chart below is a historical look at jobless claims (inverted) and full-time employment relative to the population from 1968-2007. Since all jobs created are not equal, I am using full-time employment which leads to household formation and sustainable economic growth.As shown, historically when jobless claims have fallen to 300,000 or less full-time employment has been at 50%, or above, for the working age population. However, since the financial crisis that is no longer the case. Despite falling jobless claims, full-time employment has remained a limited commodity. The good news is that there has been a relative pickup in full-time employment as a percentage of the population as of late. However, the bad news is that the ratio is increasing because the working age population is declining.

Fed’s Dudley: Notable Part of Labor Force Drop Due to Discouraged Workers - Federal Reserve Bank of New York President William Dudley said Wednesday that around “a couple of percentage points” of the nation’s decline in the labor force participation rate is tied to discouraged workers exiting the workforce. Mr. Dudley’s remarks suggested rapid declines in the unemployment rate seen of late likely overstate the nature of the improvement in job market, and point to a labor sector where considerable slack still abounds. Mr. Dudley made his observation at a briefing on regional labor conditions held at his bank. He was addressing the steady decline in labor force participation rates seen in recent years. Economists and central bankers alike have been debating the reason for the fall: is it related to the retirement of the baby boom generation, or is it due to workers, scarred by the impact of the Great Recession, simply abandoning the search for work? While most agree the decline in participation is a mix of both, there is little clarity about the balance between these factors.  Labor force participation stood at 62.8% as of April, down from 63.2% in March, and 63.4% for the same month a year ago. The decline in participation rates has helped fuel a rapid decline in the unemployment rate, now at 6.3%. While a drop in joblessness is always welcome, it becomes less so when it is driven largely on the back of workers giving up on finding new jobs. Mr. Dudley’s view appears to suggest his confidence that labor force participation rates could rebound a bit. But he allowed that because of demographic issues tied to Baby Boomer retirement, “the long-term trend is downward” for labor force participation. That said, “there’s a lot of uncertainty” around what’s happening with who is working, who is looking for work, and who is not, Mr. Dudley said.

The Recession’s Effect on Job Churn -  St Louis Fed - Jobs in the U.S. labor market get turned over at a surprising frequency, with flows into/out of unemployment being almost four times faster than in Germany, despite similar unemployment rates.1 But when U.S. workers leave jobs, they are twice as likely to go directly into another one as become unemployed.2 These job-to-job transitions make up the bulk of the job destruction and creation in the U.S. labor market. However, it appears that employed workers have slowed their transitions between employers. (Among others, Mike Konczal at The Next New Deal discussed this in a recent blog post.3) While this does not necessarily affect the unemployment rate (as these job-to-job changers are never unemployed), it may be a sign of two things:

  • Finding a job is still very difficult.
  • The job market may be experiencing coagulation, less churn and less “dynamism.”

If the second point is true, this could spell worrying news for allocative efficiency if we believe that the flow of workers from job to job plays a significant role in efficiently allocating workers.

47% of Unemployed Americans Have Just Stopped Looking for Work -  Nearly half of unemployed Americans have “completely given up” looking for a job, a new survey has found. Pollsters for job staffing company Express Employment Professionals asked 1,500 unemployed American adults how they were faring in their job hunts. A startling number were, in a word, fed up.   83% expressed a willingness to accept a job that would pay less than their previous position, and 45% blamed the economy for producing what feels to them like a jobless recovery.“After searching for four years and being unsuccessful, I am tired of trying,” one respondent said, according to the surveyors. Despite the troubling numbers, 91% agreed with the statement “I’m hopeful that I will find a job I really want in the next six months,” indicating that they still held out hope that they could land a job, even if the search felt beyond their control.

HP axes up to 16,000 more jobs - On Thursday, Hewlett-Packard announced that it would be cutting up to 16,000 more jobs as a way to save money. Late last year, the company said it would be cutting a total of 34,000 jobs by the end of the 2014 fiscal year—the new layoffs raise that to a maximum total of 50,000. The San Jose Mercury News reported that all the job cuts would be completed by the end of 2015. HP explained the cuts by saying they are a means "to reengineer the workforce to be more competitive and meet its objectives." Hewlett-Packard swung back into the black in 2013, maybe poised for "expansion." In May 2012, the Silicon Valley stalwart said that it would be cutting about 27,000 jobs through fiscal year 2014 in a move expected to save the company as much as $3.5 billion. That number ticked up to 29,000 by July 2013. At the time of the announcement, the company employed 350,000 people—a total cut of 50,000 people means the company is cutting loose 14 percent of its labor force.

Unemployment: It's Not Personal - Paul Krugman - Matt O’Brien has an interesting if depressing piece on long-term unemployment, making the point that long-term unemployment is basically bad luck: if you got laid off in a bad economy, you have a hard time finding a new job, and the longer you stay unemployed the harder it becomes to find work. Obviously I agree with this analysis – and I’d add that O’Brien’s results more or less decisively refute the alternative story, which is that the long-term unemployed are workers with a problem. Read between the lines of a lot of commentary on the unemployed – especially from those eager to slash benefits – and you’ll realize that something like this is the implicit underlying theory. But here’s the thing: the association between worker quality and unemployment should be much stronger in a good economy than in a bad economy. In 2000, with labor scarce, there probably was something wrong with many people who got laid off; in 2009, it was just a matter of being in the wrong place. So if unemployment was about personal characteristics, being unemployed should have mattered less for job search after the Great Recession than before. What we actually see, of course, is the opposite. In other words, it’s nothing personal; it’s the economy, stupid. And as O’Brien said, it’s one more reason failure to provide more stimulus is a crime against American workers.

The US labor market is not working - In a recent post Paul Krugman looks at the dismal performance of US labor markets over the last decade. To make his point, he compares the employment to population ratio for all individuals aged 25-54 for the US and France. The punch line: even the French work harder than the Americans! And this is indeed a new phenomenon, it was not like that 13 years ago [Just to be clear, there are other dimensions where the French are not working as hard: they retire earlier, they take longer vacations,... but the behavior of the 25-54 year old population is indeed a strong indicator of how a society engages its citizens in the labor market. ] So are the French the exception? Not quite. Among OECD economies, the US stands towards the bottom of the table when it comes to employment to population ratio for this cohort (#24 out of 34 countries).

This graphic shows where America's most-skilled foreign workers are coming from -- Every year, the United States lets in about 65,000 of the world's most-skilled workers. The visas, referred to as H1-B, are highly competitive. They're so competitive that in the last two years, the acceptance cap was reached within a week of the applications becoming available. They can also be valuable. Entire scams have arisen in India to make money from them. The State Department defines the H1-B as a non-immigrant visa for a foreign person working in a specialty occupation. The H1-B requires “a higher education degree or its equivalent.” Every skill-based career is included in this visa category, from fashion designers to military contractors. It’s designed to allow American companies to hire employees that have skills that they cannot find within the US population. Last year, the United States Citizenship and Immigration Services (USCIS) approved more than 150,000 H-1B visas for foreign workers. Using data from the State Department, the chart below shows you the top 10 occupations for H1-B visas. Most work in the IT industry. Brookings Institute senior analyst Neil Ruiz said most H1-B visas go to people working in a Science, Technology, Engineering, and Mathematics (or STEM) field. Some experts think the emphasis of H-1B visa distribution within the math and sciences industries is due to the “American STEM shortage.” Fewer Americans are choosing to work in STEM fields, or they just aren’t qualified for the jobs, and skilled foreign workers are there to fill the demand.

Eighty percent of current jobs may be replaced by automation in the next several decades. That’s the conclusion of Stuart W. Elliott in his recent paper, “Anticipating a Luddite Revival.” We’ve seen that scale of transformation before. But this one promises to be roughly four times as fast, dwarfing Luddite-era concerns: …the portion of the workforce employed in agriculture shifted from roughly 80% to just a few percent. However, in the shift out of agriculture, the transformation took place over a century and a half, not several decades. But there’s a much bigger difference this time — a hard limit that time can’t ameliorate: The level 6 anchoring tasks in Table 2 are not only difficult for IT and robotics systems to carry out, but they are also difficult for many people to carry out. We do not know how successful the nation can be in trying to prepare everyone in the labor force for jobs that require these higher skill levels. It is hard to imagine, for example, that most of the labor force will move into jobs in health care, education, science, engineering, and law. I’ve said it before: the median IQ is 100, by definition. Fifty percent of people are below that level. We (and they) are facing a hard cognitive limit that the Luddites never approached. I don’t think anybody reading (or writing) this post can appreciate how hard it would be to make a go of it in today’s technological society — even get through high school, much less provide a healthy, happy, financially secure life for one’s family — with an IQ of 80 or 90. If you’re in the low-IQ group (and don’t inherit), your miserable position in life is fixed at birth. Get over it.

Bezos expects 10,000 robots at Amazon warehouses by 2015 - plans to aggressively expand its use of robots at it warehouses in 2014, rolling out 10,000 of them by the end of 2014. Chief Executive Jeff Bezos told investors at Amazon’s annual shareholders meeting Wednesday that the company has about 1,000 robots picking products today. The robots are made by Kiva Systems, a company Amazon purchased two years ago for $775 million in a bid to further automate its warehouses. Last October, the company said it had deployed 1,382 robots in three warehouses.

America: Europe and Canada’s Willing Chump - One of the more memorable turns of phrase I’ve heard in the past few years came during the effort to unionize an Ikea plant in Virginia. In the same way that Mexico became an attractive location for American capitalists because of lower wages and less stringent environmental standards, some European employers began finding America more to their liking. Or, put more colorfully: During its successful campaign to organize the Danville workers, the International Association of Machinists (IAM), through its Machinists News Network, produced a web video called “Same Rules, Same Respect.” It charged that “when on American soil, IKEA is playing by a very different set of rules than when at home.” In the video, IAM Woodworking Division director Bill Street says, “We’ve become Sweden’s Mexico.” That isn’t Europe’s approach across the board, of course; heaven knows Volkswagen did its best to give its American workers more of a voice. But there has definitely been a willingness for other Western nations to take advantage of America’s willingness to put itself at risk or a disadvantage. This has been especially pronounced with fossil fuels. For instance, Canada has been at best ambivalent about building pipelines for its Alberta tar sands. On the one hand, its political and media elite is not only firmly in favor but vigorously lobbying for them. On the other, the combination of grassroots activism and court challenges has made building them in-country dicey. So it looks like Ottawa might just decide it’s easier to build what Charles Pierce called a death-funnel down the spine of the United States. Since Keystone has the enthusiastic support of climate science-denying cretins in both the House and Senate, it just might succeed.

The Deep Roots of Skilled Labor Shortages: Anti-Union, Anti-Worker Corporations -- A recent story from NPR’s Andrew Schneider, about a construction boom and skilled labor shortage in Texas, is missing some of the links needed to understand what is happening there and why. The elements are all there: the huge loss of construction jobs following the financial crisis in 2008, the energy boom creating jobs regionally even while construction employment nationally remains about a million and a half jobs lower than its peak, a decline in unauthorized immigration, and contractors grudgingly increasing pay to attract workers. The two missing links are the role of the construction owner, like Chevron, in crushing the unions that provide skilled journeymen in the construction trades, and a clear discussion of the wage levels needed to attract skilled workers from parts of the country the recovery hasn’t reached. The story says wages are rising in Texas, but from what to what? Are wage levels high enough to persuade a journeyman electrician from Michigan or Los Angeles to relocate to Houston? Or are they unreasonably low, given the scarcity of skilled workers and the years of training required to produce a journeyman? How do union wages compare with non-union wages? The story never says. Oil giants like Chevron can afford to have their construction contractors pay well for skilled work, but they resist. Organizations they fund, such as the Business Roundtable, have led a decades-long campaign to weaken or destroy the building trades unions that actually train the greatest number of skilled tradesmen. Chevron, Koch Industries, ExxonMobil and many other energy industry corporations fund the American Legislative Exchange Council and its legislative efforts to kill unions and eliminate labor standards. It’s hard to hear Chevron complain about a labor shortage when Chevron and other Fortune 500 companies themselves are a major cause. They don’t merely fight unionization, they also oppose the state and federal prevailing wage laws that protect construction wages from being driven lower and allow union apprenticeship programs to continue providing the best-trained workers.

Protest at McDonald’s Headquarters Leads to Dozens of Arrests - Over one hundred McDonald’s and other fast food employees demonstrating for wage hikes were arrested Wednesday afternoon one day ahead of the fast food king’s annual shareholder meeting, in which executive pay will be addressed. A total of around 2,000 protestors gathered at McDonald’s corporate campus Wednesday afternoon in Oak Brook, Illinois to support a $15 hourly wage and the right to unionize. Protestors arrived in dozens of buses and lined up front of heavily armed police. “We cannot survive on poverty wages. We need our wages to be increased and we need a union to have protection in the workplace and take care of our families,” 25-year-old McDonald’s employee Jessica Davis told TIME. She makes an hourly salary of $8.98 an hour. “McDonald’s is my only job. It’s really hard taking care of two children and paying the bills.” Protestors called it the largest labor demonstration against the world’s largest fast food company.McDonald’s told TIME last week that wages are set by local market conditions, adding that 80% of its restaurants are independently-owned and operated by small business owners. “McDonald’s and our owner-operators are committed to providing our respective employees with opportunities to succeed, and we have a long, proven history of providing advancement opportunities for those who want it,”

No, Taking Away Unemployment Benefits Doesn’t Make People Get Jobs, by Bryce Covert: When 1.3 million long-term unemployed people lost benefits because Congress let the program lapse, some claimed that taking away the checks would encourage people to go out and get a job. That isn’t panning out for the 74,000 people who are no longer getting checks in Illinois. In January, one month after they lost benefits, 64,000 of them, or 86 percent, were still unemployed, according to an analysis of wage records by the Illinois Department of Employment Security (IDES). February was similar: 61,3000 people were still unemployed, or 82.7 percent of the original group. That means two months later, four out of five people who were cut off from benefits still weren’t bringing in wages. “This notion that temporary unemployment benefits provide people a reason not to return to work really needs to end because it is not supported by the data,” IDES Director Jay Rowell said. Other natural experiments have shown that, rather than spurring a flurry of hiring, cutting off benefits can have disastrous consequences. North Carolina was ahead of the pack, making such drastic cuts to its benefits system that it was dropped entirely from the federal long-term compensation program. The number of state residents receiving benefits dropped by 40 percent to 45,000 by December. Since then, the unemployment rate has dropped, but not likely because people are finding work but because they’re giving up altogether. More than 22,000 found a job after the loss of benefits, but the state’s labor force is experiencing the largest contraction in history, with 77,0000 fewer people working or looking for a job in October compared to the previous year.

Q&A: David Autor on inequality among the “99 percent” | MIT News Office: Today’s wealth gap does not just exist between the richest 1 percent of the population and everyone else; there have been growing inequalities among the less-wealthy 99 percent of people, too. In an article published today in Science, MIT economist David Autor contends that much of our present inequality stems from disparities in education. This has evolved in two directions: From 1980 to 2012, inflation-adjusted, full-time earnings of college-educated males increased anywhere from 20 percent to 56 percent, depending on whether they also acquired graduate degrees. Conversely, real earnings of high school graduates fell 11 percent, and earnings of high school dropouts fell 22 percent. MIT News talked with Autor about inequality.

The wages of low pay - Dr. Tao Sheng Kwan-Gett, welcoming the crowd to a lecture I was about to give on inequality, said he asked the child’s mother question after question about basics every parent should know. Again and again the mother had no answers. She just did not know the condition and activities of her child. As Kwan-Gett spoke, his voice rose in cold fury, his face flushed with anger at the callousness of this awful excuse for a parent. Finally, he said he asked the mother directly how she could be so uncaring. Abruptly, the doctor’s voice turned soft as he recounted the mother’s response. She and her husband worked such long hours at such below-minimum-wage pay that they were always desperate for sleep. They were barely able to pay the rent. Their choice was between neglecting their child and living on the streets, where life is nasty, brutish and often short. “My anger,” Kwan-Gett said softly, “turned to sympathy.” His words brought home the hidden and future costs of our callous mistreatment of tens of millions of American workers whose incomes keep falling even as the economy recovers from the Great Recession. The price we pay today for low wages is as big as it is easy not to notice. Unless we change our public policies, that price will explode as a significant number of children grow up without proper care and diet, and with no reason to believe their own initiative will make their lives any better.

Broke and Broken? The Psychological Effects of Poverty (infographic) For the more than 40 million Americans in poverty, everyday life is a struggle — buying food, going to school, getting a job. And for a great many of them, what most people think of as simple tasks are also difficult. Let’s explore the picture of poverty in the U.S. and the psychological and physical toll it takes.

Philly Fed: State Coincident Indexes increased in 47 states in April -  From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for April 2014. In the past month, the indexes increased in 47 states, decreased in two, and remained stable in one, for a one-month diffusion index of 90. Over the past three months, the indexes increased in 45 states and decreased in five, for a three-month diffusion index of 80.Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:  The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged)  In April, 48 states had increasing activity(including minor increases). This measure declined sharply during the winter, but is now back to normal for a recovery. Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the

N.J. Faces FY 2015 Spending Gap of $3 Billion, Moody’s Says - New Jersey faces a structural budget gap of as much as $3 billion next fiscal year as Governor Chris Christie juggles rising costs and less-than-projected revenue, according to Moody’s Investors Service. The imbalance includes about $1 billion of one-time measures in Christie’s proposed spending plan and $1.2 billion of potential shortfalls. It also takes into account the gap for this fiscal year, as much as $807 million, which Christie may close with short-term fixes, Moody’s said in a report today. Moody’s downgraded New Jersey’s credit May 13. It was the sixth rating cut since Christie took office in 2010, leaving the Republican tied with Democrat James McGreevey for the most reductions for a New Jersey governor. The three major rating companies have all cited recurring deficits as revenue fails to meet Christie’s projections. “Three consecutive years of revenue shortfalls, driven by optimistic assumptions and a lagging economic recovery, have created recurring mid-year budget gaps and will continue to pressure the budget,” Baye Larsen, a Moody’s senior analyst, wrote in the report.

Gov. Chris Christie announces plan for fixing New Jersey budget deficit: – Gov. Chris Christie lashed out at past governors and lawmakers Tuesday for shorting the state's pension system — but then announced his own plan to kick the can down the road for the program's 700,000 active enrollees and retirees. Christie said he will slash contributions scheduled to be made to New Jersey public workers' pension funds by nearly $2.5 billion over the next 14 months to deal with a revenue shortfall facing the state budget. The moves are designed to help fill an unexpected $2.75 billion budget gap. New Jersey has a long history of underfunding its mandated pension contributions, starting with Republican Gov. Christine Whitman in 1994. "He's pulling a page from his predecessors,'' said Patrick Murray, the director of the Monmouth University Polling Institute. "But for Christie's chances in the Republican presidential primary in 2016, it's an attractive move for him because for Republican primary voters, the only mortal sin is raising taxes.'' The planned funding shortage will have no immediate impact for the 294,000 current retirees, who received an average pension payout of $29,936 in 2013, but could lead to a wipe out of program balance sheet gains that occurred when Christie and Democratic lawmakers pushed through a system overhaul in 2011. The unfunded liability for the pension system is expected to hit $54.1 billion by fiscal year 2018. Wall Street analysts said Christie's immediate response, if not accompanied by a benefit reduction, will make it difficult for the state's pension system to become solvent anytime soon and it won't help the state boost its overall fiscal picture in the longer run.

European Union Considers Suit Over Washington State Tax Incentives - Washington State’s $8.7 billion tax incentive for aerospace production (primarily Boeing and its affiliated suppliers) is in the news again, with the European Union indicating the tax incentive may come up in a new round of World Trade Organization disputes. The United States and the European Union have a long history of suits and countersuits regarding various programs for Boeing (in the US) and Airbus (in the EU), which have generally resulted in both sides losing in WTO rulings. As a matter of fact, Washington’s state tax incentives have come up before. Alongside Illinois and Kansas, Washington was identified in the EU’s previous Boeing-related suit against the US. In the ruling for that dispute, the WTO found that Washington’s tax reductions for Boeing are specific subsidies, but do not violate international law for various technical reasons (namely, they are not directly conditioned on Boeing exporting). Washington’s new, $8.7 billion subsidy could re-open this dispute, offering the EU new ammunition to sue the United States (sub-national entities cannot be the target of disputes at the WTO). Of course, whether it’s Washington’s tax incentives for Boeing, or California’s emissions rules, US state policy has tended to hold up fairly well in international disputes. What trade experts call “sub-national entities” (like states, municipalities, or provinces) have proven to be a thorny issue in trade policy, as such entities differ widely in structure and importance across countries. Even if the EU does sue the US and win the case, however, it wouldn’t necessarily stop Washington State from offering major tax incentives. The World Trade Organization has no way to force nations to comply: all it can do is recommend, and give other nations the legal go-ahead to retaliate (say, by the EU increasing subsidies to Airbus, or increasing tariffs on US aerospace exports).

Ohio unemployment compensation fund continues downward spiral - Ohio's Unemployment Compensation Trust Fund that provides jobless benefits for millions continues to spend more cash than it takes in. Last year, Ohio disbursed $1.8 billion in unemployment compensation to approximately 353,078 individuals. Jobless benefits are funded through taxes paid by Ohio employers. "It's been a decade long problem," says Sean Chichelli of the Ohio Chamber of Commerce. Chichelli says Ohio ranks near the top of all 50 states in terms of trust fund debt and predicts it will continue to hurt Ohio businesses that pay taxes on employees salaries. Chichelli warns the compensation fund is $1.6 billion in debt and has had solvency problems since the early 2000's. Chichelli says employers are currently paying "about $105 per employee" but warns that figure could skyrocket to "more than $200 two years from now."

As Court Fees Rise, The Poor Are Paying The Price -- NPR's yearlong investigation included more than 150 interviews with lawyers, judges, offenders in and out of jail, government officials, advocates and other experts. It also included a nationwide survey — with help from NYU's Brennan Center for Justice and the National Center for State Courts — of which states are charging defendants and offenders fees. Findings of this investigation include:

  • Defendants are charged for a long list of government services that were once free — including ones that are constitutionally required.
  • Impoverished people sometimes go to jail when they fall behind paying these fees.
  • Since 2010, 48 states have increased criminal and civil court fees.
  • Many courts are struggling to interpret a 1983 Supreme Court ruling protecting defendants from going to jail because they are too poor to pay their fines.
  • Technology, such as electronic monitors, aimed at helping defendants avoid jail time is available only to those who can afford to pay for it.

"Feeding The Homeless" Is A Crime In Increasingly More US Cities - Right now, there are dozens of major U.S. cities that have already passed laws against feeding the homeless. As you will read about below, in some areas of the country you can actually be fined hundreds of dollars for just trying to give food to a hungry person. I know that sounds absolutely insane, but this is what America is turning into. Communities all over the country are attempting to "clean up the streets" by making it virtually illegal to either be homeless or to help those that are homeless. Instead of spending more money on programs to assist the homeless, local governments are bulldozing tent cities and giving homeless people one way bus tickets out of town. We are treating some of the most vulnerable members of our society like human garbage, and it is a national disgrace. What does it say about our country when we can't even give a warm sandwich to a desperately hungry person that is sleeping on the streets? A retired couple down in Florida named Debbie and Chico Jimenez wanted to do something positive for their community during their retirement years, so they started feeding the homeless in Daytona Beach. But recently the police decided to crack down on their feeding program and slapped everyone involved with a $373 fine.

Recent Black College Grads Face Severe Underemployment - The weak labor market has been particularly devastating for young black workers. That’s even true for many of the most qualified young black Americans —those with a four-year college degree— who are stuck in low-paying jobs, a new study found. Among those with a job in 2013, more than half of black recent college graduates—56%–were in an occupation that typically doesn’t require a college degree, according to a report by the Center for Economic and Policy Research, a left-leaning Washington think tank. Among all recent college grads with a job, the rate still was a very high 45%. (The report defines a recent college grad as someone between the ages of 22 and 27 with a four-year degree.) The study’s authors call this underemployment, in which college-educated workers aren’t getting high enough salaries to pay off their student debt and achieve a middle-class lifestyle. Experience makes a difference, with workers further out of school tending to hold better jobs than recent college graduates. Among all black college graduates—regardless of when they earned their degree—about 42% were in a job that didn’t require a degree in 2013. Among all college graduates regardless of race, the figure was 35%. The weak labor market comes at a time when young college graduates also are carrying higher debt loads than previous generations to cover rising college costs. “Black workers have been told for a generation that the way for you to do better is go to college,” said Janelle Jones, a co-author of the study. “These are people who go to college in the face of rising tuition, needing to work to support themselves, not having a family structure. They finish college and then they end up finding a job that job doesn’t end up requiring a degree” and pays less than those that do require a degree.

House Republicans move to slash summer food aid to urban kids, but can’t explain why -- In a new draft of the House GOP Agriculture bill, Republicans have sought to save money by slashing summertime food aid to inner city children while continuing to assist children living in rural poverty. Talking Points Memo pointed to a passage in a Politico piece about the bill that said, “(I)n a surprising twist, the bill language specifies that only rural areas are to benefit in the future from funding requested by the administration this year” in “a modest summer demonstration program to help children from low-income households — both urban and rural — during those months when school meals are not available.”  The program operates on a modest — by federal government standards — budget of $85 million per year. The White House asked for an additional $30 million to continue the effort to reach nutritionally vulnerable children. The House replied by declining to fund the White House program, but offering $27 million for a pilot program intended to provide nutritional assistance to the children of the rural poor.

USDA delays whole grains requirement for schools - — The Agriculture Department will allow some schools to delay adding more whole-grain foods to meals this year, responding to criticism from school nutrition officials and Congress that the standards were too difficult to put in place. The delay comes hours after a Republican-led House spending panel criticized the Obama administration's healthier school-lunch standards and proposed letting some schools opt out of them entirely. USDA said schools can put off for two years a requirement that all grain products in schools be whole-grain rich, or more than half whole grain, if they can demonstrate that they have had "significant challenges" in preparing those products. Many schools have complained that the whole-grain pastas don't hold together well when cooked. "Schools raised legitimate concerns that acceptable whole-grain rich pasta products were not available," said Kevin Concannon, USDA undersecretary for food, nutrition and consumer services. "We worked to find a solution which will allow more time for industry to develop products that will work for schools." While many students have adapted easily to whole grain breads and rolls, which have been on the market for some time, school nutrition directors say they are having a harder time with pastas, biscuits, tortillas and grits — all popular items on the lunch line. The current requirement is that 50 percent of all grain products be whole-grain rich.

America dumbs down - Charles Darwin’s signature discovery—first published 155 years ago and validated a million different ways since—long ago ceased to be a matter for serious debate in most of the world. But in the United States, reconciling science and religious belief remains oddly difficult. A national poll, conducted in March for the Associated Press, found that 42 per cent of Americans are “not too” or “not at all” confident that all life on Earth is the product of evolution. Similarly, 51 per cent of people expressed skepticism that the universe started with a “big bang” 13.8 billion years ago, and 36 per cent doubted the Earth has been around for 4.5 billion years. The American public’s bias against established science doesn’t stop where the Bible leaves off, however. The same poll found that just 53 per cent of respondents were “extremely” or “very confident” that childhood vaccines are safe and effective.   When it comes to global warming, only 33 per cent expressed a high degree of confidence that it is “man made,” something the UN Intergovernmental Panel on Climate Change has declared is all but certain. (The good news, such as it was in the AP poll, was that 69 per cent actually believe in DNA, and 82 per cent now agree that smoking causes cancer.) If the rise in uninformed opinion was limited to impenetrable subjects that would be one thing, but the scourge seems to be spreading. Everywhere you look these days, America is in a rush to embrace the stupid. Hell-bent on a path that’s not just irrational, but often self-destructive. Common-sense solutions to pressing problems are eschewed in favour of bumper-sticker simplicities and blind faith.

For Schools, Long Road to a Level Playing Field - In the American national mythology, there are few more revered ideas than the belief in education’s power to provide every child a shot at success and to overcome entrenched inequality.  In developing its system of public education, the United States took care to avoid the European model of providing high-quality education only to the best, most advantaged students, while generally channeling children from a working-class background into vocational tracks at an early age. While it often fell short of the ideal, the United States aimed to provide universal comprehensive education to every child, creating “an egalitarian system that put the elite systems of Europe to shame,” By the early 20th century, young Americans were much more educated than their peers in almost every European country. That is, of course, no longer the case. Every few years, the United States faces the ritual humiliation of seeing how its educational standards trail those of most other industrial countries. The most recent came in 2012, when tests performed by the Organization for Economic Cooperation and Development on 15-year-olds found the United States in 26th place among 34 countries in math, 17th place in reading and 21st place in science. But perhaps even more disturbing, the report highlighted another trend: the persistent gulf in the test results between the rich and the poor. According to calculations by the O.E.C.D., socioeconomic background explains 15 percent of the variation in the performance of American students, far more than in high-performing countries like Finland, Japan and Norway. Only one in 20 children coming from the most disadvantaged quarter of the population manages to excel at school and climb in the rankings.

Warning: The Reading Could Make Students Squirm — Should students about to read “The Great Gatsby” be forewarned about “a variety of scenes that reference gory, abusive and misogynistic violence,” as one Rutgers student proposed? Would any book that addresses racism — like “The Adventures of Huckleberry Finn” or “Things Fall Apart” — have to be preceded by a note of caution? Do sexual images from Greek mythology need to come with a viewer-beware label? Colleges across the country this spring have been wrestling with student requests for what are known as “trigger warnings,” explicit alerts that the material they are about to read or see in a classroom might upset them or, as some students assert, cause symptoms of post-traumatic stress disorder in victims of rape or in war veterans. The warnings, which have their ideological roots in feminist thought, have gained the most traction at the University of California, Santa Barbara, where the student government formally called for them. But there have been similar requests from students at Oberlin College, Rutgers University, the University of Michigan, George Washington University and other schools. The debate has left many academics fuming, saying that professors should be trusted to use common sense and that being provocative is part of their mandate. Trigger warnings, they say, suggest a certain fragility of mind that higher learning is meant to challenge, not embrace. The warnings have been widely debated in intellectual circles and largely criticized in opinion magazines, newspaper editorials and academic email lists.

America's Most Popular And Best-Paying Majors -- Over the past month, the topic of how valuable a college education is has been extensively dissected by everyone from the San Fran Fed to Pew Research Center. The conclusion, contrary to what the Federal Reserve would like everyone to believe as Americans scramble to load up on hundreds of billions more in cheap student debt, is that a college education is certainly worthwhile... to those who can afford it outright without getting in debt. But only focusing on the big picture averages ignores something even more important: what fields of study do American concentrate on - because obviously the salary of a business grad is vastly different from that of a computer science specialist from that of a teacher, and thus - what are the most popular majors? And, just as importantly, what is the average salary by discipline? For the first answer, we go to a NPR analysis which recently laid out the history of popularity of various majors over the past 4 decades.  As for the second part, which majors pay the best wages, we go to the April 2014 edition of the National Association of Colleges and Employers (NACE). The details are as follows: The reporting year for the college Class of 2014 begins with an overall average starting salary of $45,473. Although this salary is 1.2 percent higher than the April 2013 starting salary of $44,928 reported for the Class of 2013, the increase is considerably lower than the more than 5 percent increase predicted for graduates at that time. This means, starting salaries for the newest crop of college graduates appear to be leveling

How Education Drives Inequality Among the 99% -- Recent hand-wringing about income inequality has focused on the gap between the top 1% and everyone else. A new paper argues that the more telling inequities exist among the 99%, primarily driven by education. “The single-minded focus on the top 1% can be counterproductive given that the changes to the other 99% have been more economically significant,” says David Autor, a Massachusetts Institute of Technology economist and author of the study. His paper, “Skills, Education and the Rise of Earnings Inequality Among the ‘Other 99 Percent’,” comes as something of riposte to French economist Thomas Piketty, whose bestselling “Capital in the 21st Century” has ignited sales and conversation around the world with its historical look at the fortunes of the top 1%. Mr. Autor estimates that since the early 1980s, the earnings gap between workers with a high school degree and those with a college education has become four times greater than the shift in income during the same period to the very top from the 99%. Between 1979 and 2012, the gap in median annual earnings between households of high-school educated workers and households with college-educated ones expanded from $30,298 to $58,249, or by roughly $28,000, Mr. Autor says. During the same period, he argues, 99% of households would have gained about $7,000 each, had they realized the amount of income that shifted during that time to the top 1%.  The income gap among the 99%, he says, is due to rising earnings of college-educated workers as well as declining real earnings of workers with high-school degrees.

56% Of Recent Black College Graduates Get A Job That Does Not Require A College Degree, CEPR Finds  - With everyone focused on what is undisputedly the next mega credit bubble in the form of student loans, the topic of college education, and specifically its utility, has gotten much press coverage over the past month. As we summarized most recently two days ago, the key variables involved when calculating the costs and benefits revolve around whether one uses (generous amounts) of student loans and what area of specialization one picks. But according to a recent report published by the Center for Economic and Policy Research there is another, perhaps more important variable when it comes to getting the most out of one's college education: race.

Student Debt Grows Faster at Universities With Highest-Paid Leaders, Study Finds - At the 25 public universities with the highest-paid presidents, both student debt and the use of part-time adjunct faculty grew far faster than at the average state university from 2005 to 2012, according to a new study by the Institute for Policy Studies, a left-leaning Washington research group.The study, “The One Percent at State U: How University Presidents Profit from Rising Student Debt and Low-Wage Faculty Labor,” examined the relationship between executive pay, student debt and low-wage faculty labor at the 25 top-paying public universities.The co-authors, Andrew Erwin and Marjorie Wood, found that administrative expenditures at the highest-paying universities outpaced spending on scholarships by more than two to one. And while adjunct faculty members became more numerous at the 25 universities, the share of permanent faculty declined drastically.“The high executive pay obviously isn’t the direct cause of higher student debt, or cuts in labor spending,” Ms. Wood said. “But if you think about it in terms of the allocation of resources, it does seem to be the tip of a very large iceberg, with universities that have top-heavy executive spending also having more adjuncts, more tuition increases and more administrative spending.”Since the 2008 financial crisis, the report found, the leaders of the highest-paying universities fared well, largely at the expense of students and faculty.“Like executives in the corporate and banking sectors, public university presidents weathered the immediate aftermath of the fall 2008 financial crisis with minimal or no reductions in total compensation,” the report said.

America's college students are graduating more indebted than ever --As colleges across America prepare to award degrees in the coming weeks, commencement speakers can find much to celebrate about the class of 2014. According to the Department of Education, current graduates are part of the largest, most diverse cohort of collegians in American history. That’s the good news. The bad? They’re also the most indebted.Student marketing company Edvisors calculates that the average student in the class of 2014 is expected to graduate with nearly $33,000 in debt, with nearly 60 percent of all college students having taken out a student loan. And because the debt burden has risen significantly faster than inflation, up a whopping 361.3% since 2003 according to the New York Federal Reserve, the total pile of student debt in the United States now sits at almost $1.2 trillion dollars.  That’s more than twice the size of the projected federal budget deficit for this year. It’s also about the size of the entire economies of countries like South Korea or Mexico. In fact, if Americans students could have used their education loans as purchasing power, these expenditures would amount to the world’s 15th largest economy. Perhaps realizing the burden that student debt will have on a generation with steadily increasing political clout, Senate Democrats, led by Sen. Elizabeth Warren, propose lowering interest rates on student loans to below four percent, paid for by a “Buffett Rule” tax of 30 percent on millionaires. It’s part of the Democrats’ “Fair Shot” agenda in the run-up to the 2014 elections, and is expected to be put to a vote in early June.

A Woman With Perfect Grades Is Worth The Same As A Man With A 2.0 Average -- It may seem like high school grades don’t mean anything later in life, but a new report finds that high school grade point average (GPA) is a strong predictor of income in adulthood.  That doesn’t play out evenly, though. The team of University of Miami researchers found that a one-point increase in GPA means a 12 percent boost in earnings for men and a 14 percent boost for women. Even so, there’s a big gender gap in total earnings. A woman who got a 4.0 GPA in high school will only be worth about as much, income-wise, as a man who got a 2.0. A woman with a 2.0 average will make about as much as a man with a 0 GPA

Americans owe $1.2 trillion in student loans, surpassing credit card and auto loan debt totals - Brown and Chaise are typical young college graduates in New York — they have student loan debt that will probably affect their choices for decades. “It scares me,” said Chaise who owes $20,000 but expects to borrow at least another $20,000 before finishing graduate school. “I have been pursuing higher education to raise myself out of poverty,” she said. “I grew up in the projects. There’s nothing wrong with that, but I want a better life. I don’t know if I can do everything I want to do, because I have these bills to pay each month.”  She said she thinks about her $30,000 in debt whenever she considers any big purchase or life choice. “It’s impacting my decision whether I want to continue my career,” she said. Millions of Americans are in the same boat as these New Yorkers. Americans owe $1.2 trillion in student loan debt, a number that has tripled in the last decade. New York State residents hold $60 billion of that debt, and college grads in the state owe on average $27,310 in student loans, according to the Federal Reserve Bank of New York. Student loans have passed credit cards and auto loans to become the second biggest source of personal debt in the U.S., trailing only mortgages. Aware of growing public concern over the issue, Senate Democrats are making student loans one of their top election year planks.

What The Fed Won't Tell You About Student Debt -- Two weeks ago, the San Fran Fed released "research" on the topic of whether "it is still worth going to college." What it "found" was that "Earning a four-year college degree remains a worthwhile investment for the average student.... The average college graduate paying annual tuition of about $20,000 can recoup the costs of schooling by age 40. After that, the difference between earnings continues such that the average college graduate earns over $800,000 more than the average high school graduate by retirement age... We show that the value of a college degree remains high, and the average college graduate can recover the costs of attending in less than 20 years. Once the investment is paid for, it continues to pay dividends through the rest of the worker’s life, leaving college graduates with substantially higher lifetime earnings than their peers with a high school degree." What was left unsaid, of course, is that the SF Fed merely was tasked with goalseeking a study that seeks to perpetuate America's most exponential chart. The one showing federal student loans, which as we showed recently just hit an aggregate total of over $1.1 trillion, increasing 12%, or $125 billion, from this time last year.

Students Now Indentured to the Banksters - Never in the history of the developed world has an entire generation had to go into debt just to get an education and a job. Until now. Back in January, 31-year-old Tony Muzzatti, who at the time owed around $60,000 in student loan debt to Sallie Mae and always made on-time payments, was told that he had to immediately make a payment of $10,000, or face asset seizures. That's because his grandmother, who also happened to be his cosigner on the student loans, had just died. Christopher Kibler was also told by Sallie Mae that he had to immediately pay back nearly $22,000 in student loan debts after his father, the cosigner on his loans, had passed away. Muzzatti and Kibler are just two of the many victims of what the Consumer Financial Protection Bureau refers to as "auto-defaults," or when banks immediately say that private student loan debts are in default after the death or bankruptcy of a cosigner. The "auto-default" practice is just one of the many ways that big banks and Wall Street executives are making billions of dollars off of an entire generation of struggling, debt-ridden Americans. Right now, there's over $1.18 trillion in outstanding student debt in America. More than 40 million Americans hold student loan debt, which is greater than the entire population of Canada, Poland, North Korea, Australia and more than 200 other countries.And of those 40 million borrowers, around 7 million have defaulted on their debt.

Net Worth Of College Grads With Student Debt Is 20% Less Than High School Grads With No Debt - Yesterday we provided a detailed breakdown of the cost aspect of a college education, particularly for young people who have no choice but to fund their education with student debt, a key part of the equation that the San Fran Fed in its particular cost-benefit "analysis" of college education avoided. There is much information in the post, but one particular aspect of the Pew analysis that the article was based on bears repeating and highlighting for all those less than "1%" young Americans debating whether a college education is worth the tens if not hundreds of thousands of dollars in student loans: the median net worth of "young" households, those where the head is younger than 40 years old, is $8,700, or 20% less than not college educated households with no student debt.

Chris Christie to reduce NJ public workers’ pension payments to stem state budget gap — In a stunning reversal, Gov. Chris Christie today announced plans to grab, over two years, $2.43 billion meant for public workers’ pensions to balance New Jersey’s ailing state budget. The plan threatens to derail one of Christie’s signature accomplishments in Trenton: a major revision to replenish New Jersey’s strained pension fund over the long term. But it would solve an immediate crisis for the governor, who has to find more than $2 billion somewhere to cover budget shortfalls for the current and incoming fiscal years. At a Statehouse news conference, the Republican governor said he plans to take $2.43 billion budgeted for the pension fund during this fiscal year and the next one to balance his budgets. He ruled out alternatives such as raising the state income tax or cutting funds for schools and Medicaid.

Retired city workers denounce Detroit pension cuts - Hundreds of retired city workers attended meetings at Detroit’s Cobo Hall convention center on Wednesday where the union-affiliated Committee of Retirees insisted they accept deep cuts in pensions and health care benefits. The World Socialist Web Site spoke with workers as they poured out of the meetings seething with anger.  “They are putting a gun to our heads,” said one former Detroit Public Works sanitation worker. I invested a portion of my paycheck in the annuity fund and they promised us a 7.9 percent return every year. Now because the market went bad after 2008 they want to renege and make us pay back the money.” “They are setting up a culture for a revolution,” said a retired Department of Transportation worker. “People our age elected to work for a living and now they are robbing us our hard-earned pensions. We can’t lie down and take this. We have to fight city hall. Look what’s happening in Egypt and other countries—it’s going to come to a civil war here too.”

La. lawmakers tackle state retirement system debt — Lawmakers have rewritten the rules for how the state's retirement systems will offer pension payment increases to retirees. They agreed to give a 1.5 percent cost of living adjustment to about 100,000 retired state workers, teachers, school employees and state troopers under the current rules, the first increase for most of the retirees since 2008. But lawmakers tied that pension bump to a bill by Rep. Joel Robideaux, R-Lafayette, that makes it more difficult to get such COLAs in the future. The measure is an effort to pay more money toward the state's multibillion-dollar retirement debt. Gov. Bobby Jindal's office said the Republican governor signed the cost of living adjustments into law last week. Robideaux's bill revamping the COLA rules was given final passage by the state Senate on Monday and heads to Jindal, who supports it.

25 percent of Americans are saving $0 for retirement- One in every four Americans is not saving for retirement at all, either because they are not thinking about it, do not really know how or, worse, do not feel they can afford to, according to a  report by Country Financial. Americans ages 18-29, often called “millennials," are among the worst when it comes to saving for retirement, the firm said. Nearly a third—32 percent -- aren't saving at all for their "golden years." Many 20-somethings might just be pulling themselves out of the swamps of student debt, or maybe they just think retirement is too far in the future to worry about. The latter might not be the best approach, said the report. Almost half of people 40 years or older claim to regret their retirement decisions. But there may be some deeper problems at work. Forty-six percent of those who aren't saving say they cannot do so on a middle-class income. That number has risen since 2011. There are also knowledge gaps, though. Fifty-five percent of Americans don't know if they are participating in a 401k plan, and of the 45 percent who do, only three in 10 know how their money is being invested.

Retirement shortfall strains parents and kids - reports that 40% of those nearing retirement now have no retirement savings at all, and of the remaining 60%, their average balance is about $100,000. $100,000 will only provide about $300 retirement income a month. Three hundred dollars added to their Social Security income will bring less than $2,000 a month.  After subtracting health insurance, income and property taxes, there isn't a lot left for the normal food, power, heat, water, cable, auto, and medical expenses. Those with no savings will have to seek financial assistance from charities, government — and their children.  We had to provide support to both my and my wife's parents in their elderly years. Not because they hadn’t saved enough to support retirement, but because inflation took over and the security markets tanked. Both of those factors inflict permanent damage to retirees.  For example, just one year of high inflation means that all subsequent years have a price starting point that much above past prices. Our parents went through a period where annual inflation reached 13%. Similarly, a bad year of investment performance takes a big toll. A 20% drop in the market requires an unlikely 25% increase in the following year to stay even. Further, retirees suffer from reverse-dollar-cost-averaging as they take money from their savings in down market years.

Social Security 2.0 - How Real Reform Would Look -- SS 2.0 seeks to make all Recipients a vested owner in a Defined Benefit Plan. Those plans will be managed by legions firms who have already 100 year depth of experience in Defined Benefit Plans. For more than 30 years, it has been said that few dare to touch or reform Social Security. For that same 30 year, the conversation has centered obsessively on cuts to the Retirement Benefits. In that political environment, the American Public, behaving as rational actors, rejected the calls for cuts. The plain purpose of SS2.1 is to change the conversation to an increase in the Retirement Benefit to 75 percent of preretirement income. This is a conversation we can have once we accumulate the $11.5 Trust Fund. (a) The basic mechanism which grows the Benefit level is a swap of the Bonds of the Social Security Trust Fund for Treasuries and other secure U.S Agency paper. The swap will happen between the Treasury and the Social Security Fund, using the Bonds of the Trust Fund exchanged to Treasuries. The Bonds held by the Social Security Fund will be issued at a coupon rate of 4.0% to match the historically low yield now present. Future investments will be made by exchanges of the new Treasury 4.0% Bonds for other conservative U.S and other investments. Equities will be avoided so there is no repeat of the debacle involving the British and Chilean Social Security funds whose Recipients were allowed to buy equities in Defined Contribution plans. As U.S. Treasury and Agency interest rates exceed 4 percent over time, new investments in the Trust Fund can be made from Trust Fund income, consistent with the need to pay Benefits from the Payroll Tax and existing Trust Fund accumulations. The actuarial assumptions now show a depletion of the Trust Fund by 2035. A better rate of Fund Income growth will shorten the depletion of Trust Fund assets.

The Elderly as a Source of Profit - Yves Smith -  Sometimes the damage done to individuals is an accidental byproduct of poorly thought out products or policies. Other times, it looks to be a disturbingly central element of the business model.  We’ve been alerted to an issue that no doubt many readers have had the misfortune to encounter, but our sense is that has yet to be recognized as a broader societal issue, namely, how the medical-industrial complex takes advantage of the elderly.  . We don’t want to pre-empt the excellent Maggie Mahar, author of the widely acclaimed book Money Driven Medicine, who is about to launch a series of posts on how longevity will become the major medical crisis of the 21st century, with Alzheimer’s and other types of dementia a particularly acute problem. I strongly suggest you sign up for her e-mail alerts from her Health Beat blog We had a reader, Mark L, tell us over the last two weeks of his worry and frustration about how his elderly father seemed to be held hostage in a rehabilitation facility. His father had previously been cared for at home by his wife with the assistance of a aide who visited four to five days a week. Mark L admitted he could not be fully certain of all the details, since he was working in Eastern Europe and was getting updates from his increasingly distraught mother. However, Maggie Mahar described an even more clear cut instances of medical “caregiver” overreaching in her correspondence with me, so directionally, Mark L and his mother’s fears seem well warranted. Key sections from one of his e-mails:My father is 89 years old and was admitted to a hospital a little over a month ago because his care-giver said he was sleeping too much (both at night and during the day) and that was “not normal”. My mother was told that he would be there for two weeks, to get his strength back. (During the time, he was to be given physical therapy, and regularly walk with the assistance of staff.) Now that two weeks are almost up, my mother was informed that Medicare would pay for so many days, and that their Private Insurance would pay for so many days, and that after that, she would have to pay. But the message was that my father will not be going home.

How Obamacare Policy Holders and Big Pharma Lose Out from Insurers Gaming Plan Designs - Yves Smith - At one level, it’s vastly amusing to watch Big Pharma, through its powerful lobbying group PhRMA, complaining that its ox is being gored by insurers through how they’ve designed Obamacare plans. On another, though, the analysis prepared for PhRMA confirms what this site has long argued, that the Obamacare plans represent a deliberate effort to extract more rents from the public at large on behalf of the medical-industrial complex.  For those who remember the backstory, the Affordable Care Act was intended to enrich both insurers and drug manufacturers, by providing new requirements and subsides so that a whole new group of previously uninsured would have medical coverage. Both players also got some protection of their margins, the insurers through profit “limits” that allow them to pay even less out of premium dollars to health care than they do now, the drugmakers through a ban on drug reimportation. As a result, Health insurer and pharmaceutical company stocks rose when the ACA was passed.  But the drug companies apparently woke up only now to the fact that the insurers were in a position to, and would, game the design of Obamacare plans to their benefit and to the disadvantage of the pharmaceutical industry. The critical element is that health insurers are increasingly forward integrating into providing medical care via having their own networks of HMOs.  Let’s focus initially on the pained recognition by the drug companies that the insurers are managing to cut a much bigger piece of the Obamacare cake for themselves.

Hints of higher health premiums in 2015 - Health insurers are generally seeking to increase premiums for next year, according to state regulatory filings released last week, the first look at how insurers plan to adjust prices in their second year under the Affordable Care Act. The increases--which are subject to state regulatory approval--outpace broader U.S. inflation but are smaller than analysts had predicted. For instance, the Anthem HealthKeepers plan, offered by a unit of WellPoint, said it would raise premiums by an average of 8.5% across its individual plans in Virginia, the first state to report its filings. The Anthem plans cover about 110,000 people in Virginia and are sold on the state's online insurance exchange authorized by the ACA, as well as directly to consumers. Anthem says it has to raise rates to take into account the poorer health of uninsured people signing up under the ACA, pent-up demand for services, and the costs of new fees under the law. The Virginia filings show other plans proposing rate increases ranging from 3.3% for Kaiser Foundation Health Plan of the Mid-Atlantic States, with around 10,000 members in the state, to 14.9% for CareFirst BlueChoice (about 32,000 members). CareFirst's filing said the average age of its enrollees has risen by several years. In Washington, proposed increases range from 0.57% from Kaiser Foundation Health Plan of the Northwest to an 11.2% boost by Group Health Cooperative, which had some of the lowest rates in the state for 2014. Molina Healthcare proposed cutting its Washington premiums next year, suggesting that insurers that priced cautiously for 2014 will face pressure to restrain prices next year. In Indiana, Anthem Insurance proposed an average rate increase of 9.65% for about 29,000 enrollees.

V.A. Accusations Aggravate Woes of White House - — The White House fought on Tuesday to contain the growing political furor over allegations of misconduct at the nation’s veterans hospitals as Republicans, eager to use the issue in the midterm elections, seized on the reports as new evidence that President Obama is unable to govern effectively.Rob Nabors, the president’s deputy chief of staff, will fly to the Department of Veterans Affairs medical center in Phoenix on Wednesday to assess the most damning reports — that government workers falsified data or created secret waiting lists to hide the long delays veterans faced before seeing doctors.The president is also sending Denis R. McDonough, his chief of staff, to Capitol Hill on Wednesday to consult with the chairman of the Senate Veterans’ Affairs Committee, Senator Bernard Sanders, independent of Vermont. Lawmakers are working on bipartisan legislation that would give veterans officials greater authority to fire those responsible at the department. The House is expected to vote on Wednesday on a bill, and the Senate is expected to hold hearings on the legislation soon.

Longevity and Long-Term Care: The Medical Crisis of the 21st Century : Part 2 - Thanks to better diets, exercise, and advances in medical knowledge, more and more of us are living to four score and seven. But the downside is that in too many cases, our bodies are out-living our minds. As I note in the post below, since 2011, 40% of the increase in Medicare’s outlays can be attributed to spending on Alzheimer’s patients.Why is the incidence of Alzheimer’s (AHD) spiraling? Because we are less likely to die of heart disease or strokes, millions of Americans are living long enough to be diagnosed with senile dementia. One could say that longevity is the proximate cause of Alzheimer’s.Because women live longer than men, they are more likely to fall victim to AHD, the most common form of dementia. If a woman lives into her 60s her risk of being diagnosed with Alzheimer’s at some point over the rest of her life is 1 in 6. By contrast, for breast cancer, her risk is 1 in 13. By 2050, the number of people age 65 and older suffering from Alzheimer’s may well triple, rising from 5 million to as many as 16 million. Why then don’t we hear more about this scourge? Because at this point there is little or nothing that doctors can do to stop it. The Mayo Clinic’ website explains: while some drugs can “temporarily improve symptoms of memory loss and problems with thinking and reasoning . . . these treatments don’t stop the underlying decline and death of brain cells. As more cells die, Alzheimer’s continues to progress.”Last month Consumer Reports warned that “the overall results” for Alzheimer’s drugs “are far less encouraging than the ads portray. Most people who take them don’t experience a meaningful benefit.”

The Untold Story Of What Happened At An Overcrowded West Virginia Jail After The Chemical Spill - When roughly 10,000 gallons of chemicals leaked into a West Virginia watershed this January, Governor Earl Ray Tomblin declared a state of emergency.  But in the state’s emergency response, there was one group that many forgot: the 429 prisoners locked in Charleston’s overcrowded jail, who were entirely dependent on the state to provide them clean water. The only article that looked at the spill’s impact on inmates was a small, glowing report published two months later in the Charleston Daily Mail. Jail officials trumpeted their success at “protecting” inmates by providing a “plentiful supply of bottled water.” Except that much of it wasn’t true.  Interviews with multiple current and former inmates, their family members and internal documents obtained by ThinkProgress tell a very different story of what happened inside South Central Jail, where many inmates have yet to be tried or are being detained for minor offenses.  Inmates say they were sometimes given as little as 16 oz. of water a day. Without enough clean water to drink, brush their teeth and wash their face, many say they resorted to using contaminated tap water. The jail went back to using the tap water full-time only eight days after the spill, after what inmates say was a brief, perfunctory running of the taps. Many prisoners interviewed by ThinkProgress say they suffered a myriad of health problems after exposure to MCHM and other chemicals present in the water supply.

Toxic Tech - Ming’s story is just one of many told in filmmakers Heather White and Lynn Zhang’s new short-form documentary, Who Pays the Price? The Human Cost of Electronics.  In their film, White and Zhang explore the use of dangerous toxic chemicals in Chinese factories. They focus on the effects of these chemicals on the millions of workers exposed while making the iPhones, iPads, and other electronics that global consumers have come to depend on.Considering that three-quarters of the entire population of the planet now has access to a mobile phone, the scope of this problem is huge. Roughly half of these devices are made in China, where carcinogenic benzene (banned as an industrial solvent in many countries) is allowed, and where employers often don’t provide workers with adequate protective gear. Electronics factories use reproductive toxins like toluene and neurotoxins like n-hexane as well. “I’ve now been through 28 chemotherapy treatments,” says Yi Yeting, a Chinese factory worker poisoned by benzene who shares his story in the “Who Pays the Price?” film. “My bones hurt a lot. It feels like thousands of ants biting my insides.”

Antibiotic Resistance: A Mismanaged Public Good - A post-antibiotic era—in which common infections and minor injuries can kill—far from being an apocalyptic fantasy, is instead a very real possibility for the 21st century." So says the World Health Organization in its recent report: "Antimicrobial Resistance: Global Report on surveillance."The WHO report draws on evidence from around the world to note a growing rise in resistance to antibiotics for some major diseases: tuberculosis, pneumonia, malaria, HIV, influenza, and others. The report notes: "For several decades antimicrobial resistance (AMR) has been a growing threat to the effective treatment of an ever-increasing range of infections caused by bacteria, parasites, viruses and fungi. AMR results in reduced efficacy of antibacterial, antiparasitic, antiviral and antifungal drugs, making the treatment of patients difficult, costly, or even impossible. . . . Antibacterial resistance (ABR) involves bacteria that cause many common and life-threatening infections acquired in hospitals and in the community, for which treatment is becoming difficult, or in some cases impossible. . . . Some estimates of the economic effects of AMR have been attempted, and the findings are disturbing. For example, the yearly cost to the US health system alone has been estimated at US $21 to $34 billion dollars, accompanied by more than 8 million additional days in hospital. Because AMR has effects far beyond the health sector, it was projected, nearly 10 years ago, to cause a fall in real gross domestic product (GDP) of 0.4% to 1.6%, which translates into many billions of today’s dollars globally.

Antibiotics Are Becoming Ineffective All Over the World, Why? - The World Health Organization will host its 67th Assembly here in Geneva this May. On the agenda will be the issue of antibacterial resistance. The WHO has issued a warning that microbial resistance is now happening in every region of the world and can affect anyone in any country. The Real News invited Martin Khor to talk to us about this. Martin Khor is executive director of the South Centre, an intergovernmental think tank advising over 50 nations in the Global South.  Martin, I read your op-ed in which you quoted what the WHO official who coordinates research into what they call microbial resistance was saying. Quote:“A post-antibiotic era–in which common infections and minor injuries can kill–far from being an apocalyptic fantasy, is instead a very real possibility for the 21st century.”“Without urgent, coordinated action by many stakeholders, the world is headed for a post-antibiotic era, in which common infections and minor injuries which have been treatable for decades can once again kill.” So this is very serious.

Fighting Bugs With Bugs: Hatching A Solution For Troubled Trees -- We all know about the drought in California, but farmers there have more to worry about than a lack of water.There's also the looming threat of Asian citrus psyllid (ACP), an invasive pest that flies from tree to tree, feeding on tender leaves. By itself, the psyllid is not particularly harmful, but it can carry citrus greening disease, which kills trees within a few years of infection. There is no cure.In 2005, ACP spread citrus greening disease all over Florida, devastating the state's $9 billion citrus crop, destroying 60,000 acres of farmland and driving up farming costs by about 40 percent.ACP came to California in 2008. This alone was worrying, but the truly alarming news came four years later in 2012, when a backyard orange tree in Los Angeles County was found to be infected with citrus greening disease. With both the disease and the carrier present in the state, citrus growers are worried that the agricultural disaster in Florida might repeat itself in California, and they're scrambling for a solution. And instead of relying on chemicals and quarantines, farmers and scientists are turning to an unlikely ally: another bug. That's where Mark Hoddle comes in. Hoddle is an entomologist at the University of California, Riverside, where he focuses on the biological control of invasive species using natural predators. Hoddle recently went on a research expedition to Pakistan, which is thought to be ACP's country of origin. There he found a parasitic wasp, called Tamarixia radiata, that loves to kill ACP. Hoddle brought some wasps back to the states and began running tests to ensure they wouldn't become invasive nuisances themselves if introduced in California.

Over Easy: Entire State of California in Severe to Exceptional Drought -- On Sunday, Scientific American reported that 100 Percent of California Now in Highest Stages of Drought. The National Drought Mitigation Center currently releases a graphic drought map each Thursday. Scientific American comments on last week’s map: The drought in California, which has been building for the past few years, really took hold this winter. December-March is supposed to be the region’s wet season, but this year turned out to be a bust. At the beginning of April, nearly all of the state was in a drought — nearly 70 percent was in ‘extreme’ or ‘exceptional’ drought, the two highest stages. By the end of the month, the entire state was experiencing at least some form of drought in what has been the driest start to a year in California on record.  At the request of the California Department of Food and Agriculture, UC Davis performed a cost and jobs impact study using computer modeling, and estimated costs at $1.7 to $2 billion, with 14,500 lost farm worker jobs. Unfortunately, the Central Valley is hard hit by this drought: Central Valley farmers expect 1/3 less irrigation water in a state that leads the nation in the production of fruits, vegetables and nuts. The report estimates 6 percent of farmland in the Central Valley — or 410,000 acres — could go unplanted because of cuts in water deliveries. A more detailed report is due out this summer. According to 2007 data, the top four counties in US agricultural sales are in the Central Valley

California drought to cost farmers $1.7 billion and leave 14,500 without jobs: One of California’s worst droughts in decades could cost the US state’s farmers $1.7 billion, a study warned, a week after alarmingly early wildfires forced tens of thousands of homeowners to evacuate. The drought could leave 14,500 workers without jobs in California’s Central Valley, known as America’s food basket for providing vast supplies of fruit, vegetables and meat. The new study, by the University of California’s Davis Center for Watershed Sciences, released on Monday, found that farmers in the Central Valley would get only two-thirds of their normal river water this year. Some six percent of irrigated cropland will have to lie fallow, while groundwater pumping will cost $450 million, more than a quarter of the estimated $1.7 billion the drought will cost the farming industry. “Without access to groundwater, this year’s drought would be truly devastating to farms and cities throughout California,” said Jay Lund, director of the Center for Watershed Sciences. The Central Valley, which runs for about 450 miles (700 kilometers) south to north, is the “richest food-producing region in the world,” it said. Much of America’s fresh fruits, nuts and vegetables are grown on its seven million acres of irrigated farmland.

After Balkans flooding, tons of drowned livestock: - A new calamity emerged Tuesday in the flood-hit Balkans as rescue workers battling overflowing rivers confronted wastelands of drowned livestock. As the rainfall stopped and temperatures rose, the withdrawing floodwaters revealed a harrowing sight: thousands of dead cows, pigs, sheep, dogs and other animals left behind as their panicked owners fled. "There are tons of dead animals that we must dispose of," Serbian Prime Minister Aleksandar Vucic told a government meeting. The record flooding in Bosnia, Serbia and Croatia in the past week has forced half a million people from their homes and led to at least 44 deaths: 22 in Bosnia, 20 in Serbia and two in Croatia. In the northern Bosnian town of Samac, troops used ropes to pull nearly 400 dead cows out of a barn and drove the carcasses away on trucks. In Samac, like many Bosnian and Serbian towns, waters rose within hours, racing into yards and homes without warning. Farmers often had no time to free their livestock from barns or fenced fields, so that they could attempt to swim to safety. Many dead animals were found slumped over the metal fences they had tried to jump over.

The Biggest Mideast Crisis You Probably Don’t Know Enough About - The Middle East’s seemingly endless conflicts are diverting attention and resources from a graver long-term threat that looms over the whole region: the growing scarcity of water. And the situation will get worse before it gets better — if it ever does get better. Years of war, careless water supply management, unchecked population growth, ill-advised agricultural policies, and subsidies that encourage consumption have turned a basically arid part of the world into a voracious consumer of water. The trajectory is not sustainable. Those were the gloomy if unsurprising conclusions of a three-day conference on the subject in Istanbul last week. From Libya to Iraq to Yemen, too many people and too many animals have stretched water resources beyond their limits. Some countries where the urgency is greatest, including Syria and Yemen, are the least equipped to stave off serious water crises. Jordan, always short of water, has been overwhelmed by a flood of refugees from Syria. Iraq, which once had ample water, has lost critical supplies to war and to dams built by Turkey upstream on the Tigris and Euphrates. Egypt has twice as many people as it did 50 years ago, with no additional water resources. The isolated Gaza strip has been grappling with a water crisis for years. And Yemen’s scarce water supply is being gobbled up by the unchecked production of qat, a high-water crop with no nutritional value. Chewing the mildly narcotic qat leaf is Yemen’s national pastime.

Global Food Security Needs States to Ally with Family Farmers  - Yves here. If you live in an advanced economy, and are at least middle income, you probably don’t give much thought to the availability of food.  One of the issues that is seldom discussed is food security. I find it curious the degree to which national leaders have become comfortable with making their countries less self-sufficient in the name of promoting trade. That is not to say that trade is bad, but neither is trade inherently virtuous. The gains from trade need to be weighed against costs and risk. Small countries, or ones in regions with short growing seasons may never have been self-sufficient, particularly in food (Jared Diamond in his book Collapse uses Montana as an example of an society inherently dependent on imports from the rest of the world). But for ones that were reasonably close to self-sufficiency, the choice to accede to the demands of agricultural exporters like the US and hollow out domestic food production may prove to have been short-sighted. Our house Japan expert Clive points out that Japan’s long-standing insistence of protecting most of its generally uncompetitive agricultural industry isn’t simply about catering to a powerful voting block. Japan still remembers the “starving times” of the later days of World War II and its immediate aftermath and does not want to take any more risk on the food front than it needs to. This post focuses on agribusiness as a driver of food insecurity. Many studies have found that even with global population at its present level, the driver of hunger isn’t the amount of food production but its distribution. And as NC readers regularly point out, more emphasis on local food production also reduces the use of other resources, like fuel for transport and often packaging.

Does China Pose a Threat to Global Food Security? It Says No -- Twenty years ago, environmental advocate Lester Brown got in hot water with Beijing for writing a book called “Who Will Feed China?” China was displeased with the suggestion in his book that the country’s growing population and water scarcity could drastically burden the world’s food resources. Beijing publicly criticized the author – then began a series of reforms including improving farming techniques and adopting a national policy of self-sufficiency in grain consumption that vindicated Mr. Brown’s arguments. It paved the way for a gradual rapprochement with the American, now 80. Détente is over. On Wednesday, China’s agriculture ministry issued a statement again criticizing Mr. Brown. It took umbrage with an essay he wrote titled “Can the World Feed China?” a riff on his earlier book. The essay details Mr. Brown’s concerns that rising domestic pressures on food consumption could result in spiking food prices and political unrest as China joins in a global “scramble for food.” It isn’t clear why Mr. Brown was singled out for criticism; many analysts have in one form or other also articulated these trends, though arguably not as directly or pungently. But the move underscores how increasingly sensitive China is to the growing impression that it can’t feed itself and that its acquisitions of global food assets are posing a risk to food security for the rest of the world. China has been keen in recent years to head off any impression that it’s on a global grab for natural resources.

Mexico and Monsanto: Taking precaution in the face of genetic contamination - To listen to the current debates over the controversial requests by Monsanto and other biotech giants to grow genetically modified (GM) maize in Mexico, you’d think the danger to the country’s rich biodiversity in maize was hypothetical. It is anything but. Studies have found the presence of transgenes in native maize in nearly half of Mexico’s states. A study of maize diversity within the confines of Mexico’s sprawling capital city revealed transgenic maize in 70 percent of the samples from the area of Xochimilco and 49 percent of those from Tlalpan. Mexico is the “center of origin” where maize was first domesticated from its wild ancestor, teocinte. The country is arguably the last place you’d want to risk the possibility that its wide array of native seeds might be undermined by what indigenous people have called “genetic pollution” from GM maize. Last October, a judge issued an injunction putting a halt to all experimental and commercial planting until it can be proven that native maize varieties are not threatened by “gene flow” from GM maize. The precautionary measure comes more than a decade too late. In 2001, US-based researchers discovered the presence of transgenic traits in native maize varieties in the southern state of Oaxaca. A formal citizen complaint brought an exhaustive study by the environmental commission set up by the North American Free Trade Agreement (NAFTA). The researchers acknowledged that “gene flow” had occurred, warned, as other studies did, of more widespread contamination, and called for precautionary policies, including restrictions on imports from the United States. The Mexican government buried the study and promptly passed a biosafety law that opened the door to GM maize.

Russian lawmakers want to impose criminal liability for GMO-related activities: . Russian lawmakers want to equate GMO-related activities that may harm human health or even cause death to terrorist acts and impose criminal liability on producers, sellers and transporters of genetically modified organisms, the newspaper Izvestia writes in its Thursday issue. A bill to this effect was submitted to the Russian State Duma lower parliament house by the Duma agrarian committee and the Liberal Democratic Party (LDPR) faction, who claimed that the government’s bill referred to parliament was too mild. The bill’s initiators say liability for GMO-inflicted harm should be expanded to state and local self-government officials. Under the bill, criminal responsibility should be applicable to companies and government officials only, while individuals should be subject to disciplinary liability. The bill also provides for fines for concealing or deliberate distortion of information about environmental impacts of GMOs. Thus, individuals will be punished by a fine ranging from 500 to 1,000 roubles (14.5-29 U.S. dollars), government officials - by a fine of 1,000-2,000 roubles, and legal entities - by a fine of 10,000-20,000 roubels.

‘Tide is Turning’ as Oregon Voters Overwhelmingly Approve Ban of GE Crops - In a victory for sustainable food advocates everywhere, two counties in Oregon on Tuesday voted to ban the cultivation of genetically engineered (GE) crops. Despite an onslaught of spending by agribusiness giants such as DuPont and Monsanto, voters in Jackson County and Josephine County overwhelming took a stand for measures protecting "seed sovereignty and local control" of food systems. The Jackson Measure 15-119 passed 66-34 percent, while the Josephine County Measure 17-58 passed 58-42 percent. Calling the bans a "tremendous victory" for the citizens and farmers of the counties, as well as for the national anti-GMO movement, Ronnie Cummins, national director of the Organic Consumers Association (OCA), said the votes are further proof that, when given a voice, citizens will choose a sustainable food system over corporate-dominated agribusiness. "These victories make it clear to agribusiness giants like Monsanto and Dow that the day has come when they can no longer buy and lie their way to victory," Cummins said. "By using the tools of democracy, such as ballot initiatives, citizens can overcome corporate and government corruption through honest campaigns, built on a foundation of truth, science and fair play."

The age of the jellyfish -- In Stung! On Jellyfish Blooms and the Future of the Ocean, Lisa-ann Gershwin argues that the jellyfish are coming on, and they're coming on strong.  If I offered evidence that jellyfish are displacing penguins in Antarctica -- not someday, but now, today -- what would you think? If I suggested that jellyfish could crash the world's fisheries, outcompete the tuna and swordfish, and starve the whales to extinction, would you believe me? This New York Review of Books review of Stung! by Tim Flannery is well worth a read, with fascinating bits throughout. If jellyfish fall on hard times, they can simply "de-grow." That is, they reduce in size, but their bodies remain in proportion. That's a very different outcome from what is seen in starving fish, or people. And when food becomes available again, jellyfish simply recommence growing. Some individual jellyfish live for a decade. But the polyp stage survives pretty much indefinitely by cloning. One kind of jellyfish, which might be termed the zombie jelly, is quite literally immortal. When Turritopsis dohrnii "dies" it begins to disintegrate, which is pretty much what you expect from a corpse. But then something strange happens. A number of cells escape the rotting body. These cells somehow find each other, and reaggregate to form a polyp. All of this happens within five days of the jellyfish's "death," and weirdly, it's the norm for the species.

Excess heat from air conditioners causes higher nighttime temperatures —A team of researchers from Arizona State University has found that releasing excess heat from air conditioners running during the night resulted in higher outside temperatures, worsening the urban heat island effect and increasing cooling demands.   "We found that waste heat from air conditioning systems was maximum during the day but the mean effect was negligible near the surface. However, during the night, heat emitted from air conditioning systems increased the mean air temperature by more than 1 degree Celsius (almost 2 degrees Fahrenheit) for some urban locations," said Francisco Salamanca, a post-doctoral research scientist at Arizona State University's School of Mathematical and Statistical Sciences. The research is presented in the paper, "Anthropogenic Heating of the Urban Environment due to Air Conditioning," published in the March 6 issue of Journal of Geophysical Research Atmospheres.

Global Temperatures In April Tied For The Hottest On Record - April may have brought mild temperatures to much of North America, but that wasn’t the case for the planet as a whole. Last month officially tied for the warmest April globally since recordkeeping began in 1880, according to data released by NOAA’s National Climactic Data Center on Tuesday.   This makes it the 38th consecutive April and 350th consecutive month with a global temperature at or above the 20th century average. The last time the planet experienced an April with below-average temperatures was 1976.  Last month’s record-tying global temperatures tracked with the global carbon dioxide emissions that drive climate change, as April became the first month in at least 800,000 years in which CO2 levels were above 400 parts per million (ppm) every day.  Earlier this month, NASA rankedApril 2014 as the second-warmest on record. The two agencies use the same data but analyze them differently, which occasionally results in minor discrepancies in their rankings. Although the contiguous U.S. experienced only its 46th warmest April on record, parts of Siberia, for instance, were more than 9 degrees Fahrenheit above the 1981-2010 average. “This contrast is an example of how a globally-averaged temperature can differ from a single smaller region,” NOAA explained in its press release.

'Screwed?' US climate report says era of 'normal' over - "We're screwed. Right now. And it could get much worse." That was how co-founder Jamie Henn responded to Tuesday's release of the federal government's National Climate Assessment, the national scientific community's definitive statement on the current and future impacts of greenhouse gas emissions in the United States. Compiling the efforts of 300 leading climate scientists and experts, the message is "bleak" as the NCA details how human-caused global warming is being felt "here and now" nationwide. As a consequence of the nearly two degree Fahrenheit rise which occurred throughout the country over the past century, the report says, Americans are experiencing water scarcity in dry regions, increasing torrential rains in wet ones, increasingly severe heat waves, worsening wildfires, and the death of forests as a result of heat-loving invasive insect species. And all of this is likely to worsen as average temperatures continue to increase. The authors, who were solicited by the National Climate Assessment and Development Advisory Committee, estimate that global warming could exceed 10 degrees Fahrenheit in the United States by the end of this century.

Scientist Tells Bill Moyers That Letting Climate Change Happen Is an 'Intergenerational Crime' -- This week, as the White House issued a landmark report detailing the frightening affects of global warming on our country and President Obama took to the airwaves to drive home that message, Bill Moyers talks with a scientist who has sounded the alarm for decades. For nearly 35 years, David Suzuki has brought science into the homes of millions on the Canadian television series, “The Nature of Things.” He has become a godfather of the environmental movement, and in a poll of his fellow Canadians last fall he was named that country’s most admired figure. Nonetheless, his outspoken views on climate change and the government’s collusion with the petrochemical industry in developing Canada’s oil-rich tar sands have made him the target of relentless attacks from his nation’s prime minister, corporations and right-wing ideologues. “Our politicians should be thrown in the slammer for willful blindness. ... I think that we are being willfully blind to the consequences for our children and grandchildren. It’s an intergenerational crime,” Suzuki tells Moyers.

Climate change is upon us and we must act -- It is often claimed by those who deny the reality of climate change that scientific forecasts about the impact of global warming are far too uncertain to merit taking action. There is no reason to suffer the inconvenience of leaving the planet's fossil fuels unburned when the current analyses of meteorologists, oceanographers and geophysicists will probably turn out to be false alarms, they argue. Such contention is dangerously false. For a start, scientists' warnings about future weather patterns are certainly not overreactions to the evidence they have gathered. In most cases, observed climate changes – the slump in summer sea ice coverage in the Arctic in recent years is a good example – have turned out to be far more drastic than researchers had originally predicted. Their views of the future – melting icecaps, spreading deserts and acidifying oceans – are cautious evaluations that most probably underestimate the likely impact of global warming. There is another, more straightforward reason to repudiate deniers' claims about scientists' "false alarms", however. The impact of climate change is not an issue that is going to be determined in far-off years for the simple reason that it is already happening. This is a point made clear by Nasa glaciologist Eric Rignot who reveals that his observations show that a large part of the West Antarctica ice sheet has now begun to disintegrate and that the entire sheet appears today to be in irreversible retreat. "One of the feared tipping points of the climate system appears to have been crossed," The last assessment report of the Intergovernmental Panel on Climate Change (IPCC) put a modest figure of one to three feet as the likely rise in sea levels that will be experienced this century. The disintegration of the entire West Antarctic ice shelf changes that forecast drastically. A figure of more than 10 feet is now a more likely option. Vast tracts of heavily populated coastline around the world face inundation. Millions are likely to lose their homes. It may take more than a century for this devastation to occur. Nevertheless, it now looks to be inevitable, says Rignot. Nor will the residents of low-lying regions such as Bangladesh or Florida be surprised at this forecast. They are already experiencing the consequences of rising sea levels triggered by melting icecaps.

Is Antarctica losing or gaining ice? - Antarctica is a continent with 98% of the land covered by ice, and is surrounded by ocean that has much of its surface covered by seasonal sea ice. Reporting on Antarctic ice often fails to recognise the fundamental difference between sea ice and land ice.     Antarctic land ice is the ice which has accumulated over thousands of years on the Antarctica landmass through snowfall. This land ice therefore is actually stored ocean water that once evaporated and then fell as precipitation on the land. Antarctic sea ice is entirely different as it is ice which forms in salt water during the winter and almost entirely melts again in the summer.  Importantly, when land ice melts and flows into the oceans global sea levels rise on average; when sea ice melts sea levels do not change measurably but other parts of the climate system are affected, like increased absorbtion of solar energy by the darker oceans. To summarize the situation with Antarctic ice trends:

  • Antarctic land ice is decreasing at an accelerating rate
  • Antarctic sea ice is increasing despite the warming Southern Ocean

Global warming: it's a point of no return in West Antarctica. What happens next? - Last Monday, we hosted a Nasa conference on the state of the West Antarctic ice sheet, which, it could be said, provoked something of a reaction. "This Is What a Holy Shit Moment for Global Warming Looks Like," ran a headline in Mother Jones magazine. We announced that we had collected enough observations to conclude that the retreat of ice in the Amundsen sea sector of West Antarctica was unstoppable, with major consequences – it will mean that sea levels will rise one metre worldwide. What's more, its disappearance will likely trigger the collapse of the rest of the West Antarctic ice sheet, which comes with a sea level rise of between three and five metres. Such an event will displace millions of people worldwide. Two centuries – if that is what it takes – may seem like a long time, but there is no red button to stop this process. Reversing the climate system to what it was in the 1970s seems unlikely; we can barely get a grip on emissions that have tripled since the Kyoto protocol, which was designed to hit reduction targets. Slowing down climate warming remains a good idea, however – the Antarctic system will at least take longer to get to this point. The Amundsen sea sector is almost as big as France. Six glaciers drain it. The two largest ones are Pine Island glacier (30km wide) and Thwaites glacier (100km wide). They stretch over 500km.   Considerable uncertainty remained about the timescale, however, due to a lack of observation of this very remote area.

Greenland will be far greater contributor to sea rise than expected: Work reveals long, deep valleys connecting ice cap to ocean -- Greenland's icy reaches are far more vulnerable to warm ocean waters from climate change than had been thought, according to new research by UC Irvine and NASA glaciologists. The work, published today in Nature Geoscience, shows previously uncharted deep valleys stretching for dozens of miles under the Greenland Ice Sheet. The bedrock canyons sit well below sea level, meaning that as subtropical Atlantic waters hit the fronts of hundreds of glaciers, those edges will erode much further than had been assumed and release far greater amounts of water. Ice melt from the subcontinent has already accelerated as warmer marine currents have migrated north, but older models predicted that once higher ground was reached in a few years, the ocean-induced melting would halt. Greenland's frozen mass would stop shrinking, and its effect on higher sea waters would be curtailed. "That turns out to be incorrect. The glaciers of Greenland are likely to retreat faster and farther inland than anticipated -- and for much longer -- according to this very different topography we've discovered beneath the ice," said lead author Mathieu Morlighem, a UCI associate project scientist. "This has major implications, because the glacier melt will contribute much more to rising seas around the globe."

Biggest Loser: Thawing Greenland Competes With Collapsing Antarctic For Fastest Ice Loss -- Several new studies underscore scientists’ concerns we’re headed toward a coastline at least this flooded (20 meters or 69 feet) over many hundreds of years: The worst-case scenario for sea level rise has now become simply the “business-as-usual” scenario, recent studies from NASA make clear. NASA glaciologist Eric Rignot, co-author of a new Greenland study, says that, taken together, the new papers “suggest that the globe’s ice sheets will contribute far more to sea level rise than current projections show.”  That means if we don’t reverse carbon pollution emissions trends ASAP, sea level rise will likely be 4 to 5 feet or more by century’s end. Also, the rate of sea level rise in 2100 could be upwards of 1 inch per YEAR! No one has any concept of how to adapt cities, ports, infrastructure and the like to such a rate of sea level rise. This underscores the New York Times reporting last week that we are risking “enough sea-level rise that many of the world’s coastal cities would eventually have to be abandoned.”  Last week two studies provided evidence that the West Antarctic Ice Sheet has begun an irreversible process of collapse, in part because its key glaciers are grounded below sea level and are melting from underneath. Now, a team of researchers from NASA and UC Irvine reports that the Greenland ice sheet has a similar instability: Greenland’s icy reaches are far more vulnerable to warm ocean waters from climate change than had been thought, according to new research by UC Irvine and NASA glaciologists. The work, published today in Nature Geoscience, shows previously uncharted deep valleys stretching for dozens of miles under the Greenland Ice Sheet. The bedrock canyons sit well below sea level, meaning that as subtropical Atlantic waters hit the fronts of hundreds of glaciers, those edges will erode much further than had been assumed and release far greater amounts of water.

Sea level rise threatens NASA’s launch pads: ‘Retreat is the way to go here’: Sea level rise is threatening the majority of NASA’s launch pads and multi-billion dollar complexes famous for training astronauts and launching historic missions to space, scientists said on Tuesday. From Cape Canaveral in Florida to mission control in Houston, the US space agency is busily building seawalls where possible and moving some buildings further inland. Five of seven major NASA centers are located along the coast. Experts say that proximity to water is a logistical necessity for launching rockets and testing spacecraft. Many NASA centers have already faced costly damage from encroaching water, coastal erosion and potent hurricanes, said a report by the Union of Concerned Scientists. Perhaps the most iconic launchpad lies in Florida at the Kennedy Space Center, the liftoff point for the Apollo missions to the Moon and many space shuttle flights over the past three decades. “According to NASA’s planning and development office, rising sea levels are the single largest threat to the Kennedy Space Center’s continued operations,” said the report, which also listed other historic sites across the United States that are threatened by sea level rise. They include the Statue of Liberty in New York, the first permanent British colony in North America at Jamestown Island in Virginia, and historic Charleston, South Carolina.

How Rising Seas Could Sink Nuclear Plants On The East Coast - During the 1970s and 1980s, when many nuclear reactors were first built, most operators estimated that seas would rise at a slow, constant rate.  But the seas are now rising much faster than they did in the past, largely due to climate change, which accelerates thermal expansion and melts glaciers and ice caps. Sea levels rose an average of 8 inches between 1880 and 2009, or about 0.06 inches per year. But in the last 20 years, sea levels have risen an average of 0.13 inches per year -- about twice as fast. And it's only getting worse. The National Oceanic and Atmospheric Administration (NOAA) has laid out four different projections for estimated sea level rise by 2100. Even the agency's best-case scenario assumes that sea levels will rise at least 8.4 inches by the end of this century. NOAA's worst-case scenario, meanwhile, predicts that the oceans will rise nearly 7 feet in the next 86 years.  But most nuclear power facilities were built well before scientists understood just how high sea levels might rise in the future. And for power plants, the most serious threat is likely to come from surges during storms. Higher sea levels mean that flooding will travel farther inland, creating potential hazards in areas that may have previously been considered safe. During Superstorm Sandy, for example, flooding threatened the water intake systems at the Oyster Creek and Salem nuclear power plants in New Jersey. As a safety precaution, both plants were powered down. But even when a plant is not operating, the spent fuel stored on-site, typically uranium, will continue to emit heat and must be cooled using equipment that relies on the plant's own power. Flooding can cause a loss of power, and in serious conditions it can damage backup generators. Without a cooling system, reactors can overheat and damage the facility to the point of releasing radioactive material.

North Carolina Wants To Nominate Climate Change Deniers To Study Sea Level Rise -  Climate deniers could soon overtake a North Carolina commission created to study the effects of sea level rise. The nominations are only the latest blow from conservatives that have done their best to make climate change seem inconsequential to the coastal state. In the process, the Republican-controlled legislature managed to bury a key projection of the North Carolina Coastal Resources Commission panel: The state’s shores will face more than three feet of sea level rise within the next century. Larry Baldwin, a current member of the Coastal Resources Commission, wants to nominate climate deniers to fill the science panel’s vacancies, since he is one himself. Some of Baldwin’s top picks are Nicola Scafetta, David Burton, and Robert Brown. Scafetta, a researcher with the Duke University Physics Department, thinks anthropogenic warming is “significantly overstated.” Burton, who has made a “hobby” out of “the study of the science of sea-level rise,” thinks the panel is “outside their area of expertise, really, when it comes to that topic.” And Brown once argued in a blog post against preparing for sea level rise: “Yet we are asked to spend money and time now, when there literally isn’t a hint of a problem in the … empirical data.” Once considered a scientific panel, the commission has moved in a more conservative and industry-friendly direction ever since the North Carolina legislature removed many of the actual scientists. In 2013, Gov. Pat McCrory appointed Frank Gorham, a man whose day job is overseeing his oil and gas investment company and who thinks no scientist “is smart enough to say [sea level] is going to rise 39 inches.”

​US House denies Pentagon funds to tackle climate change as security threat - The US House has voted to deny the Pentagon funding to combat impacts of climate change and its own heavy dependence on fossil fuels. The Department has long acknowledged the realities of global warming amid political wrangling over its effects. The House voted, mostly along party lines, to pass an amendment to the National Defense Authorization Act (NDAA) that aims to prevent the Pentagon from using appropriated funding to address the myriad national security concerns the Department of Defense (DOD) has said climate change poses to American interests.  The amendment to the NDAA, which sets the terms of the DOD budget, was sponsored by Rep. David McKinley (R), whose home state of West Virginia is deeply invested in coal development.  The full text of the amendment reads:  “None of the funds authorized to be appropriated or otherwise made available by this Act may be used to implement the U.S. Global Change Research Program National Climate Assessment, the Intergovernmental Panel on Climate Change’s Fifth Assessment Report, the United Nation’s Agenda 21 sustainable development plan, or the May 2013 Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order.”

US billionaire takes on climate sceptics - Liberal billionaire Tom Steyer is throwing money into four pivotal US Senate races as he seeks to elevate climate change into a decisive election issue by attacking Republicans who oppose moves to tackle it. The campaign by Mr Steyer, a former hedge fund manager channelling $100m of spending into the November elections, is the biggest test yet of whether climate change can have the same influence on voters as economic issues.  The billionaire is seeking to turn his political group, NextGen Climate Action, into a counterweight to the conservative billionaires Charles and David Koch, as “dark money” floods into US politics outside of traditional campaign channels. Mr Steyer’s group on Thursday said it would target Senate races in Colorado, Michigan, New Hampshire and Iowa, where current Democratic seats are in danger of flipping to Republicans trying to retake control of the chamber. NextGen Climate accused Republican candidates in those races of denying the science of climate change, promoting the interests of the oil and gas industry, or taking campaign dollars from the industrialist Koch brothers. “We need to accelerate the level of political support to address this critical issue before it’s too late,” Mr Steyer said in a statement. “This means making politicians feel the heat – in their campaign coffers and at the polls.”

“Erring on the Side of Least Drama” — Why Climate Scientists are Inherently Conservative - Gaius Publius: I’ve been writing for a while that predictions from climate scientists are consistently “wrong to the slow side” — a statement that, if true, adds even greater urgency to stopping carbon emissions. My favorite “wrong to the slow side” graphic is from the Copenhagen Diagnosis, the climate document produced ahead of the 2009 summit in Copenhagen. It shows loss of Arctic summer ice, both modeled and observed. In other words, IPCC models were run that showed the likely range of loss of Arctic summer ice, year by year, and over that, the actual, observed loss for the same time period was shown. As the accompanying caption says: Observed (red line) and modeled September Arctic sea ice extent in millions of square kilometers. The solid black line gives the ensemble mean of the 13 IPCC AR4 models while the dashed black lines represent their range. “AR4″ is the 2007 IPCC Assessment Report 4, the most recent at the time. Here’s that figure: See what I mean? Wrong to the slow side. Arctic ice is disappearing fast. There are many examples of the above, where models are more conservative than observations and tend to “under-predict.” In addition, scientists also tend to throw away the more extreme conclusions (or most “dramatic,” as you’ll see below), even when those extreme conclusions are also the most likely.Why is that? History of Science professor Naomi Oreskes has studied that phenomenon. In a 2012 peer-reviewed paper, “Climate change prediction: Erring on the side of least drama?” (pdf), she and her colleagues put to the test the claim of climate deniers that “climate scientists are alarmists.” When they tested that conclusion by looking at actual data — climate projections and how they compare to climate outcomes — they discovered something very interesting. In fact, the opposite is true. Climate scientists tend to underplay their results.

GOP-led science committee has held more hearings on aliens than climate change: National Journal reported today that the House Science, Space, and Technology Committee has convened thirteen more hearings about deep-space exploration than climate change. Wednesday’s hearing concerned “Astrobiology and the Search for Life in the Universe,” where Seth Shostak — the senior astronomer at the the SETI institute — addressed the importance for continuing to search for extra-terrestrial life. He stressed the fact that “the universe is very fecund,” and that the history of scientific discovery has taught humanity that it is neither special nor unique. “It’s very easy to make fun of this [search for extra-terrestrial life],” he said. “On the other hand, it would have been very easy to make fun of Ferdinand Magellan’s idea to sail around the earth, or Captain Cook to map the South Pacific.”

In Landmark Class Action, Farmers Insurance Sues Local Governments For Ignoring Climate Change --Last month, Farmers Insurance Co. filed nine class-action lawsuits arguing that local governments in the Chicago area are aware that climate change is leading to heavier rainfall but are failing to prepare accordingly. The suits allege that the localities did not do enough to prepare sewers and stormwater drains in the area during a two-day downpour last April. In what could foreshadow a legal reckoning of who is liable for the costs of climate change, the class actions against nearly 200 Chicago-area communities look to place responsibility on municipalities, perhaps spurring them to take a more forward-looking approach in designing and engineering for a future made different by climate change. “Farmers is asking to be reimbursed for the claims it paid to homeowners who sometimes saw geysers of sewage ruin basement walls, floors and furniture,” reported E&E News. “The company says it also paid policyholders for lost income, the cost of evacuations and other damages related to declining property values.” Andrew Logan, an insurance expert with Ceres, told E&E News that there is likely a longer-term agenda in mind with this latest effort, and that the company “could be positioning itself to avoid future losses nationwide from claims linked to floods, sea-level rise and even lawsuits against its corporate policyholders that emit greenhouse gases.”

U.S. insurer (Farmers Insurance) class action lawsuit against 200 Illinois towns may signal wave of climate-change suits - A major insurance company is accusing dozens of localities in Illinois of failing to prepare for severe rains and flooding in lawsuits that are the first in what could be a wave of litigation over who should be liable for the possible costs of climate change.  Farmers Insurance filed 9 class actions last month against nearly 200 communities in the Chicago area. It is arguing that local governments should have known rising global temperatures would lead to heavier rains and did not do enough to fortify their sewers and stormwater drains. The legal debate may center on whether an uptick in natural disasters is foreseeable or an "act of God." The cases raise the question of how city governments should manage their budgets before costly emergencies occur. "We will see more and more cases," said Michael Gerrard, director of the Center for Climate Change Law at Columbia Law School in New York. "No one is expected to plan for the 500-year storm, but if horrible events are happening with increasing frequency, that may shift the duties." Gerrard and other environmental law experts say the suits are the first of their kind.

How To Redress The Planet’s Energy Balance - Ilargi - If we can agree for a moment that there is a very real possibility that we will have both much less capital and less energy available to us in the future, what should we do to define our response to this possibility? The obvious answer would seem to be to scale down, and do that as best we can without causing our societies to crumble because of it. Still, though many of us are aware of both the potential of less energy availability and the failure of the use of that energy, in combination with our ingenuity, in making us happier and more fulfilled human beings, scaling down is not on the agenda of societies at large. To the contrary, the “successful” people we see as our leaders talk only of more growth, whether or not that’s realistic, let alone desirable, and we pretty blindly follow them in that line of thinking, presumably until it becomes impossible to deny any longer that growth is no longer on the horizon. Since we have a long tradition of seeing any downturn as merely temporary, that realization may take a long time to sink in, which in turn may mean that people need to be dying by the side of the road before we accept it as truth..  DeGrasseTyson lamented the fact that we have proven in our history that we can be terribly ingenious, so why can we not now? Why are we unable to steer ourselves away from the consequences of ever more energy consumption? An interesting though perhaps challenging answer to that lament is that “the human species may be seen as having evolved in the service of entropy”, as David Price wrote in 1995, that “when the history of life on Earth is seen in perspective, the evolution of Homo sapiens is merely a transient episode that acts to redress the planet’s energy balance.” That turns the question into: can or can we not escape our destiny?

This Is How Far Ahead of the U.S. China Is on Green Energy - Glaciers in western China have receded by nearly 3,000 square miles, state-run news agency Xinhua reported on Wednesday, in a startling acknowledgement of climate change striking closer to home.  Xinhua reports that glaciers in western China have receded by 15% over the past 30 years, according to a climate change study by the Chinese Academy of Sciences. Researchers said they had observed fissures in ice sheets covering Mt. Everest and warned that if the glaciers continued to melt at their current rate, it could severely reduce water flows to Asia’s major riverbeds. The report comes amid a diplomatic thaw between China and the U.S. regarding climate change negotiations, which have periodically been a source of friction between the world’s two largest carbon emitters. China has bridled at international commitments to cut total levels of emissions, preferring to peg emissions targets to economic growth. But last month the two countries pledged to discuss steeper cuts in emissions. It may be just talk, but with cities shrouded in thick blankets of smog, food contaminated with heavy metals, and the occasional mass grave of pigs turning up in waterways, China’s policymakers face mounting public pressure to tackle the nation’s soot-stained image. And appearances can be deceiving. Beneath the pollution scandals, China has raced ahead of the rest of the world in renewable energies with a whopping $54 billion investment in 2013. It is not only the world’s biggest carbon emitter, it is also the world’s biggest supplier of wind, solar and other clean energy technologies.  Green on the outside, sooty on the inside, China is uniquely positioned to not only profit from the renewable energy policies in the rest of the world, but test run a few policies at home as well.

Fukushima Seawater Radiation Rises To New All Time High -- The mainstream media may have long forgotten about the Fukushima tragedy (as it certainly goes against the far more popular and palatable meme of a Japan "recovery" courtesy of Abenomics) but that does not mean it is fixed or even contained. Quite the contrary. As a rare update from Japan's Jiji news agency reminds us, on Friday radiation at five monitoring points in waters adjacent to the crippled Fukushima No. 1 power station spiked to all-time highs according to the semi-nationalized TEPCO.

Fukushima Workers Fled Plant After Accident Despite Orders - — At the most dire moment of the Fukushima nuclear crisis three years ago, hundreds of panicked employees abandoned the damaged plant despite being ordered to remain on hand for last-ditch efforts to regain control of its runaway reactors, according to a previously undisclosed record of the accident that was reported Tuesday by a major Japanese newspaper.The newspaper, The Asahi Shimbun, said that the incident was described by Masao Yoshida, the manager of the Fukushima Daiichi plant at the time of the accident, in a series of interviews conducted by government investigators several months after the March 2011 disaster. The newspaper said it had obtained a copy of a 400-page transcript of the interviews, which had been referred to in government accounts of the accident but had never been released in its entirety. Such a transcript could represent the only testimony of the accident left by Mr. Yoshida, who died last year of cancer at the age of 58. Mr. Yoshida is widely viewed in Japan as one of the disaster’s few heroes for preventing the crisis from spinning out of control by defying an order to stop pouring seawater on the overheating reactors.

57 nuclear waste barrels from Los Alamos pose potential 'imminent' and 'substantial' threat - Los Alamos National Laboratory packed 57 barrels of nuclear waste with a type of kitty litter believed to have caused a radiation leak at the federal government's troubled nuclear waste dump, posing a potentially "imminent" and "substantial" threat to public health and the environment, New Mexico officials said Monday. State Environment Department Secretary Ryan Flynn issued a formal order giving the lab two days to submit a plan for securing the waste containers, many of which are likely stored outdoors on the lab's northern New Mexico campus or at temporary site in west Texas. The order says 57 barrels of waste were packed with nitrate salts and organic kitty litter, a combination thought to have caused a heat reaction and radiation release that contaminated 22 workers with low levels of radiation at the Waste Isolation Pilot Plant near Carlsbad in February.

Synthetic Gas: False Friend For China’s Clean Air Drive? --Beijing’s city hall recently ordered 300 industrial polluters to relocate outside the city by October as part of a campaign to clean up its notoriously bad air. Nationwide, officials have been handed sweeping new enforcement tools in what Bloomberg calls the most significant overhaul to China’s environmental regulations in more than 25 years. One method Chinese officials have prioritized in their campaign to clean the air looks promising because it exploits coal, a resource China has in abundance. The coal-to-gas technology, in use since the 1980s, produces synthetic natural gas, a much cleaner burning fuel than raw coal. The government believes it can ramp up production to 50 billion cubic meters (bcm) a year by 2020 from around 2 billion bcm this year, according to a Platts report published in January.  But if the payoff is potentially huge, so are the pitfalls. Dozens of synthetic gas plants must be built and pipelines lain to send the gas from coalfields to distant cities where it is needed. Another concern is the enormous amounts of water such plants require, some of which are set for regions where water is already scarce. Finally, some experts say, synthetic natural gas production may actually increase carbon emissions -- not welcome news for a country that already produces a quarter of the world’s greenhouse gases. Coal is facing a raft of competitors in today’s China, from natural gas to nuclear. About 75 percent of the country’s electricity comes from coal currently, but that is certain to change as new cleaner-burning plants come on line. For now, though, coal’s primacy is uncontested. One reason is the need to convert countless factories and homes to burn cleaner energy sources.

One of the above: Obama’s bet on gas throws caution to the wind - As windfalls go, America’s natural gas boom verges on the biblical. Economists talk of a “game changer”. Producers foresee a US manufacturing renaissance. Greens celebrate the death of King Coal. And strategists talk about a geopolitical trump card – not least in the west’s game of poker with Vladimir Putin’s Russia. Hydraulic fracturing has opened up a supply of cheap and relatively clean gas for decades to come. At a time when the US is facing a set of otherwise bleak trends, it is as close as you get to a godsend. That, at least, is the assumption. But what if it is wrong? According to Garten Rothkopf, an international advisory firm, the US is set to exhaust its supply of “economically recoverable” natural gas supplies by 2030. That estimate is based solely on existing projects, and excludes those that have been announced but not yet started. It also makes the conservative assumption that there will be just three liquefied natural gas export terminals in operation by then, as opposed to the six already in the works. Everyone is piling into the “dash for gas” on the basis that US gas prices will remain cheap as far as the eye can see. Long before 2030, however, US producers will have been pushed into the more expensive shale formations. Industry specialists protest that new technology will have opened up non-economic supplies by then. Yet gas euphoria has pushed risk management out of the window. However cushioned the basket might look, it is unwise to put all your eggs in it. Next month President Barack Obama’s administration will issue a new set of emissions rules that are likely to put most existing US coal-fired power plants out of business. America has likewise turned away from nuclear power. Likewise, Mr Obama set great store in the scaling up of alternative energy supplies such as wind and solar. But in its current mood, Congress looks unlikely to approve the renewal of alternative energy tax credits, which will further limit their potential.

MUST READ: Fugitive Methane Emissions from Fracking Oil and Gas Production Can Cause a ‘Global Catastrophe’ and Point of No Return A Cornell University scientist's claims that oil and gas development is so harmful to the climate that methane emissions and oil and gas production in general need to be cut back immediately to avoid a "global catastrophe" are adding more fuel to the scientific debate over the climate implications of shale oil and gas production. Fossil fuels production is the largest methane pollution source in the U.S., and ignoring those emissions will lead to a climate change “tipping point” from which there is no return, Cornell environmental biology professor Robert Howarth said in a statement Wednesday. He was unavailable for an interview.  Though scientists say there are avenues to preventing catastrophe other than curbing methane emissions, Howarth’s previous research with Cornell environmental engineering professor Anthony Ingraffea and others concluded that the climate impact of natural gas produced from shale — most of which involves hydraulic fracturing, or fracking — may be worse than that of coal and crude oil. That's because methane leaks from natural gas production have a greater effect on the climate than carbon dioxide emissions, Howarth said. Over a 100-year timeframe, methane is about 34 times as potent as a climate change-driving greenhouse gas than carbon dioxide, and over 20 years, it's 86 times more potent. Of all the greenhouse gases released by humans globally, methane contributes more than 40 percent of all radiative forcing, a measure of trapped heat in the atmosphere and a measuring stick of a changing climate, Howarth said.

NC Republicans want prison time for revealing what frackers are pumping into the ground  -- Republican lawmakers in North Carolina have introduced a bill that would make it a felony to disclose the chemicals used in fracking operations outside of emergency situations, Energywire reported. The “Energy Modernization Act,” (PDF) as the bill is called, would punish revealing fracking mix information with prison terms of “a few months,” in addition to civil penalties. While it would allow officials with the state emergency management office to gather that information for planning purposes and provide it for medical and firefighting personnel as necessary, first responders might also be forced to sign confidentiality agreements to protect that information. Otherwise, however, those details would be classified as trade secrets, which companies like ex-Vice President Dick Cheney’s former employer, Halliburton, have argued should be maintained in order to protect their business. However, fracking opponents have said that public disclosure of the chemicals used in the process is necessary to gauge how much damage it can do to local land and water supplies. Twenty states currently have laws on the books requiring companies to reveal what chemicals they use.

Illegal Dumping of Texas Frack Waste Caught on Video - If not for surveillance video given to the sheriff's department, the trucker responsible for the dumping may have disappeared into the night. But the video caught the distinctive flash from the reflective stripes on the tanker. It was the telltale clue detectives needed. Although sheriff's investigators couldn't determine whether the illegal dumping was intentional, it highlights the growing problem of how to dispose of billions of gallons of contaminated fluids left over from both the drilling and production phases of oil and gas development using hydraulic fracturing, or fracking. Karnes County is at the epicenter of a drilling boom in the 26-county Eagle Ford Shale region of South Texas. It's one of the most active drilling areas in the country, where nearly 9,000 wells have been sunk and another 5,500 approved since 2008. Drilling and fracking a single well in the Eagle Ford can take 4.9 million gallons of water, according to a report to the U.S. Environmental Protection Agency. All of that contaminated liquid waste has to be disposed of in some way. Among the approved disposal methods in Texas are injecting the unwanted fluid into deep underground wells, recycling, pumping it into huge open pits to evaporate or spraying it on top of sprawling waste fields. The pits and waste fields are being cited as a major source of noxious fumes and harmful airborne chemicals."There is so much of this that they don't know what to do with it,"  "So it's not surprising that there are cases where it's just dumped anywhere."Texas Department of Transportation officials closed the road so it could be cleaned up by a hazardous-waste disposal company, according to the sheriff's department report. Karnes City firefighters worried there may be flammable substances and potentially deadly hydrogen sulfide in the mix.

Fracking causing earthquakes? Lawmakers want to know — Monday the Subcommittee on Seismic Activity will hold a hearing at the State Capitol to listen to testimony concerning earthquakes and their possible relation to fracking. Hundreds of minor earthquakes have occurred in Northern Texas near the sites of oil and gas production and lawmakers want to know if fracking is causing it or a fault line. Fracking is a process where liquid, many times water, is mixed with sand and other chemicals and injected into the ground at a very high pressure to penetrate the deep rock formations to extract the gas and oil. The water that is used in the process is then stored in disposal wells near these sites because it is too polluted with metals and toxins. The big question by experts is, is the act of the drilling or the disposal wells that are buried thousands of feet underground causing the earthquakes? North Texas has experienced more than 300 minor earthquakes in the past few years, some in the Barnett Shale area near Dallas Fort Worth. The subcommittee will not take public comment Monday but instead invited speakers like the Mayors of Reno and Azle as well as university geologists, and the Railroad Commission Seismologist will testify.

Texas Jury Decides Fracking is a Nuisance -  At best. What a surprise.  A Texas jury just awarded damages to a homeowner that sued a fracker for being a nuisance. Even Texans think fracking is a nuisance. Heck, even the CEO of Exxon thinks it’s a nuisance  . .— Sam and Jane Crowder have lived in the same home for 41 years of their 49-year marriage. It’s on Madrid Lane, in southwest Fort Worth.Their backyard is an oasis, with a pond and landscaping. But the neighbor that moved in just beyond the backyard is what they call a nuisance.“It’s an ever-present annoyance,” Sam said. “This does not belong by houses.”A jury called it a nuisance, too. A gas-drilling site is approximately 165 feet from the Crowder’s back fence.The Crowders sued over, among other things, the dust, noise, and smell they say came from the site. The trial ended this week, and the jury sided with them, agreeing that Chesapeake Energy – which operates the site – created a nuisance and prevented the Crowders from enjoying their property.“It’s hard to put into words,” Sam said, choking up a bit. “I think now people will pay attention and listen to us, because no one ever listened before.”The jury awarded the Crowders $20,000, which is much less than the $108,000 they asked for. But overall, the verdict is more than they hoped for.

Northeast States Rush To Keep Fracking Wastewater Out - Senate Democrats in New York are renewing efforts to protect the state from the byproducts of the fracking boom in Pennsylvania. A new four-bill package would ban the waste from being used to de-ice roads and bar treatment facilities and landfills from accepting waste leftover from the drilling technique.  There are no active fracking operations in New York as the state is still involved in an extensive review of the impacts of permitting the practice, but landfills in New York currently accept fracking waste from other states and the salty brine wastewater is widely used in the state to help melt ice off roads.  “It makes no sense to me to allow the waste product from this process in Pennsylvania to be transported here,” Sen. Cecilia Tkaczyk, sponsor of a bill (S.5123-A) to prohibit the transportation of fracking waste into the state for treatment, disposal or storage told the Legislative Gazette.  The process produces millions of gallons of waste containing a cocktail of chemicals and naturally occurring radioactive material. The exact composition of fracking fluid is considered a trade secret in most states and is not public information.  In 2012, Pennsylvania produced 1.2 billion gallons of fracking wastewater. Much of that waste got shipped out of state to neighboring Ohio, which has experienced a dramatic increase in seismic activity in part related to wastewater that is injected deep underground for storage.

WSJ:  Frack Protesters Welcome Obama To Birthplace of Frack Bans -- WSJ: Hundreds of Fracking Protesters Greet Obama in Cooperstown. Because his advance team had not bothered to tell him that the Village was celebrating the 3rd anniversary of its frack ban – the first one in America. So rather than enter the Hall of Fame via the front door the way respectable folks do, he was spirited in via the service dock in a back alley. This did not go unnoticed by the Wall Street Journal. President Barack Obama visited the Baseball Hall of Fame on Thursday as crowds chanted outside, but these weren’t fans cheering on America’s pastime. Instead, they were protesters chanted “End fracking now!” And while baseball and oil production may not seem to go together, Cooperstown residents have been rallying against fracking for years. Middlefield and Otsego, which together encompass the Village of Cooperstown, came together in 2011 to pass the first local fracking ban by limiting industrial activities within the town’s borders. The ban has been upheld in two lower courts and the top-level Court of Appeals is expected to decide the case this summer.  Cooperstown still has a statement from 2011 prominently linked on its website.

The Poor Regulation of the Fracking Industry - Ohio annually processes thousands of tons of radioactive waste from hydraulic-fracturing, sending it through treatment facilities, injecting it into its old and unused gas wells and dumping it in landfills. Historically, the handling and disposal of that waste was barely regulated, with few requirements for how its potential contamination would be gauged, or how and where it could be transported and stored. With the business of fracking waste only growing, legislators in 2013 had the chance to decide how best to monitor the state’s vast amounts of toxic material, much of it being trucked into Ohio from neighboring states. But despite calls to require that the waste be rigorously tested for contamination, Governor John Kasich and the state legislature signed off on measures that require just a fraction of the waste to be subjected to such oversight. The great majority of the byproducts creating during the drilling process—the water and rock unearthed—still do not have to be tested at all. As well, the legislature, lobbied by the fracking industry, undid the governor’s bid to have the testing of the waste done by the state’s Department of Health—the agency acknowledged by many to possess the most expertise with radioactive material. The testing is now the responsibility of the Department of Natural Resources, the agency that oversees the permitting and inspection of oil and gas drilling sites, but that has no track record for dealing with radioactive waste. A ProPublica review of the legislature’s actions shows that just a handful of parties testified before the oversight committees charged with examining the pros and cons of the proposed regulations. And interviews with legislative staffers make clear that the final language of the regulations, including changes that scaled back two measures proposed by the governor, was inserted into the budget bill at the last minute. And so today, to the surprise of much of the public as well as some elected officials, Ohio’s oversight of fracking waste remains much as it had been—limited and controversial.

Energy Companies Try New Methods to Address Complaints About Fracking - --- Frackers are trying to clean up their act.  Thanks to hydraulic fracturing—a technology that uses water, chemicals and sand to unlock oil and gas trapped in dense underground rocks—communities from Pennsylvania to North Dakota are experiencing a boom in energy production. But the industry is facing more intense pressure from communities and environmentalists over its role in increased air and water pollution. In response, energy companies are pioneering new technologies to curb some of fracking's worst offenses. They're coming up with ways to cut methane seepage from their equipment, use excess gas that previously had been burned as waste to fuel drilling rigs, and put huge volumes of wastewater from fracking to work on new wells. The efforts have even won some tentative plaudits from environmentalists. Mark Brownstein, who leads the Environmental Defense Fund's efforts on natural gas, says companies should be required to do more to keep air and water clean. But he says there are some promising signs that companies are trying new things and revising certain processes, if only because they've realized it's in their best interest. "With the right technology, the right management practices and the right regulations properly enforced," he says, "there are things we can do to reduce the risks that are associated with unconventional oil and gas development."

EIA Cuts Monterey Shale Estimates on Extraction Challenges -- The Energy Information Administration slashed its estimate of recoverable reserves from California’s Monterey Shale by 96 percent, saying oil from the largest U.S. formation will be harder to extract than previously anticipated.“Not all reserves are created equal,” EIA Administrator Adam Sieminski told reporters at the Financial Times and Energy Intelligence Oil & Gas Summit in New York today. “It just turned out it’s harder to frack that reserve and get it out of the ground.” The Monterey Shale is now estimated to hold 600 million barrels of recoverable oil, down from a 2012 projection of 13.7 billion barrels, John Staub, a liquid fuels analyst for the EIA, said in a phone interview. A 2013 study by the University of Southern California’s Global Energy Network, funded in part by industry group Western States Petroleum Association, found that developing the state’s oil resources may add as many as 2.8 million jobs and as much as $24.6 billion in tax revenues.

Monterrey Shale Scam Downgraded by 95%  --The EIA has cut its original estimate of recoverable shale oil reserves in California’s much-hyped Monterey shale play by 96%, the L.A. Times’ Louis Sahagun reported late Tuesday. The agency now says there are just 600 million barrels of recoverable crude — as much as Bolivia. Previously the agency had said there were up to 13.7 billion recoverable barrels. Sahagun quotes EIA analyst John Staub:  From the information we’ve been able to gather, we’ve not seen evidence that oil extraction in this area is very productive using techniques like fracking…Our oil production estimates combined with a dearth of knowledge about geological differences among the oil fields led to erroneous predictions and estimates. In December, the Post Carbon Institute published a report calling into question the EIA’s initial estimate, noting that the Monterey’s geology, while superficially similar to the country’s marquee shale plays like the Bakken and Eagle Ford, contained unusual characteristics that would make it more difficult to access. In a statement last night the group said, “The oil had always been a statistical fantasy. Left out of all the hoopla was the fact that the EIA’s estimate was little more than a back-of-the-envelope calculation.”

In Stunning Backtrack, Feds Say Our Largest Shale Oil Reserve Is Mostly Un-Drillable -- The amount of oil that could be extracted from the country’s largest shale oil formation has been overstated by 96 percent, federal energy officials admitted Tuesday, dealing a major blow to industry projections about a new oil-boom future. In a new estimate to be released publicly next month, the U.S. Energy Information Administration is expected to say that only 600 million barrels of oil can be extracted from California’s Monterey Shale deposits — an amount of oil that would only be enough to meet U.S. oil consumption for 32 days. That number is far below the agency’s previous estimates, which said the shale likely held 13.7 billion barrels of recoverable oil, or enough to meet U.S. oil consumption needs for more than two years.  The EIA did not return ThinkProgress’ request for comment on the error in time for publication. But according to an L.A. Times report, the incorrect 13.7 billion barrel estimate of recoverable oil was issued in 2011 by an independent contractor for the government, which “broadly assumed” that oil from the Monterey Shale formation was as easily recoverable as the other prominent shale oil reserves in the country. Those reserves are the Bakken shale in North Dakota and Eagle Ford shale in Texas, which are estimated to hold approximately 3.6 billion barrels and 3.4 billion barrels of oil, respectively. While the Bakken and Eagle Ford shale deposits are “relatively even and layered like a cake,” the L.A. Times said, the 1,750-square-mile Monterey Shale has been “folded and shattered” by earthquakes — meaning the oil is lodged too deep to recover with currently available technology.

The California Shale Bubble Just Burst - The great hype surrounding the advent of a shale gas bonanza in California may turn out to be just that: hype. The U.S. Energy Information Administration (EIA) – the statistical arm of the Department of Energy – has downgraded its estimate of the total amount of recoverable oil in the Monterey Shale by a whopping 96 percent. Its previous estimate pegged the recoverable resource in California’s shale formation at 13.7 billion barrels but it now only thinks that there are 600 million barrels available. The estimate is expected to be made public in June.  The sharply downgraded numbers come amid a heated debate in California over whether or not the state should permit oil and gas companies to use hydraulic fracturing (“fracking”) – the process in which a combination of water, chemicals and sand are injected underground at high pressure in order to break apart shale rock and access trapped natural gas.  Fracking involves enormous quantities of water; an average of 127,127 gallons of water were required to frack a single California well in 2013, according to the Western States Petroleum Association. That’s equivalent to 87 percent of the water a family of four uses in an entire year.   California is home to an enormous agricultural industry, and with the Monterey Shale located beneath the fertile Central Valley, fracking is going to compete with agriculture, ranching and other commercial and residential users for water use. With 100 percent of California now in a state of “severe” drought, critics of fracking have gained traction in the debate over the extent to which the government should allow oil and gas companies to move in.

California Is In An Extremely Awkward Position Now That The Government Says Most Of Its Shale Oil Is Unrecoverable -  Last night, the LA Times' Louis Sahagun reported a piece of data dynamite the Energy Information Administration plans to detonate under California next month: There now appears to be just 600 million barrels of recoverable tight oil in the state's vast Monterey shale play — a downward revision of 96% from the agency's 2011 estimate. "The shale deposits of the Monterey are much thicker and much more complex, with target strata up to 2,000 or more feet in thickness, and at depths that can range from surface outcrops to more than 18,000 feet within a span of fortymiles or less."BI had previously talked with experts who said there were so many unknowns about the Monterey that it wasn't really on anyone's radars as a potential new chapter in the Great American Shale Boom. "It is not a focus right now," ITG's David Howard told us in December. "The market has moved away from really paying attention California unconventional and I follow the market." So, it's debatable whether it can reasonably be called "a blow to the nation's oil future," as the LAT's Sahagun put it, since no one was really factoring it into that future in the first place. But it certainly makes things extremely awkward for California. The state had pinned its hopes on a March 2013 USC study that argued tapping the Monterey could create up to 2.8 million jobs by 2020 and add up to $25 billion to state and local tax revenue. "Californians drive 332 billion, that's billion miles a year, fed almost entirely by oil products, so we have got to start hammering at the demand, as well as the sources of fossil fuel," California Governor Jerry Brown told CNN Sunday. In September 2013, Brown — often labeled as having a thumb as green as Shrek's — signed into law a bill that allowed the small-scale fracking that already occurs in to continue, with a view toward one day tapping what was thought to be Monterey's vast and accessible deposits.

Write-down of two-thirds of US shale oil explodes fracking myth -- Next month, the US Energy Information Administration (EIA) will publish a new estimate of US shale deposits set to deal a death-blow to industry hype about a new golden era of US energy independence by fracking unconventional oil and gas. EIA officials told the Los Angeles Times that previous estimates of recoverable oil in the Monterey shale reserves in California of about 15.4 billion barrels were vastly overstated. The revised estimate, they said, will slash this amount by 96% to a puny 600 million barrels of oil. The Monterey formation, previously believed to contain more than double the amount of oil estimated at the Bakken shale in North Dakota, and five times larger than the Eagle Ford shale in South Texas, was slated to add up to 2.8 million jobs by 2020 and boost government tax revenues by $24.6 billion a year. Industry lobbyists have for long highlighted the Monterey shale reserves as the big game-changer for US oil and gas production. Nick Grealy, who runs the consultancy No Hot Air which is funded by "gas and associated companies", predicted last year that: "... the star of the North American show is barely on most people's radar screens. California shale will... reinvigorate the Golden State's economy over the next two to three years."This sort of hype triggered "a speculation boom among oil companies" according to the LA Times. The EIA's original survey for the US Department of Energy  published in 2011 had been contracted out to Intek Inc. That report found that the Monterey shale constituted "64 percent of the total shale oil resources" in the US.

The US Shale Oil Miracle Disappears - Chris Martenson - The US shale oil "miracle" has about as much believability left as Jimmy Swaggart. Just today, we learned that the EIA has placed a hefty downward revision on its estimate of the amount of recoverable oil in the #1 shale reserve in the US, the Monterey in California.  As recently as yesterday, the much-publicized Monterey formation accounted for nearly two-thirds of all technically-recoverable US shale oil resources. But by this morning? The EIA now estimates these reserves to be 96% lower than it previously claimed.  Yes, you read that right: 96% lower. As in only 4% of the original estimate is now thought to be technically-recoverable at today's prices:  (Source)  From 13.7 billion barrels down to 600 million.  Using a little math, that means the hoped for 2.8 million jobs become 112k and the $24.6 billion in tax revenues shrink to $984 million.  The reasons why are no surprise to my readers, as over the years we've covered the reasons why the Monterey was likely to be a bust compared to other formations. Those reasons are mainly centered on the fact that underground geology is complex, that each shale formation has its own sets of surprises, and that the geologically-molested (from millennia of tectonic folding and grinding) Monterey formation was very unlikely to yield its treasures as willingly as, say, the Bakken or Eagle Ford. But even I was surprised by the extent of the downgrade. This takes the Monterey from one of the world's largest potential fields to a play that, if all 600 million barrels thought to be there were brought to the surface all at once, would supply the US' oil needs for a mere 33 days.

NY shale prospects dim six years after leasing frenzy Industry faces mounting legal, economic hurdles - New York’s Marcellus Shale gas reserves, once thought to be world class, continue to lose their luster along with the gumption to develop them. Shale gas proponents, once giddy with anticipation during the leasing boom of 2008, know now what they didn’t know then: legal hurdles to overcome state and local roadblocks look more formidable if not insurmountable with each passing court case and hearing, and the resource looks less and less worth the effort under today’s economics. Two recent indicators of future prospects in New York have, for the most part, slipped under the radar of the mainstream press, but it’s a reasonable bet they have not escaped notice of prospectors and the people who finance them. The first indicator is the status of a lawsuit by industry and a group of landowners to legally force open the Marcellus frontier in New York. I’ll get to that in a minute. The other indicator is the latest assessment of economically recoverable reserves under current market conditions, if the moratorium were lifted or bypassed. First the economics. Many will recall the summer of 2008, when the leasing frenzy – whipped up by a $110 million deal between XTO Energy and landowners in Deposit, New York – sent lease prices soaring along the relatively unexplored fringes of the Marcellus in the Southern Tier of New York. Since then, the price of natural gas has fallen by more than two thirds. Moreover, New York state’s moratorium on shale gas development, pending a review originally expected to last a year, is about to begin year seven, with no end in sight. In the meantime prospectors have moved on to other ventures, leaving many to wonder when and if they will return to the Empire State. The answer is simple: They will return when and if a) it’s allowed and b) it’s profitable.

What’s Not to Like About Fracking ? --  Exploding Bomb Trains. Scraping Radium 226 off your windshield. Getting run off the road by frack truck convoys. Cooking the planet with natural gas. A couple of major Frackastrophes every fracking day. What’s not to like about fracking ? Evidently a whole fracking lot according to a new pro-fracking poll from the Wall Street Journal.

Oil Spills Increased by 17% in 2013 - The rate of oil drilling in the U.S. leveled off in 2013, but the same can’t be said for the amount of spills that took place.  According to a report from E&E Publishing, there were at least 7,662 spills, blowouts, leaks and similar incidents last year in 15 of the top states for onshore oil and gas activity. In states where the publication could compare results for both years, the publication determined there were about 20 more spills per day than in 2012. While most of the spills were small, they amounted to more than 26 million gallons of oil, fracking wastewater and more. That’s equivalent to the amount of oil BP gushed into the Gulf of Mexico in 2010. North Dakota, Montana Pennsylvania and Texas were among the states with the largest increases. Production-related spills more than doubled to 103 in Ohio, but that figure is tiny compared to other states.  In some states, the spill increases have led to more enforcement, while that’s not the case in others. Notices of alleged violations increased by 50 percent  in Colorado. Since 2010, the Ohio Department of Natural Resources tripled the number of workers who deal with oil and gas to more than 100. That includes 50 inspectors.

Railroad CEO Wants To Send Oil Trains Through Town Where Derailment Killed 47 Last Year - Oil trains could soon be traveling through Lac Mégantic, the tiny Quebec town that was the scene of one of the deadliest train accidents in Canadian history last July. The new owner of the railroad company responsible for the Lac Mégantic oil train disaster, a derailment which killed 47 people and destroyed much of the town’s center, said this week that within the next ten days he wants to have an agreement with Lac Mégantic officials to restart oil train shipments through the town. John Giles, CEO of the Central Maine and Quebec railway who on Thursday purchased the U.S. assets of the bankrupt Montreal, Maine and Atlantic Railway, said the company plans to invest in safety improvements before restarting oil shipments 18 months from now, spending $10 million on rail improvements over the next two summers. “In the interest of safety, and I think being sensitive toward a social contract with Lac-Mégantic, we have chosen not to handle crude oil and dangerous goods through the city until we’ve got the railroad infrastructure improved, and made more reliable,” Giles told The Associated Press. Giles didn’t address a desire expressed by Lac Mégantic’s mayor to divert the oil trains around the city, so to try to prevent another deadly derailment.

Conflict with Local Communities Hits Mining and Oil Companies Where It Hurts -  Conflicts with local communities over mining, oil and gas development are costing companies billions of dollars a year. One corporation alone reported a six billion dollar cost over a two-year period according to the first-ever peer-reviewed study on the cost of conflicts in the extractive sector. The Pascua Lama gold mining project in Chile has cost Canada’s Barrick Gold 5.4 billion dollars following 10 years of protests and irregularities. No gold has ever been mined and the project has been suspended on court order. And in Peru, the two billion dollar Conga copper mining project was suspended in 2011 after protests broke out over the projected destruction of four high mountain lakes. The U.S.-based Newmont Mining Co, which also operates the nearby Yanacocha mine, has now built four reservoirs which, according to its plan, are to be used instead of the lakes. “Communities are not powerless. Our study shows they can organise and mobilise, which results in substantial costs to companies,” said co-author Daniel Franks, deputy director of the Centre for Social Responsibility in Mining. “Unfortunately conflicts can also result in bloodshed and loss of life,”  The study is based on 45 in-depth, confidential interviews with high-level officials in the extractive (energy and mining) industries with operations around the world.

This spread of ‘holy fascism’ is a disaster - Earlier this month, Saudi liberal activist Raif Badawi was sentenced to 1,000 lashes, 10 years in prison and a heavy fine for insulting Islam. In fact, his crime was to establish an online discussion forum where people were free to speak about religion and criticise religious scholars. He had been charged with "apostasy" in 2012, because of his writings and for hosting discussion on his Saudi Arabian Liberals website, and was sentenced to seven years in prison and 600 lashes but on appeal a heavier sentence was imposed. Lashings and beheadings generally get little publicity except where a foreigner is involved. The local media is muzzled and foreign press for the most part excluded. This contrasts with the blanket coverage of the kidnapping of more than 200 Nigerian schoolgirls by Boko Haram, the al-Qa'ida type movement in northern Nigeria. Heavy publicity is also being given to the introduction by the Sultan of Brunei of a new, supposedly more Islamic, penal code. Hassanal Bolkiah said at the beginning of May: "Tomorrow will see the enforcement of Sharia law phase one." Later phases will include flogging, amputation of limbs and death by stoning. No such legal innovations are necessary in Sudan, where, earlier this month, Mariam Yahia Ibrahim Ishag was sentenced in Khartoum to be hanged for apostasy after first receiving 100 lashes. Born a Muslim but raised a Christian, she was given three days by a judge "to return to Islam" or be executed. The 100 lashes are apparently because she is married to a Christian and is eight months pregnant with their child.

Russia believes it is impossible to return to $268 gas price in negotiations with Ukraine -Russia is ready “to discuss discounts on gas prices with Ukraine but it is impossible to return to the price that existed in the first quarter of 2014,” Russian Energy Minister Alexander Novak told a news conference in Berlin after meeting EU Commissioner for Energy Gunther Oettinger on Monday. “We believe that it is impossible to use the figure of $268 per 1,000 cubic meters of gas in our price discussions. That was the price for the first quarter established by a contract that had not been extended. We have the current contract and a price formula fixed in this contract according to which the price is $485. This is the price which can be considered,” Novak told journalists.“We can discuss discounts on this sum if mechanisms of settling (Ukraine’s) outstanding debt and ensuring Ukraine’s further solvency can be found,” the Russian energy minister added. “We do not understand the reasons for raising this question. The price of $268 cannot be considered under the current circumstances because it does not match even average European market prices,” Novak explained

R. Hunter Biden Should Declare Who Really Owns His New Ukrainian Employer, Burisma Holdings -  In other words, it’s a big shell company network of a classic British kind, with ownership and control completely obfuscated. There’s another question. How is it that, 5 years after the utterly opaque Millington rode off into the sunset with Esko Pivnich and Pari, and Burisma Holdings was left empty-handed, it’s now Burisma Holdings who say they own Esko Pivnich and Pari? It’s all as murky as hell. If I were R. Hunter Biden, I wouldn’t touch it; but as we saw from the Paradigm saga, R. Hunter doesn’t look before he leaps. Another thought: could it be that Millington, Burisma, Esko Pivnich and Pari were owned by the same one person all along? All this calling in of loans would then just be corporate kabuki: a tax dodge, say, or some sort of favour to an oligarch or politician.This is what one careful Ukrainian journalist dug up in 2012:…Burisma changed owners last year: instead of Zlochevsky and Lisin, the company was taken over by a Cypriot off-shore enterprise called Brociti Investments Ltd. Pari and Esko-Pivnich also changed their address: they moved from Kateryny Bilokur Street to 10a Rylyeyeva Street in Kyiv. A third company was already waiting for them in the same building – the above-mentioned Ukrnaftoburinnya.The owners of Ukrnaftoburinnya, Pari, and Esko-Pivnich were finally confirmed through first-hand sources. Oleh Kanivets worked as CEO of Ukrnaftoburinnya for two years. He confirmed who actually controlled the above-mentioned companies to “Slidstvo.Info”.”The Privat Group is the immediate owner. This company was founded by Mykola Zlochevsky some time ago, but he later sold his shares to the Privat Group”.

Putin's Crimea Bonus: Vast Oil And Gas Fields -- Crimea's secession to Russia - and Putin's gracious acceptance of their request for annexation - has focused all eyes on the peninsula's landmass and rolling tanks; but, as we have noted previously, NY Times reports that when Russia acquired not just the Crimean landmass but also a maritime zone more than three times its size with the rights to underwater resources potentially worth trillions of dollars. It's all about the resources as we have noted previously but Russian officials are quick to play this down, "compared to all the potential Russia has got, there was no interest there," but as one analyst noted, Russia’s annexation of Crimea "so obvious" as a play for offshore riches. No wonder Putin is happy to take on the 'burden' of Crimea. Donetsk's huge shale fields... And as other regions in east and south Ukraine follow in the Donetsk' footsteps, assuring Russia a land connection to Crimea and cutting off Kiev from the Donbas industrial zones and the Slavyansk shale gas, Putin wins again.

Putin Has Crimea, But Reaping Its Energy Riches May Prove Difficult -- Russia’s seizure of Crimea has led to speculation that a major motivating factor was to acquire potentially vast energy resources in the Black and Azov Seas. I wrote back in March on the eve of the Crimean vote to secede from Ukraine about reports that Russia was eyeing the oil and gas reserves off the coast of Crimea. But taking control of territory rich in oil and gas is different from being able to successfully pull those energy resources from the ground. The New York Times published an article on May 17 that suggested that Russian President Vladimir Putin quietly achieved a massive windfall – acquiring “rights to underwater resources potentially worth trillions of dollars.”  The Black and Azov Seas could certainly hold a huge bounty, potentially up to almost 10 billion barrels of oil and 3.8 trillion cubic feet of natural gas. The most promising field is the Skifska field just southwest of the Crimean coastline. Early estimates suggest that Skifska holds 200 to 250 billion cubic meters of natural gas.  However, just because Russia now controls this territory does not mean they will be able to take advantage of it, at least not anytime soon. Although there are rough estimates of significant reserves of oil and gas, the area is still relatively unexplored. Ukraine had trouble attracting any bidders for two of its four blocks off the coast of Crimea, despite heavy salesmanship by the government in Kiev.

Chinese Media: Russia and China Reach Major Gas Deal - Beijing and Moscow reached a long-awaited natural gas deal Wednesday that would supply hundreds of billions of dollars of Siberian gas to China, Chinese media reported, as Russian President Vladimir Putin seeks reorients his gas sales toward the East. A $400-billion deal for a 30-year supply of natural gas has been negotiated for nearly a decade, with Russia hesitant to concede a lower price for China than its European customers, the New York Times reports. Russia would invest $55 billion in infrastructure for transporting the gas to China, Gazprom CEO Alexei B. Miller said. The contract is for 38 billion cubic meters of gas each year, the Wall Street Journal reports, implying a price of about $350 per thousand cubic meter—at the low end of what Gazprom currently charges clients. “Russia needs this China deal very badly because it needs to signal to [Brussels] and to some EU nations that it’s taking a step that’s economically profitable and that it’s found a new market for its gas,” said Shamil Yenikeyeff, a research fellow at the Oxford Institute for Energy Studies. Putin has sought to sell gas in China and diversify out of stagnant European markets, particularly now in the face of sanctions and political tensions in the West. Experts said Putin’s meetings with German chancellor Angela Merkel and President Obama in June were a key motivator in completing a deal with the Chinese.

China and Russia sign gas deal - China and Russia signed an eleventh hour agreement to import natural gas from Russia’s Gazprom during a state visit by President Vladimir Putin on Wednesday following strenuous Russian efforts to secure what has been portrayed as a key test of closer Sino-Russian ties. As Moscow’s relations with the west have deteriorated over the crisis in Ukraine, Mr Putin has sought to show the world and the Russian people that he has alternative friends to the east. State-owned China National Petroleum Corp, China’s largest oil company, said on Wednesday it had signed a 30-year deal to buy up to 38bn cubic metres of gas per year, beginning in 2018. The company did not give details on the pricing of the gas, the sticking point in negotiations that have stretched over a decade. Russian media and officials had said the deal would be a highlight of Mr Putin’s visit. The breakthrough came just hours after PetroChina, the listed subsidiary of CNPC, told the Financial Times that the deal would not be completed during Mr Putin’s visit because of the pricing dispute. “At the moment the import price and the domestic price are inverted. We are already losing money on imported gas, and we can’t lose more,” said PetroChina spokesman Mao Zefeng earlier on Wednesday. In the wake of Russia’s aggressive actions in Ukraine, European countries have been rethinking their dependence on Russian gas. The deal is a powerful sign of Russia’s ability to reduce its reliance on Europe, the largest importer of Russian energy.

China signs deal for Russian gas, boosting Putin’s Asia pivot -- Russia and China reached an agreement Wednesday for Russia to supply China with about a quarter of its annual natural gas consumption over three decades starting in 2018. Russia plans to invest $55 billion and China will contribute about $25 billion, according to Russian President Vladimir Putin, to help build the necessary pipeline and infrastructure to develop gas fields in eastern Siberia and bring those supplies to population centers in northeast China. The total value of the deal, which will supply 38 billion cubic meters of gas annually, is estimated to be $400 billion. "[T]his is indeed a historic event for Russia’s gas sector," Mr. Putin told reporters at a press conference in Shanghai, wrapping up a two-day state visit with Chinese President Xi Jinping. "It is historic even looking back to the Soviet era, too. This is the biggest contract in terms of sale by volume to any one country in the sector’s entire history, whether the Soviet period or modern Russia." For decades, the expansion of the oil-and-gas empire that fuels Russia's economy has been hemmed in by its westward-oriented pipelines and flagging European growth. Russia has already built a major oil pipeline to China, and Wednesday's deal moves the ball forward on a parallel gas pipeline that physically and contractually binds together two of the world's largest economies. It is a powerful symbol of Eastern unity just as the Ukraine crisis dims Moscow's future in the West.   

The Birth of a Eurasian Century: Russia and China Do Pipelineistan  — A specter is haunting Washington, an unnerving vision of a Sino-Russian alliance wedded to an expansive symbiosis of trade and commerce across much of the Eurasian land mass — at the expense of the United States. And no wonder Washington is anxious.  That alliance is already a done deal in a variety of ways: through the BRICS group of emerging powers (Brazil, Russia, India, China, and South Africa); at the Shanghai Cooperation Organization, the Asian counterweight to NATO; inside the G20; and via the 120-member-nation Non-Aligned Movement (NAM). Trade and commerce are just part of the future bargain.  Synergies in the development of new military technologies beckon as well.  You remember “Pipelineistan,” all those crucial oil and gas pipelines crisscrossing Eurasia that make up the true circulatory system for the life of the region.  Now, it looks like the ultimate Pipelineistan deal, worth $1 trillion and 10 years in the making, will be inked as well.  In it, the giant, state-controlled Russian energy giant Gazprom will agree to supply the giant state-controlled China National Petroleum Corporation (CNPC) with 3.75 billion cubic feet of liquefied natural gas a day for no less than 30 years, starting in 2018. That’s the equivalent of a quarter of Russia’s massive gas exports to all of Europe. China’s current daily gas demand is around 16 billion cubic feet a day, and imports account for 31.6% of total consumption. Gazprom may still collect the bulk of its profits from Europe, but Asia could turn out to be its Everest. The company will use this mega-deal to boost investment in Eastern Siberia and the whole region will be reconfigured as a privileged gas hub for Japan and South Korea as well. If you want to know why no key country in Asia has been willing to “isolate” Russia in the midst of the Ukrainian crisis — and in defiance of the Obama administration — look no further than Pipelineistan.

Does Russia’s gas deal with China change things for the EU? -- News just out is that Russia and China have finally signed a gas deal, the negotiations of which have been going-on for a decade. (As the picture above, taken from a Gazprom investor presentation showed, this is something Gazprom has been targeting).  The key points of the deal are follows:

  • The contract will be over 30 years and is unofficially estimated to be worth $400bn (19% of Russian GDP).
  • It will see Gazprom supply up to 38 billion cubic meters (bcm) of gas to China per year from 2018. Once further pipelines are complete, this could be expanded to 61 bcm per year.
  • No official price has been revealed but the biggest sticking point has been that China believed Russia’s price demands were too high. It will be interesting to see if Russia gave in on this point.

What does this deal mean for the EU?

  • In the short term, not too much. The economic links between Russia and Europe will continue to be significant and they will continue to be reliant on each other when it comes to energy (the former to sell the latter to buy).
  • The deal will not be in place until 2018 and even then will only see Russia selling a fraction of its gas exports to China every year, exports to the EU could still well be two to four times the size.
  • For these reasons, it is unlikely to change the potential impact which EU sanctions would have on Russia. Although of course Russia remains relatively unconcerned by such threats when it knows of the huge divides within the EU on the issue.

How The Russia-China Gas Deal Hurts U.S. Liquid Natural Gas Industry - Russia and China finalized a truly massive gas deal during Russian President Vladimir Putin’s visit to Shanghai this week, and while the agreement is a bilateral one, its effects will be felt as far away as Texas and Louisiana.  The financial details remain murky – Gazprom’s CEO Aleksei Miller called them a “commercial secret” – but the total value of the contract is estimated at $400 billion. Russia agreed to deliver 38 billion cubic meters (bcm) of natural gas to China each year beginning in 2018, the equivalent of one-quarter of China’s current annual consumption.  The deal spans 30 years and solidifies what has often been a tense relationship between Moscow and Beijing. Russian media is calling it the “gas deal of the century.”  Even if Russia had to make large concessions to China on the final price, the deal gives it access to one of the world’s largest energy markets and diversifies its customer base away from a Europe looking for other suppliers. China, meanwhile, has gained a secure supply of natural gas for decades. But the geopolitical ramifications don’t stop there. A deal of such a monumental size will undoubtedly ripple through energy markets. For example, China has long been seen as a massive consumer of liquefied natural gas (LNG) – gas that is turned to liquid form and transported by super-chilled container ships. The deal with Russia could curb quite a bit of that projected demand; the 38 bcm that will flow to China via pipelines will supply a tenth of China’s annual gas consumption by 2020.

Russia and the Chinese LNG Market -- While the landmark $400 billion Gazprom deal stole the headlines during Russian President Vladmir Putin’s recent visit to China, another smaller deal, this one involving Russia’s second-largest natural gas producer Novatek, also warrants attention. China has contracted Novatek to supply 3 million tons of liquefied natural gas (LNG) annually.Given Chinese enthusiasm for replacing coal with gas and Russia’s ambition to acquire a 15 percent share of world liquefied natural gas (LNG) exports, the two countries potentially have significant shared interests. While many of the elements of a far-reaching partnership are taking place, long-term success will depend heavily on the ability of Beijing and Moscow to agree on prices.According to a BP estimate, China consumed 143.8 billion cubic meters (bcm) of gas in 2012 (125 million tons of oil equivalent) up 9.9 percent from the previous year. Of this, 21.3 bcm was sourced by pipeline from Turkmenistan and 20 bcm was imported as LNG (with more than half of that coming from Qatar and Australia). The remainder was domestically extracted. At present, natural gas constitutes a modest 4.4 percent share of China’s energy consumption, but Beijing plans to raise that to 7.5 percent in 2015 and then to 10.0 percent by 2020. This would mean that next year China would be consuming 260 bcm of gas annually, with 90 bcm imported and the remaining 170 bcm (ambitiously) planned to extracted domestically.China will be placing a particular focus on imports of LNG, which is sees as a key element of its national gas-for-coal strategy and a prime source for city consumption. LNG will give China another plank in its energy security, given that its transportation does not involve pipelines and troublesome transit disputes.

Russia’s Blockbuster Gas Deal Makes It Look Weak -- The politics of energy are getting ever more interesting following the signing of a historic 30 year gas deal between China and Russia. The deal has been portrayed as Putin’s revenge for Western sanctions imposed following the conflict in the Ukraine. He’s sending a message that Russia has other options aside from exporting its natural resources to Europe. (The U.S. is increasingly energy independent and doesn’t need Russian gas.) The photo-op of Chinese president Xi Jinping and Putin downing a shot of vodka following the deal close was classic.  But it’s not time to click glasses quite yet. In fact, I’d argue that the China deal makes Russia–and Putin–look weaker, not stronger. For starters, as a recent Capital Economics report on the topic points out, “while the headline figure of $400 billion seems large” given that it’s 20 percent of Russia’s current GDP, that take is spread out over 30 years. That means we’re talking about $13 billion in additional annual export revenues for Russia–less than a quarter of what they typically export to Europe. Selling to China isn’t going to mean that sanctions won’t hurt. Europe remains Russia’s most important energy market. Secondly, Russia has been in talks with China for years about this deal, and it’s not an accident that they signed only now, when the country is in a tough spot. The Chinese got a bargain in terms of gas price–they are apparently paying $350 per thousand cubic meters, $50 bucks less per unit than the Russians had wanted, and $20 bucks less than what the Europeans currently pay. No wonder Gazprom shares trade at a huge discount, despite the fact that the company made more money than any other firm in the world last year.The Russians are also picking up the bulk of the infrastructure development required for the deal (the Chinese are only committing to $20 billion in spending so far, while the project will require at least $55 billion). And, they have plenty of other gas import options from the central Asian republics, which they can of course play off of each other, and Russia, in the years ahead.

Competing Visions for Russia’s Economic Future - — A panel at an annual economic forum here was deeply divided over the direction of the Russian economy. The isolationists in the group favored relying on state banks for its financing needs. Others called for Russia to deepen its ties with China, while a different contingent said global trade and commerce remain critical.A question projected on a wall loomed large in the debate: “What is to be done?”On the verge of recession, Russia stands at a critical crossroads. President Vladimir V. Putin just struck a major gas deal with China, but the first profits will not flow for years. European and American financing is drying up while the crisis in Ukraine unfolds, and Russia’s own businesses and wealthy individuals are sending money abroad. With oil prices flat and the flight of capital from Russia, the International Monetary Fund projects that Russia’s economy will grow a meager 0.2 percent this year.  Russian officials use the St. Petersburg International Economic Forum, held in the country’s second largest city, to woo foreign investment, with the city’s eerily beautiful period of white nights, or around the clock sunshine, acting as a selling point for delegates. The event usually attracts the global business elite from a variety of industries: energy, finance, manufacturing, media and aerospace.This year is different. The Obama administration dissuaded many chief executives of American companies like PepsiCo, Alcoa and ConocoPhillips from attending. Even many German chief executives stayed home, in spite of Germany’s extensive trade ties to Russia.

$400 Billion Gas Deal Shows Russia Looking To China To Replace Western Money… The news that China and Russia have signed a $400 billion deal through which Gazprom will supply China National Petroleum Corp with 30 years of natural gas is the clearest illustration yet that Russia will be looking east, not west, for international funding. Last week, in Will China Save Russia With Investment?, I reported a series of new Russia-China deals were about to be launched by the two countries’ sovereign wealth funds, the Russian Direct Investment Fund and China Investment Corporation. Those deals have since been announced: they involve Vcanland, a developer of tourism infrastructure and senior living communities; the first ever railway bridge over the Amur River on the Russia-China border; and logistics services investment.In dollar terms, they may have involved as much as $1 billion of investment, but while the number itself is insignificant compared to the outflows Russia is experiencing, the trend is very important – and is underlined by the new gas deal. Russia’s central bank says that $63.7 billion of money left Russia in capital outflows in the first quarter of this year; the IMF is forecasting $100 billion of outflows for the full year. Others think those numbers conservative. Russian access to the international capital markets has dried up, and with vast infrastructure needs – just think of the FIFA World Cup, coming up in 2018 – that is a problem. So what to do? It can’t get those sorts of portfolio flows anywhere else, but it can bolster its foreign direct investment, or other forms of international trade. And China, which does not share the west’s sense of outrage about Russia’s behaviour in Ukraine, is the perfect candidate.

Russia May Sign Agreement to Build 8 Reactors in Iran…  (RIA Novosti) – Moscow may sign an intergovernmental agreement with Teheran this year to build eight new reactors for nuclear power plants in Iran, a source close to the negotiations told journalists Thursday. Two reactors could be built at the Bushehr Power Plant and six reactors at other sites, the source said, adding that the talks were in their final stage. Russian President Vladimir Putin said earlier this week that Russian-Iranian cooperation will continue despite international turbulence around Tehran. Putin said that Russia and Iran are not only neighbors, but also long-standing reliable partners. Iran’s only nuclear power plant near Bushehr came online September 2011 and began operating at full capacity a year after. Moscow handed over operational control of the Russian-made plant to Iran in September last year. Construction of the power plant in the country’s south began in the 1970s but was plagued by delays. Russia signed a billion-dollar deal with Tehran to complete the plant in 1998. ria

Hot On The Heels Of Its China Breakthrough, Russia Set To Build Eight Nuclear Power Plants In Iran -- The Eurasian crescent of Russia and China would be made all that much stronger if the two nations had a toehold on the Straits of Hormuz, and were able to shut traffic - either tanker or military, with the US Fifth Fleet located in Bahrain - into the Gulf at their bidding. Which is why it was not surprising that not even 24 hours after Russia and China announced the "holy grail" energy deal, that RIA reported Russia is already preparing to lock in the Tehran regime with a deal to build not one but 8 (!) more nuclear power plants in the country.

Platinum Shortage Widens With Palladium on Tight Supplies - Supply shortages for platinum and palladium will be the largest in more than three decades this year on stronger demand from car companies and restricted supplies, Johnson Matthey Plc said. Platinum consumption will beat supply by 1.22 million ounces, compared with 940,000 ounces in 2013, London-based Johnson Matthey said in its platinum-group metals report. Palladium’s deficit will expand to 1.61 million ounces, from 371,000 ounces last year. They would be the biggest shortfalls ever, based on data going back to 1975 for platinum and 1980 for palladium on the company’s website. Platinum has gained this year as more than 70,000 workers went on strike from January in South Africa, the largest producer of the metal and second-biggest for palladium. Demand from automakers, which use the metals in pollution-control devices, helped keep the materials in shortages since 2012. Palladium reached the highest since 2011 this month, partly as western nations threatened top producer Russia with sanctions. “Supply-side issues are common to both platinum and palladium,”  “We do expect auto demand to keep rising. In the medium term, this is mainly to do with emissions legislation in the case of platinum, and mainly growth in vehicle production in the case of palladium.”

China Signs Non-Dollar Settlement Deal With Russia's Largest Bank - Slowly - but surely - the USD's hegemony is being chipped away whether by foreign policy faux pas, crossed red-lines, or economic fragility. However, on Day 1 of Vladimir Putin's trip to China it is clear that the two nations are as close as ever. VTB - among Russia's largest banks - has signed a deal with Bank of China to pay each other in domestic currencies, bypassing the need for US Dollars for "investment banking, inter-bank lending, trade finance and capital-markets transactions." Kirill Dmitriyev the head of Russia’s Direct Investment Fund notes, "together it’ll be possible to discuss investment in various projects much more efficiently and clearly," as Russia's pivot to Asia continues to gather steam.

China steps up speed of oil stockpiling as tensions mount in Asia - Telegraph: China is stockpiling oil for its strategic petroleum reserve at a record pace, intervening on a scale large enough to send a powerful pulse through the world crude market. The move comes as tensions mount in the South China Sea, and the West prepares possible oil sanctions against Russia over the crisis in Eastern Ukraine. Analysts believe China is quietly building up buffers against a possible spike in oil prices or disruptions in supply. The International Energy Agency (IEA) said in its latest monthly report that China imported 6.81m barrels a day in April, an all-time high. This is raising eyebrows since China’s economy has been slowing for months, with slump conditions in the steel industry and a sharp downturn in new construction. The agency estimates that 1.4m b/d was funnelled into China’s fast-expanding network of storage facilities, deeming it “an unprecedented build”. Shipments were heavily concentrated at Chinese ports nearest the new reserve basins at Tianjin and Huangdao. “We think this is a big deal,” said one official. China accounts for 40pc of all growth in world oil demand, so any serious boost to its strategic reserves tightens the global supply almost instantly and pushes up the spot price. Chinese officials at Beijing's Strategic Reserve Bureau are playing the oil market tactically, or “buying the dips” in trader parlance. They add to stocks whenever Brent crude prices fall to key support lines, as occurred earlier this Spring. This is currently around $105.

China’s Oil Giant At Center Of Corruption Probe - Grins were on the faces of China National Petroleum executives this week as they celebrated a blockbuster 30-year deal for Russian gas. It was a good day for CNPC, the state-owned colossus at the center of China’s oil and gas webs and one of Eurasia’s biggest energy investors. For some, however, those grins could soon turn to grimaces, because the deal comes against a backdrop of a series of high profile corruption investigations by the state, and CNPC has been caught in the dragnet. A former CNPC chairman is currently under investigation and a top executive of CNPC subsidiary PetroChina has just been arrested.  They are two of the biggest suspects in a spiraling drive against corruption that has become a hallmark of President Xi Jinping’s rule. The crackdown on executives at some of China’s largest companies is yet more proof, if anyone needed it, that the Xi administration takes the latest anti-graft drive very seriously indeed. The crackdown on executives at some of China’s largest companies is yet more proof, if anyone needed it, that the Xi administration takes the latest anti-graft drive very seriously indeed.  But behind the arrests and investigations, some China watchers see signs of internal strife at the highest levels of the ruling Communist Party. The list of energy execs under scrutiny by the national corruption fighting bureau, officially known by the Orwellian title, “Central Discipline Inspection Commission,” is getting longer every week.

China launches scores of projects to try to end dire water shortages political nettle — China, home to a fifth of the world’s population but just 7 per cent of its water resources, has approved over 170 new projects it hopes can boost supply and resolve a crisis threatening to curtail economic growth and food production. The State Council, China’s cabinet, agreed to launch projects that would expand irrigation, speed up construction of its US$62 billion (RM199.64 billion) south-north water transfer project and cut water demand from agriculture. The projects, to be launched over the next six years, will increase annual supply by 80 billion cubic metres and cut demand by a further 26 billion in rural areas, according to cabinet documents. That totals more than 11 per cent of China’s 700 billion cubic metre water consumption cap in 2030. If successful, the move would relieve some of the growing pressure water shortage is putting on food production, power generation and manufacturing. “Not executing this plan is really not an option. China is trying to slow down the rate of growth in water consumption (by setting caps), but even in order to meet these caps they have to increase the supply,” . China will be short 200 billion cubic metres per year by the end of the next decade unless it starts managing its water better, according to think-tank 2030 Water Resources Group.

China’s Private Investors Jump Into Commercial Property - Major Chinese property developers have been snapping up high-profile real estate deals around the world. Now, the country’s wealthy private investors are looking to join them. Real estate brokers say they have been getting more interest in recent months from wealthy Chinese in search of commercial properties. Their appetite is so great that real-estate firm JLL is pitching its biggest current listing — the London headquarters of HSBC, the city’s largest and most expensive office building — to such clients. The asking price: £1.1 billion ($1.85 billion). “We’ve had a good response from Chinese ultra-high-net-worth individuals,” said Alastair Meadows, JLL’s head of international capital group in Asia. “It’s timely now to talk to Chinese private investors.” Looking to diversify out of their home countries and into assets other than stocks and bonds, Chinese investors are actively looking at real estate assets, primarily in gateway cities in the U.S., the U.K. and Australia, JLL says. According to CBRE, Chinese investors poured $1.4 billion into international commercial real estate in the first three months of this year, a 54% increase from the same period a year earlier. That tally includes office, retail, industrial, hotel and mixed-use properties but not residential real estate or land purchases for future development. CBRE said that 39% of that first-quarter investment was made by private individuals, greater than the 31% share made by institutional investors.

Ken Rogoff warns China is next bubble to burst - Telegraph: China has experienced explosive growth over the past decade, putting it ahead of America as the largest economy in the world, according to some measures. However, the odds of a dramatic slowdown or “hard landing” are high and rising, and probably rank as “the number one risk to the global economy today”, Rogoff says.  “The Chinese leadership has done a remarkable job of bringing hundreds of millions of people out of poverty and growing in a way that is really starting to set all records, but it doesn’t mean that it can just go on for ever,” he explains. A decade ago, Rogoff argued that there was a one in 10 chance of a sharp slowdown in China in any given year. These days, he says, it is more like one in five. “Their economy is more imbalanced than ever. The advanced countries [it sells to] are both growing more slowly and a touch more protectionist than they were, so the Chinese growth model is running out of steam.” America will probably be robust enough to withstand the fallout but it is developing countries across Asia, northern Africa and Latin America that will be hardest hit.

Goldman Kills The China Recovery Story, Says "Two Year Property Downcycle Imminent" - With everyone focusing on the "Holy Grail" deal between Russia and China, and debating who got the upper hand in the 30 year price delivery arrangement, a just as notable story is that quietly overnight Goldman's China team just took China to the cleaners. In a flurry of reports covering everything from Chinese banks to property developers to the Chinese, Goldman effectively mirrored what Hugh Hendry said several years ago when he correctly concluded that China is drowning in overcapacity, and concluded that a "two year property downcycle is imminent."

China homebuyer’s pain index -- A new map shows the China homebuyer’s pain index: In the red zones, home buyers have to scrape together every single cent they earn for at least nine years — without spending anything even on food — to cover the down payment for a home no bigger than 80 square meters in floor space. The down payment makes up an average 30 percent of the home price. According to this “map,” which has become popular on the web since Friday, home buyers in Beijing are the third most miserable groups after those in Hong Kong and Macao, where ordinary wage earners have to save 19 and 14 years respectively for the down payment. ……Fifteen cities are printed green on the map, including Tianjin, Harbin, Qingdao, Wuhan, Kunming, Haikou and Guangzhou. Home buyers there need to save from five to eight years for the down payment. ……It is relatively easy to buy a home in the less developed western cities, including Urumqi, Xining, Xi’an and even Chongqing Municipality, and landlocked cities of Taiyuan, Changsha and Shenyang, where an average wage earner needs to save for less than four years. These cities are printed blue on the map. Here are the maps. The first one is the pain index, next is monthly salary and finally home prices per sqm. On the pain index, the criteria is as the article states: an 80 sqm home, 30% down payment, all money goes towards saving for the down payment.

Goldman: Prepare for Chinese property bust - Goldman Sachs is pulling no punches today and it’s Australia that’s on the end of them: “Two-year property downcycle imminent; negative implications for banking/commodity/machinery” …With demand poised to slow given a tepid economic backdrop, weaker household affordability, rising mortgage rates and developer cash flow weakness, we believe current construction capacity of the domestic property industry may be excessive. We estimate an inventory adjustment cycle of two years for developers, driving 10%-15% price cuts in most cities with 15% volume contraction from 2013 levels in 2014E-15E. We also expect M&A activities to take place actively, favoring developers with strong balance sheet and cash flow discipline.….Mortgage key to avoid prolonged downturn: We believe lower mortgage downpayment/rates, RRR cuts, and developers’ price cuts should help improve affordability and allow transaction volumes to hold at a level sufficient for the industry to restore supply-demand balance by end-2015E.…Policy delay poses significant downside risks: We believe China has the flexibility (in terms of potential policies, e.g. RRR cut, mortgage easing, removal of L/D ratio, etc.) to prevent a severe property downturn. However, we are concerned about the timing of their implementation, if any, as possible delays could lead to further slowdown in the property sector and a fall in FAI... Near-term, we prefer defensive stocks in the property/banking/commodity/machinery sectors, and would closely watch for downside/upside risks especially pertaining to policy changes

China's housing market: When it all comes crashing down -- Governments central and local are now backtracking over years’ worth of policy updates, trying to figure out which ones to unwind. It's unlikely the policymakers in Beijing will idly sit by and watch the country's cornerstone market crumble. On May 13, the People's Bank of China met with many of the country's top banks to promote lending to the people looking to buy – and live in – their first homes. This cohort of buyers represents true, healthy demand for housing as opposed to those who purchase homes as investments. Speculative buying has warped demand and driven the price of housing sky high during the past 10 years, hence Beijing's effort to slow lending to people in the market for a second or third home. The central bank's latest message is that it hopes major lenders will speed up the mortgage approval process for people who intend to use their homes. If the central government is worried about a slowing property market, local officials must be pale with dread. After all, some analysts think up to 60% of local government revenues come from the one-time fees levied on land transactions. A drop in prices or a slowdown in buying could leave already-cash-strapped cadres high and dry. That's why local governments are also trying to make it easier for buyers to get loans – some with more foresight than others.

What China Property Crash? Economists See Growth Bump - China’s biggest homebuilding slump in at least four years isn’t enough to dissuade a majority of economists from predicting real estate will still contribute to 2014 growth. Property controls will be eased, they said in a Bloomberg News survey. While 12 of 18 economists say China has some national oversupply of housing, only seven say the market is in a bubble state countrywide, according to the survey conducted from May 15 to May 20. Half see bubbles in some cities, and a majority says the loosening of restrictions on home purchases and loans will be limited to a regional level.New construction has fallen 22 percent and sales have slumped 7.8 percent this year, testing the government’s four-year commitment to curbs targeted at making homes more affordable and its reluctance to enact broader economic stimulus. The slowdown’s depth will have implications for everything from demand for Australian iron ore to land sales that help local governments repay their $3 trillion of debt. “China won’t fully lose the engine, but the engine will roar less than in the past and will be a more moderate supporter for growth,”

China’s Trilemma Maneuvers -- China’s exchange rate, which had been appreciating against the dollar since 2005, has fallen in value since February. U.S. officials, worried about the impact of the weaker renminbi upon U.S.-China trade flows, have expressed their concern. But the new exchange rate policy most likely reflects an attempt by the Chinese authorities to curb the inflows of short-run capital that have contributed to the expansion of credit in that country rather than a return to export-led growth. Their response illustrates the difficulty of relaxing the constraints of Mudell’s “trilemma”.  Mundell showed that a country can have two—but only two—of three features of international finance: use of the money supply as an autonomous policy tool, control of the exchange rate, and unregulated international capital flows. Traditionally, the Chinese sought to control the exchange rate and money supply, and therefore restricted capital flows. In recent years, however, the Chinese authorities have pulled back on controlling the exchange rate and capital flows, allowing each to respond more to market forces. The increase in the value of renminbi followed a period when it had been pegged to increase net exports. As the renminbi appreciated, foreign currency traders and others sought to profit from the rise, which increased short-run capital inflows and led to an increase in foreign bank claims on China. But this inflow contributed to the domestic credit bubble that has fueled increases in housing prices. Private debt scaled by GDP has risen to levels that were followed by crises in other countries, such as Japan in the 1980s and South Korea in the 1990s. All of this gave the policymakers a motive for trying to discourage further capital inflows by making it clear the renminbi’s movement need not be one way.

China Considers Opening Up Its Steel Industry to Foreign Control - Chinese officials are exploring a proposal to lift a nine-year-old ban on foreign control of its steel companies, according to people in the industry. But investors eager for a slice of the world’s largest steel sector, be warned: Talks on the issue aren’t likely to produce a consensus anytime soon, says one industry official. “The idea is being explored, but the outcome may not be what people are hoping for,” said Chi Jingdong, deputy secretary-general for the China Iron and Steel Association. In July 2005, the Chinese government moved to prohibit foreign investors from taking controlling stakes in domestic steel companies. The law effectively blocked Mittal Steel Co., which would a year later become the world’s largest steelmaker, from its plan to acquire a controlling stake in Shenzhen-listed Hunan Valin Iron & Steel Co. that would be equal to the one held by the mid-sized Chinese mill’s parent, Valin Group. Since then, proposals to lift the ban – largely coming from Chinese steelmakers hopeful for injections of foreign capital and know-how – have surfaced every few years. This year, the momentum seems to be on the side of those in favor of deregulation. The National Development and Reform Commission said Thursday foreign investors are welcome to participate in infrastructure projects opened to private investment, including railways, gas pipelines, telecommunications and clean energy. These are sectors that in the past were viewed as strategic, and therefore closed to foreign participation.

China: A Manufactured Chimera? Part One – Brookings - According to the conventional wisdom, rampant exchange rate manipulation, intellectual property theft, and low labor costs have together created a boon for Chinese manufacturers at the expense of U.S. jobs. And with last year's manufacturing trade deficit with China reaching $318 billion, the conventional wisdom seems pretty persuasive.   Yet the conventional wisdom relies on conventional trade statistics, which may not actually reflect our competitive position. In fact, newer analyses of better trade data increasingly suggest China may not be our greatest competitive worry. How’s that? Well, for several years now a number of economists have criticized traditionally reported trade statistics that simply report gross imports and exports. These economists argue that a better metric is the actual value a given country adds to a particular traded product or service. Based on this new method of trade accounting, China looks less formidable. The commonly reported trade balance between two countries—which simply adds up the value of all final products exported minus those imported—was developed in an era when most of the inputs into a product were sourced domestically in the manufacturing nation. However, with the rapid globalization of manufacturing value chains few countries today are actually responsible for every piece of any "final product." And yet, countries that assemble final products from an array of imported components still see their trade surplus numbers increase by the full value of the end product—even though the country's real contribution is no more than the cost of assembly. 

Monetary Easing in China? Don’t Hold Your Breath - Some analysts have been betting on the country’s central bank to ease monetary policy to help prop up the world’s second-largest economy. Don’t hold your breath, says one China economist. Peng Wensheng, chief economist at China International Capital Corp., one of the country’s largest brokerages, said the People’s Bank of China has very limited room to relax credit at the moment because of rapid loan growth at Chinese banks in the past few years. “Since the global financial crisis, the central bank’s balance sheet has declined while the commercial banks’ balance sheets have expanded significantly,” Mr. Peng said on Tuesday at an economic forum in Shanghai held by the Institute of International Finance. He said the opposite has occurred in developed countries such as the U.S. — the Federal Reserve’s balance sheet has expanded significantly since the 2008 crisis while assets held by the U.S. commercial banks have plunged. The upshot: “We shouldn’t have too big a hope for monetary easing until we see a significant slowdown in Chinese banks’ asset expansion,”

U.S. Gains in a Spat With China Over Tariffs - The World Trade Organization sided with the United States on Friday in a dispute over punitive Chinese tariffs on American exports of cars and sport utility vehicles.China, which joined the W.T.O. in 2001 in a move that signaled its broader entry into the global market system, had already lifted the tariffs involved in the dispute, but American officials declared victory, citing the decision as the latest in a series of rulings that it has won against Beijing.“China has had 14 years — 14 years — to start playing by the rules,” said Senator Debbie Stabenow, Democrat of Michigan, at a news conference in Washington. “But instead we see illegal and improper activities over and over again. As long as China keeps up this illegal behavior, we can and must respond with these kinds of strong enforcement actions.” The decision comes against a backdrop of increasing commercial tensions between Beijing and Washington. The Obama administration has criticized China for its supposed state-sponsored spying on American firms, and challenged its willingness to play by the rules over trade in cars, steel and chickens and other goods. The broader diplomatic situation has become tense as well, over concerns about how to deal with North Korea and whether China’s territorial ambitions in the South China Sea and elsewhere threaten United States allies in the region.

On high seas, Vietnam and China play tense game — Each day the Vietnamese ships tried to get close to the rig. And each day they were driven back by the much larger Chinese ships. But before they sped away, laboring engines spewing black smoke, the Vietnamese delivered a message: "Attention! Attention! We are warning you about your provocative act," blasted out a recording from a loudspeaker in Vietnamese, Chinese and English. "We demand you respect Vietnam's sovereignty. Please immediately halt your activities and leave Vietnamese waters." Occasionally colliding with or firing water cannons at each other, Vietnamese and Chinese ships have been shadow boxing in a sun-dazzled patch of the South China Sea since May 1, when Beijing parked a hulking, $1 billion deep sea oil rig, drawing a furious response from Vietnam. Vietnam, ten times smaller than its northern neighbor and dependent on it economically, needs all the help it can get in the dispute. Its leaders believe international opinion is on their side. Vietnam is determined to defend what it regards as its sovereign territory against China, which insists that most of the South China Sea — including the Paracel Islands it took from U.S.-backed South Vietnam in 1974 — belongs to it. But Hanoi lacks options in dealing with Beijing, as China uses it burgeoning economic and military might to press its claims in the seas. TV footage recorded last week from a Vietnamese ship showed a Chinese vessel smashing into the stern of the Vietnamese ship then backing up and ramming it again, damaging its side. "It is not that we want to be in confrontation with the Chinese, but it's our duty to carry out daily patrols in Vietnamese territory," "We want to get close to the rig to persuade them that their actions are illegal and they must leave Vietnam's water unconditionally."

Vietnam riots: China ships to evacuate workers: China is sending five ships to evacuate Chinese nationals from Vietnam following a wave of anti-Chinese riots. The Chinese government has already evacuated more than 3,000 people, Chinese state-run media report. The first ship set sail on Sunday, while 16 critically injured Chinese nationals left Vietnam on a chartered flight, Xinhua news agency said. Two Chinese workers have been killed and dozens more injured in unrest over a Chinese oil rig in disputed waters. On Saturday the Vietnamese government called for an end to the protests. Officials said "illegal acts" would be stopped as they could damage national stability. However, dissident groups have urged people to rally again in major cities on Sunday and the authorities broke up some anti-China protests in Hanoi and Ho Chi Minh City.

Vietnam considers taking China to court over territorial dispute - Vietnam is considering taking China to international court to resolve an increasingly dangerous dispute over contested waters in the resource-rich South China Sea. Prime Minister Nguyen Tan Dung told Reuters that Vietnam was contemplating measures, including legal action. Ernie Bowers, a southeast Asia expert at CSIS, said Hanoi was considering following the Philippines by filing a case with the Permanent Court of Arbitration at The Hague. High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email to buy additional rights. China and Vietnam have longstanding territorial disputes over the South China Sea, and particularly the Paracel Islands. But tensions have escalated dramatically over the past three weeks after China moved a huge deep-sea rig to the area and started drilling for energy resources for the first time. More than 100 Chinese and Vietnamese ships have been engaged in a tense stand-off near the rig, which is located near Triton Island in the Paracels. China won control of the island group in 1974 following a brief conflict with Vietnam. Angry Vietnamese mobs last week protested the presence of the oil rig by ransacking foreign factories in Vietnam. The China-Vietnam spat is just one of several increasingly dangerous rows that Beijing has with its neighbours. China and Japan are at loggerheads over the Senkaku Islands in the East China Sea, which Japan controls but China claims and calls the Diaoyu.

ASEAN unites to condemn rising South China Sea tensions: Foreign ministers gathered in Nay Pyi Taw for the ASEAN Summit have reiterated their concerns over rising tensions in the South China Sea as new maritime disputes put the issue back in the spotlight ahead of the regional meeting.While there had been concerns that some members, including chair Myanmar, may lean toward China on the issue, the ministers put on a united front on May 10 to express “serious concerns” regarding incidents over the past week. In a joint statement, they urged all parties to “exercise self-restraint and avoid actions which could undermine peace and stability in the area, and to resolve disputes by peaceful means without resorting to threat or use of force”. The statement featured stronger language than the one issued during the Foreign Ministers’ Retreat in Bagan in January and comes as confrontations between China and ASEAN members Vietnam and the Philippines have further strained already tense relations. Vietnamese officials have accused Chinese ships of ramming Vietnamese vessels and spraying them with water cannon near the Paracel Islands. The islands are currently controlled by China, but are claimed by Vietnam.

China calls for new Asian security structure — China’s president has called for creation of a new Asian structure for security cooperation based on a regional group that includes Russia and Iran and excludes the United States. President Xi Jinping spoke Tuesday at a meeting of the Conference on Interaction and Confidence-building measures in Asia. The previously little-known group, founded in the 1990s, has taken on significance as Beijing tries to extend its influence abroad and limit the role of the United States, which it sees as a strategic rival. Speaking to an audience that included presidents of Russia and Iran, Xi said, “we need to innovate our security cooperation (and) establish new regional security cooperation architecture.” Xi made no mention of China’s ongoing conflict with Vietnam over Beijing’s deployment of an oil rig in disputed seas.

China Has Exhausted Its Goodwill in SE Asia - China sending ships to repatriate its workers from Vietnam as anti-PRC riots there resulting in the deaths of two of its nationals heralds a turning point not only in PRC-Vietnam relations but broader PRC-ASEAN relations. Make no mistake: it's getting really ugly in Vietnam for Chinese nationals and their businesses. In PR terms, what's odd is China's ability to snatch defeat from the jaws of victory. Having done the hard work establishing economic links with Southeast Asia--witness the landmark China-ASEAN FTA or even the forthcoming Asian Infrastructure Investment Bank--the PRC then destroys accumulated goodwill by reiterating its legally risible claims to own huge chunks of the South China Sea faraway from its exclusive economic zone (EEZ). These incidents again show how the Communist Party is not monolithic but has conflicting interests such as trade promotion and security promotion duking it out on a global stage given the scale of China's ambitions. He Anh Tuan writes about how China is managing to unite ASEAN by scaring all claimants to the South China Sea while forcing neutrals to reconsider what Chinese expansionism means for them in their own backyard. Interestingly, Myanmar--China's client state for most of the time it was being subject to sanctions--did not object to ASEAN issuing a statement of concern about China's extra-curricular activities. Worse yet for China, it has upset our equivalent of Germany in Indonesia which has the largest population, economy and diplomatic clout in Southeast Asia: China's action violates the principles of the Declaration of Conduct of Parties in the SCS and deepens suspicions among regional countries about its true intention. In addition to Vietnam and the Philippines, Singapore and Malaysia are increasingly concerned about China's behavior in the region. Indonesia, which once maintained strict neutrality toward territorial disputes in the SCS, has reversed its position, and is contesting China's claim in the SCS because it challenges Jakarta's rights in the Natuna waters. In fact, Chinese armed authority vessels have encountered Indonesian authority ships several times in the last few years in waters claimed by Jakarta.

Strong Growth, Surging Credit May Push Malaysia to Raise Rates - Malaysia’s central bank is expected to begin raising interest rates soon for the first time in three years as the economy grew much faster than expected in the first quarter and credit continues to swell. Gross domestic product grew 6.2% on-year in the first quarter, up from 5.1% at the end of last year and better than the 5.4% growth expected, data out last Friday showed. Analysts expect Bank Negara Malaysia to raise the overnight policy rate from 3.0% as soon as July, given its concern that leaving rates low for much longer could fuel speculative activities. Household debt is growing quickly, reaching about 87% of GDP at the end of 2013 from just 60% five years earlier, according to data from Capital Economics. “With the stronger-than-expected GDP growth, we believe the case of an early rate hike is now justified” to prevent overheating, including in the residential property sector, Hong Leong Investment Bank Analyst Sia Ket Ee said. If it does raise rates, Bank Negara Malaysia would be joining the regional trend. Its peers in India and Indonesia have raised benchmark rates several times since last summer to rein in inflation and curb their current-account deficits. New Zealand’s central bank is lifting rates in part to curb a surging property market, and the Philippine central bank – which has raised reserve requirements twice in two months — is expected to raise its benchmark rates soon, motivated in part by financial stability concerns.

From Sickman to Comeback Kid, Where the Philippine Economy Is Now - Just how the Philippines plans to keep up an economic turnaround dubbed one of the greatest “comeback stories in recent years” has come into focus as the World Economic Forum on East Asia kicks off in Manila. The first-time host of the forum has seen some of the fastest growth in Asia since President Benigno Aquino III took power in June 2010, amid a sluggish global economy. Internal reforms have led to a series of upgrades in sovereign credit and competitiveness ratings that have helped the country shed its former tag as the region’s “sickman.”Now, however, economists are beginning to wonder how the Philippines can sustain its stellar growth in the face of still-low foreign investment and poor infrastructure. “In the remaining years of our term, the Aquino administration will intensify efforts at reform by opening more sectors for foreign investments, rationalizing tax incentives and institutionalizing transparency,” Finance Secretary Cesar Purisima wrote in an editorial Wednesday in the Philippine Daily Inquirer. He admitted, however, that much more needed to be done. The country’s poverty rate, for example, fell from 27.9% in 2012 to 24.9% at the end of June 2013, according to estimates from the National Economic and Development Authrity, the government agency tasked with overseeing economic and development strategies.

Thailand Is Doing a Great Job of Screwing Up Its Potential - For more than a half year now, Thailand has been gripped by chaos. Protesters from both sides of the political spectrum — the antigovernment Yellow Shirts and progovernment Red Shirts — have clogged the streets of Bangkok. The country’s highest court ousted the still widely popular Prime Minister, Yingluck Shinawatra. And, on Thursday, the military took control of the government.  The past six months of factional violence have seen some 28 deaths and 700 injuries. But there have been even wider casualties of another sort. The turmoil is sapping the nation’s economic strength, and everyone is hurting.  Months of uncertainty and effectively no functioning government have taken a toll on Thailand’s economy. GDP in the first quarter contracted by 2.1%. Investment, consumption and government spending were all down. Some $15 billion of fresh investment projects are on hold. Foreign tourists, a key source of jobs and income for many Thais, are being scared off.Without a return to political stability, the situation may not improve. Research firm Capital Economics slashed its GDP forecast for 2014 to a mere 1% this week. Though the military’s intervention could prevent further violence, the outlook for Thailand’s political situation remains anything but clear.“The military’s seizure of power does nothing for Thailand’s reputation among global investors or, indeed, tourists,”

The Rupee’s Hot and Cold Streak -- While the rupee has been on a hot streak, jumping to an 11-month high against the dollar on hope a new government will usher in a new era of growth for Asia’s third-largest economy, India’s central bank has been trying to cool the currency down. The Reserve Bank of India has been raking in dollars from the market, hoping to slow any sharp upward moves in the local currency, dealers and experts said. Too much appreciation of the rupee erodes the competitiveness of the country’s exporters, which could lead to a widening of the country’s stubborn current-account deficit. While last year a sharp rupee depreciation was the RBI’s biggest headache, the new normal now apparently is that the central bank is trying to keep the rupee’s strength in check.It has climbed close to 6% since March and was trading at around 58.70 to a dollar on Tuesday amid optimism the Bharatiya Janata Party’s convincing victory in national elections last week will allow India to push through the reforms and spending needed to lift the economy. The Indian currency may be poised to gain even more ground against the greenback. “A strong mandate to the Bharatiya Janata Party to form the government and expectations of improving economic prospects through growth in infrastructure, fillip to investments and more job opportunities is adding to the appreciation,”

Will New Delhi Be Able to Translate Modi’s Gujarati Guidelines? - As India waits for prime minister-designate Narendra Modi to take charge in New Delhi, many are wondering whether he can reproduce the policies that powered growth in his home state of Gujarat. While the western state has long been one the richer states in the country thanks to a populace packed with entrepreneurs, it prospered even more than usual under Mr. Modi’s rule as chief minister for more than a decade. Companies say with his leadership the state has cut corruption and restrictions on doing business. Meanwhile its networks of roads, ports and power plants are among the best in India and have even convinced some companies to move operations from other states to Mr. Modi’s vibrant Gujarat. “He is a very good administrator and he will try to replicate the same model he had in Gujarat at the national level,” said Gautam Singh, an economist at Spark Capital. The source of power behind Mr. Modi’s magic is debatable but most agree it comes from his ability to simplify government and set deadlines as well as his facility to push through unpopular policies. Like he did in Gujarat, he is expected to streamline the number of departments and different ministries to make his entourage of key policymakers more nimble and powerful. In New Delhi, Mr. Modi will likely combine related ministries such as coal, renewable energy and petroleum for better policy implementation, said Mr. Singh. One of the biggest successes of Mr. Modi was in energy, which has made Gujarat one of the few states in India with a power surplus.

Faster, Stronger, Worse - On matters of national security, India's most fraught relationship is of course with Pakistan. Modi's Bharatiya Janata Party (BJP), with its roots in Hindu nationalism, has traditionally adopted a bellicose posture toward Pakistan. During the campaign, Modi took the kind of cheap shots at Pakistan that played to the gallery. He jeered at the Congress party defense minister, A.K. Antony -- who declined to authorize a sharp military response to a murky cross-border incident that led to the death of several Indian soldiers -- as one of several "agents of Pakistan and enemy of India." Puri dismissed the crack as an "election flourish," and said that Modi "will make a genuine effort to reach out to Pakistan."  That could be. India's previous BJP prime minister, Atal Bihari Vajpayee, made a historic visit to Pakistan in 1999 in the hopes of advancing talks on the disputed territory of Kashmir. Ashutosh Varshney, an India scholar at Brown University, has suggested that Modi could be India's "Nixon in China." That might be stretching it, but Modi's shrewd campaign left the impression that, whatever his personal views, he is more politician than ideologue. He is, however, a chesty figure who will not abide incursions, especially from weaker neighbors. Puri says that Modi "will have much less tolerance for acts of terror" than did his predecessor, Manmohan Singh, who did not strike back at Pakistan after the 2008 terrorist attack on Mumbai's Taj Mahal hotel despite abundant evidence of Pakistani involvement. Modi almost certainly would have shown no such restraint. Give that both countries have nuclear weapons, that has to be a frightening thought for Western policymakers.

Is now the time to go long Pakistan? - Maybe so.  Ian Bremmer reports that of 282 elected BJP representatives, not one is a Muslim, even though Muslims are about 15% of India’s population.  In some political models, that can make the electorate more willing to cut a deal with Pakistan, as fewer people will fear that the deal will neglect India’s interests.  In essence this kind of slanted government can become more Coasean, as it is more trusted by its core supporters.You will find related mechanisms discussed in my paper with Daniel Sutter, “Why Only Nixon Could Go To China.” Indeed Modi just invited the Pakistani Prime Minister to his inauguration, an unusual action which is being called “a bold step.” I have been relatively bullish on Pakistan for some time now.  Relative to market prices, that is.

Michael Spence describes an era in which developing countries can no longer rely on vast numbers of cheap workers. - Digital technologies are once again transforming global value chains and, with them, the structure of the global economy. What do businesses, citizens, and policymakers need to know as they scramble to keep up? Digitally enabled supply chains initially increased efficiency and dramatically shortened lead times. Capital was mobile; labor less so. Economic activity (production, research, design, etc.) moved to any accessible country or region that had relatively inexpensive labor and human capital. With only a slight lag, complexity became manageable, and global supply chains’ linear model (something produced in country A is consumed in country B) gave way to a more complex model with more fragmented but more efficient supply networks. Meanwhile, a dramatic shift occurred on the demand side, as emerging economies grew and became middle-income countries. Developing country producers, who in an earlier era accounted for a relatively small fraction of global demand, became major consumers. Global supply networks shifted again, accommodating fragmentation and dispersion on both the supply and demand sides of their structure, a process sometimes called technologically enabled atomization: the division of supply networks into finer and finer parts, breaking the bonds of proximity and the resulting transaction-cost constraints that previously prevailed.

Modern Forms of Slavery Generate $150 Billion a Year in Profits for Exploiters - Millions of slaves and other forced laborers around the world are generating an estimated $150.2 billion a year in profits for their exploiters, according to a new report from the International Labour Organization. The ILO’s definition of forced labor encompasses commercial sexual exploitation, work under slavery-like conditions and other involuntary labor resulting from “force, fraud or deception.” Guy Ryder, director-general of the United Nations labor agency, said the report being released Tuesday “adds new urgency to our efforts to eradicate this fundamentally evil, but hugely profitable practice as soon as possible.”Slavery and the slave trade are banned by international law. The ILO in 2012 estimated 20.9 million people are nonetheless engaged in forced labor. Some 14.2 million are forced to work in fields like agriculture, construction, mining and domestic care, while 4.5 million are sexually exploited. An additional 2.2 million are engaged in “state-imposed forms of forced labour, such as prisons, or in work imposed by military or paramilitary forces,” according to the report.More than half — 55% — are women and girls. A quarter are under the age of 18. Some 56% are in the Asia-Pacific region and 18% are in Africa. Smaller numbers are in Latin America and the Caribbean (9%), developed economies including the European Union (7%), central and eastern Europe and the former Soviet Union (7%) and the Middle East (3%).  Involuntary workers generate $150.2 billion per year in illegal profits, the agency said. That’s more than triple the agency’s 2005 estimate of at least $44 billion a year in profits from forced labor.

Statistical Earthquakes -- The new report of the International Comparison Program published last week promises to invigorate debate about the global economic landscape. In some areas, the report challenges conventional wisdom. In other areas, it reinforces the narrative. The headline change according to The Economist is the rise of China to potentially become the largest economy in the world by the end of 2014. According to Angus Maddison, the United States’ economy became the largest in the world in 1872, and has remained the largest ever since. The new estimates suggest that China’s economy was less than 14% smaller than that of the US in 2011. Given that the Chinese economy is growing more than 5 percentage points faster than the US (7 percent versus 2 percent), it should overtake the US this year. This is considerably earlier than what most analysts had forecast. It will mark the first time in history that the largest economy in the world ranks so poorly in per capita terms. (China stands at a mere 99th place on this ranking.) But China’s rise is just one striking example of a more general feature of our times—the rapid development of low- and middle-income countries and their convergence with rich countries. Convergence had already been well established for social indicators like life expectancy and infant mortality, but it is now clear that it is also happening with material living standards. The G7 countries, which accounted for half the world economy in 2000, accounted for little more than a third in 2011. The whole of the OECD, even with its expansion to include countries like Mexico, South Korea and many Eastern European countries, is less than half of the global economy.The pendulum has swung back to Asia. The new data suggest that Asia is today about half the global economy, not too far from its share of the world’s population.

PMIs Confirm China And Japan Economies In Contraction - China's HSBC Manufacturing PMI has now spent 3 years within 2 points of the crucial '50' demarcation between contraction and expansion but as the following chart shows, something seems 'odd' about the last few months apparent stability. Tonight China HSBC PMI printed a stunning 49.7 crushing the expectation of 48.3 (modestly above last month's 48.1) but still in contraction for the 5th month in a row (the longest contraction since Oct 2012). This was China's biggest spike in PMI in 9 months led by increases in new orders, production, and new export orders... but employment fell to new lows. Japan's Markit PMI also printed in 'contraction' territory for the 2nd month in a row - its first since Abenomics began. One of these things is not like the other (blue is the soft-survey data from HSBC's manufacturing PMI; the histogram is hard-data-based macro surprise index from Citi)

Japanese Depopulation & Few Foreign Workers - For all its current woes, there is no doubt that the United States remains an attractive destination for skilled migrant workers. Despite its current bedraggled state, there is no doubt that American is still the place to be in any number of areas: creative industries, finance, technology....the list is lengthy. In comparison, there isn't even a single "must join" industry prominent mostly in Japan that compels expatriates to go there. Besides difficulties learning the language--Japanese is an order of a magnitude more difficult to learn than English--their society is also more difficult into. All the while, deflation and depopulation mutually reinforce each other in unproductive ways. It's not that Japan hasn't been trying to attract migrant workers to help arrest its population slide and make the country more attractive to foreigners. Copying the likes of Australia, Canada and other countries of emigration, Japan instituted a points-based highly skilled foreign professionals scheme to hopefully attract these desired knowledge workers in May 2012. Unlike those English-speaking countries, however, the results in Japan have been decidedly underwhelming. As the pie chart indicates, those coming in under these program represent around 1.1% of the total number of overseas residents in Japan.

G and I in Europe and Japan --  Izabella Kaminska reports here on a Credit Suisse comparison of Japan and the Euro area (h/t Scott Sumner). Here is an interesting diagram from that report: According to Kaminska: As the analysts note, a powerful fiscal stimulus in Japan helped to counter the demand shortfall. That caused personal consumption to continue to grow until 1997 and investment to rebound almost to its previous peak in just six years — something which isn’t slated for Europe any time soon. Well, the increase in G counteracting an unexplained decline in I is one interpretation. In fact, it is the "deficient demand" interpretation that so many like to portray as obvious. But in fact, it's difficult to ascertain the direction of causality from just a picture. The Japanese data above corresponds to what I posted some time ago here: What's Up with Japan? In response to that post, Mark Sadowski alerted me to the fact that the Japanese investment series plotted above includes both private and government spending. Here's what things look like when we decompose this aggregate (I discuss in more detail here: Another look at the Koizumi boom):

Abenomics Could Hang in Balance By A Yen --  On Wednesday, the yen hit its highest level in three and a half months versus the dollar, falling below one key long-term trend line. It is now roughly one yen away from double-digit territory against the dollar, which Japan hasn’t seen since last November. The currency’s renewed strength is not good news for Mr. Abe’s ambitious economic reform program aimed at generating sustainable longer-term growth in Japan’s economy after 15 years of debilitating deflation. Monetary stimulus orchestrated by the Bank of Japan Gov. Haruhiko Kuroda, whom Mr. Abe handpicked, resulted in the lower value of the Japanese currency against the dollar and other major rivals, helping the nation’s exporters and the stock market last year. While nothing out of the ordinary happened, what apparently kicked off a sudden rise in the yen Wednesday afternoon was Mr. Kuroda’s regular post-policy board meeting news conference. Shortly after he started speaking, the dollar suddenly lost ground, falling to as low as Y100.81 – below its 200-day moving average. The yen’s renewed strength could push down the Nikkei Stock Average, which has been treading water in recent weeks above the key support line of 14000 after rallying in 2013. A appreciation in the yen could also prompt some companies to revise down their earnings estimates.

Trans-Pacific Partnership: Another Trade Liberalization Scam -- The gathering pressure for Congress to “fast track” the Trans-Pacific Partnership (TPP) demonstrates yet again that trade liberalization is one of the few aspects of economic policy about which there is agreement across the mainstream of the political spectrum, in both the United States and Europe. Almost all conservative commentators endorse it with gusto, for centrists it is an article of faith, and even many progressives accept it implicitly by their criticism of industrial country protection. The neoliberal ideologues sell it by bestowing the label “free trade,” which is allegedly reached by repeated measures of “trade liberalization.” No matter that the TPP has little to do with trade and everything to do with setting loose capital on a global scale. Well tested and demonstrably disastrous in the North American Free Trade Association, this liberating of capital includes 1) global extension of corporate patents under the moniker “intellectual property rights,” 2) shifting enforcement of those patents from national governments and courts to ad hoc international tribunals, and 3) prohibiting as “protectionist” measures protecting labor rights and the environment. This is not “freer” trade, but re-regulation of trade to entrench corporate profit making. However, if you call it freer trade, you can sell it to the public. In order to discredit this corporate sales pitch, I have to drive a stake through the heart of the Free Trade dogma that is the ideological justification for neoliberal globalization.

Top Arbitration Lawyer Says Corporate Sovereignty System Needs 'Complete Overhaul' - A few months back we wrote about the free trade supporter Cato Institute arguing that corporate sovereignty provisions should be dropped from trade agreements, for a variety of cogent reasons. You wouldn't expect one of the top arbitration lawyers that actually uses the system to go quite so far, but this is pretty close:  A prominent international lawyer has launched a scathing critique of the international arbitration system that deals with investor-State disputes, calling for its "complete overhaul". ... George Kahale III -- who has been lead counsel in several of the world’s largest international arbitration cases, including a pending claim against Venezuela -- also listed the top ten of what he viewed were the most troubling aspects of investor-State arbitration.  His ten points are all good, and well-worth reading, but the first is particularly important.  It's the fact that investor-state dispute settlement (ISDS) chapters are like a ticking trade time-bomb, just waiting to explode at some unknown future date, that makes them so dangerous. A country can't predict which apparently innocuous change to its laws or regulations will trigger a multi-million -- or even multi-billion -- dollar ISDS claim against it. Since awards must be met from the public purse, that means there could be a huge unexpected shortfall in the national budget. That lack of certainty -- and lack of financial control -- is no way to run a country, and is yet another reason why all nations, even the largest, would be wise to refuse to include corporate sovereignty provisions in their trade agreements.

The problem is TTIP -- Much attention has been focused on the Trans-Atlantic Trade and Investment Partnership (TTIP) that the EU is currently negotiating with the US. Most economists cheer this development, but I regret it – it is a pity that it has emerged.

  • Plausible estimates suggest that a realistic agreement might add about 0.025% to EU GDP; an ‘ambitious’ agreement might add 0.05%.
  • Gains to the US are around the same level.

These benefits, which are probably understated, are not to be sniffed at, but they are not to be sought at any risk. And the risks associated with the TTIP are substantial. I believe that one has to view it primarily in the context of a particular US foreign and economic policy package. The most visible and advanced element of this US package is the Trans-Pacific Partnership (TPP). The TPP is a deep international integration arrangement between the US and 11 other Pacific states, which would cover 40% of world GDP and over 30% of world trade. It seeks to address as series of issues that 21st century commerce, but arguably its most obvious feature is that it excludes China – the world’s largest international trader and before long the world’s largest economy. There are, of course, the ritual genuflections towards ‘open regionalism’ – China can join if only it will agree to the necessary policy requirements – but this is about as much use as saying the Chief Rabbi can dine with you while insisting that the menu contains pork.In my estimation, the risks of (deliberately or otherwise) excluding China are too great for a maximum expected return of perhaps 1% of GDP – nine months’ normal European economic growth.

Will the TPP Go the Way of the WTO’s Doha Round? -  After 13 years, the World Trade Organization’s Doha round of talks has failed to secure a comprehensive deal and reached just one modest agreement–on trade facilitation–last December. Negotiations for the Trans-Pacific Partnership, a U.S.-led initiative to create a free trade zone among 12 Pacific Rim nations, are now in their fifth year. A few deadlines have been missed, spawning skepticism about an eventual deal. Will the TPP meet the same fate as the Doha talks? “There’s always a risk, but I think all the countries are working very hard to get it settled this year,” Singapore Prime Minister Lee Hsien Loong said in Tokyo Thursday. The political calendar is about to get more crowded, however: The United States will hold midterm elections in November, and preparations will then begin in 2015 for the U.S. presidential election the following year. “All the countries, including Japan and the U.S., want to settle this” this year,” Mr. Lee said. “If you miss this year…the U.S. will have other preoccupations.” His sentiment was echoed by New Zealand’s trade minister, Tim Groser. He and other officials from around the Pacific Rim were in Japan this week for various symposia and conferences, and also met with Japanese officials to discuss the TPP.

World Trade Suddenly Slumps (Just Forget 'Escape Velocity'): The US economy, and by extension the world economy, is desperately waiting for the spring escape velocity to finally kick in. This American phenomenon has been forecast to occur for six years in a row now, with the prior five forecasts having turned out to be just a mix of political wishful thinking and unfettered Wall Street hype, followed by a shrug and an “ah shucks, maybe next year.” So while we were still waiting for the escape velocity, world trade, one of the major indicators of what’s going on in the globalized economy, has descended into a very unpropitious slump. World trade volume dropped 0.5% in March from February, after it had already dropped 0.7% in February, the CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, just reported in its March world trade report. For the first quarter, volume was down 0.8%, after a 1.5% increase in the fourth quarter. To eliminate the inherent volatility of these kinds of monthly numbers, the CPB offers what it calls trade “momentum” data – which it defines as “the change in the three months average up to the report month relative to the average of the preceding three months.” It eliminates some of the monthly up-and-down noise. That trade momentum measure slumped 0.8% in March, after having edged down 0.3% in February. This is what it looks like, going back to 2010. Note the steep dive since late last year that entered negative territory in February

Australia's 2014 federal budget forces rethink of retirement plans - The 2014 budget will lead to smaller government, boost infrastructure investment and cut household dependency on government payments. Everyone is hit by the budget. There is a co-payment when seeing a doctor and higher petrol prices. There is also a six-month wait for unemployment benefits for those under 30, higher university fees and tighter eligibility for family tax benefits.The measures to slow the growth in government outlays for the age pension will not start for three years, but they are significant. They include working for longer before receiving the age pension at 70 and a tightening of access to the age pension for those who reach the qualifying age.On the other side of the ledger, the government will pay employers up to $10,000 for employing over-50-year-olds who have been unemployed for at least six months.n “Pensioners, particularly full-age pensioners, are going to get a bit of a shock”, The changes to the age pension will make people think not much is being taken away, but they will actually have a big effect on the number of people accessing the pension. There is the change in the indexation of the age pension and the disability pension so that it will rise more slowly than it has in the past. The thresholds for the income and assets test for the age pension will be frozen for three years from July 1, 2017. Pensioners will be deemed to have earned more interest income from their financial assets from September 2017. These measures, added together, will have a significant impact on access to the age pension and to the payments pensioners receive.

Venezuela suspends international mail deliveries in currency row -- Venezuela's postal service has indefinitely suspended international mail deliveries, citing a collapse in the distribution system due to "excessive demand". Employees at the state-run company Ipostel told local media that the service had fallen victim to an ongoing dispute with international airlines over currency controls. According to El Universal, postal workers said tonnes of undelivered international mail had accumulated at Ipostel sorting offices after deliveries to at least 29 countries were suspended. On Tuesday, employees refused to open post offices in Caracas in protest at the decision, which many suspect might lead to mass firings. "The company is practically bankrupt, not only with its international deliveries but also its basic services because we have no materials or equipment," said Jose Gallardo, of a labour union in the eastern state of Anzoategui. Ipostel employees say international deliveries are impossible because of a dispute between Venezuela and international airlines. At least three major carriers have stopped or reduced flights to Venezuela.

Chilean Activist Burns $500 Million Student Loan Docs In Protest Against Debt Serfdom -- The current war/civil unrest cycle is an interconnected global phenomenon. Since the parasitic Central Bank driven financial system is more or less entrenched in every country on earth, every country on earth is experiencing increased concentrations of wealth into the pockets of a handful of oligarchs. Meanwhile, those nations which heretofore had a middle class are finding that this entire socio-economic class is disappearing into the dustbin of history via a variety of methods, not the least of which is criminal quantities of student loans. These loans are pushing an entire generation into inescapable serfdom, while many university administrators are enriching themselves at their expense. So it appears student loan based debt serfdom is also a major issue in Chile, and one activist, known as “Papas Fritas,” decided to take matters into his own hands. During a takeover at Universidad del Mar, he was able to get his hands on $500 million of student debt, which he subsequently torched.

Chilean artist steals and destroys $500 million worth of student debt papers: Here’s one inventive way to deal with the student debt problem. Late last week, Chilean police arrived at Santiago’s Centro Cultural Gabriela Mistral and removed a white bin of gray ash — allegedly all that remained of $500 million worth of student debt notes. The case of the destroyed student debt traces back to a hastily shot home video, a half-smoked cigarette, and a disheveled artist named Papas Fritas. In the video, which went viral last week in Chile, Papas Fritas confessed he had recently stolen the documents from the for-profit Universidad del Mar. Then he set them ablaze in a defiant, brazen act of art. “It’s over,” declared Papas Fritas, which means “french fries.” “It’s finished. You don’t have to pay another peso [of your student loan debt]. We have to lose our fear, our fear of being thought of as criminals because we’re poor. I am just like you, living a sh—y life, and I live it day by day. French Fries finished his screed: “This is my act of love for you.”

French rail company orders 2,000 trains too wide for platforms (Reuters) - France's national rail company SNCF said on Tuesday it had ordered 2,000 trains for an expanded regional network that are too wide for many station platforms, entailing costly repairs. A spokesman for the RFF national rail operator confirmed the error, first reported by satirical weekly Canard Enchaine in its Wednesday edition. "We discovered the problem a bit late, we recognise that and we accept responsibility on that score," Christophe Piednoel told France Info radio. Construction work has already begun to reconfigure station platforms to give the new trains room to pass through, but hundreds more remain to be fixed, he added. The mix-up arose when the RFF transmitted faulty dimensions for its train platforms to the SNCF, which was in charge of ordering trains as part of a broad modernisation effort, the Canard Enchaine reported.

Cheese-eating Job Creators - Paul Krugman - People are pretty down on European economic performance these days, with good reason. But mainly what we’re looking at is bad macroeconomic policy, the result of premature monetary union plus austerity mania. That’s a very different story from the old version of Eurotrashing, which focused on Eurosclerosis — persistent low employment allegedly caused by excessive welfare states. Now, people like John Schmitt and Dean Baker began pointing out a long time ago that this story was out of date. If you looked at Europe in general and France in particular, you saw that yes, people retired earlier than in America, and also that fewer young people worked — in part because they didn’t have to work their way through college. But on the eve of the economic crisis employment rates among prime-working-age adults had converged. Well, I hadn’t looked at this data for a while; and where we are now is quite stunning: Since the late 1990s we have completely traded places: prime-age French adults are now much more likely than their US counterparts to have jobs. Strange how amid the incessant bad-mouthing of French performance this fact never gets mentioned.

Italy, the euro zone’s pouting mistress, threatens financial havoc - This is a country that happily ignores danger signals and puts its crew on alert only at the last minute, when bulkheads are bursting and the ship is about to sink beneath the waves. Ditto Greece, Spain and, to a great extent, France, though Italy, the euro zone’s third-largest economy, embraces inertia and denial like a pouting mistress. Italy could still wreck the euro zone. But isn’t the crisis over? It is, in the sense that the sovereign bond yields of the crisis countries have fallen relentlessly in the past two years, taking them down to their precrisis levels. Italy’s 10-year borrowing costs are now 2.9 per cent, not much higher than Canada’s 2.3 per cent. For Italy, that’s a drop of four full points from their level in 2011 and 2012, when the country was on the verge of the bailout whose crushing expense could easily have torn the euro zone apart. Remember, Italy is a Group of Seven country whose economy is about a quarter bigger than Canada’s. Greece, the distraught victim of a six-year depression, and the recipient of two bailouts and a debt restructuring, is again raising its own debt and recently sold five-year paper at just below 5 per cent. Portugal has vaulted back into the debt markets too; its two-year bonds trade at just 1.2 per cent, roughly the same level as equivalent Canadian debt. How can this be? A big thank you must go to European Central Bank president Mario Draghi, who, in the summer of 2012, promised to do “whatever it takes” to keep the euro zone intact. The promise was backstopped by a pledge to buy, in unlimited quantities, the debt of any country having trouble financing itself.ut there are warning signs everywhere that all is not well. The bond yields in what were known as the “crisis” countries are not telling the truth; they seem to be entirely disconnected from the real economy.

Cocaine Sales to Boost Italian GDP in Boon for Budget - Italy will include prostitution and illegal drug sales in the gross domestic product calculation this year, a boost for its chronically stagnant economy and Prime Minister Matteo Renzi’s effort to meet deficit targets. Drugs, prostitution and smuggling will be part of GDP as of 2014 and prior-year figures will be adjusted to reflect the change in methodology, the Istat national statistics office said today. The revision was made to comply with European Union rules, it said. Renzi, 39, is committed to narrowing Italy’s deficit to 2.6 percent of GDP this year, a task that’s easier if output is boosted by portions of the underground economy that previously went uncounted. Four recessions in the last 13 years left Italy’s GDP at 1.56 trillion euros ($2.13 trillion) last year, 2 percent lower than in 2001 after adjusting for inflation. “Even if the impact is hard to quantify, it’s obvious it will have a positive impact on GDP,” said Giuseppe Di Taranto, economist and professor of financial history at Rome’s Luiss University. “Therefore Renzi will have a greater margin this year to spend” without breaching the deficit limit, he said.

Hookers And Blow: How Changing The Definition Of GDP Officially Jumped The Shark - A year ago it was the US which first "boosted" America's GDP by $500 billion - literally out of thin air - when it arbitrarily decided to include "intangibles" to the components that 'make up' GDP (in the process cutting over 5% from the US Debt/GDP ratio). Then Spain joined the fray. Then Greece. Then the UK. Then Nigeria, which showed those developed Keynesian basket cases how it is really done, when it doubled the size of its GDP overnight when it decided to change the base year of its GDP calculations. Now it is Italy's turn, and like everything else Italy does, this latest "revision" of the definition of GDP easily wins in the style points category. As Bloomberg reports, "Italy will include prostitution and illegal drug sales in the gross domestic product calculation this year." Yup: blow and hookers. And that, ladies and gents, how it's done.

The eurozone's problems have not gone away, and elections won't change much -- Despite all the bullish talk in recent months, the problems of the eurozone have not gone away. The single currency's weaker members, such as Greece, Spain and Italy, found it easier for a while to sell their bonds at lower interest rates. But that was largely due to the generosity of the Federal Reserve, which flooded the global economy with dollars through its quantitative easing programme. The QE injection was a godsend to the eurozone, which has so far – but perhaps not for much longer – scorned the idea of turning on the electronic printing presses. US dollars found their way through the global financial system into European bond markets, and this allowed Mario Draghi, the president of the European Central Bank (ECB), to say he would do whatever it took to save the euro, without actually having to back his words with action. This new version of the postwar Marshall plan bought the eurozone some time. What it didn't do, however, was change the core economic problem of the eurozone's weak periphery. They are not growing nearly fast enough to prevent their debts becoming more onerous. Generalised austerity has made matters worse, as has the ECB's lack of sufficient offsetting action. Unemployment is high and voters are sick of austerity. It would be a mistake though to imagine that much, or indeed anything, will change as a result of the elections to the European parliament. There will be a lot of talk about how Europe needs to deliver for its people, and that will be it. Mainstream parties with their mainstream thinking will still be in charge and life will go on as before. As a result, Europe will condemn itself to an even longer period of economic stagnation, mass unemployment and austerity. Extremism will flourish.

What Ails Europe? -  The U.S. economy has been slow to recover from the shock of the financial crisis of 2007-09. Europe, hit by the global financial crisis and then a debt crisis of its own, has been even slower. Jean Pasani-Ferry has an explanation. He fingers the “indecision, division and procrastination” of Europe’s leaders, who have acted forcefully at the last minute to avoid catastrophe or the breakup of the euro but consistently failed to agree on policies or systemic reforms that would put Europe’s economy on a better trajectory. “This behavior,” he writes, “is reminiscent of that of negligent homeowners who only contemplate repairs when the roof of their house threatens to collapse.”Mr. Pasani-Ferry, formerly director of Bruegel, a prominent Brussels-based think tank, is now chief of policy planning for the French prime minister. His book “The Euro Crisis and Its Aftermath,” originally published in 2011 in French, has been updated and translated into English. It is succinct and clear enough to serve as the best available guide to the euro mess for non-European, non-economists. The recent euro crisis exposed fundamental flaws in the monetary union, but there is no agreement on how to resolve them, he says. France and much of southern Europe regard systemic reforms as essential. Germany and much of northern Europe see these proposals as thinly disguised attempts by those who have pursued faulty policies to be bailed out by Germany taxpayers. The two sides have fought to a draw. An earlier generation of European leaders were visionaries who saw an integrated Europe as “the only chance that the continent’s old nations have to remain significant actors” in a world dominated by the U.S. and, increasingly, by China. This current generation, Mr. Pisani-Ferry says, consists of pragmatic politicians who are sensitive to euro-skeptic voters. Few have high ambitions for Europe; most are disillusioned. In language that echoes that of Washington punditry writing about the U.S., he warns that “credibility has been squandered in this crisis at a faster pace than at anytime in recent history, but beyond credibility, an even scarcer commodity–trust–has been lost.”

Europhobes gain clout: Xenophobic, right-wing and anti-EU parties catch on as elections near --Mr. Farage, leader of the United Kingdom Independence Party (UKIP), is on track to win the biggest share of British votes in elections this month for the European Parliament — a parliament Mr. Farage wants to abolish, along with the entire 28-nation European Union bloc. “The whole thing is a monstrosity,” he said. “We want our country back. It’s been sold out.”   Increasing numbers of voters agree with him — not just in euro-wary island nation Britain, but across the continent. Polls suggest Euroskeptic parties could take between 25% and 30% of the 751 European Parliament seats in May 22-25 elections. In Britain, Mr. Farage’s UKIP — which advocates UK withdrawal from the EU and has never won a seat in the British Parliament — has pulled ahead of the Labour Party into first place. The Conservatives, who lead Britain’s coalition government, look likely to finish an embarrassing third. Euroskeptic parties rail against the EU red tape they say enmeshes farmers and businesses, and against the open borders that mean French and British workers must compete with jobseekers from Poland or Spain.

Europe Imitates The Fall Of The Roman Empire - First, there was a passage from Tim Geithner’s new book. Then, there was a 3-part series ‘How The Euro Was Saved’ by Peter Spiegel for the Financial Times. Together, they deliver the following storyline: EU leaders refused to let Greece have a referendum on its bail-out, and toppled PM Papandreou to kill it. Then, afraid that Italian PM Berlusconi would make good on his threat to return to the lira if they stuck to their bail-out conditions, they toppled him. What this means to Europeans is that if they elect a government for their country, and it subsequently falls out of favor with Brussels, they can expect to see it overthrown, and likely have it replaced by a technocrat handpicked by the EU leadership (as happened in Greece and Italy). Ergo: Europe is not a democracy, and pretending otherwise is foolish. Democratic elections in member states are merely empty lip service exercises, because on important topics governments of member states have no say. In fact, the only journalist who did pick up on it was Ambrose Evans-Pritchard, also on Friday, and while I understand people’s reservations concerning Ambrose, please don’t forget this: as it became known that the EU leadership has no scruples when it comes to bringing down elected governments of member states, AEP was the only one writing for the mainstream media who brought this ultimate betrayal of European democracy, and hence of all European voters, to light.

How should the ECB enact Quantitative Easing? A proposal -- Here is what the ECB could do to achieve its objective while overcoming both its ‘operational problem’ and the ‘macroeconomic concern’ above:

  1. The European Investment Bank (EIB) and its smaller offshoot the European Investment Fund (EIF) should be given by the European Council the green light to embark upon a Pan-Eurozone Investment-led Recovery Program to the tune of 8% of the Eurozone’s GDP, with the EIB concentrating on large scale infrastructural projects and the EIF on start-ups, SMEs, technologically innovative firms, green energy research etc.
  2. The EIB/EIF has been issuing bonds for decades to fund investments, covering thus 50% of the projects’ funding costs. They should now issue bonds to cover the funding of the Pan-Eurozone Investment-led Recovery Program to the full; i.e waving the convention that 50% of the funds come from national sources.
  3. To ensure that the EIB/EIF bonds do not suffer rising yields, as a result of these large issues, the ECB ought to step into the secondary market and purchase as many of these EIB/EIF bonds as are necessary to keep the EIB/EIF bond yields at their present, low levels.

European Central Bank ‘unlikely to fire the big bazooka’ - “The European Central Bank enters uncharted territory.” “The next big experiment for central banks.” “Banks fined for parking funds overnight.” Mario Draghi, ECB president, is on course for further striking headlines after the central bank’s next governing council on June 5. A strong hint this month that the ECB will act against the dangers of low eurozone inflation has led markets to conclude that it will move to negative interest rates – charging banks which use its overnight deposit facility. If correct, the ECB would be the first of the big central banks to test such a step. The objective would be to weaken the euro and encourage banks to lend more to credit-starved companies in Europe’s weakest economies. For Mr Draghi it will be a chance to demonstrate his credentials as a bold central banker. There is just one snag: a negative interest rate on the ECB’s deposit facility – currently zero, or 25 basis points below the main policy rate – may have little impact. Short-term market interest rates could fall a little, but the effects may already be largely priced in, analysts warn. “It is one of those measures that will have a bit of an impact but not terribly much – a bit of a difference in resource allocation and a little bit of euro weakening, but it is not the big bazooka,” Mr Draghi will get credit, at least, for being innovative. Denmark’s central bank has used negative interest rates to control the krone, but not as part of a broader economic stimulus package. A negative ECB deposit facility rate will have less impact now, however, than it would have even a few months ago. During the post-2007 crises, the ECB cut official interest rates sharply but, more importantly, flooded the financial system with liquidity through “longer term refinancing operations” (LTROs).

Goldman Sachs on coping with negative rates - There’s a good note from Goldman Sachs this week on the implications of negative rates at the ECB. But given that many of the points echo much of the discussion already featured on FT Alphaville for years, we’ll cut straight to the interesting bits. Goldman agree there isn’t anything conceptually special about negative rates because bond math works with negative numbers (as it’s focused on real returns). However, they add, there is a specific reason why negative rates might have qualitatively different macroeconomic implications, unless controls on cash were put in place with them: …the possibility for banks to arbitrage against negative rates by holding banknotes. If banks are to be charged for holding excess liquidity (as the imposition of a negative DF rate would imply), they have an incentive to hold banknotes to avoid that charge. This implies that a negative DF rate would prove ineffective (as banks switch excess liquidity into banknotes): arbitrage implies that market rates are bounded at zero. Behind this so-called ’zero lower bound’ on nominal interest rates lie two assumptions: (1) the cost of holding banknotes is negligible; and (2) banknotes are supplied elastically by the monetary authorities. In principle, the central bank could impose a tax on banknote holdings (e.g., by cancelling a portion of banknotes on the basis of (a random draw over) their serial numbers). Or the central bank could ration the issuance of banknotes, either to specific institutions or in total. Either way, the (shadow) cost of holding banknotes would rise and the zero lower bound would be relaxed.

Mario Draghi’s Ongoing Faustian Pact -- Word has it that Mario Draghi is busily working up a new version of his “whatever it takes” methodology. This time the objective is not saving the Eurozone, but maintaining the region’s inflation at or near the ECBs official 2% inflation objective. The first time round the President of the Euro Area’s central bank had it easy, since market participants took him at his word and he effectively needed to do nothing to comply. This time though, as they say, it will be different. Its getting towards two years now since Mario Draghi made that first famous “whatever it takes” promise for which he will either be feted eternally in the central bankers’ heaven or cursed perpetually in whatever their equivalent of hell is. During that time the tide of the Euro Area debt financing crisis has steadily been turned – perhaps the turning point came when Spain’s prime minister Mariano Rajoy decided not to apply for a full Troika bailout and got away with it, sometime around November 2012.  During the time since that first Draghi promise Spanish (and other periphery) yields have come down dramatically, from around 7% (in Spain’s case) to the current rate of just over 3%. Perhaps the steepest, and most surprising, part of that drop was between January and April 2014, a period in which speculation – often fueled by the ECB itself – was rife that a programme of quantitative easing was in preparation and likely to be launched in order to fend off the threat to Euro recovery presented by low inflation/deflation.

Europe's centre crumbles as Socialists immolate themselves on altar of EMU - By a horrible twist of fate, Europe's political Left has become the enforcer of reactionary economic policies. The great socialist parties of the post-war era have been trapped by the corrosive dynamics of monetary union, apologists for mass unemployment and a 1930s deflationary regime that subtly favour the interests of elites. One by one, they are paying the price. The Dutch Labour Party that fathered the "Polder Model" and ran Holland for half a century has lost its bastions of Amsterdam, Rotterdam and Utrecht, its support dwindling to 10pc as it meekly ratifies austerity policies that have led to debt deflation and left 25pc of mortgages in negative equity. Contractionary policies are poisonous for countries leveraged to the hilt. Dutch household debt has risen from 230pc to 250pc of disposable income since 2008, while British debt has fallen from 151pc to 133pc over the same period. This calamitous development in the Netherlands is almost entirely result of the EMU policy structure, yet the Dutch Labour Party has no coherent critique because its pro-EU reflexes compel near-silence. Old Marxists now rebranded under the Socialist Party have eaten into their flank, running at 20pc with daily broadsides against the myopia of pro-cyclical EMU deficit rules at a time when more than half the currency bloc is stuck in depression, albeit one punctuated by short episodes of seeming recovery. The Netherlands relapsed yet again in the first quarter. "The Socialist Party has never believed in the euro and we don’t believe in it now. We must therefore stop offering up ever more sacrifices in order to maintain it," said Dennis de Jong, the party's leader in Strasbourg. He calls for a "Plan B" to dismantle the currency union in an orderly fashion, with capital controls if need be.

Crisis of the Eurocrats, by Paul Krugman - As I write this, elections are being held all across Europe, not to choose national governments, but to select members of the European Parliament. To be sure, the Parliament has very limited powers, but its mere existence is a triumph for the European idea. But here’s the thing: An alarmingly high fraction of the vote is expected to go to right-wing extremists hostile to the very values that made the election possible. Put it this way: Some of the biggest winners in Europe’s election will probably be people taking Vladimir Putin’s side in the Ukraine crisis. The truth is that the European project — peace guaranteed by democracy and prosperity — is in deep trouble; the Continent still has peace, but it’s falling short on prosperity and, in a subtler way, democracy. And, if Europe stumbles, it will be a very bad thing not just for Europe itself but for the world as a whole. Why is Europe in trouble? The immediate problem is poor economic performance. The euro, Europe’s common currency, was supposed to be the culminating step in the Continent’s economic integration. Instead, it turned into a trap. The inherent problems of the euro have been aggravated by bad policy. European leaders insisted and continue to insist, in the teeth of the evidence, that the crisis is all about fiscal irresponsibility, and have imposed savage austerity that makes a terrible situation worse.

"Political Earthquake" - Nigel Farage "Big Winner" In Local Elections - Yesterday we highlighted the European people's growing 'revulsion' against Europe and overnight we got yet another confirmation that the status quo - despite record low bond yields and record high stock and real estate prices - are losing their grip on control. Having taken the lead in the polls last week, UKIP's Nigel Farage has scored a major victory in local elections in England with early results pointing to considerable gains for the euro-skeptic party: As Reuters reports, one MP noted "I think Nigel Farage for quite a lot of those people is just a big sort of two fingers stuck up at what they feel is a sort of hectoring, out-of-touch elite."

Suddenly The EU's Break-Up Has Moved From A Possibility To A Near-Certainty - Although British voters have for decades wanted out of the European Union, that possibility has hitherto been expertly forestalled by a less-than-democratic left-right alliance of London-based elites. Now suddenly all bets are off. In local council elections yesterday, England’s long-suffering grass-roots voters finally rose up. They snubbed both main parties, the Conservatives and Labor, to support the United Kingdom Independence Party (UKIP), a relatively new and hitherto marginalized party whose main agenda is to get the U.K. out of the European Union. Yesterday’s vote, a personal triumph for UKIP leader Nigel Farage, seems likely to trigger a chain-reaction in which it becomes impossible for the London elites any longer to hold out Canute-like against the democratic will.  As things stand, Prime Minister David Cameron has already – to his own evident distaste – succumbed to pressure to hold an in-out referendum if his party wins a majority in next year’s general election. Yesterday’s election results strengthen the hand of such anti-EU Conservative politicians as Douglas Carswell, Jacob Rees-Mogg, and Peter Bone, who want their party to cut a deal with UKIP that would further undermine the London elites’ pro-EU program.

BOE’s Bean Says Crisis Shows Worse Things Can Happen Than You’d Imagine - Central banks are routinely criticized for failing to foresee the crisis that tipped the world into recession in 2009. Charles Bean, the Bank of England‘s outgoing deputy governor for monetary policy, on Tuesday underscored how other things kept monetary policy makers awake at night. BOE officials used to get together occasionally at sessions called “My Nightmare,” he told staff and students following a speech at the London School of Economics. Rate setters would take turns to spell out their biggest fears. With their focus on price stability, officials usually picked something like an oil shock, which can send output tumbling and inflation surging, a tricky mix to deal with, Mr. Bean recalled. No one predicted a crisis rooted in risky mortgage lending in the U.S. would ricochet around the world. “If somebody had come up with the scenario that actually happened, I think the rest of us on the committee would have said ‘you’re bonkers.’” His remarks underscore how unprepared central banks and other authorities were for the crisis that bankrupted Lehman Bros Holdings Inc and sent the global economy into a tailspin.

A solid rise in GDP - borrowing blips higher - GDP in the first quarter was unrevised at 0.8%, for a rise of 3.1% on a year earlier. Within that, production output rose by 0.7%, construction by 0.6% and services by 0.9%. On the expenditure measure there was 0.8% increase in household spending and a 0.6% increase in gross fixed capital formation (investment), including a 2.7% quarterly rise in business investment. Exports and imports both fell and there was no contribution to growth from net trade. Interestingly, if we take growth over the past year, gross fixed capital formation contributed 1.5 points of the 3.1% growth in the economy, more than consumer spending (1.3). Even more interesting is that compensation of employees was up 4.1% on a year earlier in the first quarter, continuing its recent much stronger trend. Though that includes factors such as higher pension contributions by firms, and though part of it reflects rising employment, it is on the face of it hard to square with the weakness of the average earnings data. The GDP figures are here. What we don't know is how much of a distortion there is because of the unusual pattern of bonuses last year, when many were delayed to April to avoid the 50% top tax rate. On the face of it the public borrowing numbers for April were disappointing, with underlying borrowing of £11.5 billion, £1.9 billion higher than in April 2013. A look at the detail of income tax and National Insurance contributions suggests, however, that the bonus effect - much lower bonuses this year than last - was important. The public finance numbers are here. The earnings figures will be badly distorted by this bonus effect for the next couple of months and should not be taken too seriously.

Interest bill on UK's £1.27 trillion debt to hit £1bn a week - Britain's huge debt interest bill remains on course to hit £1bn a week this year, after official data showed the Goverment borrowed £3bn more in April than forecast by analysts. Public sector net borrowing excluding one-off payments related to Royal Mail's pension plan and quantitative easing gilt coupon transfers, stood at £11.5bn in April, according to the Office for National Statistics (ONS). This was £1.9bn higher than in April 2013, and much higher than the £8.4bn expected by analysts. The larger-than-expected deficit helped to push up public sector net debt to £1.27 trillion in April, or 75.6pc of gross domestic product (GDP). The interest on Britain's debt pile is expected to hit £52.1bn this year, according to projections by the Office for Budget Responsibility (OBR) - or the equivalent of £1bn a week. “Today’s figures show that government’s overall debt has increased by £88bn, or 7.5pc since the same time last year - almost five times what we spend on fighting crime," "This coming year, interest on central government debt will pass the £1bn a week milestone. As political parties form their manifestos for the 2015 election, they need to consider spending and policy commitments against the backdrop of this pressure on the public finances.”

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