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

Saturday, May 3, 2014

week ending May 3

Fed Balance Sheet May 1, 2014: Highlights:

For the April 30 week, the Fed balance sheet edged down $0.3 billion after advancing $12.4 billion the week before.
Holdings of mortgage-backed securities dropped $7.3 billion while Treasuries rose $8.5 billion.
Total assets for the April 30 week were $4.296 trillion.
Reserve Bank credit for the April 30 week grew $4.6 billion after expanding $7.8 billion the week before.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 1, 2014:  Federal Reserve statistical release - Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks - The weekly average values, shown in table 1, reflect the March 31, 2014, quarterly updates to the fair values of the net portfolio holdings of Maiden Lane LLC and the fair value adjustment of the Term Asset-Backed Securities Loan Facility, or TALF, which is included in "Other Federal Reserve assets." The amounts for the first six days of this reporting week are based on the values as of December 31, 2013, and the amounts for the last day of the reporting week are based on the values as of March 31, 2014.

Fed Statement Following April Meeting - The following is the full text of the statement following the Fed’s April policy-setting meeting:

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

FOMC Statement: More Taper, Economic Growth "picked up recently" -- FOMC Statement excerpts: Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.  The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month.

By Its Own Yardstick, the Fed Is Falling Short - The Federal Reserve is failing to meet its basic responsibilities.The central bank is charged by Congress to do two things. It is supposed to keep inflation at a moderate rate while also maximizing employment. Almost five years have passed since the end of the Great Recession, and the Fed has made little progress on either count.The share of American adults with jobs fell sharply during the recession, and has since recovered only a small part of that lost ground. The unemployment rate has fallen, but primarily because the jobless stopped looking for work.Inflation, meanwhile, remains well below the Fed’s target of 2 percent.Photo Unemployment is an obvious problem. Low inflation, by contrast, may seem like a good thing. But economic research suggests that inflation is best in moderation. Rising prices give the Fed more power to stimulate the economy because inflation functions as a tax on saving, encouraging investment. Inflation is also a lubricant, making it easier for less profitable employers to reduce costs by withholding wage increases rather than imposing outright cuts. Workers whose wages keep pace with inflation can pay fixed debts more easily. Any less inflation and central bankers risk deflation, when prices and wages drop, and that may be the only thing they fear more than inflation.

Fed seen hiking rates in June 2015 as U.S. job creation surges (Reuters) - The Federal Reserve could start raising benchmark interest rates in just over a year, based on trading in U.S. short-term interest-rate futures after a government report showed employers added many more jobs than expected in April. The surge in job creation, which topped economists' expectations by more than 30 percent, helped push U.S. unemployment to a 5-1/2 year low. Traders bet that the rosier jobs picture could prompt the Fed, which has kept rates near zero for more than five years, is as likely as not to raise rates as soon as next June, about six weeks earlier than traders had forecast before the report. But the jobs data also showed a sharp decline in labor force participation, a rate that Fed Chair Janet Yellen has said she watches closely. A drop in the rate is seen as sign of labor market weakness. "The big drop in the unemployment rate may cause some concerns in consideration of what the Fed may do," "But I still think that we're looking at a second quarter of 2015 likelihood for the first consideration for the hike in the Fed funds rate."

Why the Fed will miss Jeremy Stein - The FOMC meeting this week is not likely to see any policy fireworks, but it will mark the departure of Governor Jeremy Stein, who returns to academic life at Harvard at the end of May. He has only been on the Board for two years, but he has made an intellectual mark in a critical area where leading members of the FOMC have been largely silent – how to set monetary policy when the need to maintain financial stability is conflicting with the near term outlook for inflation and employment. The issue can be simply stated: should the Fed tighten policy solely because they are worried about the emergence of bubbles in asset prices? After the financial crash of 2008, this should be a subject close to the heart of the new Chair Janet Yellen and her senior colleagues. Up to a point, it is. An enormous amount of attention has been given to the new financial architecture that has followed the crash, and Chair Yellen has already spoken specifically about the importance of too-big-to-fail, and the reform of the wholesale money markets. Yet the vast majority of the Fed’s recent communication has been on the familiar topics of estimating slack in the labour market, and the consequences of this for inflation. In its statements and minutes, the FOMC has generally given very little attention to the difficult question of how to maintain financial stability and thus avoid the next “Minsky moment”.

U.S. Inflation Ticks Up But Lags Far Behind Fed Target -- For the 23rd consecutive month, U.S. inflation has undershot the Federal Reserve’s 2% goal.  Tucked inside Thursday’s report on consumer spending and personal income from the Commerce Department was the Fed’s preferred inflation measure, the price index for personal consumption expenditures. It rose 0.2% in March from the prior month, and was up 0.2% excluding the volatile categories of food and energy. Prices were up 1.1% in March from a year earlier, and up 1.2% excluding food and energy. That’s far short of the central bank’s 2% target, though it’s a bit closer than the 0.9% annual gain in February. The PCE price index hasn’t touched the 2% mark since April 2012, and it hasn’t bumped above 1.3% since February 2013.Persistently low inflation can be a sign of underlying weakness in the economy. The Fed, in its policy statement on Wednesday, said it recognizes continued low inflation “could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”Other gauges also have detected weak inflationary pressures across the U.S. economy. The Labor Department’s consumer-price index was up 1.5% in March from a year earlier. The producer-price index, a measure of prices that businesses receive for their goods and services, was up 1.4% from a year earlier. Prices for imported goods were down 0.6% in March from a year earlier. The employment-cost index, released Wednesday, showed U.S. employers’ compensation costs rose just 0.3% in the first quarter and 1.8% in the last year. The U.S. isn’t the only advanced economy dealing with unusually low inflation. Canadian officials have expressed concern about sluggish price gains. In the U.K., inflation slowed in March to its lowest level in more than four years. Consumer prices across the euro zone rose just 0.7% in April from a year earlier, well below the European Central Bank’s 2% goal.

PCE Price Index Update: Core Inflation Remains Far Below the Fed Target - The Personal Income and Outlays report for March was published this morning by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate of 1.15% is an increase the previous month's 0.86% (a slight adjustment from 0.87%). The Core PCE index of 1.21% is up from 1.10% the previous month.As I've routinely observed, the general disinflationary trend in core PCE (the blue line in the charts below) must be quite troubling to the Fed. After years of ZIRP and waves of QE, this closely watched indicator consistently moved in the wrong direction. Since April of last year has hovered in a narrow YoY range of 1.21% to 1.10%, although it is now at the top of the range. The adjacent thumbnail gives us a close-up of the trend in Core PCE since January 2012. The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 2012 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place. I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But core PCE is such a key measure of inflation for the Federal Reserve that precision seems warranted. For a long-term perspective, here are the same two metrics spanning five decades.

Boston Fed Warns Rising Inflation Expectations May Not Drive Higher Spending -- It’s an axiom of modern monetary policy making that if you want to get consumers to spend a little more, convince them higher inflation is coming their way. As Federal Reserve officials see it, fears of an item’s price rising in the future may make a person more inclined to buy it today. But that view may be wrong. Researchers at the Boston Fed argue in new research that a rise in inflation expectations doesn’t do much to induce households to spend more on bigger ticket items. “Promoting higher inflation expectations may be insufficient for boosting present consumption, and in some case higher inflation expectations may actually discourage consumption,” write The authors found that there are very small increases in spending due to an increase in inflation expectations, but not where they can matter most: on big-ticket items. The only expensive purchases that seems to respond to changes in expectations over future prices, the report says, are cars. The authors found that this effect seems to be consistent across income levels. “We do not observe stark or consistent differences in the response of spending to inflation expectations between different households grouped on the basis of factors such as owning stocks, having a retirement account, or owning a house,” the report said. The apparent reason an expected rise in inflation doesn’t translate into boosted spending is because consumers expect that higher future inflation will erode the real value of their spending power, the paper said. The paper’s findings reflect the broader quandary the Fed is in right now. It’s kept short-term rates near zero since 2008 and pledged to keep rates very low well into the future. It’s engaged in multiple bond-buying campaigns all aimed at driving up growth. And yet, inflation has remained stubbornly low.

Is Inflation decaying? - Quote from the most recent Federal Statement.“In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments” Inflation pressures are key. We have to know how strong the inflation “inertia” is.  The Labor Department’s consumer-price index was up 1.5% in March from a year earlier. The producer-price index, a measure of prices that businesses receive for their goods and services, was up 1.4% from a year earlier. Prices for imported goods were down 0.6% in March from a year earlier. The employment-cost index, released Wednesday, showed U.S. employers’ compensation costs rose just 0.3% in the first quarter and 1.8% in the last year.” (source)  US compensation costs rose just 0.3% in the first quarter. Wow! Also, we see low inflation pressures from prices on imported goods. We have a stronger dollar. We can use less dollars to buy imports. That is good for consumers, but it creates problems for wage increases in businesses that have to compete with lower priced imports.

BEA: Real GDP increased at 0.1% Annualized Rate in Q1— The U.S. economy slowed drastically in the first three months of the year as a harsh winter exacted a toll on business activity. The sharp slowdown, while worse than expected, is likely to be temporary as growth rebounds with warmer weather.The Commerce Department says growth slowed to a barely discernible 0.1 percent annual rate in the January-March quarter, the weakest since the end of 2012 and down from a 2.6 percent growth rate in the October-December quarter.Consumer spending grew at a 3 percent rate. But the gain was dominated by a 4.4 percent rise in spending on services, reflecting higher utility bills. Spending on goods barely rose. Also dampening growth were a drop in business investment, a rise in the trade deficit and a fall in housing construction.

U.S. Economy Slows to a Crawl in First Quarter of 2014 -- Cold weather froze the U.S. economy in its tracks during the first quarter, with GDP falling to just 0.1 percent to mark the slowest quarter since 2012.  The U.S. economy slowed dramatically in the first quarter of 2014, as severe winter weather across much of the country depressed business investment and home construction.The economy’s meager 0.1% GDP growth in January, February and March represented the slowest three-month growth in the economy since the end of 2012, and a sharp deceleration from growth in the second half of 2013, when the economy grew at a 3.4% rate. The data reported by the Commerce Department early Wednesday fell far short of the expectations of Wall Street economists, who had predicted a 1.2 percent rate of growth this quarter, the New York Times reports.Consumer spending, the biggest driver of economic growth in the United States, actually grew 3.0 percent in the first quarter, nearly consistent with 2013′s fourth quarter growth of 3.3 percent. But nonresidential investment decreased dramatically, as did did exports of goods and services. Republicans were quick to blame the Obama administration for the first quarter’s measly growth. “This report is more than a low number,” said Brendan Buck, the spokesman for Speaker of the House John Boehner. “It is a reflection of the real economic despair that persists in the sixth year of the Obama presidency.” Economists said the figures were disappointing, but expect the economy’s growth rate to return to between 2.5 and 3 percent in 2014,

GDP Shocker: US Economic Growth Crashes To Just 0.1% In Q1 - Despite consensus at 1.2% growth QoQ, the "weather" destroyed the fragile stimulus-led economy of the US which managed only a de minimus +0.1% QoQ growth (the lowest since Q1 2011). However, as Steve Liesman noted on the heels of Mark Zandi's comments "basically ignore this number" - ok then. Spending on Services, however, surged by the most since 2000 - heralded as great news by some talking heads - but is merely a reflection of the surge in healthcare and heating costs (imagine if it had not been cold and if Obamacare hadn't saved us). As a reminder - this is the growth that is occurring as QE has run its course, as stimulus ends, and as escape velocity nears... if the "weather" can do this much damage to the US economy, should stocks really be trading at the multiple of exuberant future hope that they are?

In Downside Surprise, Real GDP Barely Grew at All Last Quarter - I’ll get into the weeds later in the day, but here’s a bit of a shocker: real GDP grew only 0.1% in the first quarter of the year, according to this morning’s report from the Commerce Dept.  That’s a huge deceleration from last quarter’s 2.6%, and well below analysts expectations of around 1.2%. Remember, that 0.1% is an annualized number–the actual, quarterly percent growth of GDP was 0.03%, meaning that the real level of the value of goods and services in the US economy was essentially unchanged in the first three months of the year.  That’s unusual and alarming, if it’s correct. However, given the jumpiness in the quarterly estimates, and this is the first of three estimates, based on preliminary data, it’s important to look at year-over-year results as well, to smooth out some noise, including recent weather effects.  By that measure, real GDP is up 2.3%, a deceleration from last quarter’s 2.6%.  In that regard, look at this quarter’s number as a stern warning, one that may or may not herald a downshift in GDP growth, but one that is hopefully not indicative of the underlying trend.

  • –Consumer spending wasn’t the culprit, as it rose 3% and contributed 2 points to to the final growth number (increased spending from health care reform has been a factor here in recent quarters; likely more a Medicaid expansion story than premium subsidies at this point).
  • –Investment, on the other hand, was a big negative and subtracted 1 point from q1 growth.  Businesses reduced their equipment investment which fell 5.5%, the largest pullback in almost five years.  The recent softening of the housing market can be seen here as well: home building, another component of investment, fell for the second quarter in a row.
  • –The trade deficit was also a drag on growth, as exports added 0.24 points to growth but exports subtracted about 1 point, for a net drag of -0.83.
  • –As has been the case in five of the past six quarters, government spending was also a drag on growth, in this case, due to cutbacks at the state and local level.
  • –As expected given recent bulking up, additions to inventory also slowed.
  • –Core PCE prices were up 1.3% and the more reliable yearly growth was only 1.1%.  It is notable that the Fed’s FOMC, already a bit worried about disinflation, is meeting as we speak.  I’m quite sure they won’t change course based on this one report–they’ll still reduce QE by another $10bn–but they’ll likely note this development in their statement.

GDP Q1 Advance Estimate at 0.1%, Down from 2.6% in Q4 --The Advance Estimate for Q1 GDP, to one decimal, came in at 0.1 percent, down from 2.6 percent in Q4 of last year. The GDP deflator used to calculate real (inflation-adjusted) GDP declined to 1.3 percent from the Q4 1.6 percent. had forecast 1.2 percent for today's GDP estimate and the deflator to remain unchanged at 1.6 percent. The general consensus among economists was for weaker Q1 GDP, largely a result of severe winter weather, but today's report was much worse than most expectations.Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 0.1 percent in the first quarter (that is, from the fourth quarter of 2013 to the first quarter of 2014), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.6 percent.  The Bureau emphasized that the first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3 and "Comparisons of Revisions to GDP" on page 5). The "second" estimate for the first quarter, based on more complete data, will be released on May 29, 2014.  The increase in real GDP in the first quarter primarily reflected a positive contribution from personal consumption expenditures (PCE) that was partly offset by negative contributions from exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased. [Full Release]  Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis. Prior to 1947, GDP was reported annually. To be more precise, what the lower half of the chart shows is the percent change from the preceding period in Real (inflation-adjusted) Gross Domestic Product. I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

BEA Estimates 1st Quarter 2014 GDP Growth Collapsed To A Mere 0.11% Annual Rate - In their first estimate of the US GDP for the first quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was growing at an anemic 0.11% annualized rate. When compared to prior quarters, the new measurement is down over 2.5% from the 2.64% growth rate reported for the 4th quarter of 2013, and it is now more than 4% lower than the 4.19% reported for the 3rd quarter of 2013 -- indicating that the deceleration in the growth rate first noticed last quarter has both continued and sharply intensified. Commercial activity was especially hard hit: exports led the collapse, and commercial investments and inventories also weakening significantly. Fixed investments in both equipment and residential construction contracted sharply. Government spending also contracted, primarily in Federal defense spending and state and local governmental infrastructure investment. Consumer spending for services provided the only significant growth, with outlays for non-discretionary healthcare, housing, utilities and financial services all increasing. Spending on consumer goods was essentially flat even though household savings rates dropped once again. Real annualized per-capita disposable income grew by $112 during the first quarter (although it is still $204 per year lower than it was during the fourth quarter of 2012), while the household savings rate shrank again to 4.1% (down -0.8% from the 4.9% in the prior quarter and down -2.5% from the fourth quarter of 2012). The reduced savings rate was an budgetary necessity -- given that spending on non-discretionary services (including healthcare) increased substantially faster than disposable income. And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.30%. During the first quarter (i.e., from January through March) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was a full half percent higher at a 1.80% (annualized) rate, and the price index reported by the Billion Prices Project (BPP -- which arguably reflected the real experiences of American households while recording sharply increasing consumer prices during the first quarter) was over two and a half percent higher at 3.91%. Under reported inflation will result in overly optimistic growth data, and if the BEA's numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be contracting at a -0.38% annualized rate. And if we were to use the BPP data to adjust for inflation the first quarter's contraction rate would have been a staggering -2.50%.

U.S. growth stalls -- The Bureau of Economic Analysis announced today that U.S. real GDP only grew at a 0.1% annual rate in the first quarter. Some of the reasons for an economic stall appear to be temporary, but it’s a very disappointing start to the year nonetheless. Part of the problem was doubtless an unusually cold winter in much of the U.S. Inventory drawdowns also subtracted 0.57 percentage points from that annual growth rate, meaning that real final sales grew at about a 0.7% annual rate during the first quarter– not great, but nonetheless a sign of some positive underlying growth. Both business fixed investment and new home construction fell in the quarter, which would be ominous developments if they’re repeated through the rest of this year. And a big drop in exports reminds us that America is not immune to weakness elsewhere in the world. Even the 2% growth in consumption spending is not all that encouraging. As Bricklin Dwyer of BNP Paribas noted, 1.1% of that consumption growth– more than half– was attributed to higher household expenditures on health care. The economic stall was enough to produce a modest increase in our Econbrowser Recession Indicator Index up to 9.9%. Note that in calculating this index we allow one quarter for data revision and trend recognition. Thus the latest value, although it uses the disappointing GDP numbers released today, is actually an assessment of the state of the economy as of the end of 2013. However, our index is never revised, so that the numbers plotted in the graph below since 2005 are exactly the values as they were reported one quarter after each indicated historical date on Econbrowser.

As GDP Growth Stalls, This Chart Shows Just How Badly the Fed is Missing Its Targets - The advance estimate released today by the Bureau of Economic Analysis showed U.S. real GDP growth falling to an annual rate of just 0.1 percent in the first quarter of 2014. If confirmed by later revisions, that would be weakest quarterly growth since the end of 2012. The slowdown was remarkably widespread. The contribution to real growth from consumer spending, which was 2.22 percentage points in Q4, slowed to 2.04 percentage points in Q1—and that was the good news. The contribution of investment spending flipped from a positive 0.41 percentage points to negative -1.01 points, with fixed investment, inventory investment, and residential investment all in the minus column. The contribution to growth of exports, which have been an element of strength throughout the recovery, dropped from +1.23 percentage points to -1.07 points, only partly offset by a small decrease in imports. Finally, the contribution to growth of state and local government expenditures, which, for the first time in the recovery, had been positive in the final three quarters of 2013, turned negative again. A tiny 0.05 percent boost from federal government spending was not enough to offset the negative growth at lower levels of government.Today’s data release also includes the first estimate for personal consumption expenditure (PCE) inflation for Q1. The PCE inflation index and the unemployment rate are the Fed’s two main policy targets under its dual mandate to promote price stability and full employment. Currently, the Fed defines price stability as inflation of 2 percent for the PCE index and full employment as a range of 5.25 to 5.75 percent for unemployment rate. The following chart, which puts those target values in the crosshairs, shows just how badly the Fed is missing its goals. Since unemployment peaked at 10 percent in late 2009, the labor market has improved by fits and starts. It is gradually moving toward the upper limit of the Fed’s target range, as measured by the standard unemployment rate, although other indicators, like long-term unemployment, remain far higher than normal. Meanwhile, however, inflation has been tracking downward. As a result, the large arrow in the chart, which is fitted to a four-year linear trend of unemployment and PCE inflation, is on track to pass well below the center of the target.

Dismal Q1 GDP Report (8 graphs) The BEA announced in the advance estimate that real GDP increased at a s.a.a.r. of 0.1% for 2014 Q1. In addition, the final estimate for Q4 real GDP showed a 2.6% growth rate, unrevised from the second estimate. The Q1 growth rate was the lowest since 2012 Q4. Personal consumption expenditures increased at a 3.0% clip, with the services component at 4.4%, the highest rate since 2000. The big negatives came from fixed investment (mainly equipment and residential), inventories, and net exports.  Such a dismal report certainly makes the decision of the FOMC more difficult, but they stayed the course and maintained the taper, as can be read in their release here. Is the dismal report from “weather related” disturbances? Or, is it a signal of an economy slowing down? As always in an FOMC statement the words are carefully chosen. For example,  The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. It is not clear what “…sufficient underlying strength in the broader economy…” means. The statement does mention “…adverse weather conditions…” but it seems like they are putting a lot of emphasis on the bad weather. As shown above, there were large declines in investment, both residential and non-residential. Moreover, measures of the labor market don’t seem that consistent with the statement. Here is a picture of the employment to population ratio from FRED; and here is one comparing the path after recessions:

Highlights From the First-Quarter GDP Report - U.S. economic output grew at a puny, seasonally adjusted annual rate of 0.1% in the first quarter, down from a 2.6% pace in the fourth quarter of 2013 and the economy’s slowest expansion since the fourth quarter of 2012, which also saw 0.1% growth. Here are some highlights from the Commerce Department initial estimate of gross domestic product for the first three months of 2014: Consumer spending accounts for more than two-thirds of U.S. economic output, and it rose at a seasonally adjusted annual rate of 3.3% in the fourth quarter. It slowed in the first quarter, but not much, growing at a 3% pace. Spending on goods slowed to a 0.4% pace, but spending on services – like health care and energy – rose to a 4.4% pace. Personal consumption expenditures were the single biggest boost to economic output in the first three months of the year, and helped offset big drags on growth like trade.  Spending by businesses was another story. Fixed nonresidential investment fell at a 2.1% rate in the first quarter after surging 7.3% in 2012 and rising a more modest 2.7% in 2013. Spending on equipment fell at an annual pace of 5.5% in the first quarter of 2014, the worst drop since the second quarter of 2009, after rising at a 10.9% pace in the fourth quarter of 2013. Net trade subtracted 0.83 percentage point from GDP growth in the first quarter as exports lagged and the trade gap widened. Exports fell at a 7.6% pace, the most since the recession ended in 2009. Trade had been a big boost to economic output in the second half of 2013, contributing 0.14 percentage point in the third quarter and 0.99 percentage point in the fourth quarter. Stay tuned, though: Trade data from March will be released by the Commerce Department next Tuesday, which could lead to significant revisions in GDP. The U.S. housing recovery’s slowdown was a drag on GDP in the first quarter. Residential fixed investment — spending on home building and improvements — pulled down GDP growth to the tune of 0.18 percentage point in the first quarter after contributing 0.33 percentage point to GDP growth for all of last year. A big buildup in private inventories helped boost economic output in the third quarter last year to a 4.1% annual rate. In the first quarter of 2014, by contrast, slowing inventories subtracted 0.57 percentage point from GDP growth. A measure of GDP that strips out inventory changes, final sales of domestic product, grew at a 0.7% pace in the first quarter, down from its 2.7% pace in the fourth quarter.

1Q US GDP: Blame the Weather --There has been a fair amount of discussion in economic circles regarding the effect of the very adverse US weather during the first quarter.  And, remember that Fed officials can be just as wrong in their analysis as anybody else.   But, while it will probably be impossible to discern the impact of these developments on the data, the underlying numbers of the GDP report support this conclusion.Let's begin with personal consumption expenditures, or PCEs:Real personal consumption expenditures increased 3.0 percent in the first quarter, compared with an increase of 3.3 percent in the fourth.  Durable goods increased 0.8 percent, compared with an increase of 2.8 percent.  Nondurable goods increased 0.1 percent, compared with an increase of 2.9 percent. Services increased 4.4 percent, compared with an increase of 3.5 percent.These numbers indicate that shopping related activity declined: both durable goods and non-durable goods purchases decreased.  These items are usually purchased when individuals go to a "brick and mortar" locations.  However, the adverse weather most likely delayed or outright prevented some of that activity.  Notice, however, the services increased smartly.  One of the real tells supporting the weather hypothesis is the information regarding investment:Real nonresidential fixed investment decreased 2.1 percent in the first quarter, in contrast to an increase of 5.7 percent in the fourth.  Nonresidential structures increased 0.2 percent, in contrast to a decrease of 1.8 percent.  Equipment decreased 5.5 percent, in contrast to an increase of 10.9 percent. Intellectual property products increased 1.5 percent, compared with an increase of 4.0 percent.  Real residential fixed investment decreased 5.7 percent, compared with a decrease of 7.9 percent. Notice that items directly effected by the weather largely dropped: equipment has to be moved  from point A to point B, a task which is difficult to do in a blizzard.  Secondly, residential construction declined as well, but, again, it's difficult to start building a house in adverse building conditions.  In contrast, intellectual property investment -- a largely indoor activity -- increased 1.5%.  Finally, we have exports, which decreased 7.6%.  But, as with a durable goods investment, exports have to be moved which is difficult in snowy conditions. Recent numbers also highlight a 2Q turnaround.  The latest durable goods number increased 2.6%, while both industrial production and capacity utilization were up.  Both ISM numbers (manufacturing and services) are in positive territory. 

Visualizing GDP: Dissecting the Q1 Advance Estimate --The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. Here is the latest overview from the Bureau of Labor Statistics: The increase in real GDP in the first quarter primarily reflected a positive contribution from personal consumption expenditures (PCE) that was partly offset by negative contributions from exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.  Let's take a closer look at the contributions of GDP of the four major subcomponents. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has usually been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 2.04 of the 0.11 real GDP. However, the Q1 contribution from PCE decreased from Q4 2013, and the BEA's summary quoted above would perhaps more accurately be phrased as...>The increase in real GDP in the first quarter primarily reflected a positive contribution from personal consumption expenditures (PCE) that was almost entirely offset by negative contributions from all the other subcomponents components.  Of course the general view is that the unusually severe winter was a transitory cause of weak GDP rather than fundamental weakness in the business cycle. In support of that view, note that the positive contribution from PCE was highly concentrated in services with the positive contribution from consumer goods being quite tiny. Here is a look at the contribution changes between over the past four quarters. The difference between the two rightmost columns was addressed in the GDP summary quoted above. I've added arrows to highlight the quarter-over-quarter change for the major components.

If It Wasn't For Obamacare, Q1 GDP Would Be Negative - Here is a shocker: for all the damnation Obamacare, which according to poll after poll is loathed by a majority of the US population, has gotten if it wasn't for the (government-mandated) spending surge resulting from Obamacare, which resulted in the biggest jump in Healthcare Services spending in the past quarter in history and added 1.1% to GDP, real Q1 GDP, which rose only $4.3 billion sequentially to $15,947 billion, would have been negative 1%.

Health Care, Heating Spending Save First-Quarter GDP From Contraction -- The U.S. economy might have shrunk in the first quarter if not for the Affordable Care Act and spending to keep out the cold. U.S. gross domestic product expanded a paltry 0.1% in the first three months of the year, dragged down by falling inventories and weaker exports. Spending on housing and utilities, meanwhile, contributed 0.73 percentage point to the change in GDP while spending on health care added a hefty 1.1 percentage points, the highest figure on record. “If health-care spending had been unchanged, the headline GDP growth number would have been -1.0%,” Outlays on utilities are clearly a double-edged sword. First, the severe winter weather chilled activity in other areas of the economy. Second, households have limited budgets and might well have spent money buying other goods or services had they not been forced to boost their thermostats. “Looking ahead, we expect consumption growth to remain stronger than in 2013, but we expect the contribution from goods consumption to rise and the temporary support from utilities and health care to gradually wane,” said Michael Gapen, an economist at Barclays Capital. The strong increase in health-care spending reflects that Americans — some of whom are newly insured — are visiting doctors and purchasing more medical products, said Jason Furman, chairman of the White House’s Council of Economic Advisers. Prices for health-care services rose more slowly than overall inflation in the first quarter, compared to a year earlier. That indicates utilization — not price gains — is driving the increased spending, he said.  “People who didn’t have insurance before can now go to the hospital and the doctor,” Mr. Furman said in an interview. “That’s good for the economy.” The spending figure includes amounts spent on purchasing insurance as well as drugs, exams and other care.

Q1 GDP: Investment Contributions - Private investment in Q1 was very weak. The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.  For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue. The dashed gray line is the contribution from the change in private inventories.Residential Investment (RI) made a negative contribution to GDP in Q1 for the second consecutive quarter (red). Residential investment is so low - as a percent of the economy - that this 2 quarter decline is not much of a concern. However, for the rate of economic growth to increase, RI will probably have to make positive contributions. Equipment and software investment also made a negative contribution in Q1, and the three quarter average is barely positive. The contribution from nonresidential investment in structures was zero in Q1. Nonresidential investment in structures typically lags the recovery, however investment in energy and power provided a boost early in the recovery. I expect to see investment to increase over the next few quarters - and that is key for stronger GDP growth.

Decline in real residential investment a yellow flag for possible US economic downturn in 2015 -- Back in 2007, Prof. Edward Leamer of UCLA presented a paper at the Jackson Hole symposium called Housing IS the business cycle. In it he pointed out that, on average, since World War 2, real residential fixed investment as a share of GDP has typically started to decline about 5 quarters before the onset of a recession, and served as the first warning of the downturn in the economy. So it is not a minor datapoint that in the first quarter of 2014, for the second quarter in a row, real residential fixed investment declined both as a share of GDP, and also absolutely. Here is a graph of real private fixed residential investment as a share of GDP:  And here is a graph of the absolute value of private residential fixed investment:This is the second long leading indicator to roll over (interest rates on corporate bonds made a bottom in July 2012).  While none of the other long leading indicators - corporate profits, money supply, housing permits, or real retail sales per capita - appears to have rolled over yet, the outlook for continued US economic growth in 2015 has become more problematic.

No, the US economy isn’t about to slip back into recession - Wall Street economists expected the first quarter to be a weak one for the US economy, but not quite this weak. Real gross domestic product expanded at just a 0.1% annual rate, according to the Commerce Department. That’s the slowest pace since the fourth quarter of 2012, and markedly slower than the 1.2% consensus forecast. The new consensus: blame Mother Nature and look forward to a much better second quarter. RDQ Economics: If any report shows that consumer spending does not drive economic growth, it is this one.  Consumer spending barely slowed to 3.0% inflation-adjusted growth in the first quarter from 3.3% in the fourth quarter, yet real GDP growth plunged to 0.1% from 2.6%.  We doubt growth was as slow as indicated by the first release of GDP since private-sector hours worked rose 1.6% in the first quarter (and self employment showed a strong gain as well) and industrial production jumped 4.4% in the quarter.In addition, there were likely extensive weather effects holding down activity.  We do not take this report as a serious representation of the state of growth in the economy. Business equipment spending looks poised to rebound in the orders data and housing is expected to pick up.  We believe that real growth will run ahead of 3% over the balance of the year.  And this from Capital Economics:At 3.0%, consumption growth was actually stronger than we had expected, bolstered by a 4.4% jump in spending on services. The latter is due to the expansion of healthcare provision under the Affordable Care Act. That will generate another big gain in spending at the start of the second quarter too. Durable goods consumption increased by only 0.8%, but that is largely because the weather hit sales of motor vehicles in January and February. Remember that auto sales rebounded to a multi-year high in March. …

Don't panic about slow economic growth last quarter. Panic about 6 years of it. - On Wednesday, a disappointing GDP report showed that the nation's economic output only increased at an annualized rate of 0.1 percent last quarter. In other words, it nearly ground to a halt, after a few quarters of looking at least semi-healthy. But those sorts of individual-quarter GDP charts miss the bigger picture: that this recovery is truly, phenomenally disappointing. Economists Atif Mian, professor of economics and public policy at Princeton University, and Amir Sufi, professor of finance at the University of Chicago's Booth School of Business, show this in a new post today on their House of Debt blog.It's no secret, of course, that this recession and recovery has been ugly. But this shows it goes beyond that; the last six years have been abysmal. But what's even even more unsettling is that no one really knows why that growth has been so maddeningly slow."Why has the recovery been so dismal? This has to be one of the central research questions for macroeconomics going forward," write Sufi and Mian. Theories abound, of course: the authors include demographic shifts, policy uncertainty, and tight fiscal policy as possible explanations, and even in another post try to break it down by segments of the economy. Others have said automation, which reduces the need for workers, has contributed. Christina Romer and David Romer blame excessively complacent monetary policy. Carmen Reinhart and Kenneth Rogoff say that the recovery really isn't that slow compared to other major financial crises.

Weak Construction Data Raises Risk of First-Quarter U.S. GDP Contraction - Weak construction spending in the first three months of the year raises the possibility that overall economic output might have declined during that quarter for the first time in three years, several forecasters said Thursday. Though construction spending rose a slight 0.2% in March to $942.5 billion, it declined in the two prior months, new Commerce Department data showed. That raises the risk of downward revisions to the economy’s already meager first-quarter growth rate.The Commerce Department on Wednesday said the nation’s gross domestic product rose at a seasonally adjusted annual rate of 0.1%, as exports abruptly fell off and unusually harsh winter weather chilled business investment.After Thursday’s weak construction data, forecasters at Macroeconomic Advisers, High Frequency Economics and Goldman Sachss said they now estimate GDP fell at a 0.1% pace in the first quarter. J.P. Morgan Chase and Barclays Capital estimated that overall output fell 0.2%. The government will make two revisions to its official growth estimate based on incoming economic data.Though forecasters’ views on the first quarter are darkening, they are growing more optimistic on the second quarter, when pent up demand from the winter months is expected to lift output. Macroeconomic Advisers raised its forecast for second-quarter GDP growth to 3.6% from 3.5% after a separate Commerce Department report showed Thursday that consumer spending rose in March at the fastest pace in nearly five years. The forecasting firm cited “more momentum in consumer spending heading into the second quarter” as the reason for its upgrade.

In Which We Learn That US GDP Actually Contracted In The First Quarter -- Curious why after inexplicably turning red earlier today (because as everyone knows in the New Normal selling is largely forbidden and the Caracas stock market is the model to imitation), the DJIA is about to turn green again and press on new all time record highs? Simple. Following the earlier disastrous construction spending report which feeds directly into the GDP calculation, banks promptly revised their Q1 GDP estimates. To negative. To wit from Goldman: Construction spending rose 0.2% in March (vs. consensus +0.5%). Private residential construction increased 0.8%, led by a gain in the more volatile multifamily category (+4.4%). Private nonresidential construction rose a soft 0.2%. Commercial construction continued to be a drag (-1.7%), offset by a decent gain in the smaller transportation structures category (+5.3%). Public construction continued to trend down, declining 0.6%. In addition to the modest disappointment in March, total construction spending was revised down by three-tenths in February (to -0.2%) and two-tenths in January (to -0.4%). This morning's construction spending numbers were weaker than those assumed by the Commerce Department in yesterday's initial estimate of Q1 GDP growth. We reduced our past-quarter tracking estimate by two-tenths to -0.1%.

Everyone’s Q1 GDP Estimates Turn Negative -- Yesterday, the BEA announced Q1 GDP climbed just 0.1%.  This afternoon, Wall Street is saying it's even worse.  Citing weak construction spending data, several firms' GDP tracking models now show Q1 growth fell into negative territory. "Residential construction was a bright spot, rising 0.7% on the month and standing 15.2% above year-ago levels," noted Barclays' Cooper Howes."Nonresidential construction fell 0.1%, however, and there were downward revisions to February and January. On the whole, this lowered our GDP tracking estimate three-tenths, to -0.2%."  Macroeconomic Advisers, a widely cited source for GDP estimates, said its model fell 10 bps to -0.1%, also weaker-than-expected construction spending below BEA assumptions. And according to Zerohedge, JPMorgan's model is now also tracking negative growth. Some analysts say Q2 should prove better. Despite the weak spending, Macroeconomic Advisers made no change to its forecast for 3.6% growth. And Capital Economics says this morning's ISM report points to stronger GDP in the months ahead. "...Even at 54.9 in April, the index points to a rebound in annualised GDP growth to more than 2.5% in the second quarter. We think it could come in even stronger."

Merrill: Q1 GDP now tracking negative 0.4% -- The data flow suggests Q1 was even weaker than the 0.1% real annualized growth rate reported earlier this week. From Merrill Lynch:  The advance 1Q GDP report revealed growth of only 0.1% qoq saar, about a full percentage point less than we had expected. After accounting for weaker-than-expected construction spending and nondurable inventories in March, 1Q GDP is now tracking -0.4%. This is clearly disappointing and pulls down estimates for annual GDP growth. With all the optimism to start this year, nobody was predicting the economy would contract in 1Q. Based on the Blue Chip forecasts in December last year, the average forecast for 1Q was 2.5% with the top 10 highest forecasts of 3.2% and bottom 10 of 2.0%. Obviously, we were all taken by surprise by this brutally cold winter.  It seems that the economy cannot catch a break – each year there is some explanation for a lack of momentum. It was the European crisis in 2010, the US debt rating downgrade/Greek exit in 2011, gridlock in Washington in 2012 and fiscal tightening/government shutdown in 2013. But the shock from weather does not linger and actually reverses quite quickly. With the harsh winter weather in our rearview mirror, we can focus on the underlying healing of the economy, which we think has been significant. We believe the economy is on track to bounce back, leading us to revise up 2Q GDP growth to 3.6% from 3.2%. However, this increase does not entirely offset the weakness in 1Q, leaving our forecast for annual GDP growth to slip to 2.5% from 2.7%. Importantly, we think the strength in 2Q is not just a one-quarter bounce. We expect growth to remain strong, averaging 3.4% growth in both 3Q and 4Q.

In Repeat Of Its Q1 GDP Forecast Farce, Goldman Launches Its Q2 GDP Prediction At 3.0% - It was back on January 30 that the Goldman economist team made its first downward revision to what then was a 3.0% forecast to Q1 GDP. Exactly three months later we find that Goldman was off by only 97% when Q1 GDP printed at 0.1%. That's ok - they are economists, and thus are expected to be massively, epically wrong. So here is Goldman with its first "tracking forecast" for Q2 GDP. It is.... drumroll.... 3.0%. How long until this number too is lowered to 0.1% (to be sure, all that rain in New York City has to detract at least 1%-1.5% from Q2 GDP right?).

Ranking Economic Data - Here is an update to a list I posted several years ago with my ranking of economic data releases. These lists are not exhaustive (I'm sure I left a few off), and the rankings are not static. As an example, a few years ago I ranked initial weekly unemployment claims as ‘B List’ data, but now that claims are close to normal levels, I've moved weekly claims down to the 'C List'.  Currently I'm watching measures of household debt a little closer and I've moved up the NY Fed's quarterly "Household Debt and Credit Report" to the C-list.  Note: There has been some research by Wall Street analysts about how "surprises" for many of these indicators impact the stock market. In general the ranking is similar with the employment situation report being #1. The NAR existing home sales report is difficult to rank.  'For sale' inventory is important - almost "B-List"  - but the headline sales number is more "C-List".   For each indicator I've included a link to the source and a recent post with graphs (in parenthesis).

Austerity’s Legacy: GDP is Far Below Potential, and Not Climbing - Today’s GDP report was, not to get too technical, just crummy nearly across-the-board.  We’ve tried to illustrate the historically large drag that austerity has put on the current recovery, in a bunch of ways. Here’s another try. The figure below shows the simple percentage point contribution to GDP growth from government spending.  Two things stand out. The first is the quite muted rise in spending in response to the Great Recession. It’s essentially not that different from the rise in spending during the early/mid 2000s. We have all heard the attempts to label the Obama administration as big spenders (mostly because of the Recovery Act), but, it’s (unfortunately) just not true. Given the economic context, a much larger increase in government spending during the Great Recession and throughout the recovery would have been welcome. The second thing to note is the incredibly sharp decline in spending that takes hold in (roughly) 2010 and continues nearly all the way through 2013. This figure shows 4-quarter rolling averages, so the number for the first quarter of 2014 is negative. Luckily, the stand-alone number for government spending in the first quarter of 2014 is essentially zero, so it should look a little better going forward from now. But, again, if one wanted to explain why the current recovery has been so anemic relative to previous recoveries, the data in this figure translate into the finding that that essentially the entire gap in GDP growth between the current recovery and historical averages can be explained by the contraction in government spending (for more on the arithmetic of this, see here). Now, let’s move on for a second to the longer run. Below is a chart of the same indicator (percentage point contributions to GDP growth from government spending) over a longer run (from 1957). This time I added up all the government contributions (to avoid clutter) and did a 15-month rolling average. This is the length of the contraction in government spending during the current recovery, which started in the third quarter of 2010.

It’s the Political Economy, Stupid! -- Sometimes living in the world of ideas makes it harder to understand the real one. If you happen to be an economist, and the time is now, that is true in spades. Take Paul Krugman, for instance. After bemoaning the terrible policy choices of the last two years, he writes, “I’m still trying to make sense of this global intellectual failure.” It’s as if the core problem is that political leaders didn’t learn their macroeconomics well enough. But Keynes was wrong about the power of “academic scribblers”. Idea-smiths provide language, narratives and tools for those in control, but the broad contours of policy depend on who the controllers happen to be. We are not living through an epoch of intellectual failure, but one in which there is no available mechanism to oust a political-economic elite whose interests have become incompatible with ours.This is not some sudden development, much less a coup d’etat as is sometimes claimed. No, the accretion of power by the rentiers has been systematic, structural and the outcome of a decades-long process. It is deeply rooted in modern capitalist economies due to the transformation of corporations into tradable, recombinant portfolios of assets, increasing concentration of and returns to ownership, and the failure of regulation to keep pace with technology and transnational scale. Those who sit at the pinnacle of wealth for the most part no longer think about production, nor do they worry very much about who the ultimate consumers will be; they take financial positions and demand policies that will see to it that these positions are profitable.

Dirty Secrets About the U.S. Economy - Contrary to nearly everything you hear on the subject, my humble suggestion is this: fixing the U.S. economy isn’t impossible. It’s not even that difficult. It’s straightforward; about as complicated as tying your shoelaces if you’re wearing Velcro sneakers. The US is a rich country that’s beginning to resemble, for the average person, a poor one. Its infrastructure is crumbling. Its educational systems barely educate. Its healthcare is still nearly nonexistent. I can take a high-speed train across Europe in eight hours; I can barely get from DC to Boston in nine. Most troubling of all, it is poisoning its food and water supplies by continuing to pursue dirty energy, while the rest of the rich world is choosing renewable energy. The US has glaring deficits in all these public goods — education, healthcare, transport, energy, infrastructure — not to mention the other oft- unmentioned, but equally important ones: parks, community centers, social services. So the US should invest in its common wealth. For a decade, and more. Legions of people should be employed in rebuilding its decrepit infrastructure, schools, colleges, hospitals, parks, trains. To a standard that is the envy of the world — not its laughingstock. Why? If the US invests in the public goods it so desperately needs, the jobs that it so desperately needs will be created — and they will be jobs that (wait for it) actually create useful stuff. You know what’s useless? Designer diapers, reality TV, listicles, reverse-triple-remortgages, fast food, PowerPoint decks, and the other billion flavors of junk that we slave over only to impress people we secretly hate so we can live lives we don’t really want with money we don’t really have by doing work that sucks the joy out of our souls. You know what’s useful, to sane people? Hospitals, schools, trains, parks, classes, art, books, clean air, fresh water … purpose, meaning, dignity. If you can’t attain that stuff, what good are five hundred aisles, channels, or megamalls?

Treasuries Irresistible to America’s Banks Awash in Cash - America’s banks are regaining their appetite for U.S. government debt. After culling Treasuries and bonds issued by federal agencies last year for the first time since 2007, commercial lenders such as Bank of America Corp. (BAC) have boosted their holdings every month this year, Federal Reserve data compiled by Bloomberg show. Banks now own $1.85 trillion of the debt, within 2 percent of the record amount held at the end of 2012. With a lackluster job recovery and higher mortgage rates damping loan growth, banks are tapping record deposits to plow more money into government debt as regulations designed to limit risk-taking take effect. The demand helps explain why Treasuries are rising from the deepest losses since 2009, confounding forecasters who foresaw declines as a strengthening U.S. economy prompted the Fed to cut back its own bond buying.

CBO Report Confirms U.S. Deficit Back to Normal Level - Jessica Desvarieux of The Real News Network interviews Robert Pollin, professor of economics at the University of Massachusetts and co-director of the Political Economy Research Institute (PERI), about a new Congressional Budget Office (CBO) report showing the U.S. fiscal deficit returning to historic norms. Pollin argues that the report confirms that the surge in the deficit after the financial crisis and recession was largely cyclical, that the report debunks the views of economists who claimed that high fiscal deficits would lead to economic disaster, and that it undermines arguments for austerity policies. He concludes that cuts to social spending should be reversed, and spending programs to be funded by progressive taxation like a financial-transactions tax.

Stealth U.S. Austerity: Spending After the Budget Wars -- After the big budget battles that twice brought the U.S. government to the brink of default and shut it down in 2013, theconventional wisdom was that the Republicans in Congress had lost. Even the Republicans in Congress thought that. In terms of popularity, polls showed it was true. In terms of spending policy, it’s not. The U.S. is in the first stage of a decade of budget cutting that comes straight out of the Republican playbook, in a battle House Republicans won over three years while hardly realizing it. The fights now are about nickels and dimes as the government settles in to an age of stealth austerity. Congressional committees are at work crafting 12 bills they’re supposed to pass by Sept. 30 to allow the government to spend money in the new fiscal year. The atmosphere is unusually cordial, though recent history suggests that they are likely to fail — Bill Clinton was president the last time Congress met its deadline. Confined by a bipartisan agreement struck in 2013 by the House and Senate Budget chairmen, Paul Ryan and Patty Murray, the committees have to keep discretionary spending — stuff like national parks and airport security but not counting war spending — under $1.014 trillion in 2015. That’s 0.2 percent more than this year, a cut when adjusted for inflation. If they fail, lawmakers risk another government shutdown or, more likely, a temporary patch. In good-government circles, this process is held up as evidence of dysfunction. From the perspective of those who think government is too big, it functions nicely. Ryan’s budget proposal for the 2012 fiscal year called for $3.53 trillion in spending, while President Barack Obama wanted $3.71 trillion. Actual outlays that year were $3.54 trillion. For fiscal 2013 and 2014, spending has come in below Ryan’s projections.

U.S. Lost $11.2 Billion in GM Bailout, TARP Report Says - The U.S. Treasury’s bailout fund lost $11.2 billion on the rescue of General Motors Co. (GM) with the government’s exit of the largest U.S. automaker, a report said. The total includes $826 million that the Treasury wrote off in March for its remaining claim in old GM, the special inspector general for the Troubled Asset Relief Program said in a report to Congress yesterday. In December, the government had put the loss at about $10.5 billion on its $49.5 billion investment. The Treasury sold its remaining shares in GM in December, signaling the end of Government Motors, as the Detroit-based automaker was derisively labeled by some critics after the U.S. government stepped in with emergency funding in 2008. Bailouts from the George W. Bush and Barack Obama administrations helped GM avoid liquidation and reorganize in a 2009 bankruptcy that has given new life to the company. “The goal of Treasury’s investment in GM was never to make a profit, but to help save the American auto industry, and by any measure that effort was successful,” Adam Hodge, a Treasury spokesman, said in an e-mail yesterday.

Tax Extenders: Fiscal Hypocrisy in Motion -- “Oh yes, they’re the great extenders”…the package of tax cuts that Congress routinely extends every year or two rather than making them a permanent part of the budget so that you’d, you know, have to come up with offsets to pay for them (see table 2 here for a list of the expiring tax breaks). If you Google around on the topic, you’ll be hard pressed to find anyone with much good to say about the extenders package— Yet, despite their aggressive spending cuts in recent years, culminating in sequestration, relevant committees in both chambers of Congress have advanced unpaid-for extender packages consistent mostly of business tax breaks (however, there are differences between the House and Senate that will have to be reconciled, so the deal isn’t closed yet).   And remember, this is the same Congress that refused to extend unemployment benefits without offsets.The justified criticism of the package is really in two parts.  One, we’re wasting valuable revenue by subsidizing activities that would happen anyway.  Oftentimes, for example, tax credits like the one for R&D are applied retroactively—for research and product development that’s already been done.  I suppose one could argue that the beneficiaries of the credit anticipated the retroactive credit, but this smells a lot more like a wasted tax break than an efficient incentive. But it’s the second part of the critique that seems inarguable to me: the phony budgeting that intentionally conflates temporary with permanent.  There are, of course, legitimately temporary tax policy measures, such as those associated with stimulus in recession, like the payroll tax holiday that expired at the end of 2012 (too early, IMHO).

Get Rid of Job Killing Tax Extenders; Pay For the Rest -- The House Ways and Means Committee plans to mark up six bills tomorrow that would make six temporary tax breaks—part of an annual tax extenders package—permanent. The justification being given for making these provisions permanent is they will “help businesses grow the economy and create jobs.” The resulting permanent increase in budget deficits, however, could eventually reduce economic growth and job growth if the debt-to-GDP ratio becomes large enough. More importantly, two of the provisions cannot be said to boost even short-term economic growth. The CFC look-though rule (H.R. 4464) and the active financing exception (H.R. 4429) help multinational corporations avoid paying U.S. taxes and create incentives to move jobs and investments overseas. Making these two tax provisions permanent would eliminate jobs and increase budget deficits by $80 billion over the next 10 years.  The six tax provisions that Chairman Camp wants to make permanent are part of a group 50 to 60 temporary tax provisions that are routinely extended for another year or two, and which typically reduce tax revenues by about $100 billion over 10 years. Like other temporary measures, such as extending unemployment insurance for unemployed workers during times of weak labor demand, the budget cost of the tax extenders package is rarely offset. (Mr. Camp notes that paying for the tax extenders package “is not consistent with recent practice by Congress.”) But the House GOP is now demanding that a temporary extension of unemployment insurance (budget cost of about $10 billion) be fully paid for, but not the permanent extension of selected tax extenders (budget cost of $310 billion).

Stunning Quote – Larry Summers to Elizabeth Warren in 2009: “Insiders Don’t Criticize Other Insiders” -- A couple of weeks ago, Princeton and Northwestern released a very important study that proved statistically what many of us already knew about the American political process. It is nothing more than an oligarchy.   It’s one thing to read an academic study showing how cancerous the political system is, it’s quite another to hear a description of how things work from one of the biggest crony weapons of mass societal destruction himself, Mr. Larry Summers. A recent review in the New York Times of Massachusetts Senator Elizabeth Warren’s new memoir “A Fighting Chance” recalls a stunningly despicable quote by Summers. In the spring of 2009, when the banker handout, I mean bailout, was a heated topic of discussion, Elizabeth Warren attended a dinner with Mr. Summers who at the time was the director of the National Economic Council and a top economic adviser to President Obama. This is what transpired: After dinner, “Larry leaned back in his chair and offered me some advice,” Ms. Warren writes. “I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders.

Stephanie Kelton Talks with Randy Wray -- Stephanie’s latest podcast. This episode is a broad-ranging discussion of conventional economics and the heterodox alternatives to IS/LM, Ricardian equivalence, among others.

Piketty’s Global Wealth Tax Isn’t Happening. Here Are Five Politically Realistic Ideas Instead. -- Thomas Piketty’s Capital in the Twenty First Century has been praised across the ideological spectrum for its extensive database of income statistics and economic theory. But his policy proposal—a global tax on wealth—has no chance of happening. Why describe such a serious problem and then offer such an un-serious solution? If Piketty’s conclusion is correct, than the United States must look for politically realistic ideas, not “utopian” ones, as Piketty describes his global wealth tax. Here are five achievable ideas with support in both parties: Few policy ideas have received such bipartisan support in recent months as expanding the Earned Income Tax Credit (EITC). The EITC increases the wages of low-income workers. In 2012, it lifted 6.5 million people out of poverty, but under the current system, childless workers can barely collect any EITC benefits. Policymakers from both sides of the aisle—including President Barack Obama and Senators Patty Murray and Marco Rubio—have offered proposals to close that hole, but disagree on who should pay for the increase. Expanding the EITC under President Obama ‘s plan, for instance, would lift 500,000 people out of poverty and help another 10.5 million people, according to the Treasury Department. That’s minor compared to Piketty’s wealth tax, but would help many people nonetheless.

Piketty Dikitty Rikitty - Kusntler - The debate over Thomas Piketty’s new book Capital in the Twenty-First Century is as dumb as every other issue-set in the public arena these days — a product of failed mental models, historical blindness, hubris, and wishful thinking. Piketty’s central idea is that wealth will continue to accumulate and concentrate among individual rich families at ever-greater rates and therefore that nation-states should take a number of steps to prevent that from happening or at least attempt to correct it. The first mistake of Piketty fans such as New York Times op-ed ass Paul Krugman is the assumption that the dynamic labeled “capitalism” is an ism, a belief system that you can subscribe to or drop out of, depending on your political correctitude. That’s just not true. So-called capitalism is more like gravity, a set of laws that apply to and describe the behavior of surplus wealth, in particular wealth generated by industrial societies, which is to say unprecedented massive wealth. The human race never saw anything quite like it before. In the other industrial nations, loosely called “the west,” the pretense to abolish wealth altogether never completely took, but a great deal of wealth was “socialized” for the purpose of delivering public goods. That seemed to work fairly well in post-war Europe and a bit less-well in the USA after the anomalous Eisenhower decade when industrial labor enjoyed a power moment of wage arbitrage. Now that system is unraveling, and for the reason that Piketty & Company largely miss: industrial economies are winding down with the decline of cheap fossil fuels. Piketty and his fans assume that the industrial orgy will continue one way or another, in other words that some mysterious “they” will “come up with innovative new technologies” to obviate the need for fossil fuels and that the volume of wealth generated will more or less continue to increase. This notion is childish, idiotic, and wrong. Energy and technology are not substitutable with each other. If you run out of the former, you can’t replace it with the latter (and by “run out” I mean get it at a return of energy investment that makes sense). The techno-narcissist Jeremy Rifkins and Ray Kurzweils among us propound magical something-for-nothing workarounds for our predicament, but they are just blowing smoke up the collective fundament of a credulous ruling plutocracy. In fact, we’re faced with an unprecedented contraction of wealth, and a shocking loss of ability to produce new wealth. That‘s the real “game-changer,” not the delusions about shale oil and the robotic “industrial renaissance” and all the related fantasies circulating among a leadership that checked its brains at the Microsoft window.

High Frequency Trading Is Not Like a First Class Airline Ticket – Unless You Have Also Hijacked the Plane and Robbed the Passengers in Coach - Last week Megan Leonhardt, writing at, tipped off the public that J. Bradley Bennett, Executive Vice President of Enforcement at FINRA, suggested that high frequency trading was no different than buying a first class ticket on an airplane. Here is what is currently happening every day on Wall Street by high frequency traders. See if any part of this sounds to you like simply buying a first class seat on an airplane: The New York Stock Exchange and Nasdaq (also supervised by the SEC) are selling the right to high frequency traders to co-locate their high speed computers next to the exchanges’ own computers so high frequency traders can get an early peek at order flow and jump in front of slower traders. The exchanges are also allowing exotic stock order types for high frequency traders which turn the little guy’s orders into sitting duck trades to be fleeced. The big broker dealers on Wall Street are no longer required to subject their stock orders coming from the public to sunshine; they simply match up the buy and sell orders inside their own firms in what are called “dark pools.”Where the head of enforcement for FINRA sees a first class airline ticket, Senator Ed Markey of Massachusetts sees a Formula-One race car hurtling out of control. In a letter to the SEC on January 18 of last year, Markey said: “Just as we do not allow people to drive a Formula-One race car at 200 MPH on the Massachusetts Turnpike, we should not allow a few Wall Street firms to trade millions of times faster than the average 401K investor on the S&P 500.” The one thing Senator Markey got wrong in his letter is that it’s no longer “a few.” It’s now a thundering herd of high frequency traders in a vicious high-tech arms race.

Suspicious Deaths of Bankers Are Now Classified as “Trade Secrets” by Federal Regulator - It doesn’t get any more Orwellian than this: Wall Street mega banks crash the U.S. financial system in 2008. Hundreds of thousands of financial industry workers lose their jobs. Then, beginning late last year, a rash of suspicious deaths start to occur among current and former bank employees.  Next we learn that four of the Wall Street mega banks likely hold over $680 billion face amount of life insurance on their workers, payable to the banks, not the families. We ask their Federal regulator for the details of this life insurance under a Freedom of Information Act request and we’re told the information constitutes “trade secrets.”According to the Centers for Disease Control and Prevention, the life expectancy of a 25 year old male with a Bachelor’s degree or higher as of 2006 was 81 years of age. But in the past five months, five highly educated JPMorgan male employees in their 30s and one former employee aged 28, have died under suspicious circumstances, including three of whom allegedly leaped off buildings – a statistical rarity even during the height of the financial crisis in 2008. There is one other major obstacle to brushing away these deaths as random occurrences – they are not happening at JPMorgan’s closest peer bank – Citigroup. Both JPMorgan and Citigroup also own massive amounts of bank-owned life insurance (BOLI), a controversial practice that pays the corporation when a current or former employee dies. (In the case of former employees, the banks conduct regular “death sweeps” of public records using former employees’ Social Security numbers to learn if a former employee has died and then submits a request for payment of the death benefit to the insurance company.)

When ETFs make things more volatile - Do ETFs impact the volatility of the underlying stocks they are based on? A new paper by Itzhak Ben-David, Francesco Franzoni and Rabih Moussawi suggests they do. From the abstract (our emphasis): We study whether exchange traded funds (ETFs)—an asset of increasing importance—impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, we present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid-ask spread and lending fees. Finally, the evidence that ETF ownership increases stock turnover suggests that ETF arbitrage adds a new layer of trading to the underlying securities.

Chase Bank Slams the Door on More Porn Stars - — Chase Bank has reportedly sent out letters to hundreds of porn stars notifying them that their accounts would be closed on May 11. Teagan Presley confirmed to XBIZ that her personal account was one of the ones shut down. “I got a letter and it was like please cancel all transactions, please fix your automatic pay account and make sure everything’s taken care of by May 11,” Presley told XBIZ. “I called them and they told me that because I am, I guess, public and am recognizable in the adult business, they’re closing my account. Even though I don’t use my account, it’s my personal account that I’ve had since I was 18, when it was Washington Mutual before Chase bought them out.” One of the letters, posted here by Perez Hilton, succinctly informs the recipient of the impending closure without citing specific reasons. “We recently reviwed your account and determined that we will be closing it on May 11, 2014,” the letter reads. “Please accept our apologies for the inconvenience.” Then, continuing in a more "compassionate" vein, "We want you to have enough time to complete pending transactions and open an account at another bank." And yet, when Presley went to Bank of America to open up a new account, she was summarily turned away. Presley said she did not use her Chase account for adult-related purchases, only for groceries, rent and utility payments and her childrens' gymnastics lessons. Sometimes she would deposit checks from strip clubs, Fleshlight and other adult companies. “I can understand if I had some checks that bounced or if I wrote checks that bounced, or anything like that, or I was charging stuff to a lot of adult companies, but I just don’t have anything like that on my account,” Presley added.

It’s Good – no – Great to be the CEO Running a Huge Criminal BankWilliam K. Black -- Every day brings multiple new scandals.  At least they used to be scandals.  Now they’re simply news items strained of ethical content by business journalists who see no evil, hear no evil, and speak not about evil.  The Wall Street Journal, our principal U.S. financial journal ran two such stories today.  The first story deals with tax evasion, and begins with this cheery (and tellingly inaccurate) headline: “U.S. Banks to Help Authorities With Tax Evasion Probe.”  Here’s an alternative headline, drawn from the facts of the article: “Senior Officers of Goldman Sachs and Morgan Stanley Aided and Abetted Tax Fraud by Wealthiest Americans, Failed to Make Required Criminal Referrals, and Demanded Immunity from Prosecution for Themselves and the Banks before Complying with the U.S. Subpoenas: U.S. Department of Justice Caves in to Banker’s Demands Continuing its Practice of Effectively Immunizing Fraud by Most Financial Elites.” Oh, and the feckless DOJ (again) did not require any officer who committed the felony of aiding and abetting tax fraud to resign or to repay the bonuses he “earned” through his crimes.  But not to worry, the banks – not the bankers – may have to pay fines as the cost of doing their felonious business.  The feckless regulators did not even require Goldman Sachs and Morgan Stanley to disclose to shareholders their participation in the program. Best of all, the “cooperation” the banks will offer will be of vastly reduced value because under Swiss law they will not report the names or any identifying information of the wealthy U.S. taxpayers that they helped commit felonies.  But not to worry says DOJ: “’Through the program, as well as through ongoing investigations and other law enforcement tools, we are confident that we will obtain information that will lead us to account holders who have thought for too long that they can keep hiding,’” And did I mention that there was an U.S. amnesty program for wealthy U.S. tax cheats who used Swiss banks to commit their felonies?

Why Does Refusing to Put Fraudulent Banks into Receivership Help the Economy? --  William K. Black Conservative economists love “creative destruction.” They can’t wait to “get their Schumpeter on” when a business fails and thousands of workers lose their jobs. There is no more “creative destruction” conceivable than when we put a bank that has become a fraudulent enterprise into receivership, remove the controlling officers leading the fraud, and sell the bank through an FDIC-assisted acquisition. Indeed, the pinnacle of creative destruction would be doing this with a systemically dangerous institution (SDI) through a process that split the supposedly “too big to fail” bank into smaller components that (1) were no longer large enough to pose a systemic risk, (2) were more efficient than the bloated SDI, (3) no longer extorted a large (implicit) government subsidy that made real competition impossible, and (4) no longer had dominant political power via crony capitalism. Unlike the situation in which an SDI collapses suddenly in the midst of causing a global crisis when its frauds cause a liquidity crisis, it is vastly easier to put fraudulent SDIs in receivership in today’s circumstances. Unlike Arthur Anderson, the receivership power allows us to keep the enterprise alive and create more competitors rather than fewer. As I often remarked, it is a testament to the financial and moral sophistication of our successors as financial regulators relative to our primitive era that they have realized that keeping fraudulent CEOs in charge of our largest banks – and virtually never putting such banks into receivership however massive and damaging their serial felonies – is the key to achieving financial stability. Their system, it must be admitted, has proven far superior. GDP losses are merely far more than 100X greater in the current crisis than in the savings and loan debacle. The jihad against effective regulation and prosecution of elite control frauds has been an enormous success. The primary question is whether to classify the resultant epidemics of accounting control fraud as “unintended consequences” of the three “de’s” (deregulation, desupervision, and de facto decriminalization) or as a very “intended consequences.”

It's Not Just Banks That Are Too Big To Fail - Following the financial crisis, worries about failures in over-the-counter (OTC) derivatives trading causing destabilizing runs and market crashes have led regulators to force most OTC trades to be cleared through central counterparties (CCPs). CCPs act like clearing banks, taking on their own books the risk of the seller defaulting. Sellers clearing OTC trades through a CCP can (in theory) default on payment without risking the entire system unravelling. But this creates a problem. What happens if a CCP fails? Of course, the way CCP-cleared OTC trades are structured should minimize this risk. CCPs require sellers to post initial margin in the form of cash or government bonds to cover expected volatility during the lifetime of the trade, and they also require posting of variation margin in cash to cover daily price movements. As everything is fully margined in liquid safe assets, there should in theory be no shortfalls and no defaults.But… margin requirements don’t necessarily make the system safer. Firms with largely illiquid balance sheets, such as large insurance companies, can have difficulty raising the cash to meet large increases in variation margin. The principal cause of the failure of AIG in 2008 was cash margin calls on OTC credit default swaps that it was unable to meet. And this brings me back to the question – what happens if a CCP fails? Yes, a large insurance company unable to meet cash margin calls could perhaps be allowed to fail safely. But that doesn’t solve the CCP’s problem. If margin isn’t posted and the seller defaults, the CCP itself is at risk of failure – and that could have disastrous effects across wide swathes of the market. Far from making the system safer, clearing all OTC trades through CCPs could actually make it riskier.

Two Giant Banks, Seen as Immune, Become Targets --Federal prosecutors are nearing criminal charges against some of the world’s biggest banks, according to lawyers briefed on the matter, a development that could produce the first guilty plea from a major bank in more than two decades. In doing so, prosecutors are confronting the popular belief that Wall Street institutions have grown so important to the economy that they cannot be charged. A lack of criminal prosecutions of banks and their leaders fueled a public outcry over the perception that Wall Street giants are “too big to jail.”Addressing those concerns, prosecutors in Washington and New York have met with regulators about how to criminally punish banks without putting them out of business and damaging the economy, interviews with lawyers and records reviewed by The New York Times show. The new strategy underpins the decision to seek guilty pleas in two of the most advanced investigations: one into Credit Suisse for offering tax shelters to Americans, and the other against France’s largest bank, BNP Paribas, over doing business with countries like Sudan that the United States has blacklisted. The approach applies to American banks, though those investigations are at an earlier stage.

Criminal Charges Against Banks Risk Sparking Crisis - Bloomberg: As U.S. Justice Department prosecutors angle to bring the first criminal charges against global banks since the financial crisis, they’ll have to stare down warnings of uncontainable collateral damage. The 2002 collapse of Arthur Andersen, the accounting firm indicted in the Enron scandal, “should be a lesson” for prosecutors, Brad Hintz, an analyst at Sanford C. Bernstein & Co., said today in an interview on Bloomberg Television. “Don’t play with matches.” Stung by lawmakers’ criticism that multibillion-dollar settlements have done too little to punish Wall Street in the wake of the financial crisis, prosecutors are considering indictments in probes of Credit Suisse Group and BNP Paribas, a person familiar with the matter said. Even after talking with financial regulators about ways to mitigate damage -- such as ensuring banks keep charters -- prosecutors might not fully understand consequences for the market, according to industry lawyers and bankers who are following the case. Bank clients -- including trustees, fiduciaries and pension funds -- could be forced to cut ties with a financial institution labeled a criminal enterprise, the lawyers and bankers said, asking not to be named because they weren’t authorized to talk publicly. Counterparties also might think twice before entering into billion-dollar transactions with such firms. Damaging a bank’s business could lead to broader fallout across the financial industry, just as Lehman Brothers Holdings Inc.’s collapse in 2008 prompted investors to withdraw from other firms on concern its exit would set off a wave of losses.

And Then There's This: "The Oceans Will Rise; Nuclear Winter Will Be Upon Us; And The World As We Know It Will End" -  As U.S. Justice Department prosecutors begin to bring the first criminal charges against global banks since the financial crisis, they are facing dire warnings of uncontainable collateral damage from none other than the sell-side's banking analysts... "Don’t play with matches," warned Brad Hintz, bringing up the spectre of Enron (somehow suggesting we would better if that had had not been prosecuted?) “The mere threat of requiring a hearing could cause customers to lose confidence in the institution and could cause a run on the bank,” warns a banking lawyer (well isn't that how it's supposed to be?). It seems Eric Holder's words - as we noted here..."But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.And as Preet Bharara somewhat comedically notes...Companies, especially financial institutions, will do almost anything to avoid a tough enforcement action and therefore have a natural and powerful incentive to make prosecutors believe that death or dire consequences await,” he said. “I have heard assertions made with great force and passion that if we take any criminal action, the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end.”

Banksters Pretend that Prosecuting Wall Street Crime Will Blow Up the Economy - The Department of Justice is “considering” initiating criminal charges against 2 banks. In response, the normal cast of characters is saying – as they have for years – that prosecuting banks will cause a meltdown of the economy. The U.S. attorney for the Southern District of New York recently mocked the silly claims of gloom and doom: “Companies, especially financial institutions, will do almost anything to avoid a tough enforcement action and therefore have a natural and powerful incentive to make prosecutors believe that death or dire consequences await,” he said. “I have heard assertions made with great force and passion that if we take any criminal action, the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end.” As we’ve repeatedly noted, this is wholly untrue. Indeed, prosecuting the individual Wall Street executives who knowingly committed criminal fraud won’t harm the economy.  After all, the main driver of economic growth is a strong rule of law. And numerous Nobel prize winning economists have said that prosecuting Wall Street white collar is necessary for a prosperous economy.

The “Chicken(expletive) Club” - The only “Wall Street” “executive” to go to jail for the financial crisis was Kareem Serageldin, the head of a trading desk at Credit Suisse, according to Jesse Eisinger in a recent article. Serageldin pleaded guilty to—get this—holding mortgage-backed securities at artificially high marks in order to minimize reported losses on his trading portfolio. Now if that’s a crime, there are a lot of other people who are guilty of it. In fact, a major premise of the federal government’s crisis response strategy was exactly that: allowing banks to keep assets at inflated marks in order to pretend they were solvent when they weren’t. FASB changed its rules in April 2009 in order to make it easier for banks to inflate their marks. And the Obama administration’s “homeowner relief program” was designed to allow banks to delay realizing losses on their mortgage loans by dragging out—but generally not preventing—foreclosures. (Remember “foam the runway”?)  Combine Serageldin’s story with the story of the vigorous prosecution of Abacus Federal Savings Bank—a little Chinatown bank that, if anything, was probably allowing its borrowers to underreport their income on loan applications—which Matt Taibbi tells in the first chapter of his latest book, and the picture you get isn’t pretty. It’s a picture of the immense resources of the American criminal justice system being deployed against bit players, with no consequences for the people responsible for the financial crisis. The judge in Serageldin’s case even called his conduct “a small piece of an overall evil climate within the bank and with many other banks.”

Leveraged loan crackdown drives borrowers to ‘shadow banks’ - A US regulatory crackdown on the $600bn leveraged loan market is driving borrowers to alternative lenders known as “shadow banks”, according to market participants. Bankers said the Federal Reserve and Office of the Comptroller of the Currency had stepped up their policing of the market, which provides financing for big corporate buyouts. Following a review, officials told banks in January that they were not satisfied with their lending practices and instructed them to make only “rare” exceptions to 2013 guidelines that warned against granting loans greater than six times a company’s earnings. Senior executives at two of the top US banks said buyout firms had responded by seeking leveraged loans from less-regulated entities, including foreign banks, hedge funds and broker-dealers. The US bankers complained that the regulators were picking winners and losers, while having no impact on bank or market safety. “Is it really bad that JPMorgan has a lot of people on the street trying to find loans and then a lot of people trying to find investors?” said one banker, not from JPMorgan. “That’s the essence of the US capital markets. Instead we’re going to find 100 hedge funds to go do it.” In a deal being finalised now, Morgan Stanley has had to cede its position as lead underwriter to Jefferies, the non-bank broker-dealer, which does not face the same restrictions.

The Conspiracy Behind the B of A “Mistake” -- Some very clever people deep in the bowels of Bank of America’s accounting and regulatory compliance departments came up with a clever strategy to show, once and for all, that their bank is too big to manage. On Monday, the bank admitted that it had misplaced $4 billion in regulatory capital because of an error in accounting for changes in the value of its own debts. Coming less than two months after Citigroup misplaced $400 million in cold, hard cash in its Mexican subsidiary, this latest mixup is clearly part of a concerted campaign by employees of the big banks to definitively prove that their top executives have no idea what is going on.  This shadow lobbying campaign can be traced back to its origins in the LIBOR scandal (“Let’s rig the world’s largest market and see if Vikram Pandit notices.”) and the London Whale trade (“Let’s make a colossal bet on the relative values of different corporate bond indexes and see if Jamie Dimon notices.”). The only possible explanation for this seemingly never-ending stream of embarrassing disclosures is the existence of a conspiracy, orchestrated by some of the smartest bankers in the world, designed to broadcast to the world the message that regulators and politicians somehow failed to take from the financial crisis: the Masters of the Universe can’t even figure out what’s going on four floors down in their own buildings. The Bank of America accomplices even managed to miscalculate the bank’s regulatory capital for five full years before tipping off their bosses, showing the premeditation behind their scheme.

 100% Reserve Banking — The History - So both John Cochrane and Martin Wolf are advocating 100% reserve banking. If these two agree on anything, it’s worth taking seriously!  Irving Fisher was a strong supporter of the so-called Chicago Plan which would implement 100% reserve banking. Here is a link to the one of the original documents from 1939. The Chicago Plan economists were living in the shadow of the Great Depression, and it had a very strong influence on their thinking. The economists pulled no punches: “A chief loose screw in our present American money and banking system is the requirement of only fractional reserves behind demand deposits. Fractional reserves give our thousands of commercial banks power to increase or decrease the volume of our circulating medium by increasing or decreasing bank loans and investments. The banks thus exercise what has always, and justly, been considered a prerogative of sovereign power. As each bank exercises this power independently without any centralized control, the resulting changes in the volume of the circulating medium are largely haphazard. This situation is a most important factor in booms and depressions.” And here is the core of their proposal: “Since the fractional reserve system hampers effective control by the Monetary Authority over the volume of our circulating medium it is desirable that any bank or other agency holding deposits subject to check (demand deposits) be required to keep on hand a dollar of reserve for every dollar of such deposit, so that, in effect, deposits subject to check actually represent money held by the bank in trust for the depositor.”

Is A Banking Ban The Answer? - Paul Krugman - OK, a genuinely interesting debate on financial reform is taking place. I’m not even sure where I stand. But it’s certainly worth talking about.  Atif Mian and Amir Sufi draw our attention to proposals to either mandate or create strong incentives for 100-percent reserve banking, coming from Martin Wolf and, more surprisingly, John Cochrane. Equally surprising — at least to me — is that Cochrane seems more aware of the difficulties of the issue. The basic idea both writers share is that banks as we know them — institutions that issue promises to pay money on, or almost on, demand, while holding liquid assets that cover only a fraction of that potential demand — are inherently subject to runs, self-fulfilling losses of confidence. So they propose that we aim to eliminate such institutions; there would still be things we call banks, but they would simply be custodians of government-issued liquid assets. Wolf, unless I’m reading him wrong, seems to identify the whole issue with one particular form of short-term debt — bank deposits. This seems an oddly narrow view given the nature of the 2008 crisis, which involved very few runs on deposits but a massive run on shadow banking, especially repo — overnight lending that in a fundamental sense fulfilled the functions of deposit banking but also created the same kind of risks. So, three thoughts.

  • First, Wolf’s omission is a big one. If we impose 100% reserve requirements on depository institutions, but stop there, we’ll just drive even more finance into shadow banking, and make the system even riskier.
  • Second, Cochrane insists that we can easily run our economy without dangerous short-term private debt — that we can easily set things up so that the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this right?
  • Third, and on a quite different note: Are we really sure that banking problems are the whole story about what went wrong? I’ve made this point before, but look at any measure of financial stress: what you see is a huge peak in 2008 that quickly went down:

Don’t underestimate the pivotal and persistent role of the banking crisis - Paul Krugman responds to Martin Wolf and John Cochrane arguing for narrow banking [allowing banks simply to take our cash and invest in risk free securities] in part by commenting that the banking crisis came and went quickly, and that the real problem lay elsewhere, in the debt overhang and deficient demand.  Therefore, the banking crisis was not decisive in bringing about the recession.  For that reason, don’t get so excited about the need to outlaw traditional banking. Leaving aside the debate about how to regulate banks, this description of the crisis, although it’s an intriguing idea [if it's just a matter of the occasional spike in spreads, why not run things as they are?] caused me some trouble.  Some reactions below.

  • 1.  Although many spreads have normalised [accounting, I guess, for that normalisation of the St Louis Fed stress index Paul Krugman points to], I conjecture that the harm to banks is more persistent.  They have found themselves, in part pressured by their shareholder valuations, to delever.  This has constrained net lending, and aggravated the depth and length of the recession.
  • 2.  Some markets remain closed, even now.  I guess these prices must be excluded from such a stress index.
  • 3.  Weighing on banks’ behaviour has been the uncertainty about the long run regulatory regime. 
  • 4.  Also weighing is the desire not to crystallise losses, given current accounting and regulatory practices.  This has been talked about as an acute problem in Japan.  It’s an emerging one in the UK, with the FPC spending much effort pondering how much forbearance there is.

Narrow Banks Won't Stop Bank Runs: Every financial crisis leads to a new call to restrict the activities of banks. One frequent response is to call for “narrow banks.” That is, change the legal and regulatory framework in a way that severely limits the assets that traditional deposit-taking banks can hold. One approach would require that all liabilities that are demandable at par be held in the form of deposits at the central bank. That is, accounts that can be withdrawn without notice and have fixed net asset value would face a 100% reserve requirement. The Depression-era “Chicago Plan” had this approach in mind.In the aftermath of the financial crisis of 2007-09, Lawrence Kotlikoff, Jeremy Bulow and Paul Klemperer, John Kay, and, most recently, John Cochrane, and Martin Wolf have resurrected versions of narrow banking. All of these proposals, both the old and the new, have a common core: banks should be split into two parts, neither of which would supposedly be subject to runs. ... Naturally, we share the objective of these reformers: preventing bank runs. The key issue is how to do so and at what cost. We suspect that narrow banking would be costly in terms of economic performance, yet unlikely to achieve this goal. ...We know that a combination of transparency, high capital and liquidity requirements, deposit insurance and a central bank lender of last resort can make a financial system more resilient. We doubt that narrow banking would.

Unofficial Problem Bank list declines to 513 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.Here is the unofficial problem bank list for April 25, 2014.  Today, the FDIC released an update on its enforcement action activities through March 2013 that contributed to many changes to the Unofficial Problem Bank List. For the week, there were nine removals and one addition that leave the list at 513 institutions with assets of $167.3 billion. A year ago, the list held 775 institutions with assets of $285.3 billion. During the month, the list declined from 538 to 513 institutions after 21 action terminations, five mergers, one failure, and two additions. Assets fell by $7.0 billion this month. Allendale County Bank, Fairfax, SC ($55 million) left the list by being the sixth failure of the year. With an initial loss estimate of 31.4 percent of assets, this is the most costly failure this year when measured as a share of assets. Since the on-set of the Great Recession, there have been 10 failures in South Carolina, which ranks 13th highest across all states. Moreover, failures in the FDIC Southeast's office based in Atlanta now total 187 across seven states with a loss estimate of $31.8 billion or nearly 29 percent of failed bank assets. Added this week was New Jersey Community Bank, Freehold, NJ ($144 million). Also, the FDIC issued a Prompt Corrective Action order against Columbia Savings Bank, Cincinnati, OH ($38 million), which has been operating under a Cease & Desist order since February 2011.

OCC: 87% of settlement funds distributed to borrowers - When The Government Accountability Office released the results of its study of the Independent Foreclosure Review, it didn’t look particularly good for the IFR. The GAO found that the process undertaken by the Office of the Comptroller of the Currency and the Federal Reserve to provide foreclosure assistance to distressed borrowers was lacking in oversight and transparency. The GAO's report can be read here.  In 2013, the OCC and Fed signed consent orders with 16 mortgage servicers that required the servicers to provide $3.9 billion in payments to 4.4 million borrowers and $6 billion in foreclosure prevention actions. The IFR review was met with criticism from Congresswoman Maxine Waters, D-Calif.,Ranking Member of the House Financial Services Committee. Waters said that the OCC and Fed “used a nonsensical crediting system for the largest portion of the settlement,” which was designed to provide foreclosure relief. That isn't the first time that the the IFR has been under fire. Previously, the entire settlement process faced controversy, as critics called the IFR cumbersome and costly. On Wednesday, the OCC released a status update on how much of that $3.9 billion payback fund has actually been paid out, and how much of the $6 billion in foreclosure prevention actions has been collected by the government. According to the OCC, Qualified Settlement Fund 1 had disbursed 3,948,415 checks to distressed borrowers, totaling $3,385,814,432, as of January 24, 2014. Of those checks, 3,280,458 (83%), totaling $2,903,932,623 (86%), have been cashed or deposited as of April 8, 2014.

GAO: Foreclosure Review Process ‘Without Adequate Investigation’ - Findings from a review done on foreclosures by the United States Government Accountability Office (GAO) found that errors made by banks might have been much higher than believed. In September 2010, amid allegations of inappropriately signed documents, federal coordinators began on-site reviews of servicers to evaluate foreclosure processes. The interest from the GAO came after a 2012 agreement between the Federal Reserve and the OCC with 16 mortgage servicers. The agreement required the servicers to hire consultants to review foreclosure files for errors, and to take actions to prevent harm to borrowers. In 2013, regulators changed the orders, ending the review of files related to foreclosures citing increasing costs, while most banks had not completed the examination of their mortgage modification and foreclosure practices. The servicers were then required to provide $3.9 billion in cash payments to roughly 4.4 million borrowers. Additionally, $6 billion was earmarked for foreclosure prevention actions, such as loan modifications. The recent report from the GAO examined the new consent order process. "With the adoption of the amended consent orders, regulators and servicers moved away from identifying the types and extent of harm an individual borrower may have experienced and focused instead on issuing payments to all eligible borrowers based on identifiable characteristics," the GAO said.

Mortgage Whistleblower Stands Alone as U.S. Won’t Join Lawsuit - Two years after Lynn Szymoniak helped the U.S. recover $95 million from Bank of America Corp. and other lenders for mortgage-fraud tied to the housing bubble, the whistle-blower said the government is ignoring a chance to collect more money for identical claims against other banks. Szymoniak got $18 million when the U.S. Justice Department intervened in her foreclosure-fraud lawsuit. The government negotiated a settlement with five lenders including Bank of America and JPMorgan Chase & Co. The other banks accused of the same behavior, including Deutsche Bank AG and HSBC Holdings , are still fighting Szymoniak’s suit, saying she isn’t a true whistle-blower. And the U.S., while continuing its crackdown on banks that packaged risky loans for sale as securities, hasn’t joined with her this time, leaving her to fight the banks alone. U.S. District Judge Joseph Anderson in Columbia, South Carolina, today is set to consider their bid to throw the case out. “This is a case the government should take a stand on,” Reuben Guttman, one of Szymoniak’s lawyers, said in an interview. “It is curious as to why the government is not vigorously pursuing this along with us. They are leaving money on the table.”

Fannie Mae and Freddie Mac: Mortgage Serious Delinquency rate declined in March - Fannie Mae reported today that the Single-Family Serious Delinquency rate declined in March to 2.19% from 2.27% in February. The serious delinquency rate is down from 3.02% in  March 2013, and this is the lowest level since November 2008.  The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.Earlier Freddie Mac reported that the Single-Family serious delinquency rate declined in March to 2.20% from 2.29% in February. Freddie's rate is down from 3.03% in March 2013, and is at the lowest level since February 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure". Both Fannie Mae and Freddie Mac serious delinquency rates have fallen 0.83 percentage points over the last year, and at that pace the serious delinquency rates will probably be below 2% mid-year 2014 - and will be under 1% in late 2015.  Note: The "normal" serious delinquency rate is under 1%. Maybe serious delinquencies will be back to normal in late 2015 or 2016.

GSE reform will drive up mortgage rates -- The Senate will put its hand to the future of GSE reform Tuesday morning, and how Fannie Mae and Freddie Mac evolve could affect the future of the housing market.And any GSE reform, no matter where it lands, will likely drive up mortgage rates, sources say. Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, of the Senate Committee on Banking, Housing, and Urban Affairs will markup their housing finance reform bill on Tuesday, April 29. “From the start, members of the committee have been extremely engaged on the issue and have demonstrated a sincere interest in advancing reform in a bipartisan manner,” Johnson said. “I look forward to a thoughtful debate in committee as we seek to move reform one step closer to the finish line.” Johnson-Crapo is one of four GSE reform measures on the Hill. The other primary contenders are the House’s PATH Act, the House’s HOME Forward Act, and the Senate’s Corker-Warner. (The full report on the measures from the Structured Finance Industry Group can be read or downloaded here.) The four reform measures could have substantial impact on housing, or more likely none at all, at least as they stand.

How Much Will Mortgage Rates Rise In Fannie, Freddie Overhaul? - Fannie and Freddie play such a central role in the nation’s mortgage market that how they are restructured or replaced could raise mortgage rates for many middle class Americans. The Senate Banking Committee beginning Tuesday will take up a bipartisan bill that so far has attracted the most support from lawmakers from both parties. It would replace Fannie and Freddie with a new system by which private firms could issue mortgage-backed securities and purchase federal insurance. Private investors would be required to take initial losses before government guarantees would kick in. In memos made public last week, Fannie and Freddie said capital requirements for these new firms, and the design of the new system more broadly, could raise mortgage rates sharply. Mortgage rates are likely to rise under any plan that would overhaul Fannie and Freddie to limit the risk of future bailouts. There’s little dispute Fannie and Freddie failed because they held too little capital for the risks they were taking. But the latest estimates illustrate the key dilemma facing lawmakers: requiring successors to Fannie and Freddie to hold more capital could reduce the risk of future taxpayer losses, but it would also raise borrowing costs. The Senate bill would require successors to maintain a 10% capital cushion, which some economists say is more than double what Fannie and Freddie would have required to withstand the 2008 crisis. So how much could rates rise? Estimates vary depending in part on how regulators interpret and implement the new rules. Fannie estimates that rates would rise by around 0.5 and 1 percentage points from current levels, though borrowers with small down payments and weaker credit could see rates rise by more than 3 percentage points. Borrowers with strong credit and large down payments could see rates fall slightly.

What Problem Is Privatizing Fannie and Freddie Meant to Solve? | Dean Baker -- President Obama's chief economist, Jason Furman, weighed in behind efforts to privatize Fannie Mae and Freddie Mac last week. The main plan on the table is a bill forward by Senators Tim Johnson and Mike Crapo, the chair and ranking member, respectively, on the Senate Banking Committee. While Furman's column (which was co-authored with James Stock, another member of the president's Council of Economic Advisers) indicated support for the principles behind the Johnson-Crapo bill, it is not clear what problem they are hoping to solve.  At the moment, it seems Fannie Mae and Freddie Mac are doing their job just fine. They are issuing mortgage-backed securities (MBS) that include more than 60 percent of new mortgages. Interest rates on mortgages are low and both companies are making substantial profits that are refunded to the government. Why is there any need to overhaul this system? The financial industry is of course unhappy with this situation. It sees the money being earned by Fannie Mae and Freddie Mac as money that could be going into its pockets. Of course, there is nothing that prevents Goldman Sachs, Citigroup, and the rest from going out and issuing their own MBS right now.   The problem is that they have a really awful track record. Remember the financial crisis?

Woman loses her home over $6.30 - It seems absurd someone would lose her home over a small unpaid bill, but that’s what happened to a Pennsylvania widow. Eileen Battisti’s home was sold in 2011 because she failed to pay a $6.30 tax, and last week, a judge turned down her request to reverse the sale, according to the Associated Press .  Battisti received ample notice of the coming tax auction, Beaver County Common Pleas Judge Gus Kwidis wrote in his ruling. Kwidis wrote there was “no doubt” Battisti received multiple notifications before the house was sold in September 2011 for $116,000.  Battisti still lives in the home, which is worth $280,000, and she said she plans to appeal the judge’s decision. Battisti said she didn’t know about the outstanding $6.30, as her husband managed the property tax paperwork before he died in 2004. Including other interest and fees, Battisti owed the county $235 at the time her house was sold.  Battisti’s experience is one of many consumer stories where small debts combust into massive financial problems. In this case, a woman is fighting to keep a major asset (her home), but sometimes the issue can be as small as an unpaid parking ticket.

CoreLogic: Foreclosed homes cut by more than one third -- The number of homes in foreclosure fell 37% year-over year, declining to 720,000 from 1.1 million in March 2013, analytics firm reported. The CoreLogic latest National Foreclosure Report revealed that there were 48,000 completed foreclosures nationally in March, down from 53,000 last year, a year-over-year decrease of 10%. However, month-over-month completed foreclosures were 5.9% from 45,000 in February 2014 (February numbers revised), and 48,000 in January. Before the housing crisis in 2007, completed foreclosures averaged 21,000 per month nationwide between 2000 ad 2006. “The inventory of homes in foreclosure and serious delinquency status are back to 2008 levels, yet remain elevated from a historical perspective,” said Mark Fleming, chief economist for CoreLogic.

MBA: Mortgage Applications Decrease in Latest Survey, Refinance Activity Lowest Since 2008 - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey Mortgage applications decreased 5.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 25, 2014. ... The Refinance Index decreased 7 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. ... “Purchase applications decreased 4 percent over the week, and were 21 percent lower than a year ago. Refinance activity also continued to slide despite a 30-year fixed rate that was unchanged from the previous week. The refinance index dropped 7 percent to the lowest level since 2008, continuing the declining trend that we have seen since May 2013.”The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained unchanged at 4.49 percent, with points decreasing to 0.38 from 0.50 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loansThe first graph shows the refinance index. The refinance index is down 76% from the levels in May 2013 (almost one year ago). With the mortgage rate increases, refinance activity will be very low this year. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index is now down about 19% from a year ago. The purchase index is probably understating purchase activity because small lenders tend to focus on purchases, and those small lenders are underrepresented in the purchase index.

The Refi Boom Is Dead; Applications Drop To Lowest Since Lehman - The Fed's QE efforts were - if one is to believe the words spewed from their ever-lying mouths - designed to aid the man on the street, to lower interest rates, and enable another refinancing-led housing boom/bubble which would maintain the status quo and confirm the 'happily-ever-after' dream of every taxpaying (and non-taxpaying American). Today's data from the Mortgage Banker's Association confirms - QE's work is done and the refi boom is over. A 7% plunge on the week has pushed the refinancing activity index to its lowest levels since September 2008 - just before Lehman.

Mortgage-Loan Limits Hit Buyers In High-Cost Housing Markets - You may like living on the coasts, but you pay for it every day. Homes are more expensive, and even if you can afford one it’s harder to get a loan. That’s the message from a new analysis by real-estate firm Trulia Inc. of loan limits — the maximum loan size that can be sold to mortgage giants Freddie Mac and Fannie Mae — in the nation’s largest 100 metropolitan areas. Trulia’s analysis considers a city-by-city comparison of how many for-sale homes are above Fannie and Freddie conforming loan limits. Jed Kolko, Trulia’s chief economist, notes that if loan limits perfectly reflected local differences then every metro area would have a similar share of homes above the local loan limit. But that’s far from true. In the nation’s most out-of-whack market, San Francisco, a majority of homes — 61% — is above the local loan limit of $625,500. No. 2 was San Jose, with 43%. Like San Francisco, San Jose has seen home prices skyrocket with the booming technology sector. In addition to the San Francisco Bay Area, the top 10 places with the largest share of homes above local loan limits were in the cities and suburbs around New York, Boston and Southern California. Places with the greatest number of listings below local loan limits tend to be clustered around the South and Rust Belt. In El Paso, Texas, only 2% of homes on Trulia were above the conforming loan limits. In Buffalo, N.Y., it’s 4%. Trulia analyzed regional loan-limit differences by looking at the share of homes on its service that were above local loan limits. They assumed a 20% down payment.

Weekly Update: Housing Tracker Existing Home Inventory up 8.2% year-over-year on April 28th -  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 8.2% 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. 

Where Are All The Homebuyers? -- I want to direct your attention to another nice Upshot column, this time, by Neil Irwin: "Why the Housing Market Is Still Stalling the Economy.'' I like the column, which tries to explain why the housing market is still soft. It does a nice job of combining history, demographics, current sales data and charts. Irwin focuses on two areas: Residential overbuilding during the boom and a lack of new household formation since the bust. You probably recall the massive new home construction during the boom; economist David Rosenberg has pointed out that we are still at levels of new home construction and sales that are associated with the bottoms of prior recessions. The other issue Irwin discusses is the lack of new household formation. You may not be aware that “Before the recession, 27 percent of 18- to 34-year-olds lived with their parents. Now that share is 31 percent.” The weak job market is most likely to blame. Tighter mortgage credit is briefly mentioned, but at this point in the recovery, I think it is a well-known factor. I have spent an inordinate amount of time on the subject of residential housing. I wanted to supplement Irwin’s column with two additional observations. These involve homeowner equity and buyer psychology. My view is they impose a huge additional drag on the housing recovery. Homeowner equity is simply how much more a house is worth than the underlying mortgage. A house that would fetch $500,000 in a sale with a $400,000 mortgage has $100,000 of equity. This equity, equal to 20 percent of the purchase price, corresponds to the amount that could be used for a down payment in a subsequent move by the owner.  

Black Knight (formerly LPS): House Price Index up 0.7% in February, Up 7.6% year-over-year - The timing of different house prices indexes can be a little confusing. Black Knight uses the current month closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted.  From LPS: U.S. Home Prices Up 0.7 Percent for the Month; Up 7.6 Percent Year-Over-Year Today, the Data and Analytics division of Black Knight Financial Services (formerly the LPS Data & Analytics division) released its latest Home Price Index (HPI) report, based on February 2014 residential real estate transactions. ... The Black Knight HPI represents the price of non-distressed sales by taking into account price discounts for REO and short sales.The year-over-year increase was less in February (7.6% YoY increase) than in January (8.0%), December (8.4%), November (8.5%) and October (8.8%), so this suggests price increases might be slowing.  The LPS HPI is off 13.5% from the peak in June 2006.Note: The press release has data for the 20 largest states, and 40 MSAs. Prices increased in 19 of the  20 largest states in February and were unchanged in Ohio.  LPS shows prices off 43.7% from the peak in Las Vegas, off 36.7% in Orlando, and 34.1% off from the peak in Riverside-San Bernardino, CA (Inland Empire). Prices are at new highs in Colorado and Texas (Denver, Austin, Dallas, Houston and San Antonio metros). Prices are also at new highs in Honolulu.

Case-Shiller: Comp 20 House Prices increased 12.9% year-over-year in February - S&P/Case-Shiller released the monthly Home Price Indices for February ("February" is a 3 month average of December, January and February prices). This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities). From S&P: Home Prices Defy Weak Sales Numbers According to the S&P/Case-Shiller Home Price Indices Data through February 2014, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the annual rates of gain slowed for the 10-City and 20-City Composites. The Composites posted 13.1% and 12.9% in the twelve months ending February 2014.  Both Composites remained relatively unchanged month-over-month. Thirteen of the twenty cities declined in February. Cleveland had the largest decline of 1.6% followed by Chicago and Minneapolis at -0.9%. Las Vegas posted -0.1%, marking its first decline in almost two years. Tampa showed its largest decline of 0.7% since January 2012.  The three California cities and Las Vegas have the strongest increases over the last 12 months as the West continues to lead. Denver and Dallas remain the only cities which have reached new post-crisis price peaks. The Northeast with New York, Washington and Boston are seeing some of the slowest year-over-year gains. However, even there prices are above their levels of early 2013. On a month-to-month basis, there is clear weakness. Seasonally adjusted data show prices rose in 19 cities, but a majority at a slower pace than in January.The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 18.9% from the peak, and up 0.9% in February (SA). The Composite 10 is up 22.8% from the post bubble low set in Jan 2012 (SA). The Composite 20 index is off 18.1% from the peak, and up 0.8% (SA) in February. The Composite 20 is up 23.4% from the post-bubble low set in Jan 2012 (SA). The second graph shows the Year over year change in both indices. The Composite 10 SA is up 13.1% compared to February 2013. The Composite 20 SA is up 12.9% compared to February 2013. Prices increased (SA) in 19 of the 20 Case-Shiller cities in February seasonally adjusted. (Prices increased in 7 of the 20 cities NSA) Prices in Las Vegas are off 44.5% from the peak, and prices in Denver and Dallas are at new highs (SA).

Housing Price Gains Slow, But Still Up Double Digits - As expected, housing price gains slowed this month as reflected by the S&P/Case-Shiller index. The 20-city composite, an index of major metropolitan areas from Atlanta to Washington, D.C., rose 12.9% year-over-year for the month ending in February. That healthy double-digit gain would cause optimism anywhere but in the world of housing prices, where it reflects a deceleration from the 13.2% increase clocked for January. What’s more, the slowdown is expected to continue for the next few months. The question the data poses is whether this easing of speed is worrisome or not. The delayed spring in much of the country could explain the softness in housing starts too, so — in an attempt to take some of the drama out of the data — let’s take a look at three other factors:

  • Mortgage rates. Despite the threat of Fed tapering, rates have been fairly consistent for a few months at around 4.5%. While there’s no discount for consumers taking smaller mortgages to buy starter homes, last week’s rates of 4.49% for small loans and 4.41% for jumbo loans aren’t likely to scare any consumers away. (Though an increase in the upfront payments, known as points, to get those loans bears watching. Points paid for a jumbo went up from .18 to .34 according to the Mortgage Bankers Association, which surveys rates nationally).
  • Weakness from peak. Taken in aggregate, housing prices have been around 20% below their highs of Spring/Summer 2006.  However, as TIME’s Rana Foroohar has noted, there’s a difference between top markets and the rest of the country, with higher priced-markets performing better. Still, every single city in the Case-Shiller 20 showed a year-over-year increase in prices, ranging from Cleveland (up 3.0%) to Phoenix (up 12.5%) and Seattle’s (12.8%) to highest-flyer Las Vegas (up 23.1%).
  • Dearth of inventory. This may be the real X factor behind how the 2014 turns out. Monday’s release from the National Association of Realtors noted that the Pending Home Sales Index, an indicator based on contract signings, rose 3.4% from February to March, but noted “ongoing inventory shortages in much of the U.S.” A lack of homes can lead to the existing homes being fought over — and their prices bid up — by potential buyers, but it isn’t a component of a broad-based real estate recovery.

Case-Shiller Has Longest Home Price Decline Stretch Since 2012; 13 Of 20 Cities See Price Drops -  What a difference Seasonally adjusted and Unadjusted data makes: for the best example look no further than the just released latest Case Shiller index, where the Seasonally Adjusted 20 City Composite Index grew by a less than expected 0.76% (Exp. 0.80%), down from the 0.80% last month, and the Year over Year price also missed expectations of a 13.00% increase, printing slightly less at 12.86%. However, while the well-delayed February data was a modest miss across the board, more importantly it represented that there has been price increases for 24 consecutive months. One gets a very different story if one looks at the NSA data, where Y/Y prices increased the same, or 12.86%, however on a sequential basis, prices have now declined for 4 months in a row - the longest negative stretch in actual home prices since March 2012. What's worse, even Case Shiller itself appears to have given up on housing as the driver of the wealth effect: "Five years into the recovery from the recession, the economy will need to look to gains in consumer  spending and business investment more than housing. Long overdue activity in residential  construction would be welcome, but is certainly not assured." Here is the quite attractive Seasonally Adjusted data: And the not quite so attractive Unadjusted data:

Wolf Richter: Implosion of Housing Bubble 2 Hits Six Cities in the West -“Homes in more than 1,000 cities and towns nationwide either already are, or soon will be, more expensive than ever,” Zillow reported gleefully the other day. “National home values have climbed year-over-year for 21 consecutive months, a steady march upward….” Glorious recovery. Our phenomenal housing bubble that, when it blew up spectacularly, helped topple our financial system, threw the economy into the Great Recession, caused millions of jobs to evaporate, and made people swear up and down: never-ever again another housing bubble. Steps in the Fed, and trillions of dollars get printed and handed to Wall Street, and assets prices become airborne, and Wall Street jumps into the housing market and buys up hundreds of thousands of vacant single-family homes, drives up prices, and armed with free money, shoves aside first-time buyers and others who would actually live in these homes, and turned them instead into rental units. Now in over 1,000 cities, prices are, or soon will be, as high as they were at the peak of the last housing bubble. The difference? Last time, all that craziness was called a “housing bubble” with hindsight. This time, it’s called a “housing recovery.”The result of this, as Zillow called it, “remarkable milestone”: real buyers who intend to live in these homes are falling by the wayside. Every week for months, mortgages to purchase homes have been between 10% and 15% below the same week in the prior year. In the latest week, they dropped 21%, the worst week I remember seeing. The number of refis has plunged even more, but that only ate into bank income statements and caused thousands of people to get laid off. Purchase mortgages, when they drop, decimate home sales. Real Americans, rather than Wall Street, have been priced out of the housing market. And now history has become a Fed-induced rerun. It started in six until recently white-hot housing markets in Arizona and California – Phoenix, Ventura, Riverside, L.A., Sacramento, and San Diego – where home prices have skyrocketed to the point where few people can afford them.

New Home Sales and Prices - The conventional view seems to be that housing is "bubbly".  Here is the monthly annualized change in the Case-Shiller 10 city home price index. Home prices have been increasing by around a 10% annualized rate for two years.  (Case-Shiller is already smoothed enough that I don't see the need for a YOY treatment.  This is annualized monthly percent change.)Interestingly, while the Case-Shiller Index reflected much higher increases in the 2000s than the Census Bureau's new home price series, both series are moving up at a similar rate now.Here is a recent post by Political Calculations on the topic.  Ironman is taking the bubble position.  Bill McBride at Calculated Risk is more optimistic.  He thinks that a recent downswing in new home sales is temporary, and that new single unit home sales will eventually recover back to about 800,000 - less than before the crisis, but about double the current level.  I think he expects home prices to settle down, but he doesn't think we have a bubble. Ironman sees prices as a function of median income.  McBride sees a pullback because of the increase in mortgage rates.  I think both of these perspectives are subtly wrong, in that they both miss the importance of real long term rates on the intrinsic value of the home.Rent may be a function of median income, but home values should be a product of the discounted future value of those rents, which is highly responsive to the discount rate, especially when rates are as low as they are now.  One sign of this is the current low level of mortgage debt service - at 5, compared to a long-term level of 6.  This actually understates the depressed level of real estate credit, because given a stable expected inflation, lower real rates should raise the mortgage payment on a home with a given implied rent.  This is counterintuitive, but it's true.  The subtle mis-reading of thinking home values are a product of the mortgage payment is wrong.  When you divide interest rates into real rates and an inflation premium, and treat a home's value as the present value of future net rent payments that rise at the rate of inflation, the justifiable mortgage payment will decrease if expected inflation decreases, as we would expect, but it will increase if real interest rates decrease.

A comment on the New Home Sales report - The Census Bureau reported that new home sales in Q1 combined were 107,000 not seasonally adjusted (NSA). This is down slightly from 109,000 in Q1 2012 (NSA) - so essentially there was little change when comparing Q1 2014 to Q1 2013.  This is what the public builders have been reporting too.  Weather probably played a small role in the disappointing year-over-year change, however higher mortgage rates and higher prices were probably larger factors. Also there were probably supply constraints in some areas and credit remains difficult for many potential borrowers. Mortgage rates are up again - this time from 3.6% a year ago to over 4.3% now (and people are concerned about Fed "tapering").  However sales are even lower (only 429 thousand in 2013), demographics are once again favorable, and I still expect new home sales to increase to 750 thousand to 800 over the next several years.  That will be a significant increase from the  384 thousand sales rate in March! Maybe sales will move sideways for a little longer, but remember Q1 was a difficult comparison period. Sales in 2013 were up 16.6% from 2012, but sales in Q1 2013 were up over 25% from Q1 of the previous year! The comparisons to last year will be a little easier in a few months - and I still expect to see solid year-over-year growth later this year. 

What's Driving the U.S. Housing Market? -- After falling in February 2014 for the first time since June 2012, the initial median new home sale price in the U.S. reported for March 2014 increased by the largest percentage ever recorded since the U.S. Census Bureau began tracking this data back in January 1963. To put numbers to that achievement, the median new home sales price increased by 11.2% from February 2014's revised figure of $260,900 to March 2014's initial figure of $290,000.  At the same time, the preliminary estimate of 384,000 new home sales for March 2014 was significantly lower than the 449,000 recorded in February 2014.  Our chart below puts the trailing twelve month average of median new home sale prices into context with respect to median household income in the U.S., which allows us to account for annual seasonality in the housing data while also smoothing out the volatility of the median income data. So why did the month-over-month median sale prices of new homes rise so much while the number of new home sales fell by so much?  The answer has a lot to do with the distortionary effects of the second U.S. housing bubble. One of the defining characteristics of a housing bubble is the effect that it has on the sales mix of new homes being sold. Here, as a housing bubble matures, builders come to pursue a strategy of trying to maximize their profits by producing an increasing share of new homes at higher and higher sale prices. Our chart below shows how distorted the mix of new homes being produced and sold has become:

Where Flipping A Home Generates An 80% Profit - Overnight, RealtyTrac released its latest home-flipping report. What it found is that while the latest housing bubble may have indeed popped, manifesting itself not only in a decline in flipping prices but also a tumble in flipping activity across the US as a percentage of all sales from 6.5% a year ago to just 3.7% in Q1, and down from 4.1% last quarter, flipping, where a home is purchased and subsequently sold again within six months, can still be massively profitable, leading to returns that would make the pimpliest 25-year-old, math PhD HFT-firm owner green with envy. Among the core findings was that the average sales price of single family homes flipped in the first quarter was $55,574 higher than the average original purchase price. That gross profit provided flippers with an unadjusted ROI (return on investment) of 30 percent of the average original purchase price averaged out across the US. The average gross profit per flip a year ago was $51,805 for an unadjusted ROI of 28 percent. However, it is the range that is notable: the flip ROI ranged from -8%, or a loss of $10k on the property, to a gain of 80%, a whopping $144K! What is just as notable is that while flipping across the US is moderating, in some states it is as high as 12% of all sales activity. And just as notable, in the first quarter a whopping 43% of all flipping sales were to an all-cash buyer - in other words, flipping to other flippers!

NAR: Pending Home Sales Index increases 3.4% in March, down 7.9% year-over-year - From the NAR: Pending Home Sales Increase in March The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 3.4 percent to 97.4 from an upwardly revised 94.2 in February, but is 7.9 percent below March 2013 when it was 105.7....The PHSI in the Northeast increased 1.4 percent to 78.8 in March, but is 5.9 percent below a year ago. In the Midwest the index slipped 0.8 percent to 94.5 in March, and is 10.1 percent below March 2013. Pending home sales in the South rose 5.6 percent to an index of 112.7 in March, but are 5.3 percent below a year ago. The index in the West increased 5.7 percent in March to 91.0, but is 11.1 percent below March 2013.Mr Yun's once again lowered his forecast for 2014, and is now down to 4.9 million "Existing-home sales are expected to total just over 4.9 million this year, below the nearly 5.1 million in 2013." This is down from his earlier forecast of 5.1 million existing home sales this year. I'll once again take the under on his current forecast - but I think that it would be a positive sign if sales were under 5 million in 2014 as long as distressed sales continue to decline and conventional sales increase.Note: Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in April and May.

Vital Signs: Home Demand Picks Up in March -- Worries about the spring home-selling season eased a bit on Monday thanks to news that more buyers signed contracts in March. The National Association of Realtors said its index of pending home sales increased a larger-than-expected 3.4% in March. The index covers contracts signed; once the contract is closed—usually one or two months later—the transaction is reported as an existing home sale. The March gain is the first increase in the past nine months and suggests demand for housing may pick up this spring, even as affordability and tight inventories remain problems. “After a dismal winter, more buyers got an opportunity to look at homes last month and are beginning to make contract offers,” said Lawrence Yun, the NAR’s chief economist.

Pending Home Sales Rise First Time in 9 Months, Down 7.9% From Year Ago -- The Wall Street Journal reports Pending Home Sales Up 3.4% in March, the first rise in nine months.

  • Pending sales up 3.4% from February
  • Pending sales down 7.9% from year ago
  • Index 2.6% Below 2001 Level
  • Actual new home sales down 14.5%

In the wishful thinking department, Gennadiy Goldberg, U.S. strategist at TD Securities stated "The stronger pending home-sales report hints at resurgence in housing-market momentum during the typically busier spring buying season."  Don't count on it. Home prices are up, and so are mortgage rates. Thirty year mortgages are about a full point higher from a year ago. The recovery, if that's what wants to call it, was driven by all-cash sales.  Investor demand has waned at these prices. There is just not much left of the recovery, if anything at all.

Pending Home Sales Slam Expectations After End Of "Harsh Weather" In South And West - Pending Home Sales provided some hope for the serial extrapolators this morning as month over month saw a 3.4% gain (against expectations of a 1% pop) for the first sequential rise in 7 months (led by the South and West - which were largelty unaffected by the weather). NAR appears happy to state that there are no more weather factors and it's business as usual. This is the 6th month in a row of negative year over year comps for pending home sales.

NMHC Survey: Apartment Market Conditions Tighter in April 2014 -  From the National Multi Housing Council (NMHC): Overbuilding Overblown? Apartment Markets Expand in April NMHC Quarterly Survey Apartment markets rebounded from a soft January, with all four indexes above the breakeven level of 50 in the latest National Multifamily Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions. Last year’s concerns of overbuilding or lack of capital have largely eased, reflected in market tightness (56), sales volume (52), equity financing (53) and debt financing (63) all above 50 for the first time since April 2013. The Market Tightness Index rose from 41 to 56. Almost half (47 percent) of respondents reported unchanged conditions, and approximately one-third (32 percent) saw conditions as tighter than three months ago, in contrast with January’s survey, where almost one-third saw conditions as looser than three months ago. This is the first time the index has indicated overall improving conditions since July 2013.

HVS: Q1 2014 Homeownership and Vacancy Rates - The Census Bureau released the Housing Vacancies and Homeownership report for Q1 2014 this morning.  This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey. This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply or household formation, or rely on the homeownership rate,except as a guide to the trend. The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate decreased to 64.8% in Q1, from 65.2% in Q4.  I'd put more weight on the decennial Census numbers - and given changing demographics, the homeownership rate is probably close to a bottom. The HVS homeowner vacancy decreased to 2.0% in Q1. 

Zillow Rental Affordability 2013 Q4 - The Rent is Too Damn High: Rapidly rising rents and stagnant incomes have made renting an expensive proposition across the country. Nationally, renters are spending more of their income on rent than they have at any point in the past 30 years. At Zillow we measure affordability by looking at how much of a household’s monthly income is spent on rent (excluding utilities and other costs). Spending on rent is captured by the Zillow Rent Index, which tracks the monthly median rent in particular geographical regions. Historically in the United States, the median household would need to spend 24.9 percent of their income to afford the rent on the median property. Currently that number stands at 29.6 percent. In other words, renters across the nation are currently spending almost 19 percent more of their incomes on rent than they did in the pre-bubble period between 1985 and 2000. In fact, in some parts of the country such as Los Angeles, Miami and San Francisco, the average household would need to spend over 40 percent of their income to rent the average home.Nationally, the share of income that households must devote to rent has increased steadily and consistently since 2000, as the increase in rent has dramatically outpaced the growth in income over the same period. Over the period from 2000 to 2014, median household income has increased by 25.4 percent, while rents have increased over 52.8 percent, more than twice as much. On the heels of our recent analysis showing the erosion of affordability of homes for purchase, this represents even more bad news for those looking for housing. The interactive visual below shows how housing affordability in metros across the country has evolved over time, highlighting the steadily increasing unaffordability of rentals.

Where Is the Rent Too Damn High? - Several recent articles have noted a sharp rise in the price of renting an apartment or house across the United States. Many have also argued that the rise in rents disproportionately affects lower and middle class renters. We decided to take look by examining the great data available on rents from Zillow. The chart below shows general inflation (measured with PCE headline inflation) versus the increase in rents. Both series are indexed to be 100 as of November 2010 (the first month the Zillow data are available). The pattern is undeniable: rents are rising much more rapidly than other consumer prices. So rents are rising rapidly. But where is the increase in rents the largest? Several stories suggest that the rise in rental prices has been largest for lower and middle income families. Zillow has zip code level data on rents, which we can use to evaluate this argument. Here is the growth in rent from November 2010 to March 2014 across zip codes, where we split zip codes into five groups based on their average adjusted gross income as of 2006. As the graph clearly shows, the growth in rents has been largest for the richest zip codes, not the poorest. From 2010 to 2014, rents increased by almost 25% in zip codes with an average income of $100 to $200 thousand. Rents increased by just over 10% in zip codes with average income less than $35 thousand.

US Construction Spending Rises 0.2 Pct in March - U.S. construction spending rose slightly in March, fueled by increases for apartments, single-family homes, factories, health care centers and office projects. The Commerce Department said Thursday that construction spending increased just 0.2 percent in March after having fallen 0.2 percent in February. The March gains put construction at a seasonally adjusted annual rate of $942.5 billion, an 8.4 percent increase year-over-year. Construction spending dipped in January with the harsh winter weather and continues to run below its December 2013 levels. Apartment construction spending increased 4.3 percent in March, while single-family home spending inched up 0.2 percent. Residential construction spending is at its strongest pace since May 2008, nearly five years ago. Spending on government projects fell 0.6 percent, including a 2.3 percent drop for schools and educational buildings. Despite the gains in residential construction, warmer weather has yet to produce much of a rebound for residential real estate. Builders started work on 946,000 homes at a seasonally adjusted annual rate in March, up 2.8 percent from 920,000 in February, the Commerce Department said last month. Applications for permits, a gauge of future activity, fell 2.4 percent to a seasonally adjusted annual rate of 990,000.

Construction Spending increased 0.2% in March, Public Construction Spending Lowest since 2006 -  The Census Bureau reported that overall construction spending increased in March: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during March 2014 was estimated at a seasonally adjusted annual rate of $942.5 billion, 0.2 percent above the revised February estimate of $940.8 billion. The March figure is 8.4 percent above the March 2013 estimate of $869.2 billion. Private spending increased and public spending decreased in March: Spending on private construction was at a seasonally adjusted annual rate of $679.6 billion, 0.5 percent above the revised February estimate of $676.3 billion. ... In March, the estimated seasonally adjusted annual rate of public construction spending was $262.9 billion, 0.6 percent below the revised February estimate of $264.5 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 45% below the peak in early 2006, and up 62% from the post-bubble low. Non-residential spending is 25% below the peak in January 2008, and up about 38% from the recent low. Public construction spending is now 19% below the peak in March 2009 and at a new post-recession low. The second graph shows the year-over-year change in construction spending. On a year-over-year basis, private residential construction spending is now up 16%. Non-residential spending is up 8 year-over-year. Public spending is down 1% year-over-year. Looking forward, all categories of construction spending should increase in 2014. Residential spending is still very low, non-residential is starting to pickup, and public spending is probably near a bottom.

Consumer Spending in U.S. Jumps by Most in Five Years - Consumer spending surged in March by the most in almost five years as warmer weather brought shoppers back to auto-dealer lots and malls, a sign the U.S. economy gained momentum heading into the second quarter. Household purchases, which account for about 70 percent of the economy, climbed 0.9 percent, the most since August 2009, after a 0.5 percent gain in February that was larger than previously estimated, Commerce Department figures showed today in Washington. The median forecast of 77 economists in a Bloomberg survey called for a 0.6 percent gain. Incomes increased by the most in seven months.Spending on durable goods, including automobiles, surged 2.7 percent after adjusting for inflation, the biggest gain in four years, following a 1.3 percent increase in February. Purchases of non-durable goods, which include gasoline, rose 0.9 percent.  Household outlays on services increased 0.4 percent after adjusting for inflation following a 0.2 percent increase in February. The biggest contributor was a jump in utility outlays. Spending on health care also rose, though by less than in the prior two months.

Patterns of consumption in March rebounded from near-recessionary winter levels: This morning's personal income and spending report for March serve as a nice juxtaposition to yesterday's GDP report. One of the relationships I track is real retail sales vs. real PCE's. In virtually every business cycle since World War 2, retail sales started out stronger than PCE's, but then faded later on and continuing into the next recession. The reason is that retail sales measure more discretionary spending vs. necessities compared with PCE's, and consumers cut back on their discretionary spending first. Now that we have all of the first quarter's data, let's first looks at real retail sales YoY (blue, monthly) vs. PCE's (red, quarterly): Notice that real retail sales fell to near recessionary levels before rebounding in March as compared with PCE's. A similar relationship can be tracked by comparing PCE's on durable vs. nondurable goods. As this first graph, averaged quarterly for the last 50 years shows: Consumers cut back on big ticket discretionary durable goods spending before they cut back on nondurables, which include necessities like food and energy. When durable spending YoY approaches zero, a recession has typically started. Now here's a close-up of the last 10 years, measured monthly:  You can see that durable goods were just barely positive YoY in January and February, but rebounded in March.  This is fully in line with the flatline GDP report yesterday.

Spending Rises, But Is It A Sign Of A Stronger Economy? - Yesterday, we saw the first estimate of the first quarter's gross domestic product which grew at an annualized rate of just 0.1% or just .025% for the quarter. However, what was crucially important was where that smidgen of growth came from. As shown in the chart below had it not been for the 3% surge in personal income expenditures that actual economic growth rate would have been a -1% annualized.  Mainstream economists and analysts immediately jumped on this surge in consumer spending as a sign that the underlying economy was actually much stronger than the data showed. However, that spending was NOT broad based. As shown in the next chart, the increase in consumer spending was the only offset to weakness in every other major subcategory of the GDP calculation. While the "harsh winter weather" was used as the scapegoat for the weak economic report, the broad weakness in other areas like the plunge in exports should raise some concerns. (Exports make up roughly 13% of economic growth versus the much more focused on housing contribution of 3%.)Where money is spent within the economy has a huge impact on both the strength and sustainability of growth. Spending that has long lasting impacts on economic growth by stimulating further spending or employment is much more preferable over spending that diverts consumptive capabilities. For example, spending by businesses to build or expand production, which fosters employment, is much more preferable that dollars spent on food services which has a much lower "multiplier effect" in the economy.  Let's take a close look at the surge in services spending over the last quarter.

US Savings Rate Plummets To Second Lowest Since 2008 To Pay For March Spending Spree- There was good and bad news in today's personal spending report. First the good: US consumers saw their personal income rise by 0.5%, or $78 billion, in March to a $14.5 trillion SAAR, driven mostly by a $32 billion increase in service wages, as well as $16 billion from government transfer receipts. Now the bad (or, if one is a Keynesian, doubly good) news: personal spending more than offset the increase in income, rising by 0.9% or the most since August 2009, which rose to $12.3 trillion SAAR, driven roughly equally by an increase in spending on Goods ($53 billion) and Services ($54 billion). Curiously the increase in goods spending was the single biggest monthly increase also since August 2009. As for services, the systematic increase on spending over the past several months is unmistakable as far more money is allocated toward healthcare, that one major spending category which rescued Q1 GDP.

The Latest on Real Disposable Income Per Capita --With this morning's release of the March Personal Incomes and Outlays we can now take a closer look at "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. This indicator was significantly disrupted by the bizarre but predictable oscillation caused by 2012 year-end tax strategies in expectation of tax hikes in 2013. The March nominal 0.48% month-over-month increase is encouraging, but after we adjust for inflation, the real MoM change is a smaller 0.30%. The year-over-year metrics are 2.62% nominal and 1.45% real.  The BEA uses the average dollar value in 2009 for inflation adjustment.  For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.  Nominal disposable income is up 57.3% since then. But the real purchasing power of those dollars is up only 19.5%. Here is a closer look at the real series since 2007. Real disposable incomes are now fractionally above the interim high set in September of last year.

April U.S. Consumer Confidence Slips to 82.3, Below Expectations - U.S. consumers this month are less optimistic about the current economy, according to a report released Tuesday. The Conference Board, a private research group, said its index of consumer confidence fell to 82.3 in April from a revised 83.9 in March, first reported as 82.3. The April index is below the 83.0 expected by economists surveyed by The Wall Street Journal. Last Friday, the Thomson-Reuters/University of Michigan consumer sentiment index showed householders were more optimistic about the economy in April than in March. The board’s survey, however, shows consumers are more cautious, especially about the labor markets. The present situation index, a gauge of consumers’ assessment of current economic conditions, fell to a three-month low of 78.3 from a revised 82.5 in March, originally put at 80.4. Consumer expectations for economic activity over the next six months was little changed at 84.9 from March’s revised 84.8, first put at 83.5, which was a large gain from February’s 76.5. “Consumer confidence declined slightly in April, as consumers assessed current business and labor market conditions less favorably than in March,” said Lynn Franco, director of economic indicators at the board. “However, their expectations regarding the short-term outlook for the economy and labor market held steady.” “Thus, while sentiment regarding current conditions may have slipped a bit, consumers do not foresee the economy, or the labor market, losing the momentum that has been building up over the past several months,” she said.

Vital Signs: Consumers Take Dimmer View of April Job Markets - Tuesday’s confidence survey from The Conference Board shows consumers are slightly less upbeat about the economy than they were in March. But they’re still more optimistic than they were during the wintry months of January and February. One reason for the downshift: Consumers think job prospects are worse now than a month ago. The survey shows only 12.9% of consumers think jobs are “plentiful” this month, down from 13.8% saying that in March, while 32.5% think jobs are “hard to get”, up from 31.4% in March. The wider gap between those two labor perceptions (called the labor differential by economists) means consumers see hiring as slowing this month–not speeding up as economists think. Forecasters’ median forecast says April nonfarm payrolls increased 215,000.

Gasoline Price Update: Twelfth Week of Increases - It’s time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, Regular and Premium are up 3 cents, the twelfth week of increases. Regular is up 52 cents and Premium 50 cents from their interim lows during the second week of November. According to, California and Hawaii remain the only states with regular above $4.00 per gallon, but two states, Illinois and Connecticut, and Washington DC are above $3.90. Montana has the cheapest regular at $3.34, up a penny from last week.

Inside The “Low-flation” Myth: A Disquisition On Inflation Seen And Not Seen - After paying my bills the other day I had home heating and electric utility costs on my mind—the winter having been an unusually harsh one in NYC like much of the rest of the nation. But then I noticed a story by an outfit called CNS that contained some great historical graphs on decades worth of utility prices, and I was duly reminded that this wintery winter wasn’t all that: Home utility and fuel costs have been rising at a pretty robust clip for more than a decade now. Indeed, notwithstanding the modest weight (5%) ascribed to utilities and fuel in the BLS price basket, there are few households in America that have escaped their relentless grind higher. Nor would most everyday Americans shuck this off as a trivial component of their own cost-of-living index or express relief that all remains copasetic on the inflation front— since these large utility and fuel gains have been offset by falling iPad prices and hedonic adjustments to the price of their $40,000 family sedan. The fact is, the price index for electrical power increased by 5.3% during the past 12 months and has reached an all-time high. But I get it. That doesn’t count as “inflation” because its not in the Fed’s preferred measuring stick—the PCE deflator ex-food and energy. And, yes, they do have a point about the short-run volatility of commodity-driven components of the index like the price of Kwh’s from your local utility. Heck, the price of power is even seasonal—-rising in the spring, peaking with the summer air-con load and then re-tracing in fall-winter. The latter is supposedly already factored into the BLS’ seasonal maladjustments. But, still, it can be granted that on a short-run basis of a few quarters or even years there is probably a lot of off-trend “noise” in electricity prices. Back in 2004-05, the government said the average price for electrical power was 9.0 cents/ Kwh compared to the 13.5 cents posted last week for March. Doing the math, that’s a compound growth rate of 4.5% over a decade. And that’s not noise. Its signal. Its inflation.

Rising Food Prices May Cause Consumer Indigestion - The Commerce Department reported on Thursday that consumers boosted their spending by a large 0.9% in March. Health-care demand related to the Affordable Care Act temporarily lifted service spending, but consumers also caught up on goods purchases postponed in the winter. The March numbers mean consumer spending starts the second quarter at a high level. But after surviving the drag of winter, households must now confront the pressure of rising food prices.  A survey of U.S. consumers released Thursday by the Royal Bank of CanadaRY.T -0.29% show the vast majority of households have noticed the recent rise in food prices–from milk and meat to baked goods and kitchen staples. Those sentiments are borne out by consumer prices tracked by the Labor Department. The price index for food bought to eat at home increased a large 0.5% in both February and March. The RBC survey also found most consumers expect groceries to cost even more in the next six months. That attitude looks correct, says RBC’s chief U.S. economist Tom Porcelli, given that raw food prices tracked by the Commodity Research Bureau are also on the rise. Over time, higher commodity costs will filter into grocery prices. What’s important for the consumer outlook is how households are dealing with their higher grocery bills.Some of those who have noticed the price increases are buying less of an item or substituting a cheaper alternative. But the vast majority are spending less on other goods and services to meet their food bills, or they are increasing their food budgets, leaving less money for saving.The big exception is alcohol. RBC found 58% of consumers are adjusting to higher prices by buying less beer, wine and spirits.

Why Weather Could Determine Who Wins a Race To Measure Inflation -  Beginning in 2008, a pair of economists at the Massachusetts Institute of Technology began tracking prices across the Internet to see if they could beat the Labor Department at its own game. Their task? Estimate the U.S. rate of inflation accurately before the government released its Consumer Price Index. Dubbed the Billion Prices Project, that effort provided an amazingly close estimate of the CPI. Until quite recently, that is. The PriceStats index, first developed by Alberto Cavallo and Roberto Rigobon at MIT, is part of a growing body of research that seeks to marry computer science and economics to gather real-time data online. The Internet-based measures hope to predict and even outdo official government statistics, and the gap between PriceStats and the CPI in recent months is a compelling test case as to which approach is better. Their Web-based measure, now known as the State Street PriceStats inflation series, has tracked the official CPI so closely that it is frequently cited as proof that the Labor Department’s measure is honest and can be independently verified. So does the emerging gap reflect that the government measure is being cooked? Actually, what’s happening is less sinister and more interesting, according to Jessica Donohue, the senior managing director at State Street who helps oversee the index. The gap could be explained by bad weather, and the superiority of online data in measuring commerce that increasingly takes place over computer screens, not cash registers.

U.S. Light Vehicle Sales decrease to 16.0 million annual rate in April - Based on an AutoData estimate, light vehicle sales were at a 16.04 million SAAR in April. That is up 5.5% from April 2013, and down 2% from the sales rate last month.   This was below the consensus forecast of 16.2 million SAAR (seasonally adjusted annual rate).  This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for April (red, light vehicle sales of 16.04 million SAAR from AutoData). Severe weather clearly impacted sales in January and February, and some of the increase in March was probably a bounce back due to better weather.  Sales in April were probably a return to trend. The second graph shows light vehicle sales since the BEA started keeping data in 1967.

U.S. factory orders up, durable goods revised higher (Reuters) - New orders for U.S. factory goods rose for a second straight month in March, suggesting strength in manufacturing and the broader economy at the end of the first quarter. The Commerce Department said on Friday new orders for manufactured goods increased 1.1 percent. February's orders were revised to show a 1.5 percent rise instead of the previously reported 1.6 percent gain. Economists polled by Reuters had forecast new orders received by factories advancing 1.4 percent in March. true Orders excluding the volatile transportation category rose 0.6 percent after advancing 0.7 percent in February. Manufacturing is pushing higher after a lull in the winter, but a surge in inventories in the second half of 2013 remains an obstacle to achieving a faster pace of factory activity. A report on Thursday showed a gauge of national factory activity rose in April for a third month. The Commerce Department report showed inventories increased only 0.1 percent in March, slowing from February's 0.7 percent increase. In March factory orders rose across all categories. Unfilled orders rose 0.6 percent and shipments increased 0.3 percent.

Dallas Fed: "Texas Manufacturing Picks Up and Outlook Improves Notably" -- Another solid regional manufacturing survey, this one from the Dallas Fed: Texas Manufacturing Picks Up and Outlook Improves Notably Texas factory activity increased for the 12th month in a row in April, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 17.1 to 24.7, reaching its highest level in four years and indicating stronger output growth.Some other measures of current manufacturing activity also reflected more robust growth. The new orders index posted a four-year high, rising to 21.3. The capacity utilization index rose to a multiyear high as well, climbing from 13.1 to 18.7, with a third of manufacturers noting an increase. The shipments index fell 7 points to 12.4, indicating the volume of shipments grew but at a slower pace than in March. Perceptions of broader business conditions were markedly more optimistic in April. The general business activity index rose for a second consecutive month, increasing from 4.9 to 11.7. The company outlook index jumped nearly 15 points to a four-year high of 23.4, reflecting a sharp rise in optimism among manufacturers. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Dallas Fed Surges To 7-Month Highs But Job Outlook Tumbles To Lowest In 2014 - The Dallas Fed manufacturing survey beat expectations by the most since September 2013 and rose to near its highest since Feb 2012. Most of the 'current' sub-indices rose thogh prices paid tumbled (oddly to its lowest since August) and wages stagnated (as new orders surged to their 2nd highest since 2006 - entirely sustainable!!) What is probably more worrisome is the plunge in the employment expectations index - which dropped to its lowest since Dec 2013 (but but but the weather).

ISM Manufacturing index increased in April to 54.9  --The ISM manufacturing index suggests faster expansion in April than in March. The PMI was at 54.9% in April, up from 53.7% in March. The employment index was at 54.7%, up from 51.1% in March, and the new orders index was at 55.1%, unchanged from 55.1% in March.From the Institute for Supply Management: April 2014 Manufacturing ISM Report On Business® Economic activity in the manufacturing sector expanded in April for the 11th consecutive month, and the overall economy grew for the 59th consecutive month,  . "The April PMI® registered 54.9 percent, an increase of 1.2 percentage points from March's reading of 53.7 percent, indicating expansion in manufacturing for the 11th consecutive month. The New Orders Index registered 55.1 percent, equal to the reading in March, indicating growth in new orders for the 11th consecutive month. The Production Index registered 55.7 percent, slightly below the March reading of 55.9 percent. Employment grew for the 10th consecutive month, registering 54.7 percent, an increase of 3.6 percentage points over March's reading of 51.1 percent. Comments from the panel generally remain positive; however, some expressed concern about international economic and political issues potentially impacting demand."

ISM Manufacturing Index Rises a Bit Above Expectations - Today the Institute for Supply Management published its March Manufacturing Report. The latest headline PMI at 54.9 percent is an improvement over last month's 53.9 percent. Today's number was slightly above the forecast of 54.3.Here is the key analysis from the report:Manufacturing expanded in April as the PMI® registered 54.9 percent, an increase of 1.2 percentage points when compared to March's reading of 53.7 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. "The April PMI® registered 54.9 percent, an increase of 1.2 percentage points from March's reading of 53.7 percent, indicating expansion in manufacturing for the 11th consecutive month. The New Orders Index registered 55.1 percent, equal to the reading in March, indicating growth in new orders for the 11th consecutive month. The Production Index registered 55.7 percent, slightly below the March reading of 55.9 percent. Employment grew for the 10th consecutive month, registering 54.7 percent, an increase of 3.6 percentage points over March's reading of 51.1 percent. Comments from the panel generally remain positive; however, some expressed concern about international economic and political issues potentially impacting demand."  Here is the table of PMI components.

Manufacturing ISM Rises, Beats On Pick Up In Employment - With the Chicago PMI yesterday beating wildly, the whisper expectation today, in a world in which baffle with BS is the dominant strategy (aside for "hope" of course), that the manufacturing ISM would be a modest miss. It wasn't, and instead while consensus expected the April ISM to rise from 53.7 to 54.3, the final print instead ended up being 54.9, with an increase reported in most indexes, except for Production, Prices and and Order Backlogs. Ahead of tomorrow's NFP, the increase in employment by 3.6 points from 51.1 to 54.7 is notable. Finally, with exports rising only 1.5% compared to the 3.5% increase in imports, the trade component of Q2 GDP is not looking like it is improving much.

US PMI Job Creation Slowest Since January, Says "Growth Rate Of The Economy Has Weakened Since Late Last Year" - From Markit: "Although GDP may bounce back in the second quarter, the updated manufacturing numbers are not strong enough to offset the softer trend in the flash services PMI, suggesting that the underlying growth rate of the economy has weakened since late last year. The manufacturing sector continues to benefit from rising domestic demand, but weak overseas demand continues to mean export performance disappoints, with only modest growth of new export orders recorded again in April."

Weekly Initial Unemployment Claims increase to 344,000 --The DOL reports:In the week ending April 26, the advance figure for seasonally adjusted initial claims was 344,000, an increase of 14,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 329,000 to 330,000. The 4-week moving average was 320,000, an increase of 3,000 from the previous week's revised average. The previous week's average was revised up by 250 from 316,750 to 317,000. There were no special factors impacting this week's initial claims.  The previous week was revised up from 329,000. The following graph shows the 4-week moving average of weekly claims since January 2000.

New Jobless Claims Again Rise Above Expectations - Here is the opening of the official statement from the Department of Labor:In the week ending April 26, the advance figure for seasonally adjusted initial claims was 344,000, an increase of 14,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 329,000 to 330,000. The 4-week moving average was 320,000, an increase of 3,000 from the previous week's revised average. The previous week's average was revised up by 250 from 316,750 to 317,000.  There were no special factors impacting this week's initial claims. [See full report]Today's seasonally adjusted number at 344K came in well above the forecast of 319K. 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.

 ADP: Private Employment increased 220,000 in April -- From ADP: Private sector employment increased by 220,000 jobs from March to April according to the April ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. Mark Zandi, chief economist of Moody’s Analytics, said, "The job market is gaining strength. After a tough winter employers are expanding payrolls across nearly all industries and company sizes. The recent pickup in job growth at mid-sized companies may signal better business confidence. Job market prospects are steadily improving.”This was above the consensus forecast for 210,000 private sector jobs added in the ADP report.   Note: ADP hasn't been very useful in directly predicting the BLS report on a monthly basis, but it might provide a hint.

ADP 220K Print Beats Expectations, Continues To Goal-Seek Historical Revisions To Ape BLS Data -- Since ADP is completely useless when it comes to actually hinting at the future and all it does is "confirm" whatever momentum the BLS reports on, today's print, like all those from the past, is absolutely meaningless. Still, for those who care, the April private jobs print, even though the month is not over yet, was 220K, above the 210K expected, with the last month revised once again higher from 191K to 209K - this was the highest number since November 2013. Sadly, since ADP continues to not report non-seasonally adjusted numbers (since it doesn't have them as all it does is take BLS numbers and gently massages them to appear relevant), there is no way of knowing what ADP is actually selling.

How Not to Be Misled by the Jobs Report - We obsess far too much on the Labor Department’s monthly jobs report. Think about it this way: It’s the first Friday of the month, and the Labor Department has bad news. The economy has added a mere 64,000 jobs last month, a steep slowdown from 220,000 the month before. From Wall Street to Twitter, the reaction is swift and negative. The price of oil falls, as do the prices of blue-chip stocks like General Electric. The Federal Reserve faces calls to push interest rates lower. The lead headlines in the next day’s papers talk of faltering job growth. But what if all the worries were based on nothing more than random statistical noise? What if the apparent decline in job growth came from the inherent volatility of surveys that rely on samples, like the survey that produces the Labor Department’s monthly employment estimate? We generated those numbers with a computer, after giving it a simple set of directions: Assume that the economy is adding exactly 150,000 jobs every month, and that the monthly estimates of job growth come with exactly as much statistical noise as the Labor Department says its estimates have.  Let’s consider how statistical oise might affect our perception of the jobs report in two scenarios: one with steady job growth and one with accelerating job growth.

Unemployment Rate Dips as Job Gains Beat Expectations - New jobs numbers released on Friday show employers added 288,000 jobs in April, beating expectations by analysts who predicted about 200,000 would be added, and pushing down the unemployment rate from 6.7 percent to 6.3, the lowest in five and a half yearsEmployers added 288,000 jobs in April, according to government data released Friday, beating expectations and pushing the unemployment rate down to 6.3%, the lowest level in more than five years.The latest drop in the unemployment rate, which has steadily ticked down in recent months, marks a more significant drop from 6.7% last month.Jason Furman, who chairs the White House Council of Economic Advisors, called the employment growth “solid,” but said President Barack Obama “continues to emphasize that more can and should be done to support the recovery, including acting on his own executive authority to expand economic opportunity, as well as pushing Congress for additional investments in infrastructure, education and research, an increase in the minimum wage, and a reinstatement of extended unemployment insurance benefits.”

April Employment Report: 288,000 Jobs, 6.3% Unemployment Rate - From the BLS:  Total nonfarm payroll employment rose by 288,000, and the unemployment rate fell by 0.4 percentage point to 6.3 percent in April, the U.S. Bureau of Labor Statistics reported today.... The change in total nonfarm payroll employment for February was revised from +197,000 to +222,000, and the change for March was revised from +192,000 to +203,000. With these revisions, employment gains in February and March were 36,000 higher than previously reported.

April Jobs Report Brings Very Good News - Heading into today’s release of the April Jobs Report, the consensus forecast called for roughly 200,000 new jobs created and, perhaps a small drop in the unemployment rate. While the First Quarter GDP number released earlier this week was disappointing to say the least, other economic indicators released over the past several weeks seemed to indicate that the economy had started to revive itself after an unusually cold, stormy, winter. The biggest such number was released yesterday and showed that consumer spending had jumped a much higher than expected .9%% in March, perhaps indicating that the economy was waking up from a winter slumber. Those optimistic assumptions are likely to be reinforced by the release of the Jobs Report today, which showed that 288,000 jobs were created in the month of April: Total nonfarm payroll employment rose by 288,000, and the unemployment rate fell by 0.4 percentage point to 6.3 percent in April, the U.S. Bureau of Labor Statistics reported today. Employment gains were widespread, led by job growth in professional and business services, retail trade, food services and drinking places, and construction. In April, the unemployment rate fell from 6.7 percent to 6.3 percent, and the  number of unemployed persons, at 9.8 million, decreased by 733,000.  Both measures had shown little movement over the prior 4 months. Over the year, the unemployment rate and the number of unemployed persons declined by 1.2  percentage points and 1.9 million, respectively. (See table A-1.) (…) The number of long-term unemployed (those jobless for 27 weeks or more) declined by 287,000 in April to 3.5 million; these individuals accounted for  35.3 percent of the unemployed. Over the past 12 months, the number of long-term  unemployed has decreased by 908,000. (See table A-12.)  The civilian labor force dropped by 806,000 in April, following an increase of 503,000 in March. The labor force participation rate fell by 0.4 percentage point to 62.8 percent in April. The participation rate has shown no clear trend in recent months and currently is the same as it was this past October. The employment-population ratio showed no change over the month (58.9 percent) and has changed little over the year.

Nonfarm Payrolls +288,000, Unemployment Rate Drops to 6.3%; Household Survey Employment -73,000, Labor Force -806,000 - This month sported another amazing difference between the household survey and the payroll survey. The difference is so vast that looking at the numbers in isolation, one might think the results were from two different countries.  The headline number from the payroll survey beat expectations by a mile with 288,000 jobs, but beneath the surface, the household survey shows employment declined by 73,000.  at a Glance:

  • Nonfarm Payroll: +288,000 - Establishment Survey
  • Employment: -73,000 - Household Survey
  • Unemployment: -733,000 - Household Survey
  • Involuntary Part-Time Work: +54,000 - Household Survey
  • Voluntary Part-Time Work: -330,000 - Household Survey
  • Baseline Unemployment Rate: -0.4 at 6.3% - Household Survey
  • U-6 unemployment: -0.4 to 12.3% - Household Survey
  • Civilian Non-institutional Population: +181,000
  • Civilian Labor Force: -806,000 - Household Survey
  • Not in Labor Force: +988,000 - Household Survey
  • Participation Rate: +0.2 at 62.8 - Household SurveyThe unemployment rate varies in accordance with the Household Survey, not the reported headline jobs number, and not in accordance with the weekly claims data.
  • In the past year the population rose by 2,260,000.
  • In the last year the labor force rose by 62,000.
  • In the last year, those "not" in the labor force rose by 2,203,000
  • Over the course of the last year, the number of people employed rose by 1,993,000 (an average of 166,000 a month)

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

A Whopping 288K New Jobs in April, Unemployment Rate Drops to 6.3% -  Here are the lead paragraphs from the Employment Situation Summary released this morning by the Bureau of Labor Statistics: Total nonfarm payroll employment rose by 288,000, and the unemployment rate fell by 0.4 percentage point to 6.3 percent in April, the U.S. Bureau of Labor Statistics reported today. Employment gains were widespread, led by job growth in professional and business services, retail trade, food services and drinking places, and construction.  In April, the unemployment rate fell from 6.7 percent to 6.3 percent, and the number of unemployed persons, at 9.8 million, decreased by 733,000. Both measures had shown little movement over the prior 4 months. Over the year, the unemployment rate and the number of unemployed persons declined by 1.2 percentage points and 1.9 million, respectively.  Today's report of 288K new nonfarm jobs was dramatically above the forecast of 210K. And the unemployment rate, unchanged at 6.3% was well below the expectation of 6.6%. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948.  The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. This rate has fallen significantly since its 4.4% all-time peak in April 2010. It dropped below 3% in April of last year, and last month's 2.4% is fractionally off the interim low of 2.3% in January.  The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over. The inverse correlation between the two series is obvious. We can also see the accelerating growth of women in the workforce and two-income households in the early 1980's. Following the end of the last recession, the employment population has been range bound between 58.2% and 59.4% — the lower end of which that harkens back to the 58.1% ratio of March 1953, when Eisenhower was president of a country of one-income households, the Korean War was still underway, and rumors were circulating that soft drinks would soon be sold in cans.

Jobs Report, First Impressions: A Tale of Two Surveys - Payroll growth was strong and broad based last month and the jobless rate fell sharply, but that seemingly impressive decline in unemployment was wholly due to the shrinking labor force.  In other words, a confusing month of labor market data as the two surveys reported on today tell very different stories. The survey of establishments recorded strong payroll gains in April of 288,000, above the expected addition of 215,000.  The household survey reported that the unemployment rate fell by 0.4 tenths, to 6.3%.  That’s the largest monthly decline since December 2010 and the lowest jobless rate since September 2008. So, as my Grandma might have asked, what’s not to like?It’s this: the decline in unemployment is entirely due not to job creation, but to labor force decline (employment actually fell slightly in the household survey).  This important and closely watched indicator—the labor force participation rate—also fell 0.4 tenths, reversing recent gains and returning the lfpr to its low where it stood at the end of last year, commensurate with levels we haven’t seen since the late 1970s.  Though part of the recent decline in the participation rate reflects our aging demographics, more than half in my judgment is due to weak demand.The BLS noted that the large decline in the labor force—about -800,000—was likely due to fewer entrants as opposed to more leavers.  And this is a volatile number, as I stress below.  But neither can it be dismissed out of hand: it has been essentially stuck at historically low levels for a while now.On the other hand, the payroll report shows pretty decent labor demand/job creation.  As noted, the 288,000 jobs beat expectations, and gains for the prior two months were revised up by 36,000.  Job gains occurred across most industries, with 67% of private industries expanding employment, the largest share in over two years (government employment was also up 15,000, almost all due to local government; federal employment was down slightly).

Whopping 288K Jobs Added In April, Far Higher Than Expectations; Unemployment Rate Tumbles To 6.3% - The "not really most important jobs data ever" is out. Here are the results:

  • Jobs soar higher by 288K, far higher than expected 218K, and well above the 203K revised
  • Unemployment rate 6.3%, tumbles from 6.7% and well below expected 6.6%
  • Birth Death adjustment: +234K
  • Average hourly earnings M/M +0.0%, Exp. 0.2%
  • Average hourly earnings all employees Y/Y: 1.9%, Exp. 2.1%

The visual breakdown: the 288K jobs added in April was the highest since January 2012. The total employment  (establishment survey) is now less than 100K away from regaining December 2007 levels -the month the Great Depression started. From the report: In April, the unemployment rate fell from 6.7 percent to 6.3 percent, and the number of unemployed persons, at 9.8 million, decreased by 733,000. Both measures had shown little movement over the prior 4 months. Over the year, the unemployment rate and the number of unemployed persons declined by 1.2 percentage points and 1.9 million, respectively. (See table A-1.) Among the major worker groups, unemployment rates declined in April for adult  men (5.9 percent), adult women (5.7 percent), teenagers (19.1 percent), whites (5.3 percent), blacks (11.6 percent), and Hispanics (7.3 percent). The jobless  rate for Asians was 5.7 percent (not seasonally adjusted), little changed over the year.

April Unemployment Rate Plunges to 6.3 Percent on Gain of 288,000 Payroll Jobs but Details Still Show Some Weaknesses in Employment Situation: The BLS monthly household survey, released today, showed that the unemployment rate plunged 0.4 percentage points in April to 6.3 percent, a new low for the recovery. The broad U-6 unemployment rate, which takes into account discouraged workers and involuntary part-time workers, fell to 12.3 percent, also a new low for the recovery. In another welcome development, the percentage of unemployed who have been out of work for 27 weeks or more also fell to a new low for the recovery. Elevated long-term unemployment has been one of the most painful features of the Great Recession. Almost five ears into the recovery, it still remains far above historical levels. A separate survey of establishments showed a gain of 288,000 jobs. February and March payroll gains were revised upward by a total of 36,000. Those revisions make this the first time in more than two years that the economy has gained more than 200,000 jobs for three consecutive months. The gains were broadly based, with goods producing industries, services, and governments all showing an increase in jobs. As with every report on the employment situation, not all of the data were good. The most prominent negative in the latest report was a decrease of 806,000 in the size of the civilian labor force. The number of people reported as employed by the household survey fell by 73,000. Although the household and establishment surveys move together in the long run, they often differ substantially on a month-by-month basis, partly because of sampling error and partly because of differences in methodology. Average weekly hours of production and nonsupervisory employees were unchanged and hourly earnings gained a scant three cents.

April 2014 Employment Review  --The noise went back the other direction this month & took us all the way to 6.3%.  Let's take a look at the parts & pieces. First is unemployment by duration.  I suspect there was some statistical noise this month that moved unemployment down.  Here we can see that unemployment declined across durations.  But, all the excess unemployment is currently in the ">26 weeks" category.  The other categories are pretty much at normal levels.  They might have a few 100,000 to give between now and the cyclical peak, almost entirely from the 15-26 week category.  (As a percentage of the labor force, that dip in 0-4 week unemployment in December was the lowest level ever recorded.)  So, while it's a good sign to see them declining, there is likely to be some bounce-back there in the coming months.  Also, keep this is mind when reading the inevitable misreadings of statistical noise as desperate workers giving up.  That story doesn't match up well with the significant declines in short-duration unemployment. That statistical noise looks like it helped the ">26 week" category, too.  I am not seeing any unusual decline in my estimated number of very long term unemployed this month, so I don't believe that this month's decline is strong evidence of an EUI effect, although the trends remain relatively positive, in general.  Most of the decline in unemployment over the past few months has been among workers under 45 years old.  There appears to be a correlation between older workers, EUI, and very long term unemployment, so the relatively small decline in unemployment among older workers also suggests that the unemployment decline is not particularly related to the termination of EUI. I have been watching the churn in long term unemployment.  The gross number of people leaving long term unemployment over the past 3 months has been remaining strong at about 2 million.  It dipped down to about 1.8 million last month.  It recovered to about 1.9 million this month, so it didn't get all the way back to 2 million, but at least it's heading in the right direction.  January wasn't an easy month to compare against, either.  If this flow remains at 2 million a quarter, long term unemployment should be below 3 million by July

A Decidedly Weird Report -  Today’s jobs report was, to say the least, strange. The first look was exciting—288,000 payroll jobs added! Now that is the kind of job growth that would get us back to a healthy labor market relatively soon. If we were to keep up this pace, we would get back to pre-recession labor market conditions by the end of 2016. Even I could live with that. The second look was good, too—the household survey showed the unemployment rate plunged to 6.3 percent. But I should have stopped looking there, because the rest was pretty bad. It turns out the drop in unemployment was entirely due to people dropping out of the labor force. Employment in the household survey actually declined, and the labor force participation rate fell back down to its lowest point of the recovery. Our estimate of the number of “missing workers” (workers who are not working or actively seeking work but who would be if job opportunities were strong) increased to an all-time high of 6.2 million. If those missing workers were in the labor force looking for work, the unemployment rate would be 9.9 percent instead of 6.3 percent. So this was one of those cases where the two surveys were telling completely different stories—the establishment survey was strong, the household survey was weak. As always, when the two surveys tell different stories, the rule of thumb is to place much more weight on the payroll survey, since it is larger and less erratic. But the weak household survey certainly dampens the fun of the payroll survey. If the economy really were entering a new stage of much stronger job growth, I’d expect both surveys to regularly be posting strong gains. That was far from the case in April.

One Million People Dropped Out Of Labor Force In April: Participation Rate Plummets To Lowest Since 1978 - And so the BLS is back to its old data fudging, because while the Establishment Survey job number was a whopper, and the biggest monthly addition since January 2012, the Household Survey showed an actual decline of 73K jobs. What is much worse, is that the reason the unemployment rate tumbled is well-known: it was entirely due to the number of Americans dropping out of the labor force. To wit, the labor force participation rate crashed from 63.2% to 62.8%, trying for lowest since January 1978! And why did it crash so much - because the number of people not in the labor force soared to 92 million, the second highest monthly increase ever, or 988K, only 'better' than January 2012 which curiously was the one month when the establishment survey reported a 360K "increase" in jobs.

Report: More Than 92 Million Americans Remain Out Of Labor Force — Despite the unemployment rate plummeting, more than 92 million Americans remain out of the labor force.The unemployment rate dropped to 6.3 percent in April from 6.7 percent in March, the lowest it has been since September 2008 when it was 6.1 percent. The sharp drop, though, occurred because the number of people working or seeking work fell. The Bureau of Labor Statistics does not count people not looking for a job as unemployed.The bureau noted that the civilian labor force dropped by 806,000 last month, following an increase of 503,000 in March.The amount (not seasonally adjusted) of Americans not in the labor force in April rose to 92,594,000, almost 1 million more than the previous month. In March, 91,630,000 Americans were not in the labor force, which includes an aging population that is continuing to head into retirement. The labor force participation rate fell by 0.4 percentage point to 62.8 percent in April. The participation rate has shown no clear trend in recent months and currently is the same as it was this past October. The employment-population ratio showed no change over the month (58.9 percent) and has changed little over the year,” the bureau said in a statement.. The number of unemployed Americans decreased by 733,000 to 9.8 million last month.“The number of long-term unemployed (those jobless for 27 weeks or more) declined by 287,000 in April to 3.5 million; these individuals accounted for 35.3 percent of the unemployed. Over the past 12 months, the number of long-term unemployed has decreased by 908,000,” the press release stated.

Number of Missing Workers Jumps to All-Time High - After a few months of the labor force participation rate (LFPR) showing what was hopefully early signs of strength, it dropped back down to its low of the recovery in March. The biggest drops in labor force participation in March were among young workers; the LFPR of workers under age 25 dropped 1.3 percentage points, from 55.6 percent to 54.3 percent. (However, these series are erratic due to small sample sizes, and the April decline in the under-25 LFPR was simply a reversal of its jump up in March.) The biggest drop in LFPR in April was among men under the age of 20. To my knowledge, data on unemployment insurance exhaustions by age don’t exist, but it is unlikely that young workers are a big proportion of exhaustions. This means that the April drop in labor force participation is likely not being driven by the expiration of federal unemployment insurance benefits last December as some have suggested, but simply by the weak labor market. There is currently an all-time-high of 6.2 million missing workers (potential workers who are neither working nor actively seeking work due to the weak labor market). Almost a quarter of them (1.4 million) are under age 25. The figure below shows that the unemployment rate for young workers would be 18.4 percent instead of 12.8 percent if the missing young workers were in the labor force looking for work and thus counted as unemployed.For a complete picture of the labor market prospects facing the new cohort of young adults graduating from high school and college this spring, see the Class of 2014 report released yesterday. It includes, for example, a detailed discussion of the finding that there is little evidence that today’s missing young workers are “sheltering in school”

Highlights from the April Jobs Report -- Employers added 288,000 jobs and the unemployment rate fell to 6.3% in April, suggesting the labor market is gaining momentum heading into the spring. Here are highlights from the Labor Department’s latest employment report: U.S. payroll growth was the strongest since January 2012. Gains were broad-based, led by professional and business services (including temporary workers, management and computer systems design), retail trade, food services, construction, health care and mining.  The unemployment rate dropped to its lowest level since September 2008. But the big decline isn’t all good news. The Labor Department’s figures, obtained by a separate survey of households, showed the labor force shrank by 806,000 and the number of employed people fell by 73,000. The labor force participation rate was down to 62.8%, around a three-decade low. People are dropping out of the workforce.  The unemployment figure only captures those who have a job or are actively looking for work. A broader measure of joblessness, known as the “U-6,” accounts for people who have stopped looking for work as well as people working part-time for economic reasons. That number dropped to 12.3% from 12.7%. The Fed is also monitoring the number of part-timers. In April, almost 7.5 million were working part time but would have preferred a full-time job, a very slight increase from the prior month. The figure remains relatively high, suggesting there is still quite a bit of slack in the labor market.  February and March payrolls were revised up by a combined 36,000. Monthly job gains have averaged 238,000 over the past three months. In the 12 months prior to April, employment growth averaged 190,000, the Labor Department said. Neither the work week nor wages budged. Taken together, the figures show how much money workers are taking home each week, a key metric for consumer spending.

Prime working age employment population ratio improves in 2014 -- As I pointed out below, that the employment population ratio has increased while the percentage of the population in the labor force has decreased seems like a good think, suggesting that the reason for the decrease is moving more and more towards Boomer retirements.  Part of that may be that Boomers who want to retire can now enroll under the ACA, and don't have to wait for their Medicare eligibility. I thought I'd look at a metric Paul Krugman has examined from time to time, in order to avoid the confoundment of the data by Boomer retirements; namely, the employment to population ratio of 25 to 54 year olds.  And I got a surprise:Since last October, the employment to population ratio in this age group has increased from 75.5% to 76.5% (in March, it was actually higher at 76.7%). It is now higher than it was at the beginning of 1985.  It has made up about 1/3 of its Great Recession decline.

Comments on Employment Report - First, as always, we shouldn't read too much into any one report. Also there was probably some weather related bounce back in this report (one of the reasons I took the "over" yesterday).  Through the first four months of 2014, the economy has added 857,000 payroll jobs - slightly better than during the same period in 2013 even with the severe weather early this year. (For comparison, there were 821,000 payroll jobs added during the first four months of 2013).   My expectation at the beginning of the year was the economy would add between 2.4 and 2.7 million payroll jobs this year, and that still looks about right. Here is a table of the annual change in total nonfarm and private sector payrolls jobs since 1999.  The last three years have been near the best since 1999 (2005 was the best year for total nonfarm, and 2011 the best for private jobs). It is possible that 2014 will be the best year since 1999 for both total nonfarm and private sector employment.And we are almost to another milestone: total employment is now only 113,000 below the previous peak, and I expect total employment will be at a new high in May.   Of course the labor force has continued to increase over the last 6+ years, and there are still millions of workers unemployed - so the economy still has a long way to go.  Private payroll employment increased 273 thousand in April and private employment is now 406,000 above the previous peak (the unprecedented large number of government layoffs has held back total employment).Overall this was a solid employment report. Since the overall participation rate declined recently due to cyclical (recession) and demographic (aging population, younger people staying in school) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. In the earlier period the employment-population ratio for this group was trending up as women joined the labor force. The ratio has been mostly moving sideways since the early '90s, with ups and downs related to the business cycle.The 25 to 54 participation rate declined in April to 80.8% from 81.2% in March, and the 25 to 54 employment population ratio decreased to 76.5% from 76.7%.  As the recovery continues, I expect the participation rate for this group to increase.  (see more graphs)

The BLS Jobs Report Covering April 2014: A Tale of Two Contradictory Reports And Deeply Mixed Messages  - This is a very schizophrenic jobs report. In the seasonally adjusted “official” data, the unemployment rate dropped an amazing four-tenths of a percent to 6.3% but this was accomplished completely by contraction in the labor force (-806,000) and employment actually fell slightly.  On the seasonally unadjusted side, the contraction in the labor force was of a similar magnitude (782,000). Employment grew by 677,000 but unemployment decreased by 1.458 million, again signaling a large scale exit or definition of workers out of the labor force. Signs of recovery among the unemployed were mostly absent. The number of workers confident enough of the job market to quit their job to look for a better or different one remained small, while those entering the labor force for the first time or rejoining it decreased. Nevertheless, there were a few positive indications. The number of full time workers increased seasonally adjusted 412,000 and unadjusted 1.088 million. My calculation of the BLS undercount, workers the BLS refuses to include in the labor force, is now at or higher than the number of the unemployed. That is the BLS is missing something like half of the unemployed in its measures.  In another schizophrenic turn, while the household survey is showing a shrinking labor market, the business survey is showing, at least on the surface, a red hot spring rebuild. Seasonally adjusted an increase of 288,000 jobs; unadjusted and even more impressive 1.152 million. But as usual, the jobs are mostly confined to low paying industries like retail, leisure and hospitality, and administrative and waste services. With improving weather, the seasonal construction sector also took off increasing by 212,000. Overall, the spring rebuild is similar in size to last year’s. On the other hand, hours and wages were stagnant, hardly what you would expect for a job market heating up (and at odds with the increases in full time work seen in the household report).  In essence, we have two contradictory reports. The household survey is fairly negative. Unemployment improved but only because the labor force shrank. This is not good news. The business survey is mixed, showing growth but in low paying sectors and with no significant growth in wages and hours.

It’s a Mistake to Pretend This Jobs Report Tells a Consistent Story - A brief piece of advice for fellow journalists: Don’t try to pretend that the headline numbers from the two surveys that the Labor Department released this morning can tell a consistent story. They can’t. The monthly survey of businesses showed that the economy added 288,000 jobs last month — and 238,000 on average over the last three months, the best such pace in more than two years. The monthly survey of households showed that the economy actually lost 73,000 jobs; the only reason the unemployment rate fell is because people dropped out of the labor force, no longer looking for work and thus not counted as officially unemployed. It’s tempting to try to combine the two surveys into one neat package and claim that the economy added jobs, albeit not enough to bring people back into the labor force. But that’s not right. If you believe the household survey, the economy lost jobs. If you believe the business survey — which is much larger than the household survey — job growth was quite strong. They cannot both be right. Any one jobs report contains a fair bit of statistical noise, as Neil Irwin and Kevin Quealy have explained. It’s a mistake to pretend otherwise. The best approach is to take all the evidence — both the household and business survey, as well as multiple months of data — and use it all to tell the most sensible story we can, based on the evidence.Right now, that story looks something like this: The labor market appears to be gaining strength. But there are enough conflicting signals that we will need more months of data before we can be sure.

Jobs Day: the Good, the Bad, and the Ugly - This morning’s jobs report, showing an April surprise of 288,000 jobs added, was welcome news. This is the kind of job growth that would get us back to health in the labor market relatively soon. If we kept up this pace, we would get back to pre-recession labor market conditions by the end of 2016. However, this was a particularly wild case of “a tale of two surveys.” The household survey showed a substantial drop in the unemployment rate—to 6.3 percent—but the drop was entirely due to people dropping out of the labor force. Employment in the household survey actually declined, and the labor force participation rate fell back down to its lowest point of the recovery. Our estimate of the number of “missing workers” (workers who are not working or actively seeking work but who would be if job opportunities were strong) increased to an all-time high of 6.2 million. If those missing workers were in the labor force looking for work, the unemployment rate would be 9.9 percent instead of 6.3 percent.  As always, when the two surveys tell different stories, the rule of thumb is to place much more weight on the payroll survey, since it is much larger and less erratic. However, the weak household survey hugely dampens the enthusiasm of the strong payroll numbers. We can’t be confident that the economy is entering a new stage of stronger job growth until both surveys are regularly posting strong gains, and that did not happen in April.

Where The April Job Additions Were - While not nearly as horrific as recent months, in which the vast majority of job additions were relegated to the worst paying sectors possible, the month of April did see a pick up across virtually all industries (except for one of the best paying fields of course, Information), however four of the top six industries that saw job pick ups were once again in the lowest paying fields: Education and Health, Retail Trade, Temp Help and Leisure and Hospitality. The two best paying fields: Financial Services and Information saw a combined 3K jobs added between them.

Workers Younger Than 55 Lost 259K Jobs In April - Taking another peek beneath the only headline that vacuum tubes and algos care about, namely the headline establishment survey print, reveals another mockery of a "recovery", because in addition to the farce that 1 million Americans were added to the "not in labor force" number, a breakdown of jobs added by age group reveals more of the same. Namely, in the one most important age group for jobs, those workers aged 25-54 which represent the bulk of the US labor force and are also the best and most productive group, the total number of jobs tumbled from 95,360K to 95,151K, a drop of 209K!

As America Recovers The Jobs Lost During The Depression, Here Is What Sticks Out - While we expect much media coverage of the fact that as of the end of April, total jobs have risen to 138,252K or just 98,000 jobs shy of the December 2007 highs when the depression started (which means that the next jobs report will finally show a full recovery of the jobs lost in the past 6 years), another fact which will not receive nearly as much attention is that the cumulative increase in Americans who have, over the same period, dropped out of the labor force has more than "made up" for the job gains. In fact, it may come as a surprise to most, that since the peak of the depression in February 2010, when the job number dropped to 129.7 million and has been rising ever since, the average monthly number of job adds is 172K. And what about the average monthly number of people who drop out of the labor force since February 2010? 175K, or a virtually perfect mirror image.

Why Did the Unemployment Rate Drop So Much? --The U.S. unemployment rate tumbled to 6.3% in April as the overall labor force posted its biggest decline since October. The question for the health of the labor market: Why did all those people drop out? The details suggest it might not be for the most worrisome reasons. The jobless rate is calculated by taking the total number of unemployed people and dividing it by everyone in the U.S. who is working or looking for work — what the Labor Department calls the labor force. When both of those numbers decline, even if fewer people got jobs in the month, the unemployment rate falls. Both of those numbers can fall for many reasons, and they’re worrisome to different degrees. The one that raises the biggest concern is when unemployed people get discouraged with the job market and give up looking for work. Once someone leaves the labor force, it’s much harder for them to eventually find work. Many never return. That was at least part of the reason for the decline in April. The number of workers who said they weren’t looking for work because they were discouraged over job prospects ticked higher. Another way to look to see if people are giving up is by looking at a broader measure of unemployment, known as the “U-6″ for its data classification by the Labor Department. That rate includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find. The rate was 12.3% in April, falling the same 0.4 percentage point that the headline rate declined. So if the labor force didn’t drop this month because of people giving up, what’s going on? One trend weighing on the labor force is people with jobs retiring, and last month there was an increase in the number of employed people who were no longer working or looking for work. That flow was at its highest level since October and the third highest since before the recession. But the number of unemployed can fall because people got jobs, because they dropped out of the labor force, or it can fall just because fewer people decided to start looking for work. In April, one of the reasons the number of unemployed fell is because fewer people came off the sidelines to look for work. . Lots more people than usual decided to stay on the sidelines.That isn’t a hopeful sign for the economy, as people who otherwise might want work aren’t encouraged enough to come off the sidelines. But it’s also less worrying than people giving up looking for work. Many new entrants to the labor force are younger people who will eventually come in, and are on the sidelines because they can be.

Unemployment May Soon Drop to 3.8%, But Don’t Get Too Excited - The unemployment rate remains stubbornly high and millions of Americans are looking for work. So is it really time to start worrying about labor shortages? That’s the view of economists at the Conference Board, who argue in a new paper that the United States will soon enter a period of prolonged labor shortages that could drive the unemployment rate down to 3.8% or less in the next 15 years, lower than at any time since the 1960s. The current unemployment rate is 6.7%. As the retirement of baby boomers accelerates—nearly all these Americans born between 1946 and 1964 will leave the workforce by 2030, multiple forecasts predict—the labor force will contract, especially in occupations that currently employ a disproportionate number of older workers. Industries likely to see significant worker shortages include rail transportation, plant operations and law enforcement, according to authors Gad Levanon and Ben Cheng. On the other hand, STEM (science, technology, engineering and math) professions will be insulated from the brunt of this trend because large shares of those workers are young immigrants, they write. Unemployment will return to its “natural rate” of 5.5% by the end of 2015, the authors write. That seems like good news at first glance, especially for those who are out of work and eager to earn a paycheck, but there are darker elements to it. Along with retirements, another factor fueling the tight labor market of the future is the erosion in skills and qualifications of those who have been unemployed for a long time—a segment that has remained high during this recession. These individuals will, most likely, constitute an unemployable group that will eventually drop out of the workforce, the authors write.

The Real Unemployment Rate: In 20% Of American Families, Everyone Is Unemployed -- According to shocking new numbers that were just released by the Bureau of Labor Statistics, 20 percent of American families do not have a single person that is working.  So when someone tries to tell you that the unemployment rate in the United States is about 7 percent, you should just laugh.  One-fifth of the families in the entire country do not have a single member with a job.  That is absolutely astonishing.  How can a family survive if nobody is making any money?  Well, the answer to that question is actually quite easy.  There is a reason why government dependence has reached epidemic levels in the United States.  Without enough jobs, tens of millions of additional Americans have been forced to reach out to the government for help.  At this point, if you can believe it, the number of Americans getting money or benefits from the federal government each month exceeds the number of full-time workers in the private sector by more than 60 million.

Can We Have More Jobs and Less Work? - Few would argue that 2014 is a great time to be a waged worker in the United States. The unemployment rate remains high, and that’s not accounting for the droves of people who have dropped out of the workforce entirely. The jobs that do exist are often low-paid and precarious. Workers work longer hours and are more productive than ever before, but wages still have stagnated.One solution proposed by two progressive economists—Dean Baker, co-director of the Center for Economics and Policy Research, and Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities—has been “getting back to full employment” (which is the title of their 2013 book, a follow-up to their 2003 book, The Benefits of Full Employment). Full employment doesn’t mean completely eradicating joblessness, but Baker and Bernstein argue that if the government can decrease unemployment to an equilibrium such that everyone seeking work can find it relatively quickly, it will stanch the fiscal pain of the unemployed and help boost workers’ bargaining power—resulting in not just more jobs, but better ones. Another influential economic thinker, Kathi Weeks, a women’s studies professor at Duke University and author of The Problem with Work: Feminism, Marxism, Antiwork Politics and Postwork Imaginaries, has made the case that any solution to our current crisis of work must address the fact that work has consumed our lives. She calls for a radical “anti-work” politics that recognizes the social, economic and personal value of the things we do in our off-hours. To this end, she advocates for implementing policies like fewer work hours and a universal basic income. The latter is gaining traction across the Atlantic: The Swiss will vote this fall on whether to pay every citizen $2,800 a month regardless of whether they work, and a campaign for a Europe-wide basic income is gaining steam.

Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones: The deep recession wiped out primarily high-wage and middle-wage jobs. Yet the strongest employment growth during the sluggish recovery has been in low-wage work, at places like strip malls and fast-food restaurants. In essence, the poor economy has replaced good jobs with bad ones. That is the conclusion of a new report from the National Employment Law Project, a research and advocacy group, analyzing employment trends four years into the recovery. “Fast food is driving the bulk of the job growth at the low end — the job gains there are absolutely phenomenal,” said Michael Evangelist, the report’s author. “If this is the reality — if these jobs are here to stay and are going to be making up a considerable part of the economy — the question is, how do we make them better?”... The National Employment Law Project study found especially strong growth in restaurants and food services, administrative and waste services and retail trades. Those industries — which often pay wages at the federal minimum — accounted for about 40 percent of the increase in private sector employment over the past four years. There has also been strong jobs growth in some high-paying industries, like professional, scientific and technical services — a category that includes accountants, lawyers, software developers and engineers. That sector accounted for about 9 percent of the private-sector job gains in the recovery.

Trucking used to be a ticket to the middle class. Now it’s just another low-wage job.: Owning his own rig was supposed to be a crack at something better. As an owner-operator working on contract, he gave up some stability in exchange for the freedom of working whenever he wanted. But then, the bargain broke down. Prices started rising, and Tigre's pay rate didn’t keep up. Diesel used to be 87 cents a gallon; now it’s $3.99. Tolls on some roads are now more than $100 for truckers. There are anti-terrorism identity cards and stricter emissions requirements, and any traffic infraction could send his insurance through the roof. That’s a great deal for the trucking companies. Unlike employees, owner-operators aren’t entitled to benefits like workers compensation, Social Security contributions, unemployment insurance or the same level of protection by safety and health regulation. And it’s not just the trucking industry: Contractors have emerged all over the economy, from cheerleaders to construction workers. Personnel not covered by unemployment insurance made up 23.5 percent of the workforce in 2010, up from 19 percent in 2001. Companies often try to classify their workers as independent, even if they’re not, to avoid taxes and weaken unions.

More Stay-At-Home Dads Finding Jobs - Stay-at-home dads are going back to work. The number of married couples where a mother is employed but the father isn’t slipped to just over 1.45 million in 2013, the Labor Department said Friday, down from about 1.5 million the prior year and a peak of nearly 1.79 million in 2009. The annual report analyzed the employment status of husbands and wives living in the same household with children under 18. At the high point in 2009, 7.4% of that group had a mom who worked and a dad who didn’t. The surge in stay-at-home dads drew media coverage, created a new culture of dad groups and engendered dad-style parenting.

Why Americans Are Moving Less: New Jobs Aren't Worth It - Americans are moving less and less these days. Last year, just 11.7 percent of us (a near record low) packed up and moved across town or the country, a huge decline from the ferment of the 1950s and 1960s. What’s behind Americans' decreasing mobility? I have argued that high levels of home-ownership—especially in older, lagging regions— — locks people in place, making it harder to move to areas with more vibrant economies and better job opportunities. Demographers have suggested lower levels of mobility are a function of an aging population, since the rate at which people move declines steeply with age.But a recent National Bureau of Economic Research working paper from the Federal Reserve offers an even more basic explanation. Americans are moving less—and not as far—because it's not nearly as worthwhile economically. Most moves are local, from neighborhood to neighborhood in the same city or county, and are largely driven by seeking better housing or more proximity to family and friends. But long-distance moves between states are different. These interstate moves are typically driven by those seeking better job opportunities. Since the 1980s, neither the job opportunities nor the potential for better wages have made such moves worth it, according to the study. It finds that by 2013 the rate of interstate relocations had fallen 51 percent below its 1948 to 1971 average levels, the peak years for such longer-distance moves. As the graph below shows, since the 1970s the rate of long-distance movement has decreased more precipitously than the rate of shorter moves within the same state or county.

How Smaller Government Is Hitting Payrolls in Parts of U.S. --Smaller government and a slimmed-down military are taking toll on payrolls in some parts of the country. March’s unemployment rate in the Anniston-Oxford, Ala., metropolitan area has shot up 1 percentage point to 7.8% over the past year, the biggest rise in the country, according to Labor Department data released Tuesday. The Cape Girardeau-Jackson area, which spans the Missouri-Illinois border, saw a 0.9 percentage point rise in unemployment over the past year to 7.2%. By contrast, unemployment rates in March fell in 333 of the nation’s other 371 metro areas, the Labor Department said. The U.S. unemployment rate, not seasonally adjusted, was 6.8% in March, down from 7.6% a year earlier. Most of the country has followed the broader trend. Rocky Mount, N.C., had the largest year-over-year fall in unemployment in March, though the rate remained a painfully high 9.4% and some of the decline was due to people leaving the workforce. Elsewhere, some cities have been buoyed by the energy industry. Midland, Texas, had the lowest unemployment rate at 2.7%. But a loss of government jobs has pinched some metro areas, including Cape Girardeau-Jackson and Anniston-Oxford. For example, one of the big local employers for more than a decade had been the Anniston Chemical Agent Disposal Facility, which was used to destroy stockpiles of nerve agents and other chemical weapons stored at the Anniston Army Depot. The process began in 2003 and for years employed about 900 people. But the last of the stockpiles were destroyed in in late 2011 and since 2012, the facility has steadily let workers go. Now, staff is down to only 90.

Obama Administration Argues in Favor of Right to Fire Public Employees Who Testify at Corruption Trials -- The Supreme Court heard arguments today over whether public employee who testify under subpoena at public corruption trials should be protected by the First Amendment. The position of President Barack Obama’s administration appears to be that they should not be protected. The case is Lane v. Franks and it involves Edward Lane, who according to NPR was “hired in 2006 to head a program for juvenile offenders” at Central Alabama Community College that provided “counseling and education as an alternative to incarceration.” The program “received substantial federal funds.” Lane conducted an audit and discovered that one of the program’s “best-paid employees, a state representative named Suzanne Schmitz, was not showing up for work.” He met with her and was told that he shouldn’t “tangle” with her because she had influence. He refused to be complicit and fired Schmitz. The FBI was investigating “public corruption in Alabama” and Lane was subpoenaed to testify before a grand jury and at Schmitz’s two trials. She was convicted of “fraudulently obtaining $177,000 in public funds.” Yet, Lane never received any reward for his role. He was, instead, fired and decided to sue because he believed his termination was retaliation for testifying. It violated his First Amendment rights.

Post Office Piles on Shift to Low Wage Economy with Staples Deal --The National Employment Law Project (NELP) has just come out with its latest report on the wage-levels of jobs added as the nation has emerged from the Great Recession. As with NELP’s previous reports, which continue to garner national attention, the news was pretty simple: we’re only adding low wage jobs. Some 1.85 million more low-wage workers – defined by under $13.33 an hour – are employed by low-wage industries now then in 2008.  About the same number, 1.93 million workers – fewer workers are now employed in mid-wage and higher-wage industries.  The U.S. Postal Service has historically been one of those higher-wage industries, with average pay just under $25 an hour. For generations, postal jobs have been a ticket to the middle-class, including as one of the few employers who hired African-Americans at good wages earlier in the 20th Century.  But the post office is accelerating a new strategy to increase sales and shed labor costs by opening up mini-post offices at Staples stores. Staples is one of those low-wage employers, with Staples workers reporting that retail clerks average around $8.50 an hour. After piloting the mini-post offices in 82 Staples stores, the post office announced it would expand the program, prompting the American Postal Workers Union to organize more than 50 protest rallies outside Staples stores around the country.

Fight over minimum wage hike comes to a head in the Senate - Senate Majority Leader Harry Reid, D-Nev., has spent months setting up a vote on a bill to raise the minimum wage to $10.10 an hour, but the legislation is expected to meet its end in a matter of minutes Wednesday. With staunch Republican opposition to the policy - not to mention the belief that Democrats are using the issue as an election-year gimmick - Reid won't be able to muster the GOP votes he would need to get the bill on the floor for debate. The majority leader had hoped to bring the proposal up for a vote earlier this year but it has been delayed by the gridlock facing the Senate on other issues, including judicial nominations and an extension of emergency unemployment benefits that took months to pass. Reid would need at least six Republicans to overcome a filibuster and bring the minimum wage vote up for debate on the floor. One Democrat facing a tough re-election bid, Arkansas Sen. Mark Pryor, had said the increase was too much, too fast and would have voted no. He will also miss Wednesday's vote to attend to tornado damage in his home state. Other Democrats who hail from Republican-leaning states were also unsure. But even potential Republican supporters have been put off by Reid's insistence that the wage be raised to no less than $10.10, the amount a person would have to earn each hour in a 40-hour work week to be above the poverty line.

Senate Republicans block bill to raise the federal minimum wage to $10.10 per hour: (Reuters) – Senate Republicans on Wednesday blocked one of President Barack Obama’s top legislative priorities, a bill to raise the federal minimum wage for the first time in five years. On a nearly party-line vote of 54-42, supporters fell short of the 60 votes that would have been needed to end a procedural roadblock against the legislation in the Democratic-led Senate.  Just one Republican, Senator Bob Corker of Tennessee, joined Democrats in voting to advance the bill, which would increase the minimum wage to $10.10 per hour during the next three years and then adjust it for inflation in the future. The federal minimum wage is now $7.25 an hour. Senate Democratic Leader Harry Reid switched his vote from yes to no to reserve his right to bring up the bill again. President Barack Obama planned to attack Republicans over their opposition at an event at the White House later in the day where he was expected to again argue that 16 million minimum-wage workers deserve a raise. The non-partisan Congressional Budget Office estimated that the bill would raise the wages of about 16.5 million Americans and lift 900,000 out of poverty.

Seattle Mayor Details Plan for $15 Minimum Wage -  Mayor Ed Murray presented on Thursday what he described as an imperfect but workable plan to increase the city’s minimum wage to $15 an hour, more than twice the federal minimum wage and one of the highest anywhere in the nation, through a series of complex and phased-in stages. Just as crucially, he said, the plan has broad political support, with a coalition of labor and business groups ready to push hard for it at the City Council, starting with the first hearings next week.But the plan, which in many other cities might be seen as a liberal Democratic agenda at the frontier of social and economic engineering, was immediately attacked not from the mayor’s right, but from his left. Kshama Sawant, a Socialist Alternative Party member who was elected to the Seattle City Council last year on a single-minded drive to raise wages, said the plan had been “watered down” by business interests on the mayor’s 24-member committee on income inequality, of which she was also a member. In a packed news conference at City Hall right after Mr. Murray’s, she called on her supporters to continue their effort to gather signatures for a possible ballot initiative on wages this fall. The campaign might also put pressure on the Council to make the mayor’s plan better for workers, she suggested. “Every year of a phase-in means yet another year in poverty for a worker,” Ms. Sawant said. “Our work is far from done.”

Inequality and Pay: “Rents” vs. Merit -  In the age of Piketty, it is increasingly recognized that historically high levels of economic inequality are a serious and growing problem in many economies across the globe.  The problems caused by this phenomenon range from stagnant incomes and sticky poverty rates for the majority on the “have-not” side of the divide, to skewed political power (especially, given all the money in politics, here in the US), to possibly slower macroeconomic growth, self-reinforcing wealth accumulation, and a tendency toward terribly damaging bubbles.The causes of increased inequality are generally viewed to be increased competition through globalization, technological change, diminished union power, lower minimum wages, and persistent slack in the job market, which has the effect of significantly lowering the bargaining power of most workers. But there’s another alleged cause: there’s a lot more inequality, especially in earnings, because in this day and age, really talented people are finally able to get paid what they’re actually worth.  Some These forces have helped to unleash the earning power of a small number of individuals who are simply and legitimately earning their “marginal product,” i.e., the true value of their contribution to the world (hereafter MP). Now, I happen to think that’s wrong, but contrary to popular opinion, it’s actually the first assumption made by economics in evaluating pay.  The average person looks at figures showing more wealth or income inequality than ever and sees something out of whack.  In economic terms, they see evidence of “rents:” people who are, by dint of some economic inefficiency, being paid well beyond their MP. 

Inequality and Mobility in America - If you want a tutorial on how the political right responds to inequality and mobility concerns, this video is for you (Chrystia and Jared do their best to respond, and Jared has a nice summary of all of the potential causes of inequality in his opening remarks):  Income inequality has diminished in many parts of the world--Chile, Turkey, Mexico and Hungary being a few examples. But in America, the gap has widened. Ironically, the same forces may be responsible for both: globalization and technology, which have eased poverty in the developing world but led to the loss of unskilled but well-paying middle-class jobs in the United States and other developed nations. For the first time in nearly a century, the top 10 percent of American earners take home more than half the nation's income. New research suggests that it's harder than ever for the poor to move up into the middle and upper classes, an issue that has potential consequences for our economy, government, institutions and people. What can--or should--be done to narrow this disparity? Is education the key? With many Americans falling behind, these questions are stirring concern among policymakers and the business community as well. This panel will examine the magnitude of this complex challenge and strategies for reversing the trend.

  • Speakers: Jared Bernstein, Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and Policy Priorities; Former Chief Economist to Vice President Joe Biden
  • Edward Conard, Author, "Unintended Consequences"; Former Senior Managing Director, Bain Capital
  • Robert Doar, Fellow in Poverty Studies, American Enterprise Institute; Former Commissioner, Human Resources Administration, City of New York
  • Chrystia Freeland, Member of Parliament, Canada; Author, "Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else"
  • Moderator: Alan Schwartz, Executive Chairman, Guggenheim Partners

Inequality and Guard Labor - Excellent piece of work here by Samuel Bowles and Arjun Jayadev showing the correlation between inequality and guard labor across countries.  Why didn’t I think of making this graph?!  A few notable points:

  • –The authors stress that they are observing correlations but neither do shrink from suggesting obvious causal linkages.
  • –They note in passing that this same relationship exists across American states, which underscores the validity of the relationship.
  • –It’s not hard to imagine, as they suggest, that there are cultural, political, and policy differences that lead a Scandinavian country, like Demark, to have both low inequality and fewer guards as a share of employment; this doesn’t disprove causality at all—it just points out that these relationships have more causes than you can plot on two axes.
  • –They note another correlation not shown here: higher social welfare spending, less guard labor. 
  • –There is a school of thought that higher inequality increases the incentives for rewards and innovation, since it increases the benefits of “winning” and the costs of “losing.”   But I find this connection more compelling and concerning: “You have money spent on guarding stuff rather than making stuff,” said Michael Hood, an economist at Barclays Capital. “There’s a large population standing around in blue blazers rather than engaged in more productive activities.” He was talking about Latin America, but could have been describing things in the United States.

Want To Fix Income/Wealth Inequality? Here's How - I propose three straightforward solutions that will systemically rectify wealth and income inequality.

  • 1. Rather than add taxes to fund more social welfare--in effect, placing a Band-Aid over the tumor--let's start by removing the source of rising inequality: the Federal Reserve. I laid out in detail how the Fed's policies have enriched the top .1% at the expense of everyone else in Want to Reduce Income/Wealth Inequality? Abolish the Engine of Inequality, the Federal Reserve
  • 2. Eliminate the 6.2% Social Security payroll tax paid by employees and employers, and print the money to pay Social Security benefits in the Treasury. I described this solution in How About Ending Social Security and Paying Retirees with Cash? (November 15, 2013).
  • 3. Tax unearned income at much higher rates than earned income. The vast majority of the New Nobility's income is unearned income from rents, interest, dividends and capital gains. Taxing unearned income is in effect a wealth tax because only those who own income-producing assets have unearned income.

There is nothing fancy about these three solutions. They shift the incentives away from speculation to earned income/productive work, they lower regressive taxes on the middle class and working poor and they do not restrain legitimate enterprise and wealth accumulation. They eliminate complex systems (the Federal Reserve and the tax code) and put money in the hands of tens of millions of households rather then the top .1%. Yes, they are utopian, but only because we keep electing the same bought-and-paid-for Demopublican lapdogs of the super-wealthy and vested interests.

Why poverty is still miserable: Cheap consumer goods don't improve your long-term prospects.: How punishing is poverty in 2014? That depends. When it comes to consumer goods, low-income families might have it better than ever. The poor can now buy cheap cellphones and televisions that would have seemed like fantastical luxuries to yesteryear’s rich. Microwaves and air conditioners are standard. Food is relatively inexpensive, as is clothing. At the same time, some essentials are receding from the poor’s reach. Education, health care, and child care, I probably don’t need to tell you, are all becoming more expensive by the year.  This is the tension at the core of modern impoverishment, which Annie Lowrey takes on in the New York Times today. The wonders of globalization, modern manufacturing, and ruthless Walmart-style supply-chain management have made the stuff we buy to fill our homes and time much cheaper, and as a result the poor now enjoy a level of material well-being that would have seemed unimaginable decades ago. The safety net is also infinitely more generous compared with the early 1960s, before Lyndon Johnson launched his war on poverty. Yet, because the prices of key services are spiraling out of control, the poor’s lot is still rather hopeless. The NYT captures it in this very, very long graph.

In the U.S., Punishment Comes Before the Crimes - Few things are better at conveying what a nation really cares than how it spends its money. On that measure, Americans like to punish. The United States spent about $80 billion on its system of jails and prisons in 2010 — about $260 for every resident of the nation. By contrast, its budget for food stamps was $227 a person. In 2012, 2.2 million Americans were in jail or prison, a larger share of the population than in any other country; and that is about five times the average for fellow industrialized nations in the Organization for Economic Cooperation and Development. The nation’s unique strategy on crime underscores the distinct path followed by American social and economic institutions compared with the rest of the industrialized world. Scholars don’t have a great handle on why crime fighting in the United States veered so decidedly toward mass incarceration. But the pivotal moment seems to have occurred four decades ago. In 1974, the criminologist Robert Martinson published “What Works? Questions and Answers About Prison Reform.” Efforts at rehabilitation, it concluded, were a waste of time.If rehabilitation was out of reach, the thinking went, all that was left was to remove criminals from society and, through harsh sentencing, deter future crime. From 1975 through 2002, all 50 states adopted mandatory sentencing laws, specifying minimum sentences. Many also adopted “three strikes” laws to punish recidivists. Judges lost the power to offer shorter sentences.

Epidemic Of Hunger: New Report Says 49 Million Americans Are Dealing With Food Insecurity - If the economy really is "getting better", then why are nearly 50 million Americans dealing with food insecurity?  In 1854, Henry David Thoreau observed that "the mass of men lead lives of quiet desperation".  The same could be said of our time.  In America today, most people are quietly scratching and clawing their way from month to month.  Nine of the top ten occupations in the U.S. pay an average wage of less than $35,000 a year, but those that actually are working are better off than the millions upon millions of Americans that can't find jobs.  The level of employment in this nation has remained fairly level since the end of the last recession, and median household income has gone down for five years in a row.  Meanwhile, our bills just keep going up and the cost of food is starting to rise at a very frightening pace.  Family budgets are being squeezed tighter and tighter, and more families are falling out of the middle class every single day.  In fact, a new report by Feeding America (which operates the largest network of food banks in the country) says that 49 million Americans are "food insecure" at this point.  Approximately 16 million of them are children.  It is a silent epidemic of hunger that those living in the wealthy areas of the country don't hear much about.  But it is very real.

Debt of some states’ unemployment trust funds concerns experts -- Debt of State unemployment insurance trust funds — the engines that finance jobless benefits for millions of Americans — were battered by the Great Recession and went deep into debt to meet the demand from the unemployed. Years after the worst of the crisis, many states are still saddled with huge debt, according to a Stateline analysis of U.S. Treasury data showing trust fund balances from 2007 through the first quarter of 2014. At its worst in early 2011, states’ collective debt owed to the federal government reached more than $47 billion. Through the first part of 2014, 16 states still owe more than $21 billion to Washington. Many other states borrowed billions from the harder-to-track private bond market to cover funds that were insufficient to pay benefits. Altogether, three dozen states turned to Washington for loans during the Great Recession, more than had relied on similar support during the recessions of the 1970s and 1980s. California reached the highest level of debt among the states, more than $10 billion, and its fund was nearly $9.8 billion in the red as of March 31. Indiana, New York, North Carolina and Ohio all still have more than $1 billion in debt. Others saw their trust fund balances plummet over the course of the recession and then recover along with the economy. Minnesota started with a positive trust fund balance of $237.8 million, which slipped to more than $700 million in the red early in 2011. As of March this year, the state’s positive balance was more than $1 billion. Another example is Virginia, which started 2007 with nearly $670 million in its trust fund, saw its balance fall more than $400 million into debt in early 2011, but has since recovered to nearly $139 million in the black. Other states proved resilient enough to weather the downturn. Mississippi’s fund had nearly $720 million in reserves in early 2007 and saw it drop to $294 million in early 2011. As of March, it was back to more than $500 million.

Real State Per capita Income - The Bureau of Economic Analysis has been working on creating state and metro cost of living indices for several years and they have just published a new set of them that can be used to create real per capita income comparisons between states. In their press release they show a map comparing real growth in 2012 that ranged from plus 12.7% in North Dakota and minus -2.3% in South Dakota.  But I found the ranking of the states real per capita income much more interesting. Technically, the District of Columbia has the highest real per capita income but I suspect that measure is distorted the same way the D.C. real GDP is distorted.  Many people work in D.C.,  but commute in from other states. Because they live elsewhere they are counted in those states population, but their income or output generated in D.C. is included in the D.C data.  Interestingly, Luxemburg has the same distortion that gives it the highest real per capita GDP in Europe. Differences in rent is the major factor driving the differences in the cost of living by state.  For example, the Massachusetts price index is  index is 107.2 and within that rent is  121.4.  In Mississippi,  in contrast the overall price index is 86.4 and the rent index is 62.1.  So the difference in the overall index is about 14 while the rent index spread is about 60.  Rent in Massachusetts is approximately double rent in Mississippi.  Mississippi has the lowest rent in the country while Hawaii is the highest at 159. Hawaii has the second highest overall cost of living at 117.2 compared to 118.2 in Washington, D.C..  Only 14 states regional price indices are  greater than 100. Real per capita income in the top ten states is 135% of that in the bottom ten states.

White House opens door to tolls on interstate highways, removing long-standing prohibition - With pressure mounting to avert a transportation funding crisis this summer, the Obama administration Tuesday opened the door for states to collect tolls on interstate highways to raise revenue for roadway repairs. The proposal, contained in a four-year, $302 billion White House transportation bill, would reverse a long-standing federal prohibition on most interstate tolling.Though some older segments of the network — notably the Pennsylvania and New Jersey turnpikes and Interstate 95 in Maryland and Interstate 495 in Virginia — are toll roads, most of the 46,876-mile system has been toll-free. “We believe that this is an area where the states have to make their own decisions,” said Transportation Secretary Anthony Foxx. “We want to open the aperture, if you will, to allow more states to choose to make broader use of tolling, to have that option available.” The question of how to pay to repair roadways and transit systems built in the heady era of post-World War II expansion is demanding center stage this spring, with projections that traditional funding can no longer meet the need. That source, the Highway Trust Fund, relies on the 18.4-cent federal gas tax, which has eroded steadily as vehicles have become more energy efficient.

Will “Highway Cliff” Allow Obama to Revive “Public/Private Partnership” Infrastructure Scam?Yves Smith - Your humble blogger may be reading more than is warranted into the synchronistic timing of stories in two different newspapers about financing highway construction. But it nevertheless looks sus.  On Wednesday, Politico warned of a “highway cliff,” that the Highway Trust Fund, which funds infrastructure, is projected to run out of dough at the end of August. That means that projects underway could be stopped or delayed. With this budget need coming so close to an election, grandstanding is even more likely than usual to prevail over common sense. From Politico: There aren’t many good options for lawmakers — particularly Republicans, who are loath to approve big-money projects, don’t much like shifting money around and are sure to resist even a minimal hike in the gas tax. Few things rile up voters more than political stumbles leaving them stuck in traffic. Just ask New Jersey Gov. Chris Christie. And the timing couldn’t be worse, with funding slated to run out just months before voters head to the ballot box to vote in a critical election — providing the electorate with a fresh example of congressional dysfunction. Highway policy is pricey, complicated and fraught with regional tensions, and the process of rebuilding the trust fund could rattle the power hierarchies within the Capitol… Multiple committees have jurisdiction, and even the most senior lawmakers charged with spearheading transportation policy say the decision-making process is parked in the posh leadership suites in the Capitol. If you read the rest of the article, the situation is a mess, procedurally as well as practically. One assumes that Congresscritters will grope for a Euro-crisis style kick-the-can-down-the-road-past-the-midterms approach, but even getting to that is fraught. What struck me as telling was a story the same night, in the Financial Times, on infrastructure deals. Now why would that have anything to do with highway funding gridlock in the Beltway? In fairness, the Financial Times article made nary a mention of the imminent financing shutdown. But in talking about infrastructure deals, it peculiarly spoke only about highway financing, and of financing new construction. As readers likely know, infrastructure deals more commonly involve mature government assets, and range well beyond highways. Airports, tunnels, parking meters and parking garages have also been popular infrastructure plays.

The Folly of Prudence - Krugman - Many American roads are in pretty bad shape — I can attest to that, after driving up to Massachusetts and back for family business last week. When you combine that fact with the underlying macroeconomic situation, of which more in a minute, the case for spending substantial sums on repair seems obvious.  But Obama’s proposal for what is actually a modest infrastructure program appears to be going nowhere, thanks to a fight over how to pay for it.Which brings me back to something I started saying way back in 2008, which is still true: when you’re in a liquidity trap, virtue becomes vice and prudence becomes folly. Asking how we pay for infrastructure may seem prudent, but it is in fact deeply foolish.Think about it: what would the true costs be of repairing our roads? It wouldn’t divert capital from other investments — capital has no place to go, and markets are practically begging the federal government to borrow funds and put it to work:

An Empire in Decline, City by City, Town by Town - I returned to America to find another sort of regime change underway, only I wasn’t among the 1% for this one. Instead, I ended up working in the new minimum-wage economy and saw firsthand what a life of lousy pay and barely adequate food benefits adds up to. For the version of regime change that found me working in a big box store, no cruise missiles had been deployed and there had been no shock-and-awe demonstrations. Nonetheless, the cumulative effects of years of deindustrialization, declining salaries, absent benefits, and weakened unions, along with a rise in meth and alcohol abuse, a broad-based loss of good jobs, and soaring inequality seemed similar enough to me. The destruction of a way of life in the service of the goals of the 1%, whether in Iraq or at home, was hard to miss. Still, I had the urge to see more. Unlike in Iraq, where my movements were limited, here at home I could hit the road, so I set off for a look at some of America’s iconic places as part of the research for my book, Ghosts of Tom Joad. Here, then, are snapshots of four of the spots I visited in an empire in decline, places you might pass through if you wanted to know where we’ve been, where we are now, and (heaven help us) where we’re going.

Wasting One Life Away - “One in 31 Adults” (~2.3 million) are under the control of the correctional system according to a March 2009 Pew Center Report of the same title. 1 in every one hundred adults are imprisoned in jail, state prison, or federal prison. 25 years ago, those under the control of the correctional system was 1 in 77 adults as compared to 1 in 31 adults. If you factor in the numbers on parole or probation (~5.1 million [2007]), the numbers in jail, prison or on probation swell to ~ 7.3 million under some type of correctional/probationary control (2007).  What does the then growing prison and correctional population cost taxpayers? To support the then growing state prison population, costs ranged (it has only gone up) from ~$13,000 in Louisiana to ~$45,000 in Rhode Island annually (2005). The average was ~$23,000 annually, “US Imprisons 1 in every 100 Adults” NYT. The cost of imprisonment compares nicely to a state or private college education (another story which then I had not written about). As a whole the US imprisons a higher percentage of its population than any other nation in the world (and we still do such) from which the cost burden of housing prisoners has become an issue for states with a decreasing/stagnant economy and decreasing tax revenues. Paradoxically while costing the state more, jails and prisons for many communities are a stable and growing business employing people, services, and a fast growing part of the rural community economies.

BBC News - Oklahoma inmate dies after 'botched' lethal injection -  Lockett writhed and shook uncontrollably after the drugs were administered, witnesses said. "We believe that a vein was blown and the drugs weren't working as they were designed to. The director ordered a halt to the execution," Oklahoma Department of Corrections spokesman Jerry Massie said.   But Lockett's lawyer, David Autry, questioned the remarks, insisting his client "had large arms and very prominent veins," according to the Associated Press. The prisoner was moving his arms and legs and straining his head, mumbling "as if he was trying to talk", Courtney Francisco, a local journalist present at the execution, told the BBC. Prison officials pulled a curtain across the view of witnesses when it became apparent that something had gone wrong. "It was a horrible thing to witness. This was totally botched," Mr Autry said.

For more states, execution means improvisation as drug supplies dwindle - Oklahoma’s bungled execution of convicted murderer Clayton Lockett on Tuesday was, in some ways, a medical experiment gone wrong. In recent years, as pharmaceutical companies have halted sales of drugs used in executions, as legal challenges have mounted and medical groups have vowed to ostracize doctors who participate in sanctioned killings, states have found themselves winging it when it comes to carrying out lethal injections. In their scramble to carry out death sentences, prison officials from different states have made secret handoffs of lethal-injection drugs. State workers have carried stacks of cash into unregulated compounding pharmacies to purchase chemicals for executions. Some states, like Oklahoma, have relied on unproven drug cocktails, all while saying they must conceal the source of the drugs involved to protect suppliers from legal action and harassment. “It looks like a street-level drug deal,” said Dean Sanderford, a lawyer for Lockett. “And they’re keeping all the information secret from us. . . . They don’t need to be carrying out any more executions until they come clean, until we know exactly what happened with Clayton’s execution and everything about these drugs, where they’re getting them.”

Detroit Homeowners Gun Down Burglars as Police Await Cars - Even as bankrupt Detroit’s residents have resorted to gunning down neighborhood burglars, its police await money for patrol cars, radios, armored vests and modern computers. Emergency Manager Kevyn Orr last month pledged $36.2 million for police from a $120 million loan from Barclays Plc approved by U.S. Bankruptcy Judge Stephen Rhodes. Department officials wouldn’t discuss plans for the money, though Orr’s shopping list includes vehicles, station houses and a training facility for the city, which piled up $18 billion of debt by the time it filed for bankruptcy in July. The money can’t come soon enough for a shrunken department that patrols 139 square miles (360 square kilometers) scarred by blight and poverty with decade-old cruisers. Although crime is down under new Police Chief James Craig, attacks in recent months have residents on edge and reinforced the city’s image as a danger zone.

Kindergarten show canceled so kids can keep studying to become ‘college and career ready.’ Really.: An annual year-end kindergarten show has been canceled at a New York school because the kids have to keep working so they will be “college and career” ready. Really. That’s what it says in a letter (see below) sent to parents by Ellen Best-Laimit, the interim principal of Harley Avenue Primary School in Elwood, N.Y., and four kindergarten teachers. The play was to be staged over two days, May 14 and 15, according to the school’s calendar. One mother who received the letter, Ninette Gonzalez Solis, wrote on Facebook that parents learned recently the play was being canceled and started calling the principal, leading the school officials to send out the new missive. Solis wrote that she was very upset about the cancellation. This didn’t come out of the blue. Kindergarten (and even preschool) has increasingly become academic — at the expense of things such as recess and the arts — in this era of standardized test-based school reform. In most states, educators are evaluated in large part on test scores of students (sometimes students they don’t have) and on showing that their students are “college and career ready,” the mantra of the Obama administration’s education initiatives.

A Walmart Fortune, Spreading Charter Schools - — DC Prep operates four charter schools here with 1,200 students in preschool through eighth grade. The schools, whose students are mostly poor and black, are among the highest performing in Washington. Last year, DC Prep’s flagship middle school earned the best test scores among local charter schools, far outperforming the average of the city’s traditional neighborhood schools as well.Another, less trumpeted, distinction for DC Prep is the extent to which it — as well as many other charter schools in the city — relies on the Walton Family Foundation, a philanthropic group governed by the family that founded Walmart.Since 2002, the charter network has received close to $1.2 million from Walton in direct grants. A Walton-funded nonprofit helped DC Prep find building space when it moved its first two schools from a chapel basement into former warehouses that now have large classrooms and wide, art-filled hallways.One-third of DC Prep’s teachers are alumni of Teach for America, whose largest private donor is Walton. A Walton-funded advocacy group fights for more public funding and autonomy for charter schools in the city. Even the local board that regulates charter schools receives funding from the Walton Family Foundation.

A Link Between Fidgety Boys and a Sputtering Economy -  The behavior gap between rich and poor children, starting at very early ages, is now a well-known piece of social science. Entering kindergarten, high-income children not only know more words and can read better than poorer children but they also have longer attention spans, better-controlled tempers and more sensitivity to other children. All of which makes the comparisons between boys and girls in the same categories fairly striking: The gap in behavioral skills between young girls and boys is even bigger than the gap between rich and poor. By kindergarten, girls are substantially more attentive, better behaved, more sensitive, more persistent, more flexible and more independent than boys, according to a new paper from Third Way, a Washington research group. The gap grows over the course of elementary school and feeds into academic gaps between the sexes. By eighth grade, 48 percent of girls receive a mix of A’s and B’s or better. Only 31 percent of boys do.  And in an economy that rewards knowledge, the academic struggles of boys turn into economic struggles. Men’s wages are stagnating. Men are much more likely to be idle — neither working, looking for work nor caring for family — than they once were and much more likely to be idle than women. We reported last week that the United States had lost its once-enormous global lead in middle-class pay, based on international income surveys over the last three decades. After-tax median income in Canada appears to have been higher last year than the same measure in this country. The poor in Canada and much of western Europe earn more than the poor here. These depressing trends have many causes, but the social struggles of men and boys are an important one. If the United States is going to build a better-functioning economy than the one we’ve had over the last 15 years, we’re going to have to solve our boy problems.

My Students Don't Know How to Have a Conversation - My junior English class had spent time researching different education issues. We had held whole-class discussions surrounding school reform issues and also practiced one-on-one discussions. Next, they would create podcasts in small groups, demonstrating their ability to communicate about the topics—the project represented a culminating assessment of their ability to speak about the issues in real time. Even with plenty of practice, the task proved daunting to students. I watched trial runs of their podcasts frequently fall silent. Unless the student facilitator asked a question, most kids were unable to converse effectively. Instead of chiming in or following up on comments, they conducted rigid interviews. They shuffled papers and looked down at their hands. Some even reached for their phones—an automatic impulse and the last thing they should be doing. As I watched my class struggle, I came to realize that conversational competence might be the single-most overlooked skill we fail to teach students. Kids spend hours each day engaging with ideas and one another through screens—but rarely do they have an opportunity to truly hone their interpersonal communication skills. Admittedly, teenage awkwardness and nerves play a role in difficult conversations. But students’ reliance on screens for communication is detracting—and distracting—from their engagement in real-time talk.

For More Than One Million Kids, Graduating High School is Followed by… Nothing -- More than 1 million kids who have graduated high school in recent years have begun the pursuit of nothing: they are not working, not looking for work, and not enrolled in any further education. An additional 600,000, though searching for work, remain unemployed. At 17.7%, the share of non-working, non-enrolled high school graduates, age 17-20 is at its peak, as is the 11.1 percent neither working, looking for work, or enrolled in further education, according to an analysis released today by the Economic Policy Institute, a left-leaning think tank in Washington. “There are two key ways young graduates can further advance their careers and their futures: getting a job or further schooling,” said Heidi Shierholz, the lead author of the report. ”You like to think people are traveling around the world or doing something enriching. I doubt that’s it. It’s people who are thrown into this position because of the weak economy in the aftermath of the Great Recession.” Twenty years ago, young women were significantly more likely to be outside the labor force and unenrolled in school – perhaps as they started families – yet today the trend has reversed and its young men who are likeliest to be neither working nor in school.  Many recent college graduates are struggling as well, with 11.2% not working or enrolled in further school, a figure that has improved slightly since 2011, but remains higher than any point before the recession.

The Adjunct Revolt: How Poor Professors Are Fighting Back - Mary-Faith Cerasoli has been reduced to “sleeping in her car, showering at college athletic centers and applying for food stamps,” The New York Times recently reported. Is she unemployed? No, in fact, she is a college professor— but an adjunct one, meaning she is hired on a short-term contract with no possibility of tenure. A spate of research about the contingent academic workforce  indicates that Cerasoli’s circumstances are not exceptional. This month, a report by the American Association of University Professors showed that adjuncts now constitute 76.4 percent of U.S. faculty across all institutional types, from liberal-arts colleges to research universities to community colleges. A study released by the U.S. House of Representatives in January reveals that the majority of these adjuncts live below the poverty line. Over spring break, Cerasoli publicly protested her working conditions on the steps of New York Department of Education wearing a vest emblazoned with the words “Homeless Prof” on it. Her efforts dovetail with a national labor movement in which thousands of adjuncts are fighting for change within the higher-education system. In the short-term, adjuncts are demanding a living wage, but they are also proposing long-term solutions to structural problems ailing universities. Many argue that the dependence on contingent labor is part of a larger pattern of corporatizing the university, which they believe is harming not just professors and students, but society more broadly.

The Weak Economy Is Idling Too Many Recent Graduates -- Across the country, millions of students are gearing up for graduation and will begin focusing on their career goals. Two key paths young graduates can take to continue preparing for their careers are to get a job, or to enroll in further schooling. In this recovery, both of those paths have been blocked for many young workers. There has been a large increase in the share of young high school and college graduates who are idled—neither employed nor enrolled in school—by the weak economy. The share of recent high school graduates (age 17-20) who are neither employed nor enrolled in college increased from 13.7 percent in 2007 to 17.7 percent in 2010 and has made no sustained improvement since that time. The share of recent college graduates (age 21-24) who are neither employed nor enrolled in further schooling increased from 8.4 percent in 2007 to 11.6 percent in 2011, and has improved only modestly since then, to 11.2 percent. These high rates of idleness of both recent high school and recent college graduates represent an enormous loss of opportunities for these young graduates that will have lasting consequences on their careers.

Obama administration flags big growth in student debt (Reuters) - The Obama administration on Tuesday flagged the "daunting" levels of debt taken on to pay for college education in the United States, and pledged to take a closer look at the sustainability of that borrowing. "We need to look carefully at the performance of these loans," Deputy Treasury Secretary Sarah Bloom Raskin said. Raskin's comments played to growing worries among economists and investors over the more than $1 trillion in outstanding U.S. student loans, most of which was lent by the federal government. She pointed to data showing a university education can help people rise up the income ladder, a key element of the administration's focus on reducing economic inequality. true But she also noted that the percentage of university graduates with student debt had risen to 60 percent in 2012, twice its level two decades earlier. By the end of last year, more than 40 million people owed money for their college educations, and an increasing share of people are falling behind on their loans, Raskin said. "These numbers are daunting," she said, saying the U.S. Treasury needs to be "clear-headed when we evaluate the sustainability of these debt levels and the challenges associated with repayment.

Just How Much Are Parents Bailing Out Their Student-Debt-Addled Kids? -  The rising mountain of student debt is weighing down America’s young adults in myriad ways. It’s also a burden on their parents, who are quietly acting as economic supports by helping their adult children out with money, according to preliminary findings released Friday at this year’s Population Association of America conference in Boston. Nearly 40% of U.S. parents of adult children 18 years old and up gave money to their children for education, according to the latest data from the Panel Study of Income Dynamics, the world’s longest-running nationally-representative household panel survey. Parents who got help themselves are likelier to help their children. Some 66% of parents of adult children 18 years and up who got help from their own parents gave money to their kids, compared with only 30% for those who didn’t get money from their own parents. All told, just under a quarter of all U.S. adults have received money from parents for education, the study found. We’ve seen “a tremendous rise in student debt,” . “The question is, is the family basically paying for some of the consequences of mortgage and student debt?” America’s $1 trillion-plus student-loan burden was a key theme of this year’s PAA conference, with researchers blaming high debts among the young—as opposed to the health of the economy—for stunting their ability to reach typical milestones from moving out of parents’ homes and getting married to having children and moving to the suburbs.

Enrollment in Student-Debt Forgiveness Programs Soars in 2014 - Two federal programs that offer to wipe away huge accumulations of student debt have grown at a rapid clip this year, putting them among the government’s fastest-growing forms of financial assistance. The Journal reported last week that enrollment in the plans—which allow students to rack up big debts and then forgive the unpaid balance after a set period—surged nearly 40% in the second half of 2013. The growth of the programs hasn’t slowed. The number of borrowers in the income-based repayment programs climbed 24% between January through March to 1.63 million, the Education Department said.  The amount of debt absorbed grew by 22% to $88 billion—now nearly a 10th of all outstanding federal student debt. At that rate, the government took on more than $5.3 billion per month in potential student-debt liability in the first three months of the year. Interest in the programs began to surge in the middle of last year as the Obama administration promoted the programs through emails to borrowers and on the Internet. In the nine months through March, enrollment is up a staggering 72%. The programs’ popularity comes as top law schools have taken to advertising their own plans that offer to cover a graduate’s federal loan repayments until outstanding debt is forgiven—opening the way for free or greatly subsidized degrees at taxpayer expense. Expanding use of the programs, which have been rolled out and enhanced over the past several years, have mixed implications for borrowers and taxpayers. The programs cap borrowers’ monthly payments at 10% to 15% of their discretionary income, often reducing monthly bills by hundreds of dollars. Those borrowers are now more likely to stay current on their payments, avoiding default and the resulting damage to their credit.

These Are The Top Financial Concerns Of Ordinary Americans - While institutional investors and money managers have a very specific list of worries when it comes to their "financial concerns" such as Fear Of Missing Out (FOMO), monthly/quarterly performance and redemption requests, losing top traders, what the year end bonus will be, order fill slippage, being frontrun by HFT algos, what the Fed chairwoman may say any given day, whether it is 3:30pm or if it is a Tuesday, ordinary Americans have a far simpler list of concerns. According to a recent Gallup poll, the one thing that has most Americans very/moderately worried is "whether or not they have enough money for retirement." Going down the list, the next highest concern, not being able to pay medical costs in the event of a serious illness or accident, worries 53% of Americans. This is down from a record high of 62% in 2012. Third on the list of Americans' top financial worries is not being able to maintain the standard of living they enjoy, with nearly half of the country's adults citing this concern. Together, retirement savings, unexpected medical costs, and maintaining one's standard of living typically top the list of the eight financial items that Gallup has tracked annually since 2001. Concerns about all three are down modestly from two years ago, but are still higher than they were before the Great Recession.

Average Retirement Age In America Hits Record High - The average age at which U.S. retirees report retiring is 62, the highest Gallup has found since first asking Americans this question in 1991. While not a total surprise, given our previous discussion of the rise in employment that is so focused on the elder cohorts of society as they smash headlong into the realization that they have no retirement plan. As we pointed out here, the typical worker near retirement only has about 2 years of replacement income saved, or about 15 years short of the median lifespan post-retirement. What is perhaps more worrisome is the rapid rise that Gallup notes in the last few years, as we have pointed out in the past that in fact, over 60% of workers accumulated more debt than they contributed to retirement savings between 2010 and 2011.

Retirement Accounts for Everyone - The Connecticut legislature is considering a bill that create a publicly administered retirement plan that would be open to anyone who works at a company with more than five employees. Employees would, by default, be enrolled in the plan (at a contribution rate to be determined), but could choose to opt out. The money would be pooled in a trust, but each participant would have an individual account in that trust, and the rate of return on that account would be specified each December for the following year. Upon retirement, the account balance would by default be converted into an inflation-indexed annuity, although participants could request a lump-sum deferral. The legislative session ends in less than two weeks, and while the bill has passed through committees, I believe it’s not certain whether it will be put to a floor vote. On Friday I wrote on op-ed for The Connecticut Mirror about the bill. The requirements for businesses are relatively modest. The main one is that they have to allow employees to make contributions by payroll deduction. If they don’t outsource their payroll (which most companies do), that will involve a little more administrative hassle, but nothing terribly complicated. (Employers already have to deal with federal and state income tax withholding, payroll taxes, workers’ compensation insurance, and unemployment insurance contributions, to name a few.) And compared to a 401(k), this plan has the huge benefit that the employer isn’t a fiduciary. Retirement benefits are paid solely out of participants’ contributions and investment returns, so there’s no fiscal impact.

CalPERS: Judge Rules Our Suit is Premature -  Yves Smith  - We will not have a copy of the formal ruling on our case against CalPERS until the court issues one, but based on a verbal report, my understanding is that Judge Marla Miller ruled from the bench that our case was premature.  If her written order confirms that understanding, this is the least adverse outcome we could have experienced. It does not preclude us filing again at a later date. We will review the written order to see whether it would make sense to file a motion for reconsideration or an appeal. The ruling is nevertheless puzzling, and may have been the result of our having been concerned with getting evidence into the record so as to have a good factual foundation in case CalPERS appealed, which we thought was likely had we prevailed. But that may have had obscured the most salient facts. By way of background, we had asked CalPERS to give us data about their private equity fund performance that they provided to two scholars at Oxford University, Tim Jenkinson and Ruediger Stucke. Their paper, written with an additional co-author, Miguel Sousa, was published in 2013. It stressed that they had the entire performance of all of CalPERS’ 761 private equity investments, from CalPERS’ first participation in that strategy in 1990 through the first quarter of 2012. The article also stated repeatedly that substantial portions of their data had never been previously made public. The notion that our suit was premature was based on CalPERS’ claim that they were cooperating with us, hence the suit was not ripe. But the standard under the Public Records Act (California’s version of FOIA) is whether it took litigation to compel the production of records.  CalPERS had in fact deemed our records request closed as of January 27, 2014, as a letter from CalPERS that we included as an exhibit in our original filing clearly showed. That is also confirmed on CalPERS’ website (see the final entry on the page):

Time to Act: Pension Funds are Drying Up  - If you’ve been counting on your pension, whether from work or even Social Security, you may want to revise those plans, as most are way underfunded. Research by Bridgewater Associates, the world’s largest hedge fund, estimates that 85% of public pensions could go bust within 30 years. Public pension funds currently have about $3 trillion in assets, but will need to pay out nearly $10 trillion over the next several decades. That would require average annual returns around 9%, but Bridgewater estimates they’ll only earn about 4%, leaving pensions severely underfunded as paid benefits exceed contributions and returns. Here and elsewhere, governments have bought votes by overpromising benefits that will never be honored.

New York Will Keep Affordable Care Act Health Plans Restricted - New York State health officials said on Friday that they would not require out-of-network coverage on Affordable Care Act health plans next year, a decision likely to disappoint customers who have complained that they can no longer use their favorite doctors and hospitals.Restricting consumers to a fixed network of doctors and hospitals, called in-network coverage, helps keep costs down, and for the first year, none of the 16 insurance companies in New York’s exchange deviated from that model.Advocates for consumers had lobbied hard for out-of-network coverage, saying that some patients needed more choices, particularly since the networks are being kept small to further reduce costs. Under the current in-network system, someone who lives part of the year out of state, or a student at a college out of state, are not covered while they are away, except for emergency care.The limitation affects people who buy individual or family coverage on the health exchanges, not those insured through employers, who often have the option of seeing out-of-network doctors if they pay higher fees. More than 350,000 people have signed up with private insurers on New York’s health exchange, making it one of the most successful exchanges in the country.

Behind the scenes, much of is still under construction - The Obamacare website may work for people buying insurance, but beneath the surface, is still missing massive, critical pieces — and the deadline for finishing them keeps slipping. As a result, the system’s “back end” is a tangle of technical workarounds moving billions of taxpayer dollars and consumer-paid premiums between the government and insurers. The parts under construction are essential for key functions such as accurately paying insurers. The longer they lag, experts say, the likelier they’ll trigger accounting problems that could leave the public on the hook for higher premium subsidies or health care costs. It’s an overlooked chapter in the health care law’s story that has largely escaped scrutiny because consumers aren’t directly affected. Yet it bolsters the Republican narrative that the government has mishandled the implementation of Obamacare.

ObamaCare enrollment extended again -- Sick patients who obtained health coverage through ObamaCare's federal high-risk pool will have until June 30 to select a plan at, the Obama administration said Thursday. The special enrollment period applies to patients in the Pre-Existing Condition Insurance Plan (PCIP), a temporary, federal program designed to provide coverage to people insurers had turned away.  Lawmakers intended the PCIP to stop at the end of 2013, coinciding with the implementation of a rule requiring insurers to cover people regardless of their health status. But after three extensions, PCIP benefits will now expire on April 30. Starting May 1, anyone who was left in the pool can enroll in a policy at

ObamaCare Clusterfuck: “Medical Homelessness” in California - KPIX (CBS local) in San Francisco: While open enrollment for coverage under the Affordable Care Act is closed, many of the newly insured are finding they can’t find doctors, landing them into a state described as “medical homelessness.” Rotacare, a free clinic for the uninsured in Mountain View, is dealing with the problem firsthand. Mirella Nguyen works at the clinic said staffers dutifully helped uninsured clients sign up for Obamacare[1] so they would no longer need the free clinic. But months later, the clinic’s former patients are coming back to the clinic begging for help. “They’re coming back to us now and saying I can’t find a doctor, “said Nguyen.  Nguyen said the newly insured patients checked the physicians’ lists they were provided and were told they weren’t accepting new patients or they did not participate in the plan.  Dr. Kevin Grumbach of UCSF called the phenomenon “medical homelessness,” where patients are caught adrift in a system woefully short of primary care doctors.“Insurance coverage is a necessary but not a sufficient condition to assure that people get access to care when they need it,” Grumbach said. Those who can’t find a doctor are supposed to lodge a complaint with state regulators, who have been denying the existence of a doctor shortage for months. Meanwhile, the sick and insured can’t get appointments. “What good is coverage if you can’t use it?” Nguyen said.

High Cost Is Still Number One Thing Keeping People From Getting Health Care Coverage -  The main reason that more uninsured haven’t signed up so far is it still seems too expensive, even under the Affordable Care Act. From Kaiser Family Foundation: This reminds me of candidate Obama’s main complaint against the idea of the individual mandate, which if mandates alone worked we could end homelessness by just mandating everyone buy a house. The problem is cost, not a lack of desire. Health insurance is very expensive. Even with the subsidies in the Affordable Care Act buying and/or actually using the required coverage can still be a financial burden for many.This cost issue can be addressed by throwing even more subsidies at the problem or ending the significant overcharging of Americans for all health care services compared with the rest of the first world. Of course, Democrats wanted to both cut deals with the industry and get a low CBO score, so we were left with an Affordable Care Act which is short on the “affordable” part for many.

Major Obamacare insurer backs away from double-digit rate hike prediction: Wellpoint, the nation's second-largest insurer, said it saw a major enrollment boost toward the end of the Obamacare sign-up period in the 14 states where it sells exchange plans, including California and New York. The company said enrollment in exchange plans through Feb. 15 was 400,000, and it expects enrollment to increase to more than 600,000 after it factors in the late-March/early-April surge. A month ago, the insurer surprised investors when it said it expected double-digit rate increases in 2015 – even after the company in its previous January earnings said the early enrollment mix had been meeting the company’s expectations. “On a year-over-year basis on our exchanges, and it will vary by carrier, but all of them will probably be in double-digit plus,” a company official reportedly said last month. Company officials were more cagey about expectations Wednesday. Several analysts asked about expected rate increase for next year, including one analyst who asked specifically whether the insurer expects double-digit rate increases and if it felt any pressure to keep down rates after a meeting with President Obama this month. “Rates will vary by market, but given this information, they may not be what we thought from previous reports,” Wellpoint said Wednesday in an e-mailed statement

Despite High Enrollment, the Affordable Care Act is Still Unpopular - While signups on the exchanges may have reached 8 million that seems to have had little impact on popular opinion about the health care law. Indications are that support for the Affordable Care Act remains as weak as it has been for the past few years. Two new polls find support for the ACA at roughly where it was before implementation. The Kaiser Family Foundation poll found only 38 percent have a favorable opinion of the law while 46 percent view it unfavorable. This is a modest improvement from when was at its worst, but basically back to where it was in early 2013. From KFF:  More importantly, the Washington Post-ABC News poll again shows the law in negative territory, with 44 percent support to 48 percent opposed. Many Democrats and supporters of the law were heavily promoting the Post poll from last month which found increasing support for the law, but based on the new evidence it appears that was only a statistical outlier, nothing more than noise in the polling.

Health Care Information Technology: A Danger to Physicians and Your Health -  Yves Smith  - The causes of the crapification are legion, but one that is having a bigger impact on health care than is widely recognized is bad information technology implementation. And I don’t mean the website.  In case you missed it, the Federal government is in the midst of a $1 trillion experiment to promote (as in force) the use of Electronic Health Care records, or EHRs. Astonishingly, this program has been launched with no evidence to support the idea that rendering records in electronic form will save patient lives. From a Freedom of Information Act filing by the American Association for Physicians and Surgeons got this response, which was reprinted in their April newsletter (emphasis ours): While our Office of E-Health Standards and Services works to implement the provisions of the ARRA, we do not have any information that supports or refutes claims that a broader adoption of EHRs can save lives. Now of course, one might argue based on intuition that surely electronic data would help patient care. Think of all those illegible doctor scrawls that get misread from time to time. But you need to weigh those errors against those of bad data entry, difficult to read file formats, difficulty in converting records to electronic form, and greater risk of loss of patient data (hard disk crashes and faulty backups).  We’ll get to the lousy patient outcomes part in due course. But I wanted to focus on a less obvious but no less significant element of this health care information technology push: that it is accelerating the death of solo practices. Mind you, this was already well underway, as reader Juneau noted in our recent post on corporatized medicine: Going from working for a large corporate healthcare entity to working alone, I have seen insurance rates cut by 40 percent simply for going from “group” to “solo” status. Those who can afford to “do it right”  feel like dopes. Colleagues who put themselves first survive. Those who made sacrifices, provide free care to indigent patients, accept insurance, etc…..are now the low tier low status docs who work 60 plus hours to make overhead and stay afloat.

Do Physicians’ Financial Incentives Affect Medical Treatment and Patient Health? - We investigate whether physicians' financial incentives influence health care supply, technology diffusion, and resulting patient outcomes. In 1997, Medicare consolidated the geographic regions across which it adjusts physician payments, generating area-specific price shocks. Areas with higher payment shocks experience significant increases in health care supply. On average, a 2 percent increase in payment rates leads to a 3 percent increase in care provision. Elective procedures such as cataract surgery respond much more strongly than less discretionary services. Non-radiologists expand their provision of MRIs, suggesting effects on technology adoption. We estimate economically small health impacts, albeit with limited precision.

Doctors Get Millions From Medicare After Losing Their Licenses - The first time cardiologist Robert Graor lost his Ohio license to practice medicine was in 1995, after he was convicted of 10 felony theft counts for embezzling more than $1 million from the Cleveland Clinic and sentenced to three years in jail. The second time was in 2003, after he’d won back the license following his release from prison. This time, the Ohio Board of Medicine found he repeatedly misrepresented his credentials over a two-decade period and permanently barred him from practicing medicine. That didn’t stop Graor from participating in Medicare, the government’s health insurance program for the elderly and disabled. In 2012, Medicare paid $660,005 for him to treat patients in New Mexico, which gave him a license to practice in 1998. Graor declined to comment.At least seven doctors who’d lost a medical license because of misconduct collected a total of $6.5 million from Medicare in 2012, according to federal data. The list includes doctors accused of gross malpractice, a brutal sexual assault and violating prescription drug laws. Their continued participation in the $604 billion program reflects what some members of Congress and others call a permissive approach that lets providers with questionable backgrounds keep billing taxpayers. All the doctors notified Medicare of the loss of their licenses, records show

The Pervasiveness of Health Care Corruption as Shown by Another Roundup of Legal SettlementsYves here. This post is important, not simply for chronicling health care corruption, but also in demonstrating how, just as in financial services, the individuals responsible are not targeted for fines or prosecution. Legal settlements are one way to document unethical and even corrupt behavior by large health care organizations, even if they may not deter bad behavior in the future.  It is time for another roundup of settlements by large pharmaceutical and device companies, presented in alphabetical order

First Million-Dollar Drug Near After Prices Double on Dozens of Treatments -  Earl Harford, a retired professor, recently bought a month’s worth of the pills he needs to keep his leukemia at bay. The cost: $7,676, or three times more than when he first began taking the pills in 2001. Over the years, he has paid more than $140,000 from his retirement savings to cover his share of the drug’s price. “People with this condition are being taken advantage of by the pharmaceutical industry,” “They haven’t improved the drug; they haven’t done anything but keep manufacturing it. How do they justify it?” As the pharmaceutical industry, led by Pfizer Inc.’s proposed $100 billion takeover of AstraZeneca Plc, is in the throes of the greatest period of consolidation in a decade, one reality remains unchanged: Drug prices keep defying the law of gravity. Since 2007, the cost of brand-name medicines has surged, with prices doubling for dozens of established drugs that target everything from multiple sclerosis to cancer, blood pressure and even erections, according to an analysis conducted for Bloomberg News. While the consumer price index rose just 12 percent in the period, one diabetes drug quadrupled in price and another rose by 160 percent, according to the analysis by Los-Angeles based DRX, a provider of comparison software for health plans.

Childbirth death is way more likely in the US than the UK, and it’s getting worse – The US is one of only eight countries to see an increase in childbirth-related deaths since 2003, according to a study by the Institute for Health Metrics and Evaluation (IHME) at the University of Washington. While maternal mortality has dropped by 3.1% in developed countries (and 1.3% globally) since 1990, it increased by 1.7% in the US during the same time period. More than 18 mothers died for every 100,000 live births in the US in 2013, which is more than double the rates in Saudi Arabia and Canada, and more than triple that in the UK. The biggest increase occurred in women aged 20-24: While only 7.2 women died for every 100,000 births in 1990, that age group saw a mortality rate of 14 per 100,000 in 2013. Now the US is ranked at 60 out of 180 countries in the measures of maternal death (where a lower number indicates fewer deaths). This is down from a rank of 50th based on the last available data (from 2004-2008), and a rank of 22nd in 1990.

The Next Plague: Alzheimer’s  - In the 1970s and 1980s, a plague called AIDS swept through this country. Like a medieval scourge it was mysterious, incurable, and ruthless as it killed those who were far too young to die.  Now, baby-boomers have reason to fear a new scourge: It won’t cut them down in their youth, but if they dodge heart disease and beat cancer they may find themselves trapped in their bodies, watching their minds dissolve. Did you know that a woman who is now 65 stands a 20% chance of dying of Alzheimer’s? (See Michael Kinsley’s essay in the New Yorker.)  On Bloomberg View Matthew C. Klein has put together a booklet of “visual data” titled: “How Americans Die.” These stunning interactive graphs will startle you. For instance, were you aware that suicide has recently become the leading cause of violent death in the U.S.? But it is the pages devoted to Alzheimer’s here and here that stopped me in my tracks.  It turns out that about 40% of the increase in Medicare spending since 2011 can be attributed to greater spending on Alzheimer’s treatment.  And that number is bound to climb.) The Boomers will be the second generation to die of dementia, but the first to see it coming. These charts are terrifying but important.I’m not optimistic about a cure anytime in the foreseeable future. But we definitely need to think about how to care for the many who will be suffering from this dreadful disease

Mandatory LTC Insurance Proposed as Possible Solution to Aging Crisis - A Wednesday Senate hearing on the future of long-term care and how to pay for it raised questions and policy suggestions but provided no definitive solutions for what many have called a looming crisis. One such suggestion was to require individuals to participate in a long-term care insurance program, similar to how the Affordable Care Act has structured regular health insurance participation by including an individual mandate. There are currently around 12 million Americans with long-term care needs, Senator Bill Nelson (D-Fla.), Chairman of the Special Committee on Aging, said during the hearing, and that number is rising rapidly. But few have the forethought to purchase a long-term care insurance policy, and many instead rely on unpaid family caregiving, which the Congressional Budget Office values at roughly $234 billion annually. “Despite these enormous costs, most Americans have done little or nothing to prepare for their long-term care needs, according to a recent study from The SCAN Foundation,” Nelson said, adding that the current long-term care system is “unsustainable for both the government and families.”

World Health Organization warns of “post-antibiotic” era - With the rise and rapid spread of antibiotic resistance, we run the risk of returning to this pre-antibiotic era. Earlier this week, the World Health Organization (WHO) announced that "the problem is so serious that it threatens the achievements of modern medicine. A post-antibiotic era—in which common infections and minor injuries can kill—is a very real possibility for the 21st century." In response, the WHO plans on coordinating a global effort to limit the spread of antibiotic resistance. As it notes, though, "Determining the scope of the problem is the first step in formulating an effective response." So the WHO has polled all of its member states to get a sense of what they know about drug-resistant pathogens within their borders. The results were released this week.The report makes clear that antibiotic resistance isn't our only problem. Malaria parasites have evolved drug resistance at a number of sites, drug-resistant flu viruses have been detected, and strains of HIV that resist various antiviral therapies exist. All of these things make health care more challenging.But at the moment, none of them are as widespread as antibiotic-resistant bacteria. Even within the limitations of poor reporting in many locations, drug-resistant pneumonia is present in all six of the WHO's global regions. Two different types of drug-resistant E. coli show up in five out of the six.

Drug-resistant antibiotics: Bitter pills to swallow - Economist - ANTIBIOTICS everywhere are over-used. As a result, bacteria are growing ever more resistant. Our correspondents discuss the risks of this and what can be done.

Antibiotic crisis bigger than Aids as common infections will kill, WHO warns - A child's scratched knee from falling off their bike, common bladder infections among the elderly in care homes and routine surgery to replace broken hips could all become fatal as antibiotics are becoming increasingly useless, the World Health Organisation has said. The crisis is bigger and more urgent than the Aids epidemic of the 1980s, it was warned. UK experts said the 'era of safe medicine is coming to an end' and government funds must be pumped into the production of new drugs. In the foreword to the report Dr Keiji Fukuda, WHO’s Assistant Director-General for Health Security, wrote: "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." He said: "Unless we take significant actions to improve efforts to prevent infections and also change how we produce, prescribe and use antibiotics, the world will lose more and more of these global public health goods and the implications will be devastating.”

Merck’s Former Doctor Predicts that Gardasil will Become the Greatest Medical Scandal of All Time -- Dr. Dalbergue (pictured above), a former pharmaceutical industry physician with Gardasil manufacturer Merck, was interviewed in the April 2014 issue of the French magazine Principes de Santé (Health Principles). You can read it here (in French): Excerpts: The full extent of the Gardasil scandal needs to be assessed: everyone knew when this vaccine was released on the American market that it would prove to be worthless!  Diane Harper, a major opinion leader in the United States, was one of the first to blow the whistle, pointing out the fraud and scam of it all. Gardasil is useless and costs a fortune!  In addition, decision-makers at all levels are aware of it! Cases of Guillain-Barré syndrome, paralysis of the lower limbs, vaccine-induced MS and vaccine-induced encephalitis can be found, whatever the vaccine. I predict that Gardasil will become the greatest medical scandal of all times because at some point in time, the evidence will add up to prove that this vaccine, technical and scientific feat that it may be, has absolutely no effect on cervical cancer and that all the very many adverse effects which destroy lives and even kill, serve no other purpose than to generate profit for the manufacturers.

Deadly MERS virus turns up in U.S. for first time: A deadly virus from the Middle East that causes severe acute respiratory illness has turned up in Indiana in the first known case in the United States. The man fell ill after arriving in the U.S. about a week ago from Saudi Arabia, where he is a health care worker. The virus — known as MERS, short for Middle East respiratory syndrome — first surfaced two years ago. Since then, the Centers for Disease Control and Prevention has confirmed cases in 401 people in 12 countries, 93 of whom have died. Saudi Arabia has been hit hardest with 322 cases and 68 deaths. The U.S. case involves a man in Indiana who traveled to Saudi Arabia and returned to the United States through London Heathrow airport to Chicago's O'Hare airport and then to Indiana by bus, the CDC says. "This is a rapidly evolving situation," Assistant Surgeon General Anne Schuchat, who is also the director of the National Center for Immunization and Respiratory Diseases, said at a Friday news conference. "The introduction of MERS-CoV is another reminder that diseases are just a plane ride away." The man didn't become ill until he arrived in Indiana. Symptoms can include fever, cough and breathing problems, which can lead to pneumonia and kidney failure. The CDC says the virus has spread from ill people to others through close contact but has not been shown to spread "in a sustained way in communities." MERS belongs to the coronavirus family, which includes the common cold and SARS, or severe acute respiratory syndrome, which caused some 800 deaths globally in 2003.

BBC News - Concerns grow in Europe over threat from deadly pig virus: France is expected to suspend pig-related imports from a number of countries as worries grow over the spread of a deadly swine virus. Porcine Epidemic Diarrhoea Virus (PEDv) has killed some seven million piglets in the US in the past year. The disease has also been found in Canada, Mexico and Japan. While the virus isn't harmful to humans or food, France is concerned over the potential economic impact and is set to suspend imports of live pigs and sperm. PEDv is spread in faecal matter and attacks the guts of pigs, preventing them from absorbing liquids and nutrients. Older animals can survive but fatality rates among piglets run between 80% and 100%. So virulent is the agent that one expert estimated that a spoonful of infected manure would be enough to sicken the entire US herd.

Mysterious Kidney Disease Slays Farmworkers In Central America - This form of kidney failure, known as insuficiencia renal cronica in Spanish (or chronic kidney disease of unknown origin in English), is now found from southern Mexico to Panama, Turcios-Ruiz says. But it occurs only along the Pacific coast.The disease is killing relatively young men, sometimes while they're still in their early 20s. Researchers at Boston University have attributed about 20,000 deaths to this form of kidney failure over the past two decades in Central America. As the disease progresses, agricultural laborers, who may earn a couple of thousand dollars a year, if they're lucky, end up in need of dialysis that costs tens of thousands of dollars annually. Treatment options in El Salvador, Guatemala and Nicaragua for kidney problems are extremely limited, Turcios-Ruiz says. The epidemic has become a major burden on already overstretched public health systems. One of the prominent theories about the disease is that men get dehydrated as they cut sugar cane under the intense tropical sun. Then the dehydration somehow makes them more susceptible to environmental toxins.  Researchers are also looking into whether an agricultural chemical might be causing the problem. A similar epidemic is afflicting sugar farmers in Sri Lanka, which has a hot, dry climate similar to western Nicaragua. In response, the Sri Lankan government banned the use of glyphosate this past March. Glyphosate is the generic version of the popular herbicide marketed by Monsanto as Roundup. Officials at the Ingenio San Antonio in Chichigalpa say they also use Roundup. But a link between the herbicide and the disease hasn't been proven

Three-Fourths of Job Injuries on Farms Go Unreported - Today is Workers Memorial Day, a day of remembrance for the thousands of workers who die on the job each year, and the tens of thousands whose lives are shortened by illness or disease contracted at work. It’s easy to see the dangers of construction work, or to imagine why logging would be the single most dangerous occupation. But farm work is far from most people’s minds when it comes to dangerous work. It turns out that that’s partly because so little is reported about the dangers, either to the media or to government agencies. New research, published in the April issue of the Annals of Epidemiology, finds that approximately 77 percent of non-fatal occupational injuries and illnesses in agriculture go unreported. Such a large undercount likely results in fewer private and public resources devoted to ameliorating agricultural safety and health threats. The Bureau of Labor Statistics’ annual Survey of Occupational Injuries and Illnesses (SOII) estimates the number and types of nonfatal injuries and illnesses within and across all industries. Injuries include fractured bones, lacerations, severed body parts, and head trauma; illnesses include asthma, chronic obstructive pulmonary disease, and cancer. The SOII estimated there were 19,700 injuries and illnesses for crop farms and 12,400 for livestock farms in 2011. My colleagues and I estimated that the numbers of cases was actually 74,932 and 68,504, respectively, which means the SOII undercounted by 74 percent and 82 percent.

Death on the Farm - People started talking about farmer suicide during the 1980s farm crisis. Since that crisis, the suicide rate for male farmers has remained high: just under two times that of the general population. And this isn't just a problem in the U.S.; it's an international crisis. India has had more than 270,000 farmer suicides since 1995. In France, a farmer dies by suicide every two days. In China, farmers are killing themselves to protest the government's seizing of their land for urbanization. In Ireland, the number of suicides jumped following an unusually wet winter in 2012 that resulted in trouble growing hay for animal feed. In the U.K., the farmer suicide rate went up by 10 times during the outbreak of foot-and-mouth disease in 2001, when the government required farmers to slaughter their animals. And in Australia, the rate is at an all-time high following two years of drought. One factor disputed among agricultural and mental health professionals is the connection between pesticides and depression. A group of researchers published studies on the neurological effects of pesticide exposure in 2002 and 2008. Lorrann Stallones, one of those researchers and a psychology professor at Colorado State University, says she and her colleagues found that farmers who had significant contact with pesticides developed physical symptoms like fatigue, numbness, headaches and blurred vision, as well as psychological symptoms like anxiety, irritability, difficulty concentrating and depression. Those maladies are known to be caused by pesticides interfering with an enzyme that breaks down the neurotransmitter that affects mood and stress responses.

Nitrate Monologues: Stories From Water and Farm Frontlines in Iowa - The Iowa River twists in an interconnected and continuous system, accumulating and dissipating as it travels across the land. The water that flows through the river systems shapes the environment around it, above it, below it, impacting every aspect of life on the farm, in the towns and in the cities. The river runs through all of us. So, why then, would we degrade the Iowa River and its watersheds with such carelessness? Iowa is ground zero of the corn-belt. Corn has become the sole embodiment of many, if not most Iowan lives. Since the 1850’s when corn began to replace the natural prairies of Iowa, farms have been expanding and pushing their boundaries closer to roads, rivers and other farms, gridlocking Iowa into a permanent state of boom and often bust farming. Never has this been more true than today—we are living in what may be considered the last throes of a corn rush. Thanks to incentives for ethanol, fuel has become the number one use for corn in America. As noted in a recent Associated Press (AP) investigation, this intense development of the corn-belt in Iowa and across the heartland includes a loss of nearly five million acres of prairies and woods across the nation in areas that were originally set aside for the Conservation Reserves land program. This loss has had a significant impact on our landscapes, natural drainage systems, and the health of the rivers in Iowa and those downstream from them, all the way to where the Mississippi empties into the gulf. Not to mention the impact this is having on our climate.

Study Shows Ethanol Produces More CO2 Emissions Than Gasoline - A Northwestern University study by an economist and a chemist reports that when fuel prices drove residents of São Paulo, Brazil, to mostly switch from ethanol to gasoline in their flexible-fuel vehicles, local ozone levels dropped 20 percent. At the same time, nitric oxide and carbon monoxide concentrations tended to go up. The four-year study is the first real-world trial looking at the effects of human behavior at the pump on urban air pollution. This empirical analysis of atmospheric pollutants, traffic congestion, consumer choice of fuel and meteorological conditions provides an important tool for studying other large cities, such as Chicago, New York, London and Beijing. Previous studies mainly have consisted of computer simulations of atmospheric chemical reactions based on tailpipe emissions studies. “Individuals often don’t realize it, but in the aggregate, you can have a real impact on the environment,” said Alberto Salvo, formerly with Northwestern’s Kellogg School of Management and now an associate professor of economics at the National University of Singapore. “In São Paulo, there were more than a million cars switching from ethanol to gasoline in the same season, and we found that ozone levels went down. We didn’t expect this, but it is a precise result.”

California Drought Linked To Global Warming In New Study: — While researchers have sometimes connected weather extremes to man-made global warming, usually it's not done in real time. Now a study is asserting a link between climate change and both the intensifying California drought and the polar vortex blamed for a harsh winter that mercifully has just ended in many places. The Utah State University scientists involved in the study say they hope what they found can help them predict the next big weird winter. Outside scientists, such as Katharine Hayhoe at Texas Tech University, are calling this study promising but not quite proven as it pushes the boundaries in "one of the hottest topics in climate science today." The United States just came out of a two-faced winter — bitter cold and snowy in the Midwest and East, warm and severely dry in the West. The latest U.S. drought monitor says 100 percent of California is in an official drought. The new study blames an unusual "dipole," a combination of a strong Western high pressure ridge and deep Great Lakes low pressure trough. That dipole is linked to a recently found precursor to El Nino, the world-weather changing phenomenon. And that precursor itself seems amplified by a build-up of heat-trapping greenhouse gases, the study says. It's like a complex game of weather dominos that starts with cold water off China and ends with a devastating drought and memorable winter in the United States, said study author Simon Wang, a Utah State University climate scientist.

8 Foods That California’s Drought Will Make More Costly - Most people expected food prices to rise over time as California’s drought worsened earlier this year, but some goods will be impacted more than others. Research from Timothy Richards, a professor of the W. P. Carey School of Business at Arizona State University, shows that vegetables like lettuce and avocados are likely to experience the most dramatic prices bumps. “We can expect to see the biggest percentage jumps in prices for avocados and lettuce—28 percent and 34 percent, respectively,” Richards said. “People are the least price-sensitive when it comes to those items, and they’re more willing to pay what it takes to get them.” Time will tell if people feel the same way about the other items on Richards’ research list. He lists them along with the anticipated price increases:

  • Avocados are likely to go up 17 to 35 cents to as much as $1.60 each.
  • Berries could rise 21 to 43 cents to as much as $3.46 per clamshell container.
  • Broccoli likely to go up 20 to 40 cents to a possible $2.18 per pound.
  • Grapes might rise 26 to 50 cents to a possible $2.93 per pound.
  • Lettuce likely to rise 31 to 62 cents to as much as $2.44 per head.
  • Packaged salad could cost 17 to 34 cents more, to a possible $3.03 per bag.
  • Peppers likely to go up 18 to 35 cents to a possible $2.48 per pound.
  • Tomatoes are likely to rise 22 to 45 cents to a possible $2.84 per pound.

With no federal water, pot growers could be high and dry - Newly licensed marijuana growers in Washington state may find themselves without a key source of water just as spring planting gets under way.Federal officials say they'll decide quickly whether the U.S. government can provide water for the growers or whether doing so would violate the federal Controlled Substances Act, which makes possession of the drug illegal.The U.S. Bureau of Reclamation, which controls the water supply for two-thirds of Washington state’s irrigated land, is expected to make a decision by early May, and perhaps as soon as this week, said Dan DuBray, the agency’s chief spokesman. The ruling will mark another key test for the Obama administration, which again will decide how far it will go in allowing the state to bypass federal law with its experimental plan to license growers and sell pot for recreational use.The government's decision also will affect growers in Colorado _ the only other state to fully legalize marijuana _ but would likely have limited impact there because Colorado allows only indoor pot farms.

The National Budget For Fighting Wildfires Is $400 Million Short - According to the Department of Agriculture, government spending to fight wildfires in 2014 will exceed what Congress budgeted for the task by a good $400 million. A new report released Friday by the Department projects that spending by the U.S. Forest Service and the Department of the Interior (DOI) to deal with wildfires this season will hit $1.8 billion, versus the $1.4 billion Congress actually allocated to the task for this year. That will force the departments to engage in what’s called “fire borrowing” — covering the gap by pulling funds away from regular thinning of forest and brush as well as controlled burns that reduce the number and severity of wildfires. It’s something they’ve had to do for seven of the last twelve years. The length of fire seasons has ballooned by 60 to 80 years since the 1980s, and the amount of acres consumed by wildfires each year has doubled to more than seven million. Over 1,000 homes were burned last year as more developments are threatened by wildfires than before, which also raises the costs. Thirty-four firefighters were also killed by wildfires in the course of their duty in 2013. All of this has forced the Forest Service — in addition to the fire borrowing — to cut its general staff by almost a third while doubling the number of firefighters on its payroll. “The forecast released today demonstrates the difficult budget position the Forest Service and Interior face in our efforts to fight catastrophic wildfire,” said Under Secretary for Natural Resources and Environment Robert Bonnie. “While our agencies will spend the necessary resources to protect people, homes and our forests, the high levels of wildfire this report predicts would force us to borrow funds from forest restoration, recreation and other areas.”

The Coffee Apocalypse Is Nigh: Brutal Brazilian Drought Forces Starbucks To Pause Purchases - The worst drought Brazil has seen in fifty years is pushing coffee bean prices to new heights. As a result, Starbucks, the largest coffee company in the world, has halted coffee purchases over the past few weeks, the Wall Street Journal reports. Brazil is the world’s largest producer of coffee. Arabica coffee futures, the most common bean variety sold in the US, have soared nearly 90 percent over the past year, and reached the highest price in two years on Tuesday. The surge was prompted by estimates that Brazil’s arabica crop, which was decimated by this year’s drought, will miss expectations by 18 percent. Overall, the world’s harvest is expected to fall short of demand by 11 million bags, — meaning coffee lovers may be forced to pay more for their morning cup.  Besides destroying coffee crops, the prolonged drought has wreaked havoc on Brazil’s water and electricity supplies. Now, the nation is bracing for El Niño, which promises an epic downpour that will be even worse for bone-dry coffee plantations. Some regions may lose over a third of their crops.

Unusually Intense El Nino May Lie Ahead, Scientists Say -- Since climate forecasters declared an "El Niño Watch" on March 6, the odds of such an event in the tropical Pacific Ocean have increased, and based on recent developments, some scientists think this event may even rival the record El Niño event of 1997-1998. If that does happen, then 2015 would almost be guaranteed to set a record for the warmest year on Earth, depending on the timing of the El Niño conditions. El Niño and La Niña events refer to fluctuations in air and ocean conditions in the tropical Pacific. El Niño events are characterized by warmer than average sea surface temperatures in the central and eastern equatorial Pacific, and they add heat to the atmosphere, thereby warming global average temperatures. They typically occur once every three to seven years and can also alter weather patterns around the world, causing droughts and floods from the West Coast of the U.S. to Papua New Guinea.  El Niño events tend to dampen hurricane activity in the North Atlantic, and some research has even linked El Niño events to civil conflicts in Africa.  When combined with global warming from greenhouse gas emissions and other sources, El Niño events greatly increase the odds that a given year will set a new global temperature record, as occurred in 1998.

Trenberth on El Nino: The only question is, How big? - video - I interviewed Kevin Trenberth last week for an upcoming video on the developing El Nino event. He had a number of interesting things to say, which I’ll be pulling together over the next week. Above, in a nutshell, the bottom line for now.

Q & A: What’s El Niño - and why does it matter that scientists say one is on the way? - Forecasters worldwide are issuing alerts. Later this year, we're likely to be in the midst of an El Niño - a phenomenon driving severe weather worldwide. So when can we expect it to kick in, and what will the consequences be for global temperature? Every five years or so, a change in the winds causes a shift to warmer than normal ocean temperatures in the equatorial Pacific Ocean - known as El Niño, or cooler than normal - known as La Niña, moving briefly back to normal in between.Both phases together are known as the El Niño Southern Oscillation (ENSO), and are responsible for most of the fluctuations in global weather we see from one year to the next. Each time a switch occurs, changes in the ocean and atmosphere above affect global temperature and rainfall patterns worldwide. In El Niño years, Indonesia and Australia see below average rainfall, while South America and parts of the United States see more than usual. The ocean releases heat into the atmosphere in El Niño years. Added to the warming we're already seeing from greenhouse gases, this puts El Niño years among the warmest on record. You can see this in the graph below showing global temperature between 1950 and 2013. Five of the top ten warmest years are El Niño years (orange bars).

Super el Nino brewing -- We have only just moved into May and despite being seven months away from next summer in the southern hemisphere, climate researchers are seeing the beginnings of what could be the most powerful El Niño event since 1997/98.  An El Niño is a change in Pacific Ocean and atmosphere that typically causes drought, extreme heat and bushfires in Australia. Last year was a neutral El Niño and we have been surprisingly lucky with only a few small El Niño’s since the 21st century started, despite having two of the hottest years on record globally in 2005 and 2010. The last really big El Niño was in 1997/98. It is no coincidence that 1998 is the only remaining year from the past century that still sits in the top 10 for the hottest years, globally, on record. Over the past month and a half, three strong westerly wind blasts along the equator appear to have triggered ocean subsurface warming. The warming has intensified and rolled to the eastern equatorial Pacific — a strong sign of a developing El Niño. But it is not the ocean warming by itself that is significant, it is also the amount of water involved. Even at this early stage the equatorial Pacific is storing the largest amount of warm water since 1997/98. From these observations, it appears that a very strong El Niño may be initiated. Forecasters suggest the probability of an El Niño is now above 70%, which is a remarkable estimate considering the time of year.

Sea Change: Ocean acidification - It didn’t take long for researchers examining the tiny sea snails to see something amiss. The surface of some of their thin outer shells looked as if they had been etched by a solvent. Others were deeply pitted and pocked. These translucent sea butterflies known as pteropods, which provide food for salmon, herring and other fish, hadn’t been burned in some horrific lab accident. They were being eaten away by the Pacific Ocean. For the first time, scientists have documented that souring seas caused by carbon-dioxide emissions are dissolving pteropods in the wild right now along the U.S. West Coast. That is damaging a potentially important link in the marine food web far sooner than expected. “What we found was just amazing to us,” . “We did the most thorough analysis that’s ever been done and found extensive impacts on marine life in the field from ocean acidification.” This is the broadest and most detailed indication ever that acidification is already damaging native creatures in the wild. It raises many new questions about whether other sea life, too, might already be harmed — directly by acidifying seas, or by subtle shifts in parts of the food chain.

One Of The Greatest Threats Facing The World Today - Below is what Gerald Celente, founder of Trends Research and the man considered to be the top trends forecaster in the world, had to say in this fascinating interview. Eric King: “Gerald, you just had your Spring Trends Journal hit the street. The big story in the mainstream media was the missing plane for almost two months, but they are missing the bigger story, and you talked about this in your (Spring) Trends Journal, the amount of garbage and plastics accumulating in the oceans of the world and how this poses a danger.” Celente: “Yes. When you go back and you look at the coverage of that missing Malaysian jetliner, all they kept talking about was they kept finding pieces of debris. And then when you look deeper into it, it’s not a piece of debris, it’s a continent worth of debris....  “And that’s what’s not being covered, how filthy the ocean is, how much garbage has been dumped into it, and the effects it’s having on the planet. So every time they kept saying, ‘They found pieces of floating debris. Is this the plane?’ Everywhere you look in the ocean there is floating debris and it’s killing off the ocean.

China’s pollution plagues coastal waters - Large swaths of China’s coastal waters do not even meet the country’s lowest standard of water quality, according to the latest in a series of recent government reports that are painting an alarming picture of the damage wrought by decades of unchecked development. The sobering assessment of the oceans follows this month’s release of a report that for the first time estimated the extent of heavy metals pollution in China’s agricultural land. A second report this month found that three-fifths of underground water was unfit for drinking without treatment. Week-long episodes of choking air pollution in the past two winters have helped raise public awareness of pollution in China and strengthened the hand of those pushing for greater disclosure as a first step towards addressing the problem. As more Chinese settle into lives of relative comfort, quality of life issues, including clean air, clean water and safe food are becoming the focus of public dissatisfaction. Beijing’s new willingness to acknowledge the extent of China’s pollution accompanies a shift away from GDP growth as one of the main criteria for official promotion. This quarter, all but one province reported growth figures that fell well short of 2014 targets originally set a few years ago. A revised environmental protection law now allows more forceful measures against polluting industries, which in the past held an undisputed advantage as the main engines of local growth. But even if a more relaxed approach to growth targets, particularly along the prosperous east coast, means less reliance in future on polluting industry, China still faces a delayed bill for the damage done to its soil, water and seas.

Australian Government Calls for Ben & Jerry’s Boycott After Company Supports Save the Reef Campaign - Australia’s Queensland government is calling on citizens to boycott ice cream brand Ben and Jerry’s after it offered its support to the World Wildlife Fund’s (WWF) campaign to save the Great Barrier Reef. The campaign—Fight for the Reef—aims to protect this natural wonder of the world from the threat of widespread, rapid and damaging industrial developments taking place in Queensland. It follows a decision by both the Queensland and federal governments in January to approve the dumping of 3 million cubic meters of dredge soil in the marine park and World Heritage area to help enable the Abbot Point coal port expansion.

Climate change report was watered down says senior economist - A politically sensitive part of the latest report by the world’s leading authority on climate change was gutted at the insistence of government officials, one of the study’s authors has revealed. Nearly 75 per cent of a section on the impact of international climate negotiations was deleted at a meeting in Berlin two weeks ago, said one of the authors responsible for that part of the report, Harvard University’s Professor Robert Stavins. The Berlin meeting was held so representatives of the world’s governments could approve a summary of a massive report by the UN’s Intergovernmental Panel on Climate Change, on how to tackle climate change which took hundreds of authors from around the world nearly five years to compile. The report was the third of a trilogy of studies the IPCC has released since September in its fifth major assessment of the latest state of knowledge about climate change. Prof Stavins, a leading expert on climate negotiations at Harvard’s John F. Kennedy School of Government, wrote to the organisers of the Berlin meeting last week to express his “disappointment and frustration” at the outcome. “I fully understand that the government representatives were seeking to meet their own responsibilities toward their respective governments by upholding their countries’ interests, but in some cases this turned out to be problematic for the scientific integrity of the IPCC summary for policy makers,” he said.

Climate change is the fight of our lives – yet we can hardly bear to look at it, by Naomi Klein - This is a story about bad timing. One of the most disturbing ways that climate change is already playing out is through what ecologists call "mismatch" or "mistiming." This is the process whereby warming causes animals to fall out of step with a critical food source, particularly at breeding times, when a failure to find enough food can lead to rapid population losses. The migration patterns of many songbird species, for instance, have evolved over millennia so that eggs hatch precisely when food sources such as caterpillars are at their most abundant, providing parents with ample nourishment for their hungry young. But because spring now often arrives early, the caterpillars are hatching earlier too, which means that in some areas they are less plentiful when the chicks hatch, with a number of possible long-term impacts on survival. Similarly, in West Greenland, caribou are arriving at their calving grounds only to find themselves out of sync with the forage plants they have relied on for thousands of years, now growing earlier thanks to rising temperatures. That is leaving female caribou with less energy for lactation, reproduction and feeding their young, a mismatch that has been linked to sharp decreases in calf births and survival rates.  Scientists are studying cases of climate-related mistiming among dozens of species, from Arctic terns to pied flycatchers. But there is one important species they are missing – us. Homo sapiens. We too are suffering from a terrible case of climate-related mistiming, albeit in a cultural-historical, rather than a biological, sense. Our problem is that the climate crisis hatched in our laps at a moment in history when political and social conditions were uniquely hostile to a problem of this nature and magnitude – that moment being the tail end of the go-go 80s, the blast-off point for the crusade to spread deregulated capitalism around the world. Climate change is a collective problem demanding collective action the likes of which humanity has never actually accomplished. Yet it entered mainstream consciousness in the midst of an ideological war being waged on the very idea of the collective sphere.

10 reasons Americans ignore climate disasters - C’mon, admit it, we humans really are causing our own climate suicide. But so what? We’ve got freedom of choice. And we love our cars. They need gas. And we’re a bundle of mental contradictions. Is climate a “big issue?” Gallup polls say no. Only 24% of Americans think “climate change” is a big problem, near the bottom of 15 “national problems” polled. We’ll worry about that later. But aren’t environmentalists warning it may already be “too late.” So what? Blame Big Oil? No way, we love our wheels, big trucks, little Minis, Nascar, car pools, they’re our soul. A billion cars on the planet. Need them. Maybe hate Big Oil. But need gas pumps. Get it? Humans are unpredictably irrational. Besides, Big Oil’s nine million jobs generates over $1 trillion in annual revenue. Even trusted Vanguard owns over $15 billion of ExxonMobil across 170 funds and 20 million shareholders. Stop those pipelines? No way, Congress gives Big Oil $4 billion a year in free tax loopholes. What’s their big secret? It’s human nature, programmed in our DNA, DNA, brains. You, me, all of us have a secret little “climate science denier” in our brains. Listen every time you fill up at the pump. Trips to work, kids’ ball games, energy stock dividends. We just tune out the climate risks. At least until later. And, nobody stops us from exercising our rights, secretly, openly. End of the human race? Why? ‘You can’t handle the truth!’

Let This Earth Day Be The Last - Fuck Earth Day. No, really. Fuck Earth Day. Not the first one, forty-four years ago, the one of sepia-hued nostalgia, but everything the day has since come to be: the darkest, cruelest, most brutally self-satirizing spectacle of the year. Fuck it. Let it end here. End the dishonesty, the deception. Stop lying to yourselves, and to your children. Stop pretending that the crisis can be “solved,” that the planet can be “saved,” that business more-or-less as usual—what progressives and environmentalists have been doing for forty-odd years and more—is morally or intellectually tenable. Let go of the pretense that “environmentalism” as we know it—virtuous green consumerism, affluent low-carbon localism, head-in-the-sand conservationism, feel-good greenwashed capitalism—comes anywhere near the radical response our situation requires. So, yeah, I’ve had it with Earth Day—and the culture of progressive green denial it represents.

More on Melt Ponds [on the Arctic sea ice] – Neven - A really good paper has been published online a couple of days ago in Nature, called September Arctic sea-ice minimum predicted by spring melt-pond fraction. It's really good because it's interesting, short, and it confirms what I've been suspecting for a while now.  The paper by Schröder et al. presents evidence that melt ponds play a very important role at the start of the melting season, to the point that it can heavily influence the September minimum. The last two melting seasons actually proved to be a great lesson in this respect. 2012 had a really good* start to the melting season, so good that when bad weather showed up, it didn't really slow down sea ice loss, the trend lines just kept dropping (low sea ice volume also played a role, of course). The reverse was true in 2013: cold and cloudy weather during the first half of the melting season caused a lagged response during the short periods when the Sun and higher temps finally got to the ice. What Schröder et al. did was develop a melt pond model and incorporate it into the larger Los Alamos sea-ice model called CICE. Here's what they came up with: Our simulations show that melt ponds start to form in May, a maximum extent of 18% is reached in the climatological mean at mid-July, and there are hardly any exposed ponds left by mid-August. The strong interannual variability and the positive trend are striking. Whereas in 1996, the year with the highest September ice extent since 1979, the maximum pond fraction reaches only 11%, in 2012, the year with the lowest September ice extent, up to 34% of the sea ice is covered by ponds. This is accompanied by the following figure:

Rich nations' greenhouse gas emissions fall in 2012, led by U.S. (Reuters) - Industrialised nations' greenhouse gas emissions fell by 1.3 percent in 2012, led by a U.S. decline to the lowest in almost two decades with a shift to natural gas from dirtier coal, official statistics show. Emissions from more than 40 nations were 10 percent below 1990 levels in 2012, according to a Reuters compilation of national data submitted to the United Nations in recent days that are the main gauge of efforts to tackle global warming. Still, with emissions rising elsewhere, experts said the rate of decline was too slow to limit average world temperature rises to 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial times, a ceiling set by almost 200 nations to avert droughts, heatwaves and rising seas. In 2012 "the success story is the declining emissions in the United States," said Glen Peters, of the Center for International Climate and Environmental Research in Oslo. "Europe is a mix with slow GDP growth offset by a shift to coal in some countries." Total emissions from industrialised nations fell to 17.3 billion tonnes in 2012 from 17.5 billion in 2011 and compared with 19.2 billion in 1990, the base year for the U.N.'s climate change convention. U.S. emissions fell 3.4 percent in 2012 to 6.5 billion tonnes, the lowest since 1994, the U.S. Environmental Protection Agency said on April 15. The fall was linked to low natural gas prices, helped by a shale gas boom and a shift from coal, a mild winter and greater efficiency in transport.

U.S. Greenhouse Emissions Tied To Aging Nuclear, Coal Plants - U.S. emissions could be 4 percent higher by 2040 if more nuclear power plants are retired than expected, as natural gas moves in to fill the void. Similarly, if more coal plants are retired than expected, U.S. GHG emissions could be 20 percent lower than expected.  Many of the nation’s nuclear plants began operation in the 1960s and 1970s with an initial 40-year operating license – meaning most are near the end of their intended lives. However, more than 75 percent have received 20-year renewals, which extends their operations into the 2020s and 2030s. Many plant operators are pushing for a second 20-year renewal, and how successful they are at convincing regulators and the public to allow such a move will largely determine how many plants remain in operation beyond the next two decades. Coal-fired power plants face a darker future. Environmental regulations will most likely lead the industry into gradual decline, forcing many plants out of operation over the same timeframe.

Carmakers Are Cutting Carbon Emissions, Except When They Aren't - Releasing a rare bit of optimistic news in the fight against climate change, the United States Environmental Protection Agency said Friday that automotive carbon emissions are down. They declined nearly 7 percent on average for the 2012 model year compared with the year before, the agency said. That's more than 3 percent lower than the 2012 federal standard. “The report reveals that consumers bought cleaner vehicles in the first year of the program than the 2012 [greenhouse gas] standard required, and that automakers are off to a good start in meeting program requirements,” the EPA said in a statement.. Well, sort of. It’s not quite as straightforward as that. As part of a 16-year program to slash vehicle greenhouse emissions that began in 2012, the EPA allowed automakers to initially offset their carbon spew by accumulating and trading various credits, earned for doing things like improving the efficiency of air conditioning systems to prevent the leakage of potent greenhouse gases. According to the EPA report: It is possible, for example, for a manufacturer to routinely fall short of meeting the fleet average tailpipe emissions targets yet remain in total compliance with the program. For example, while it is fair to say that nine manufacturers were unable to meet their car and/or truck fleet average CO standards applicable in the 2012 model year, this fact in isolation has no meaning with respect to the overall compliance position of these manufacturers. All but one of these manufacturers were able to offset any resulting 2012 model year deficit through GHG reductions achieved through other means and the application of optional credits generated from those reductions.

U.S. electricity prices may be going up for good - As temperatures plunged to 16 below zero in Chicago in early January and set record lows across the eastern U.S., electrical system managers implored the public to turn off stoves, dryers and even lights or risk blackouts. A fifth of all power-generating capacity in a grid serving 60 million people went suddenly offline, as coal piles froze, sensitive electrical equipment went haywire and utility operators had trouble finding enough natural gas to keep power plants running. The wholesale price of electricity skyrocketed to nearly $2 per kilowatt hour, more than 40 times the normal rate. The price hikes cascaded quickly down to consumers. Robert Thompson, who lives in the suburbs of Allentown, Pa., got a $1,250 bill for January.The electrical system's duress was a direct result of the polar vortex, the cold air mass that settled over the nation. But it exposed a more fundamental problem. There is a growing fragility in the U.S. electricity system, experts warn, the result of the shutdown of coal-fired plants, reductions in nuclear power, a shift to more expensive renewable energy and natural gas pipeline constraints. The result is likely to be future price shocks. And they may not be temporary. One recent study predicts the cost of electricity in California alone could jump 47% over the next 16 years, in part because of the state's shift toward more expensive renewable energy. "We are now in an era of rising electricity prices," said Philip Moeller, a member of the Federal Energy Regulatory Commission, who said the steady reduction in generating capacity across the nation means that prices are headed up. "If you take enough supply out of the system, the price is going to increase." In fact, the price of electricity has already been rising over the last decade, jumping by double digits in many states, even after accounting for inflation.

Enron-style price gouging is making a comeback - The price of electricity would soar under the latest scheme by Wall Street financial engineers to game the electricity markets. If regulators side with Wall Street — and indications are that they will — expect the cost of electricity to rise from Maine to California as others duplicate this scheme to manipulate the markets, as Enron did on the West Coast 14 years ago, before the electricity-trading company collapsed under allegations of accounting fraud and corruption. Energy Capital Partners, an investment group that uses tax-avoiding offshore investing techniques and has deep ties to Goldman Sachs, paid $650 million last year to acquire three generating plant complexes, including the second largest electric power plant in New England, Brayton Point in Massachusetts. Five weeks after the deal closed, Energy partners moved to shutter Brayton Point. Why would anyone spend hundreds of millions of dollars to buy the second largest electric power plant in New England and then quickly take steps to shut it down? Energy partners says in regulatory filings that the plant is so old and prone to breakdowns that it is not worth operating, raising the question of why such sophisticated energy-industry investors bought it. The real answer is simple: Under the rules of the electricity markets, the best way to earn huge profits is by reducing the supply of power. That creates a shortage during peak demand periods, such as hot summer evenings and cold winter days, causing prices to rise. Under the rules of the electricity markets, even a tiny shortfall between the available supply of electricity and the demand from customers results in enormous price spikes. With Brayton Point closed, New England consumers and businesses will spend as much as $2.6 billion more per year for electricity, critics of the deal suggest in documents filed with the Federal Energy Regulatory Commission.

Coal Increasingly Seen As Option For European Energy Security --The crisis in Ukraine has thrust energy security to the top of the agenda in European capitals. With Russia accounting for almost one-third of Europe’s natural gas, the prospect of the conflict escalating has stoked fears of a supply disruption. At the time of this writing, Ukrainian officials said that any crossing of the border by Russian troops would be viewed in Kiev as an “invasion,” suggesting that the conflict could come to a head in the coming days or weeks.  While Europe’s dependence on Russian gas has been on the decline for years, it is obviously not free of Russia’s grip just yet. The standoff over Crimea, and now the eastern provinces of Ukraine, has Europe looking for alternatives. Ukraine is at the crossroads for a significant portion of European energy flows – Europe gets 16 percent of its natural gas from pipelines that pass through Ukraine. As a whole, the EU gets about 40 percent of its gas from Russia, and 20 percent of its oil. Replacing Russian gas will likely include some combination of greater pipeline and electrical grid interconnections between countries, more LNG imports, renewable energy, and a push for the development of European shale gas. But a campaign to improve energy security could have coal at its core, despite many European governments’ long-held goals to reduce greenhouse gas emissions. Coal is still a low cost energy, and countries like Germany and Poland are major producers. And although Europe has made major progress in its use of renewable energy, it’s done so while keeping an increasingly nervous eye on Russia. As Ladka Bauerova writes in Bloomberg News, the energy security that coal provides may trump Europe’s climate goals.

Energy Journal: Fukushima “an ongoing crisis… an international issue, its important we all keep our eye on it… we owe it to the Pacific” — Nuclear fuel dropped into sub-basement and melted through some concrete, no one can get in to see where it is now (AUDIO) ENENews (full audio).

  • Fukushima revisited with Miles O’Brien, 3:15 in – Miles O’Brien, journalist: You have these melted nuclear piles, they’ve melted through the pressure vessels of these boiling water reactors and much of the fuel has dropped down onto concrete sub-basements… While it has melted through some of the concrete, as best as they can tell — and no one can get in there… it has stabilized.
  • 4:00 in – O’Brien: The water just flows through that site naturally and its passing right through those piles of radioactive material and so everyday 100,000s of gallons of water becomes toxic… They’re going to have to face the reality that they are going to have to discharge some of this water and won’t be completely free of radionuclides… there’s really going to be a reckoning there, as to what to do about this water.
  • At 8:30 - Chadwick: Anything on this trip to change your perspective? O’Brien: Yes. I think what changed the most Alex is we all want these horrible things to be over. I had the sense things were more over than they are — this really is just beginning in so many ways. We’re talking about 30 to 40 years of very hard work… the whole issue of how do you get that fuel out of there safely and contained, this is an ongoing crisis… this is an issue that is really an international issue. Its important that we all keep our eye on it… the fact of the matter is we owe it to the Pacific Ocean, which we all have a lot of interest in, to watch this very carefully, make sure the Japanese are honest and frank about it and that Tepco is more transparent than it has been. And up to this point, the Japanese have not been great at this… we need to hold them accountable for this cleanup for a long time… In Japan consensus is important, you don’t say anything until everybody agrees on something, and as a result it looks like they’re trying to sit on secrets.  Full interview available here

Fukushima operator TEPCO books $4.3 billion annual profit - The operator of Japan's crippled Fukushima nuclear plant said Wednesday it booked a $4.3 billion annual net profit owing to an electricity rate hike and a massive government bailout following the 2011 disaster. Tokyo Electric Power (TEPCO) was teetering on the brink as cleanup and compensation costs stoked huge losses and threatened to collapse the sprawling utility until Tokyo stepped with a multi-billion dollar rescue. The company at the centre of the worst nuclear accident in a generation said it earned 438.65 billion yen ($4.3 billion) in the fiscal year to March, compared with a net loss of 685.3 billion yen in the same period a year earlier. Sales rose 11.0 percent to 6.63 trillion yen, it said. The company's results got a boost from a rate hike, and helped offset a decline in the amount of electricity TEPCO sold owing to warmer-than-usual winter weather, it said. It also booked a special gain of 1.8 trillion yen based on funds the company received from a government-backed bailout fund as well as asset sales.

Forced to Flee Radiation, Fearful Japanese Villagers Are Reluctant to Return - Ever since they were forced to evacuate during the accident at the Fukushima Daiichi nuclear plant three years ago, Kim Eunja and her husband have refused to return to their hilltop home amid the majestic mountains of this rural village for fear of radiation. But now they say they may have no choice. After a nearly $250 million radiation cleanup here, the central government this month declared Miyakoji the first community within a 12-mile evacuation zone around the plant to be reopened to residents. The decision will bring an end to the monthly stipends from the plant’s operator that have allowed Ms. Kim to relocate to an apartment in a city an hour away. “The government and the media say the radiation has been cleaned up, but it’s all lies,” said Ms. Kim, 55,  “I want to run away, but I cannot. We have no more money.” She is not the only one. While the central government and national news media have trumpeted the reopening of Miyakoji as a happy milestone in Japan’s recovery from the devastating March 2011 accident, many residents tell a darker story. They insist their homes remain too dangerous or too damaged to inhabit and that they have not received enough financial compensation to allow them to start anew somewhere else. They criticize the plant’s operator, Tokyo Electric Power Co., or Tepco, for failing to reimburse them for the value of their homes, usually their family’s largest financial asset. Depending on where they lived, they say they have received amounts from half the preaccident value to just $3,000, a tiny fraction of the original value of their homes.

Chernobyl: Capping a Catastrophe - Against the decaying skyline here, a one-of-a-kind engineering project is rising near the remains of the world’s worst civilian nuclear disaster.  An army of workers, shielded from radiation by thick concrete slabs, is constructing a huge arch, sheathed in acres of gleaming stainless steel and vast enough to cover the Statue of Liberty. The structure is so otherworldly it looks like it could have been dropped by aliens onto this Soviet-era industrial landscape. If all goes as planned, by 2017 the 32,000-ton arch will be delicately pushed on Teflon pads to cover the ramshackle shelter that was built to entomb the radioactive remains of the reactor that exploded and burned here in April 1986. When its ends are closed, it will be able to contain any radioactive dust should the aging shelter collapse. By all but eliminating the risk of additional atmospheric contamination, the arch will remove the lingering threat of even a limited reprise of those nightmarish days 28 years ago, when radioactive fallout poisoned the flatlands for miles around and turned villages into ghost towns, filled with the echoes of abandoned lives. The arch will also allow the final stage of the Chernobyl cleanup to begin — an arduous task to remove the heavily contaminated reactor debris for permanent safe storage. That this job will fall from international hands to those of Ukraine presents new worries, especially as Russia threatens the nation’s borders.

Chernobyl - how many died? - It was 28 years ago today that Reactor 4 at the Chernobyl nuclear plant in Ukraine ruptured and ignited, sending a massive plume of radiation across Europe. The never-ending debate over the Chernobyl cancer death toll turns on the broader debate over the health effects of low-level radiation exposure. The overwhelming weight of scientific opinion holds that there is no threshold below which ionising radiation poses no risk. Uncertainties will always persist. In circumstances where people are exposed to low-level radiation, public health (epidemiological) studies are unlikely to be able to demonstrate a statistically-significant increase in cancer rates. Cancers are common diseases and most are multi-causal. The upshot is that cancer incidence and mortality statistics are being pushed up and down by a myriad of factors at any point in time and it becomes impossible or near-impossible to isolate any one factor.About 50 people died in the immediate aftermath of the Chernobyl accident. Beyond that, studies generally don't indicate a significant increase in cancer incidence in populations exposed to Chernobyl fallout. Nor would anyone expect them to because of the data gaps and methodological problems mentioned above, and because the main part of the problem concerns the exposure of millions of people to low doses of radiation from Chernobyl fallout. But for those of us who prefer mainstream science, we can still arrive at a scientifically defensible estimate of the Chernobyl death toll by using estimates of the total radiation exposure, and multiplying by an appropriate risk estimate.The International Atomic Energy Agency estimates a total collective dose of 600,000 person-Sieverts over 50 years from Chernobyl fallout.  Applying the LNT risk estimate of 0.10 fatal cancers per Sievert gives an estimate of 60,000 deaths.

New York’s Energy Plan, the “N” Word and Global Cooling -- No, not that “N” word, the other “N” word. Nuclear. As in energy. The draft New York Energy Plan is a bit vague about it. On the one hand it calls for phasing nuclear out, it also shows an increase in power from nuclear. The fact is that, nuclear is the only non-greenhouse power source that can handle base load electrical demands, and in some areas with low insolation (sun power) and low wind or hydro potential, is the default source for carbon-free energy. Best make it work, or standby to get cooked. Without nuclear in the mix, gas will continue to cook the planet – until the supplies are exhausted – and the damage is done. Literally a bridge fuel to hades.  The hydrocarbon industry – gas, oil and coal – kills people every day in the United States – in accidents and from pollution driven illness. The nuclear power industry has not killed anybody. Nor sickened anyone in the US. Like the Lada car, Chernobyl was a textbook example of Soviet bureaucracy at work, or rather, asleep at the consoles. Fukushima was sited on a fault zone on a low beach fronting a tidal wave. What could have possibly gone wrong with that ? Your choice. Get cooked with gas. Or stop global warming with a non-greenhouse power supply.

Coal Company Unlawfully Polluted West Virginia Water, Federal Judge Rules -- Coal company Alpha Natural Resources violated its state-issued pollution permit by allowing toxic amounts of selenium to seep into West Virginia waters, a federal judge ruled Thursday, the latest event in the state’s ongoing coal-driven water pollution saga.  In a decision first reported by the Charleston Gazette, U.S. District Judge Robert C. Chambers said that Alpha subsidiary Marfork Coal also violated state water quality law by allowing excess selenium from its Brushy Fork coal impoundment — one of the biggest coal waste ponds in the country — to discharge into the Brushy Fork stream in 2012. The stream is not a source of drinking water for humans, but is a source for plants and wildlife, according to the complaint. The ruling was a win for the four environmental groups that brought the lawsuit — The Ohio Valley Environmental Coalition, West Virginia Highlands Conservancy Inc., Coal River Mountain Watch Inc., and the Sierra Club — who had argued that Alpha violated its state-issued permits despite the fact that the permit did not specifically limit selenium pollution. Judge Chambers agreed that those permits exist to prohibit water quality violations in general, and confirmed the credibility of water samples showing selenium levels in excess of West Virginia’s official limit.

Gassed by Gas: Turns out that “America’s clean burning abundant 100 year supply natural gas” is also a great way to gas people with carcinogenic benzene. Which provides work. For oncologists. Benzene is a “byproduct” of oil and gas production. Like other “byproducts” such as radon, it is normally vented at the drilling site with the raw gas or vented at the gas processing plant – after it is separated from the methane, propane, butane and ethane. It’s invisible, but the venting can be seen with an infrared camera. Once in the air, it’s inhaled and shows up in people’s blood. Gassed with gas. Read More. Air samples taken near a gas well in Denton showed increased levels of benzene, along with other chemicals, according to data released by the Denton Drilling Awareness Group on Thursday. The data, and infrared video of vapor releases from energy company facilities, comes days before the group is expected to officially file a petition to ban the fracking process in the city.The air testing was done in a backyard in the Vintage neighborhood on the city’s south end. The neighborhood has been a focal point for the fracking fight in Denton, with gas wells within just a few hundred feet of homes.A California lab showed benzene readings at 6.5 micrograms per cubic meter of air. That is two points higher than the Texas Commission on Environmental Quality’s limits for long-term exposure risks.

The Bacteria That Can Mitigate Fracked Natural Gas Before It Pollutes the Atmosphere -- By the ton, methane from fracking has about 20 times the global warming effect of carbon dioxide. Researchers at a college in the United Kingdom believe they have found a tiny way to mitigate the greenhouse gas before it spreads into the atmosphere. Methylocella silvestris, a single bacterial strain found in soil and other environments around the world, is capable of growing on methane and propane, according to research by a team at the University of East Anglia that was published in Nature, a weekly, international publication. “The findings could help mitigate the effects of the release of greenhouse gases to the atmosphere from both natural gas seeps in the environment and those arising from man-made activity such as fracking and oil spills,” according to a statement from the university. While some previously believed that different groupings of bacteria could metabolize methane and propane, researchers say their recent findings mean that just one bacteria could “mop up” natural gas components to reduce pollution.“This is very important for environments exposed to natural gas, either naturally or through human activity,” said Colin Murrell, the lead researcher and a professor from UEA’s school of Environmental Sciences. “These microbes may play an important role in mitigating the effects of methane and other gases before they have a chance to escape into the atmosphere.”

Goldman environment prize goes to 6 activists -- Six environmental advocates from India, Peru, Russia and three other countries have won this year's Goldman Prize, which is awarded for grass-roots activism. The Goldman Environmental Foundation says India's Ramesh Agrawal received the prize for helping villagers fight coal mining in Chhattisgarh state. Peru's Ruth Buendia was recognized for helping to prevent two dams in the Peruvian Amazon, while Russian zoologist Suren Gazaryan won for defending protected areas from Olympic development in Sochi. The foundation says American lawyer Helen Slottje was selected for helping to shut down fracking in New York State, South Africa's Desmond D'Sa for closing a toxic dump site in Durban, and Indonesian biologist Rudi Putra for shutting illegal palm oil plantations in Sumatra. The winners will each receive $175,000 on Monday, up from $150,000 last year.

Architect of NY local fracking ban wins Goldman prize -– The architect of New York’s local fracking ban strategy is being awarded the prestigious Goldman Environmental Prize today. Helen Holden Slottje, an attorney from Ithaca, NY, is one of six grassroots environmental activists from around the globe being honored by the Goldman Environmental Foundation. Recipients of the Goldman Prize, often referred to by those in the environmental movement as the ‘Nobel Prize for environmentalists,’ are each awarded a $175,000 cash prize. Invoking the state constitution and implementing legislation, which give municipalities the right to make local land use decisions, Helen and her husband David empowered towns across New York to defend themselves from oil and gas companies by passing local bans on fracking. Their work helped pave the way for more than 170 communities in New York to take action. One such community was Dryden, NY -- one of the first municipalities in New York to enact a fracking ban. The town was subsequently sued by a billionaire-owned oil and gas company. Earthjustice attorneys are defending the town in court, working closely with the Slottjes to make sure the legal rights of communities across New York are upheld. Following is a statement from Earthjustice President Trip Van Noppen:“Helen Slottje is a true hero of the American environmental movement. When New York communities felt helpless at the onslaught of fracking, her work gave them hope. More importantly, it gave them power. “Not only has Helen’s groundbreaking work empowered communities in New York state – it has helped inspire similar movements across the country in Pennsylvania, Ohio, Colorado, California, and even Texas."

New York state shale gas: Not so much -  A drilling foreman once told me, "Don't believe ANY reserve number unless it's linked to a price." And, that is just what petroleum geologist and consultant Arthur Berman and his colleague Lyndon Pittinger have done in a new report on the viability of shale gas in New York state. Not surprisingly, when Berman and Pittinger considered what it would cost to extract the shale gas beneath New York state at a profit, the mammoth claims about recoverable reserves made by the oil and gas industry appeared heavily inflated. The stunning conclusion of the report is that at current prices--in the mid-$4 range per thousand cubic feet (mcf)--NONE of the natural gas trapped in the New York portion of the Marcellus can be profitably extracted. It's possible, of course, that someone would try. But, the economics look very shaky at current prices given what we know about the nature of the underground deposits. The natural gas in the Marcellus is deep, and it does not flow in commercial quantities on its own after a well is drilled. A new variant of an old technique called hydraulic fracturing--namely, high-volume slickwater hydraulic fracturing--combined with horizontal drilling has made this resource available for the first time. The fractures that result allow the gas to flow out of the formation, and the horizontal wells provide a relatively economical way to do a lot of fracturing or fracking from just one drilling pad. Industry spokespersons, analysts and reporters often quote the total technically recoverable natural gas resource when discussing the Marcellus. Berman and Pittinger note a 2009 estimate of 489 trillion cubic feet (tcf) of which about 71 tcf were thought to be under New York state.There are two problems with this estimate. First, just because something is technically recoverable doesn't mean that it will be profitable to bring out of the ground. Second, these estimates (and they are only estimates) keep going lower as actual drilling reveals just how little of the Marcellus is turning out to be amenable to extraction.

Frackers Vow To Buy Governorship for Gastorino - According to none other than the New York Post.  Frackers Ready to Contribute Millions to Gastorino Republican challenger Rob Astorino, badly trailing Gov. Cuomo in campaign cash, expects “several millions of dollars’’ in windfall Super PAC funding from across the nation as a result of last week’s federal court ruling in Manhattan, GOP insiders say. Some of the funding is expected to come from wealthy oil- and gas-industry executives furious at Cuomo’s nearly 3¹/₂-year delay in making a decision on “fracking’’ for natural gas in the Marcellus Shale region of the Southern Tier near Binghamton. Other pro-Astorino contributions are expected from Second Amendment supporters and firearms-industry executives, who strongly opposed Cuomo’s anti-gun-ownership “Safe Act,’’ as well as from well-heeled social conservatives outraged over the governor’s claim that “extreme conservatives’’ have “no place in New York.’’“There could be a lot of money coming into New York as a result of the ruling. There are a lot of folks across the country who have come to see Cuomo as a symbol of the Democrats’ hostility to the use of our nation’s oil and gas resources and who resent his positions on guns and traditional values,’’ said a prominent Republican activist.

No Toxic Radioactive Frack Goo On These Roads - (New York) - The Karen has been mapping county and town ordinances that prohibit spreading frack goo on roads. Now that counties and towns are banning dumping frack filth into municipal water plants, she’s going to start mapping that too. Bravo The Karen. Go here to see the full data set, go to “Layers” to show the frack waste bans shown in camo green below – and coming soon – the bans on dumping Genuine Imported Fracksylvania Frack Filth into water treatment plants. Have your elected officials not banned frack goo yet ? If not, get some new elected officials. Or get fracking slimed. There is no “economic upside” to splattering encrusted frack goo on your car. There is no benefit to dumping radioactive drill cuttings into the local landfill - unless of course you are a politician on the take from the waste haulers.

Paper trail for Pa. shale waste leads to ex-IBM site in NY Official dismisses DEP record of cuttings shipped upstate: An issue over what – exactly -- is arriving in tanker trucks for disposal at a manufacturing plant in Endicott, New York is a recent and vivid example of the fear and uncertainty over the endpoint of waste produced by the shale gas industry, and the lack of regulatory wherewithal to track it. It’s a matter of record with the New York State Department of Environmental Conservation that the tanker trucks in question are importing more than 80,000 gallons of waste a day to the plant in the heart of the village. That sum includes 30,000 gallons of leachate from the Seneca Meadow’s landfill, and 50,000 gallons from the Broome County landfill. But there is much that is not on the record, and I will get to that in a moment.  The i3 Electronics site and the surrounding residential and retail district is a Class 2 state Super Fund site, meaning existing pollution there poses a “significant threat to public health or the environment.” Since 1979, IBM Corp. has been pumping toxic solvents from the ground that have seeped from the micro-electronics plant into the community, affecting more than 470 homes. There have been multiple spills since.  It is no surprise that Endicott residents are generally concerned about becoming a waste destination, and specifically concerned about waste from shale gas development, which have been banned in New York pending a health review.

The Seismic Link Between Fracking and Earthquakes - New research indicates that wastewater disposal wells—and sometimes fracking itself—can induce earthquakes. Ohio regulators did something last month that had never been done before: they drew a tentative link between shale gas fracking and an increase in local earthquakes. As fracking has grown in the U.S., so have the number of earthquakes—there were more than 100 recorded quakes of magnitude 3.0 or larger each year between 2010 and 2013, compared to an average of 21 per year over the preceding three decades. That includes a sudden increase in seismic activity in usually calm states like Kansas, Oklahoma and Ohio—states that have also seen a rapid increase in oil and gas development. Shale gas and oil development is still growing rapidly—more than eightfold between 2007 and 2o12—but if fracking and drilling can lead to dangerous quakes, America’s homegrown energy revolution might be in for an early end.  But seismologists are only now beginning to grapple with the connection between oil and gas development and earthquakes. New research being presented at the annual meeting of the Seismological Society of America this week shows that wastewater disposal wells—deep holes drilled to hold hundreds of millions of gallons of fluid produced by oil and gas wells—may be changing the stress on existing faults, inducing earthquakes that wouldn’t have happened otherwise. Those quakes can occur tens of miles away from the wells themselves, further than scientists had previously believed. And they can be large as well—researchers have now linked two quakes in 2011 with a magnitude greater than 5.0 to wastewater wells.

Wastewater disposal may trigger quakes at a greater distance than previously thought | Science Codex: Oil and gas development activities, including underground disposal of wastewater and hydraulic fracturing, may induce earthquakes by changing the state of stress on existing faults to the point of failure. Earthquakes from wastewater disposal may be triggered at tens of kilometers from the wellbore, which is a greater range than previously thought, according to research to be presented today at the annual meeting of the Seismological Society of America (SSA). As an indication of the growing significance of man-made earthquakes on seismic hazard, SSA annual meeting will feature a special session to discuss new research findings and approaches to incorporating induced seismicity into seismic hazard assessments and maps.The number of earthquakes within central and eastern United States has increased dramatically over the past few years, coinciding with increased hydraulic fracturing of horizontally drilled wells, and the injection of wastewater in deep disposal wells in many locations, including Colorado, Oklahoma, Texas, Arkansas and Ohio. According to the U.S. Geological Survey (USGS), an average rate of 100 earthquakes per year above a magnitude 3.0 occurred in the three years from 2010-2012, compared with an average rate of 21 events per year observed from 1967-2000. A new study of the Jones earthquake swarm, occurring near Oklahoma City since 2008, demonstrates that a small cluster of high-volume injection wells triggered earthquakes tens of kilometers away. Both increasing pore pressure and the number of earthquakes were observed migrating away from the injection wells. "The existing criteria for an induced earthquake do not allow earthquakes associated with the well activity to occur this far away from the wellbore," said Katie Keranen, assistant professor of geophysics at Cornell University, who led the study of the Jones earthquake swarm. "Our results, using seismology and hydrogeology, show a strong link between a small number of wells and earthquakes migrating up to 50 kilometers away" said Keranen.

Fracking-triggered earthquakes could get stronger, seismologists say -- Fracking-triggered earthquakes could become stronger over time as more wastewater is injected deep underground, new research suggests. It follows the release of several studies linking hydraulic fracturing directly to increased seismic activity. Scientists attending the Seismological Society of America (SSA) annual meeting Thursday said that underground disposal of wastewater and fracking likely induce earthquakes by changing the state of stress on existing faults to the point of failure. Most seismic events linked to fracking had been magnitude 3.0 or less. Researchers had previously believed that such induced earthquakes could not exceed magnitude 5.0. But in 2011, two stronger earthquakes were recorded in heavily drilled areas near Trinidad, Colorado and Prague, Oklahoma. The larger quakes led researchers brought together by the SSA meeting to believe there may be a cumulative effect and that larger, "outlier" earthquakes could become the norm. “I think ultimately, as fluids propagate and cover a larger space, the likelihood that it could find a larger fault and generate larger seismic events goes up,”

Stronger ‘Frackquakes’ Are On The Way, Scientists Warn - The man-made earthquakes that have been shaking up the southern United States only stand to get stronger and more dangerous as the controversial practice of hydraulic fracturing, or fracking, increases, scientists warned at a Thursday conference.  According to multiple reports, scientists attending the Seismological Society of America annual meeting agreed that fracking can change the state of stress on existing faults to the point of failure, causing earthquakes. That stress is generally not caused by fuel extraction itself, but by a process called “wastewater injection,” where companies take the leftover water used to frack wells and inject it deep into the ground.  Though it was previously believed that the man-made earthquakes could not exceed a 5.0 magnitude, many now say that larger quakes could become the norm as more and more water is stored underground.  Because of this and other warnings, the U.S. government also announced on Thursday that it would begin to track the risks that these so-called “frackquakes” pose, and start including them on official maps that help influence building codes. Though the U.S. Geological Survey is known for mapping regular earthquakes and alerting local governments about their risks, it has never taken man-made quakes into account. It made the decision to do so, however, after finding that two strong earthquakes in heavily-drilled areas of Colorado and Oklahoma in 2011 were likely the result of wastewater injection from fracking.

Three Oklahoma earthquakes recorded today; 8 recorded Monday -  Latest Earthquake Information From The U.S. Geological Survey: The U.S. Geological Survey recorded three more earthquakes today in Oklahoma, with 11 recorded in the past two days. At 9:08 a.m. today, a 2.5 magnitude recorded about 14 miles north-northwest of Healdton in Carter County. Then, at 9:59 a.m., a 2.7 magnitude recorded about 4 miles northwest of Yale in Payne County. Finally, at 12:06 p.m., another 2.7 magnitude recorded about 14 miles north-northwest of Heraldton. Eight earthquakes ranging from 2.5 to 3.0 magnitude were recorded on Monday in Oklahoma, according to USGS. Oklahoma has recorded 122 earthquakes of at least 2.5 magnitude this month, and more than 300 earthquakes so far this year, according to the USGS.

Shale Drillers Feast on Junk Debt to Stay on Treadmill – Bloomberg - Rice Energy, a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought. Not bad for the Canonsburg, Pennsylvania-based company’s first bond issue after going public in January. Especially since it has lost money three years in a row, has drilled fewer than 50 wells -- most named after superheroes and monster trucks -- and said it will spend $4.09 for every $1 it earns in 2014. The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it. “There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”

Fracking’s Personal Tragedies: Shalefield Stories - About a year ago, an Ohio operator was caught after dumping an estimated 250,000 gallons of fracking wastewater into the Mahoning River. Since then, scarcely a month has gone by without some new fracking incident adding to the toll of damage done. Fracking fluids flowed into Colorado’s rivers and communities during flooding last fall. Then, researchers in Pennsylvania found high levels of radioactive material in the sediment of a creek where fracking waste is discharged from a treatment plant. Across the country, fracking is contaminating drinking water, making nearby families sick with air pollution, and turning forest acres into industrial zones. Yet as we read news stories or even peer reviewed scientific studies on fracking, we can sometimes forget that we are talking about real people whose lives have been gravely damaged by dirty drilling. Judy Armstrong Stiles of Bradford County, Pa., tells of finding barium and arsenic in her drinking water, and then in her own blood, after Chesapeake began drilling on her land. Mayor William Sciscoe of Dish, Texas, explains how air quality tests near a compressor station found cancer-causing substances at 400 times the safe exposure levels set by the U.S. Environmental Protection Agency. And then there’s Jaime Frederick of Coitsville, Ohio, who discovered barium, strontium, toluene and other contaminants in her water after 25 drilling wells began operating within a mile of her home. Eventually a drill was placed right next to her house, “as close as the law would allow.” She was given no advance notice before the three straight days of hydraulic fracturing, explosions, and noise “like an airport runway.” Now she has a view of gas storage tanks and radioactive toxic waste tanks from her bedroom window.

New legislation would undo state laws on fracking toxics -- The current draft of the Chemicals in Commerce Act (CICA), made public today, would add another special oil and gas industry loophole to federal environmental law. CICA, legislation that aims to “reform” the Toxic Substances Control Act (TSCA), would block states and localities from requiring the oil and gas industry to reveal the toxics they inject through the water table during hydraulic fracturing. The legislation would also prohibit states or localities from regulating or banning toxic chemicals used in the drilling and fracking process, such as benzene and diesel fuel. As hydraulic fracturing has facilitated the extraction of shale oil & gas across the country, affected states and communities have increasingly required some form of public disclosure of the chemicals used during fracking. “Oil and gas industry apologists in Congress have sunk to a new low,” said Lauren Pagel, Policy Director for Earthworks. “This toxics reform legislation risks public health in favor of energy industry profits. It would undo even modest efforts by states to protect and inform the public about fracking risks.” Nationwide, toxic fluids and waste from fracking are polluting our air and water and making nearby residents sick. There are more than one thousand documented instances of fracking-enabled oil and gas development contaminating water – from the residential wells in Dimock, PA to the more than 400 waste pits that have leached into groundwater in New Mexico alone.

Fracked, Dumped And Abandoned in Ohio -- BP, Antero,  EQT, Halcon are all pulling out of Ohio Utica shale. Which Deborah Rogers predicted two years ago.What’s Ohio to do for frackquakes and toxic dumping ?  Here’s a summary of how Ohio was teed up by the frackers for a good fracking - first they paid the state off to eliminate Home Rule protections for towns, then they sent in the landmen to dupe the landowners.  If that sounds familiar, they did the same thing in Fracksylvania and tried it in New York. BP Pulls Out of Ohio’s Utica Shale  One of the world’s largest oil company is calling it quits in Ohio’s Utica shale. BP announced today that it is pulling out of the region after disappointing results from test wells in Trumbull County. The energy giant invested $300 million in the Utica’s northern play, and according to the Youngstown Business Journal, holds leases for 80,000 acres. Last month, Houston-based Halcon Energy also said it’s suspending drilling in the northern Utica.

Big Oil Eyes Florida’s Public Lands, Plans to Drill in the Everglades - Plans to drill for oil close to the Florida Panther National Wildlife Refuge on the western edge of the Everglades have environmentalists worried. A number of companies want to drill and test beneath the Big Cypress National Preserve where prospectors believe significant new oil and gas resources lie buried. People living near the Florida Panther Wildlife Refuge first learned about these plans when they received a surprise notice in May 2013 advising them about evacuation plans if a gas leak or explosion occurred at the proposed drilling site located less than a mile west of the refuge. “Initially I was concerned about the one well proposed next to the Florida Panther Refuge. There will be a lot of noise and a gigantic construction site for the well next to the pristine wetlands,” says Matthew Schwartz, executive director of the South Florida Wildlands Association that’s leading a grassroots effort to protect the Everglades from drilling. “[Then] I found out the leasing company had about 115,000 acres and includes most public lands in southeast Florida. Other companies want to come in. A giant swath of land will be turned over to drilling companies.

Nevada Is Open To Frack -- Nevada has become the newest state to frack for oil.  Noble Energy Inc. first used fracking to explore for oil in Nevada in March, and as the AP reports, the company hasn’t yet determined the monetary potential of the region’s previously inaccessible oil deposits. The company is seeking oil underneath a 580-square-mile stretch of land, 67 percent of which is privately owned, with the rest managed by the U.S. Bureau of Land Management. So far, two exploratory wells have been drilled (both of which are on on private land) and fracking has occurred on one.  “What’s unique about Nevada is it really is a frontier area,” Kevin Vorhaben, Rockies business unit manager for Noble Energy, told the AP. “It’s a chance to get in and really do the right thing for oil and gas development. We’re excited to be in Nevada.” Not everyone is excited to have the oil company in Nevada, however. Some are concerned that fracking will use too much of the desert state’s precious water supplies. Some are worried that fracking could contaminate the groundwater. Other states have already seen fracking use up considerable portions of their water supplies — in one county in Texas, fracking accounted for almost one quarter of total water use in 2011. Last year, in the midst of a severe drought, some Texas residents wondered why so much water was still being shipped to fracking operations — especially when, according to one resident, “getting one oil well fracked takes more water than the entire town can drink or use in a day.”

Two Texas Oil Field Workers Die In Explosion - Two people are dead and nine injured from an oil well explosion in West Texas Wednesday morning. Those are two more workers to add to the rising count of on-the-job fatalities in America’s oil fields.  Updated data from the Bureau of Labor Statistics show that oil worker deaths rose 3.2 percent to a 545 total. The Houston Chronicle reports that Texas led the states with 216 deaths or 40 percent of overall fatalities over the same period. Many more suffered a temporary or permanent injury on the job: 18,000 workers had amputations, were crushed, burned, broke bones, or suffered other work-related injuries. The oil and gas industry fatality rate is almost eight times the average industry rate. There are a couple of reasons behind that, and most of them suggest these deaths are preventable. In Texas, 78 percent of fatal accidents were safety violations — meaning, they could conceivably have been prevented with tougher oversight. Experts say worker fatigue from 12- to 14-hour shifts and inexperience are also both to blame in the oil boom rush. Other sites of rising deaths are all located in states that have had drilling booms: North Dakota and Pennsylvania both reported 300 percent increases 2008-2012 compared to the years prior, and Oklahoma saw a 24 percent rise. Another man died at a North Dakota drilling operation this week from a toxic gas byproduct from oil drilling.

The Government Corruption Case Against Fracking and Keystone - America is struggling with at least three major environmental policies: fracking, Keystone, and climate change. Climate change needs its own post. This one focuses just on the first two, which are so critical because of their potentially devastating impact on our water.  The debate on whether to frack or not, whether to build the Keystone pipeline or not, focuses on jobs v. environment. The claims are two: the jobs will be many and good paying (and implicitly, there’s no alternative source of such jobs) and the environmental consequences are overblown because both fracking and oil pipelines are safe (or could be done safely.) Both are flawed. Sure, these projects will create large numbers of good paying jobs, and we desperately need such. However, they are not the only way to get such jobs. Building and restoring decrepit infrastructure is an easy way to generate good jobs. And we could invest in cleaning up contaminated soil and water too–the Superfund list is quite long. Second, the track record of contamination and secrecy is shows that both fracking and pipelines are currently done in ways that produce large amounts of contamination and have very high contamination risk profiles. (See below, after the corruption example)Let’s assume, however, that it is possible to frack and pipe oil in a way that poses very very little risk to our water supply. Do we have any reason to believe that is what will happen as fracking expands?The answer is no, because of the corrupt relationship between industry and government at all levels. Americans cannot trust industry to act safely on its own; Americans cannot trust the government to ensure industry acts safely.

Company Halts Plans On 500-Mile Pipeline Through Kentucky - Plans for a 500-mile pipeline that would carry natural gas liquids through 13 Kentucky counties have been tabled indefinitely, an update that has thrilled the project’s opponents who have been outspoken in their opposition to the pipeline over the last year.  Williams Co. and Boardwalk Pipeline Partners, the companies in charge or the Bluegrass Pipeline, announced online Monday that they had halted all investments in the pipeline “primarily in response to an insufficient level of firm customer commitments,” meaning the companies felt they hadn’t won enough buyers for the natural gas liquids that would be transported through the pipeline. Their decision to back off from pursuing the project for now doesn’t mean the pipeline is dead completely– it could one day be started back up, but for now, the companies are no longer trying to acquire land for the pipeline and are closing its offices along the pipeline’s route.

Gulf Stream: Williams Suspends Bluegrass Gas Export Pipeline, Announces New Export Line -- Right before the champagne bottles began popping for activists engaged in a grassroots struggle to halt the construction of Williams Companies' prospective Bluegrass Pipeline project — which the company suspended indefinitely in an April 28 press release — Williams had already begun raining on the parade. The pipeline industry giant took out the trash on Friday, April 25, announcing its intentions to open a new Louisiana pipeline named Gulf Trace.Akin to TransCanada's ANR Pipeline recently reported on by DeSmogBlog, Gulf Trace is not entirely “new,” per se. Rather, it's the retooling of a pipeline system already in place, in this case Williams' Transco Pipeline system.  The retooling has taken place in the aftermath of Cheniere's Sabine Pass LNG export facility receiving the first ever final gas export permit from the U.S. Federal Energy Regulatory Commission (FERC) during the fracking era.Both ANR and Gulf Trace will feed into Sabine Pass, the Louisiana-based LNG export terminal set to open for business in late 2015. Also like ANR, Transco will transform into a gas pipeline flowing in both directions, “bidirectional” in industry lingo.Bluegrass, if ever built, also would transport fracked gas to the Gulf Coast export markets. But instead of LNG, Bluegrass is a natural gas liquids pipeline (NGL). “The project…is designed to connect [NGLs] produced in the Marcellus-Utica areas in the U.S. Northeast with domestic and export markets in the U.S. Gulf Coast,” it explained in an April 28 press release announcing the project's suspension. With Bluegrass tossed to the side for now, Williams already announced in a press release that the company has launched an open season to examine industry interest in Gulf Trace. It closes on May 8, 2014.

Pipeline Regulator Cutting Its Staff By 9 Percent Despite An Increase In Pipeline Spills In 2013 -- The U.S. agency in charge of regulating pipelines and oil-shipping rail cars could shrink its staff by 9 percent by mid-June, if employees accept the buyouts the agency is offering them. The Pipeline and Hazardous Materials Safety Administration (PHMSA) is offering buyouts to 33 employees on top of the 13 buyouts it offered at the end of last year, InsideClimate News reports. If all the employees accept their buyouts, the agency would experience a net loss of 40 workers (it hired six recently). A PHMSA spokesman told InsideClimate News that the agency would continue to hire in other key areas, and that the buyouts were done to help manage the agency’s workforce in areas where a large percentage of workers are eligible for retirement. But some pipeline safety advocates are worried that, in this period of surging oil-by-rail activity and blossoming pipeline networks across the U.S., a smaller PHMSA could be bad news for fossil fuel transport safety.

Train Derails In Lynchburg, Massive Fire Erupts, "Flames Stories High" - In what can only be explained as a massive oil pipeline derailment, because trains are obviously so much safer when transporting flammable commodities, moments ago another train derailed in Lynchburg, Virginia with numerous railcars falling in the river, and a massive fire erupting with flames that are "storeys high" according to ABC13. And moments ago it was also announced that the train belongs to CSX and the burning product is, expectedly, crude oil. Additionally, it appears that the CBTX on the side of the train cars indicates they are associated with CIT Croup/Capital Finance. Some more photos from the scene of the accident:

BBC News - Derailed US train in bursts into flames in Lynchburg: A freight train carrying crude oil has derailed and burst into flames in Lynchburg, Virginia. Hundreds of people have been evacuated from a number of buildings in the city, but no injuries have been reported. Oil has been spilling into the James river, according to reports. Three or four tanker cars carrying crude oil were breached, according to a tweet by the city of Lynchburg, and more than a dozen tanker cars were involved in the collision. A city spokeswoman said several train cars derailed at about 14:00 local time (18:00 GMT), and about 300 people have been evacuated from nearby buildings. It happened very close to the city centre. Lawyer John Francisco, who works in the city, told local TV station WSET 13 he heard a loud noise that sounded like a tornado and then saw flames rise high into the sky

Crude Oil Train Derails, Catches Fire, Spills Into Virginia's James River - A CSX freight train carrying crude oil derailed in Lynchburg, Virginia Wednesday afternoon around 2 p.m. according to local authorities, “causing extensive flames and dense black smoke” to reach into the air. The City of Lynchburg said that between 12 and 14 crude oil tanker cars derailed next to the James River, though fortunately there have been no reported injuries. The cause “has not been determined” at this time, according to a statement posted on the city’s website. WSET reporter James Gherardi estimated that the tankers were no more than 100 feet from river. “You don’t often imagine the James River on fire,” said WSET anchor Len Stevens during his station’s live broadcast.  Amherst County Public Safety Director Gary Roakes confirmed to WSET that “there is product in the river” — meaning crude oil — a that “there are three cars in the river.” Three or four of the tankers were reported breached, ostensibly the source of the spilled oil. There were initial reports that downtown residents were being evacuated to a local gym, but when Mr. Roakes was asked about public safety in Lynchburg and the surrounding area, he said “we are not evacuating anyone from Amherst County.” However, deputy city manager Bonnie Svrcek told the Washington Post that “we have evacuated the downtown area from the river up about 3 or 4 blocks… It looks like there’s a buffer of trees between the river and any buildings, so it doesn’t appear right now any buildings have been affected.”

As New Shipping Rules Are Studied, Another Oil Train Derails - In the latest accident involving rail cars carrying crude oil, a CSX train derailed and erupted into black, smoky flames on Wednesday in downtown Lynchburg, Va., forcing scores of people to evacuate and causing a spill in the James River.Hours later, the Transportation Department said that a long-awaited package of rules aimed at improving the safety of oil transport by rail had been sent Wednesday night to the White House for review.The proposed regulations were not made public, but they follow Canada’s announcement of stiffer regulations last week and are expected to include measures requiring transport companies to replace old tank cars with more robust models that are resistant to puncture.It was the second train accident involving crude oil for CSX this year.As smoke billowed into the air, frightened shoppers, office workers and residents evacuated a 20-block area of Lynchburg, a city of 77,000. There were no reported injuries.

Less Than 24 Hours After Virginia Oil Train Spill, Same Company Derails Again In Maryland  - Less than 24 hours after an oil train operated by CSX derailed and caught fire in Lynchburg, Virginia on Wednesday, another CSX train carrying 8,000 tons of coal derailed in Bowie, Maryland early Thursday morning.  CSX spokeswoman Kristin Seay said about 10 cars of the coal train went off the tracks, though the cars were all still upright and there are currently no safety or hazardous material concerns. According to the Baltimore Sun, however, it appears from initial photos that one coal train overturned, spilling its load of coal. CSX officials are currently investigating the scene of the derailment and don’t yet know the cause. FD clearing the scene. @CSX taking the incident over. 8000 tons of coal onboard. No Injuries.— Bowie Volunteer Fire. The CSX coal train derailement occurred less than a day after an oil train operated by the same company derailed near Lynchburg, Virginia, an accident which resulted in the loss of about 50,000 gallons of crude oil, according to a Lynchburg spokesperson.

Accident Leads to Scrutiny of Oil Sand Production — In the annals of oil well blowouts and pipeline disasters, the 7,400 barrels of oily slush that oozed out of the mossy bogs of the boreal forest in northeast Alberta last summer may seem like a trivial matter. No one was hurt in the accident, which spread across at least 17 acres in the Primrose oil sands field, and the most damage to wildlife came from the killing of about 70 frogs in a lake contaminated by the leak. It has since been drained. But while the accident has so far been overshadowed by the controversy over the proposed Keystone XL pipeline south of the border, it has nevertheless stirred nervous misgivings throughout the oil sands industry and drawn an unusually intense response from Alberta regulators, who have traditionally had a cozy relationship with the oil companies. In a move that has raised eyebrows in the industry, officials of the Alberta Energy Regulator have refused to accept the explanations for the cause of the accident by Canadian Natural Resources, the field’s operator and one of the country’s largest oil companies. In March, the agency also rejected the company’s bid to restart its operation until a complete investigation had been completed. The full implications of the Primrose accident are still unclear, as are the causes of the accident. But the regulators’ new interest in what caused it has raised questions, more broadly, about the way oil companies are planning to tap Alberta’s richest deposits.

BP Well Sprays Crude Oil Mist Over 27 Acres Of Alaskan Tundra  -- A large pipe attached to a BP-owned well pad on Alaska’s North Slope has sprayed an oily mist of natural gas, crude oil, and water over an area of tundra larger than 20 football fields, state officials confirmed Wednesday. The discovery at BP’s Prudhoe Bay oil field operation comes one week after federal scientists released a report warning that the United States is woefully unprepared to handle oil spills in the Arctic.  A statement provided by the Alaska Department of Environmental Conservation (DEC) said BP discovered the release on Monday during routine inspections, and that the spray was active for about two hours before it was contained. The pipe spewing the gas mixture was facing upwards while strong 30 mph winds blew, which ultimately caused the spray to spread over 27 acres.It is unclear at this point how much of the mixture was released, the DEC statement said. A spokesperson for BP told the Associated Press that it is “still assessing repairs.” Federal scientists from the National Research Council recently confirmed the difficulty of cleaning up spills in the Arctic. According to their 198-page report, the Arctic’s environment is uniquely challenging due to pockets of oil that get trapped under freezing ice, sealing it beyond the reach of traditional cleanup equipment. The Arctic also lacks a variety of infrastructure, including paved roads, which could make response time exponentially longer than typical spills.

Oil and gasoline prices: many still missing the big picture - Hamilton - Gasoline prices in the United States have risen sharply recently, leading some newspapers to round up the usual suspects. But the reality is the price of crude oil has been remarkably stable over the last three years. The international price of crude oil ultimately determines the price Americans pay for gasoline at the pump. Seasonal factors can bring the price temporarily below the long-run relation, and this accounted for the temporarily low gasoline prices that we saw last fall and winter. Movements in gasoline prices back up this spring are basically a return to normal. And crude oil prices have remained stable despite impressive gains in U.S. production of shale oil, referring to oil produced from tight geological formations using horizontal fracturing methods. These new drilling techniques have added 2.5 million barrels of daily U.S. oil production since 2010. Why hasn’t that new oil brought lower prices? Here are some updated data on the answer I gave to that question last September. What the EIA reports as total oil supply grew by 5.7 mb/d between 2005 and 2013. But about half of this increase came in the form of natural gas liquids like ethane and propane, whose uses don’t include making gasoline, along with biofuels, at best a marginal addition to net energy supply. The total increase in actual field production of crude oil globally since 2005 has only been 2.3 mb/d. U.S. production of oil from tight formations is up 3.5 mb/d since 2005, and yet total global field production of crude from all sources is only up 2.3 mb/d. In other words, more than all of the increase worldwide over the last 8 years is attributable to U.S. tight oil production. Without U.S. tight oil, world oil production would be lower today than it was 8 years ago.

Just keeping up --- HERE is a striking fact from James Hamilton: U.S. production of oil from tight formations is up 3.5 mb/d since 2005, and yet total global field production of crude from all sources is only up 2.3 mb/d. In other words, more than all of the increase worldwide over the last 8 years is attributable to U.S. tight oil production. Without U.S. tight oil, world oil production would be lower today than it was 8 years ago. Petrol prices have been ticking up in recent weeks, mostly for seasonal reasons. But the broader picture, Mr Hamilton points out, is one of surprising stability in prices. For most of the last three years oil has hovered around $100 a barrel, and the price of petrol has been correspondingly flat. But there is another way of looking at this stability; prices have remained relatively high in order to temper demand growth and keep it in line with available supply growth. But for the North American oil bonanza, global demand would have to have been considerably more muted; indeed, it may have needed to decline (at a time while the world economy was growing steadily). That would presumably have taken a far higher price of oil. It's interesting: the public may underestimate the economic benefits of new oil production because prices have not been falling. But that oil has allowed the economy to continue growing even as older fields are generating less output, and without suffering a massive and economically damaging oil-price spike.

BBC News - Fossil fuel subsidies growing despite concerns: Government subsidies for renewable energy cause great consternation to those who believe in the sanctity of free markets. "If they can't stand on their own feet, then why support them?" the argument goes. But in actual fact, most energy sources are subsidised, and none more so than fossil fuels. Indeed in straight numerical terms, subsidies for oil, coal and gas far outweigh those for renewables. According to the International Energy Agency (IEA), in 2012 global fossil fuel subsidies totalled $544bn (£323bn; 392bn euros), while those for renewables amounted to $101bn. The International Monetary Fund (IMF) puts the total for hydrocarbons nearer $2 trillion.

U.S. Sanctions on Russia Don’t Nail Energy Sector -- With the latest slate of sanctions on high-profile Russians Monday, the Obama administration argues that it is ratcheting up the pressure on Vladimir Putin and inflicting significant pain on the Russian economy. But the new sanctions stop short of hitting the key energy firms that are the backbone of Russia's economy -- and that are the most vulnerable to sanctions pressure from the West.  The U.S. Treasury designated a number of individuals in Russian president Vladimir Putin's inner circle, including Igor Sechin, a former deputy prime minister of Russia and currently the president of Rosneft, one of the company's largest oil companies, with a market capitalization of about $65 billion.  The designation means that U.S. persons cannot have dealings with Sechin -- but a Treasury spokesperson said that Monday's sanctions don't prevent U.S. and European companies such as ExxonMobil and BP from continuing to do business with Rosneft. That's because Sechin controls less than half the company; if he held a majority stake the company itself would be off-limits. The loophole means that Western firms can continue their multi-billion dollar, multi-year deals with Rosneft. Western Exxon is working with the company on oil-exploration projects in Siberia and the Arctic. BP, meanwhile, owns about 20 percent of the Russian oil giant.

Putin Threatens Retaliation Against Western Oil Companies -- Russian President Vladimir Putin has responded to U.S. and EU sanctions by warning that further action against Russia could force him to reconsider the involvement of western oil companies in his country.  If the West issues another round of sanctions, “then of course we will have to consider who’s working and how in the Russian Federation, in the key sectors of the Russian economy, including energy,” Putin told reporters in Belarus on April 29. “We really don’t want to take these reciprocal steps.”  The not-so-veiled threat increased uncertainty for the billion dollar investments held by several major oil companies, including ExxonMobil, BP and Royal Dutch Shell. The companies are already growing concerned about how U.S. sanctions will affect their positions after Rosneft’s Igor Sechin was included on the U.S. target list.  The Russian economy is already feeling some pain from U.S. and EU sanctions. The Micex Index is down more than 13 percent so far this year and the Russian ruble has lost 8 percent of its value, the second worst emerging-market performance in the world.

Why Hasn’t The U.S. Gone After Gazprom? -- Although the European Union has imposed its own tough sanctions on 48 Russian individuals, Gazprom is arguably where daylight exists between the Obama administration and the EU on the issue of penalizing Moscow for its actions in Ukraine. The numbers make it clear why. Russia is the EU’s third-biggest trading partner, after the U.S. and China; in 2012, bilateral EU-Russian trade amounted to almost $370 billion. The same year, U.S. trade with Russia amounted to just $26 billion.  More than half of Russia's exports go to Europe, and 45 percent of its imports come from Europe, according to the EU EUROSTAT agency. Out of 485 billion cubic meters of gas consumed by the EU annually, Russia supplies about 160 billion cubic meters, or almost one-third the total volume. Germany, the EU’s economic powerhouse, has been explicit about the costs for the German economy from increased sanctions. Anton Börner, the president of Germany’s main trade group, BGA, warned that more than 6,000 German businesses with $105 billion of turnover are interlinked with Russia and stand to lose if sanctions are ratcheted up.

Mirable Dictu! Americans Diss Obama’s Ukraine Adventurism, Want US to Play More Modest Global Role - Yves Smith - Wow, Obama is really losing it. He can’t even manage a good war scare any more. Despite a runup-to-Iraq-war-level propagandizing, Americans aren’t buying what the Administration is selling. Obama’s bizarre push to rebrand the US’ botched efforts to destabilize the Ukraine into some sort of Russian threat to democracy and the American way has backfired spectacularly. Americans are having none of it. They aren’t persuaded that Putin is a threat, much less a belligerent that merits starting a new Cold War.  Perhaps as important, Obama economic neoliberalism has collided headlong with his support of neocon adventurists. Spend the better part of three years engaging in budget scaremongering and guess what? The great unwashed public starts paying more attention to where Federal dollars are going. It’s not hard to notice that our supersized military is a big cost item. Again and again in polls, voters have said in substantial majorities that they want to preserve programs like Medicare and Social Security. Poll have also consistently found that voters want military spending cut rather than cutting these critical safety nets, and they’d also be willing to raise taxes to preserve them.

Slovakia Agrees To Supply Ukraine With Gas - Slovakia has signed an agreement with Ukraine to reverse the flow of a natural gas pipeline that connects the two countries. The pipeline was constructed to send Russian gas through Ukraine and on to Slovakia, but the threat to Ukraine from Russia has the government in Kiev looking for ways to diversify away from its overwhelming dependence on Russian gas.  The pipeline is currently not being used, and the agreement will require engineering changes over the next several months. When completed, the pipeline could deliver 10 billion cubic meters of natural gas annually, which would be enough to meet around one-fifth of Ukraine’s gas demand.

Malcolm Fraser warns Australia risks war with China unless US military ties cut back: Australia risks being pulled into a disastrous war against China because successive Australian governments have surrendered the nation's strategic independence to Washington, former Liberal prime minister Malcolm Fraser has warned. With tensions rising in the East China Sea between China and Japan, Mr Fraser said there was a real danger of conflict and that he had become "very uneasy" at the level of Australia's compliance with the US's strategic interests.

Iron Ore Prices Tumble As China Crackdown Begins -  After the initial crash in many of the commodities backing China's shadow-banking system's ponzi, levels recovered modestly as rumors were spread of bailouts, stimulus, and in fact the exact opposite of what the Chinese government had declared it was trying to do. That ended for Iron Ore this weekend when, as The FT reports, China announced plans to get tougher on loans for iron ore imports as concerns grow that steel mills are using import loans to stay afloat in defiance of policies to reduce overcapacity in heavily polluting and lossmaking industries. Iron Ore prices tumbled overnight, closing near the lowest levels since Sept 2012 as it appears the PBOC and CBRC are serious and set to implement the tougher rules on May 1st.

AP survey: China's lending bubble could threaten US and global economies if not defused — Just as the global economy has all but recovered from debt-fueled crises in the United States and Europe, economists have a new worry: China. They see a lending bubble there that threatens global growth unless Beijing defuses it. That's the view that emerges from an Associated Press survey this month of 30 economists. Still, the economists remain optimistic that Beijing's high-stakes drive to reform its economy — the world's second-largest — will bolster Chinese banks, ease the lending bubble and benefit U.S. exporters in the long run. "They've really got to change the way they do business," said William Cheney, chief economist at John Hancock Asset Management. "But they have a good track record of doing just that. I'm an optimist about their ability to make this transition." The source of concern is a surge in lending by Chinese banks. The lending was initially encouraged by the government during the 2008 global financial crisis to fuel growth. Big state-owned banks financed construction of homes, railroads and office towers. But much of the lending was directed by local officials for pet projects rather than to meet business needs.

China’s crisis is coming – the only question is how big it will be - A financial crisis in China has become inevitable. If it happens soon, its effects can be contained. But, if policy makers use further doses of stimulus to postpone the day of reckoning, a severe collapse will become unavoidable within a few years. The country is in the middle of by far the largest monetary expansion in history. On one widely used measure, M2, its money supply has tripled in the past six years, an expansion four times as large as that of the US over the same period. This unprecedented expansion is at least partly responsible for China’s extraordinary growth rate, which is now running up against a demographic constraint. Last year, for the first time, the working-age population declined, a trend set to continue for the next two decades. Unless the country can keep lifting the labour force participation rate (for example by getting more women into the workforce or persuading older people not to retire), China will struggle to expand its labour force by even 1 per cent per year. To sustain economic growth of more than 7 per cent, productivity would need to grow by 6-7 per cent a year across the entire economy. This would be a tall order in any country. In China, where the labour-intensive services and agriculture sectors make up half the economy, it is well-nigh impossible. The country suffers from excess capacity in most industrial sectors. Yet investment in fixed assets continues to grow at double-digit rates. . China has about 1bn tonnes of annual steel-production capacity; about a third of it sits idle. Consequently, the growth statistics present a misleading figure. Output is being produced, sometimes even in the absence of any demand. A continuing burst of credit is needed to help fuel new capital spending to keep the factories busy – but that only adds to the stock of unused capital. It is a similar story with property investment. China is brimming with high-quality housing that is unaffordable. Sharp price declines are needed to clear the market. That will involve severe pain for banks that participated in the monetary expansion.

IMF: Three Reasons Not to Worry About a Crisis in China -- China’s economic growth is slowing, property prices in some smaller cities are declining and  companies are starting to default. But Changyong Rhee, director of the International Monetary Fund’s Asia and Pacific Department, believes the odds of China suffering a full-blown financial crisis remain low. In an interview, Mr. Rhee outlined a number of reason not to sound the alarm bells:

  • 1. China’s owes most of its debt to itself. True, China’s debt – some tallies put the sum of private and government debt at double China’s gross domestic product – is scary. How companies and local governments will manage to service that debt as growth cools and interest rates rise is a puzzler. The IMF’s latest Regional Economic Outlook, released Monday, predicts China’s economic growth will slow to 7.5% this year from 7.7% last year, then further to 7.3% in 2015. Mr. Rhee says China is bound to see a rising number of credit defaults. But unlike Thailand or South Korea before the Asian financial crisis erupted in 1997, China hasn’t borrowed heavily abroad in foreign currencies. China’s total foreign debt amounts to only about 9% of its GDP, according to the country’s foreign-exchange regulator. South Korea’s was roughly one-third of GDP back in 1997.
  • 2. China’s government debt is low. Like many governments in advanced economies, Beijing runs a budget deficit. But that deficit is relatively small – about 2.1% of GDP. And total government debt, both those owed by the national government and China’s much more heavily indebted provinces, still add up to only about 53% of GDP, according to Bank of America Merrill Lynch. Compare that with the U.S., where government debt is roughly as big as GDP, or Japan, where government debt has ballooned to roughly 240% of GDP.
  • 3. China’s slowdown, like its economy, is central planned. While it’s easy to overestimate the degree of control Communist Party leaders have over economic decision making on the ground, they nonetheless are able to exert their influence in a way that policy makers in the United States and other democratic nations can only envy.

China’s Income Inequality Surpasses U.S., Posing Risk for Xi - - The income gap between the rich and poor in China has surpassed that of the U.S. and is among the widest in the world, a report showed, adding to the challenges for President Xi Jinping as growth slows.  A common measure of income inequality almost doubled in China between 1980 and 2010 and now points to a “severe” disparity, according to researchers at the University of Michigan. The finding conforms to what many Chinese people already say they believe -- in a 2012 survey, they ranked inequality as the nation’s top social challenge, above corruption and unemployment, the report showed.  The growing wealth disparity that accompanied China’s breakneck growth in the decade through 2011 has increased the risk of social instability in the world’s most populous nation and biggest developing economy. Xi is engineering a slowdown in expansion to below 8 percent and leading a campaign against corruption as he grapples with rising unrest, credit risks, and pollution choking the country’s biggest cities.

More on China’s weakening provinces -  From Mac Bank today: Local governments turn more conservative in reporting GDP. Up until April 28, all provinces in China except Shaanxi had reported 1Q14 GDP growth figures. Weighting them by the GDP level of each province, we get 8.0% yoy in 1Q14, compared with the 7.4% national GDP growth from the NBS (Figure 1). In the past four years, the ratio between these two has never fallen below 1.2 (Figure 2). Does this mean China only grew 6.5% in 1Q14? We don’t think so. A more plausible explanation is that local governments began to systemically reduce the over-reporting of their growth figures. Why?

  • Deleveraging as the top priority for local governments: Local officials used to engage in a tournament competition for GDP growth, resulting in a fast accumulation of local government debt (~30% annual growth). Since last Dec, local officials seem to sense the pressure for deleveraging from Beijing.
  • Consequently, they are turning more conservative in playing the old game as higher growth often entails faster debt accumulation. Moreover, the national debt audit last year made it harder to attribute newly raised debt to their predecessors. As the result, 23 provinces lowered their growth target for 2014 and only one province (Guangdong) raised it. Even so, in 1Q14, all provinces in China except one missed their new growth targets.

China plots massive state sector shake-up -  Far from the spotlight, in secretive high-level meetings and company boardrooms, Beijing is drawing up one of the country’s thorniest reforms: an overhaul of China’s hugely inefficient state-owned industry. It shapes up as an eclectic mix of pilot projects and initiatives rather than a single blueprint, which makes it harder to judge their progress than, for example, regulation-driven financial liberalization. Yet taken together, they probably mark the beginning of the biggest revamp of China’s state sector since the late 1990s, when Beijing set out to shore up the nation’s industry ahead of joining the World Trade Organization. In recent weeks, some of China’s top conglomerates have announced spinoffs and restructuring plans, local authorities have begun experimenting with new management structures, and political sources say a group focused on state enterprises plays a prominent role among six teams that form President Xi Jinping’s economic brain trust.During the last reform push, the government sold off or closed thousands of firms, laying off 30 million workers and cutting the number of state firms to around 110,000 from 260,000. That boosted efficiency, opened room for private businesses and cemented China’s position as the world’s factory floor. This time, however, there is no one-size-fits-all solution.

China April Manufacturing Data Add to Signs of Weakness - China’s manufacturing grew less than analysts estimated in April, highlighting weakness in the economy from exports to construction that could force extra government measures to support growth. The Purchasing Managers’ Index (CPMINDX) was at 50.4, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today in Beijing, less than the 50.5 median estimate of 38 analysts in a Bloomberg News survey. March’s reading was 50.3, with numbers above 50 signaling expansion. Today’s data showed weakness in export orders that may make it harder for Premier Li Keqiang to avoid a deeper slowdown after property construction plunged in the first quarter and economic growth cooled. China’s gross domestic product is projected to expand 7.3 percent this year, the weakest pace since 1990, as the government reins in credit.

China Creates Jobs, Even as Growth Slows - China’s economic policy makers have trained their sights on the twin goals of growth and employment, insisting that growth needs to be near current levels to create enough new jobs. The government wants to create 10 million urban jobs and keep the official urban employment rate under 4.6%. Doing so, they believe, is key to ensuring social stability. But many economists say that the official reasoning is flawed and that China could withstand lower growth levels than the 2014 target of about 7.5% and still get all the jobs it needs to meet targets. “The relation between GDP and jobs is not that clear,” said Shen Minggao, head of China research with Citigroup. “Maybe if growth slows to 6% jobs would still be OK.” The official growth target – often referred to as a “bottom line” for government leaders – is a sensitive issue. For years, planners set a target of 8% even when actual growth breezed past that level – which was more of an acceptable minimum. Growth has been slowing more recently, reflecting sluggish global demand and problems at home – not to mention the economy now needs to expand from a much bigger base.

China poised to pass US as world’s leading economic power this year - The US is on the brink of losing its status as the world’s largest economy, and is likely to slip behind China this year, sooner than widely anticipated, according to the world’s leading statistical agencies. The US has been the global leader since overtaking the UK in 1872. Most economists previously thought China would pull ahead in 2019. The figures, compiled by the International Comparison Program hosted by the World Bank, are the most authoritative estimates of what money can buy in different countries and are used by most public and private sector organisations, such as the International Monetary Fund. This is the first time they have been updated since 2005. After extensive research on the prices of goods and services, the ICP concluded that money goes further in poorer countries than it previously thought, prompting it to increase the relative size of emerging market economies. The estimates of the real cost of living, known as purchasing power parity or PPPs, are recognised as the best way to compare the size of economies rather than using volatile exchange rates, which rarely reflect the true cost of goods and services: on this measure the IMF put US GDP in 2012 at $16.2tn, and China’s at $8.2tn. [...] With the IMF expecting China’s economy to have grown 24 per cent between 2011 and 2014 while the US is expected to expand only 7.6 per cent, China is likely to overtake the US this year. The figures revolutionise the picture of the world’s economic landscape, boosting the importance of large middle-income countries. India becomes the third-largest economy having previously been in tenth place. The size of its economy almost doubled from 19 per cent of the US in 2005 to 37 per cent in 2011.

China Set to Overtake U.S. as Biggest Economy in PPP Measure - China is poised to overtake the U.S. as the world’s biggest economy earlier than expected, possibly as soon as this year, using calculations that take purchasing power into account. China’s economy was 87 percent of the size of the U.S. in 2011, based on so-called purchasing power parity, the International Comparison Program said in a statement yesterday in Washington. The program, which involves organizations including the World Bank and United Nations, had put the figure at 43 percent in 2005. The latest tally adds to the debate on how the world’s top two economic powers are progressing. Projecting growth rates from 2011 onwards suggests China’s size when measured in PPP may surpass the U.S. in 2014, which would be years earlier than many economists had previously estimated, according to Arvind Subramanian of the Peterson Institute for International Economics. “There’s a symbolic element to this, to China overtaking the U.S., and that seems to be happening,” said Subramanian, a senior fellow at the Washington-based Peterson Institute. The latest data “plays to the idea that China is very big and getting bigger. It’s not to be underestimated.” In a book published in September 2011, Subramanian estimated China became the world’s largest economy in 2010. While this was too early, the International Monetary Fund’s projections in its World Economic Outlook show China will move to the top in 2019, which is too late, he said today.

China Could Overtake the U.S. as the World’s No. 1 Economy This Year - A World Bank report suggests that China could take over from the U.S. as the world’s biggest economy as early as this year.  China’s economy is catching up to the U.S.’s much more quickly than anticipated. That’s according to a new report from the International Comparison Program of the World Bank. The study recalibrates GDP statistics based on updated estimates of “purchasing-power parity” — a measure of what money can actually buy in different economies. In the process, the economy of China comes out far larger than we had previously thought. Its GDP surges to $13.5 trillion in 2011 (the latest year available), compared with the $7.3 trillion calculated using exchange rates. That catapults China’s economy much closer to that of the U.S. — at $15.5 trillion. Forecasting ahead, these figures show that China could overtake America as the world’s largest economy as early as this year. This day, of course, was always going to arrive. The ascent of China to the world’s No. 1 slot has been inevitable ever since the country embarked on its great quest for wealth in the 1980s. With a population heading toward 1.4 billion, the question has been when, not if, China will topple the U.S. from its lofty perch. Still, we can’t ignore the historic significance of that switch. The U.S. has been the globe’s unrivaled economic powerhouse for more than a century. The fact that China will replace the U.S. at the top is yet another signal of how economic and political clout is rapidly shifting to the East from the West.

China about to overtake USA as world’s largest economy - New data suggests that China will soon overtake the United States with the largest GDP adjusted for purchasing power parity. This short Financial Times video from Chris Giles looks at the new data which are being driven by fresh estimates of what money can buy - i.e. the volume of goods and services that are produced in different countries and what one dollar can buy in one country compared to another. The data finds that poorer countries are cheaper than economists thought they were and richer countries are more expensive. China barely breaks into the top one hundred of the countries of the world in terms of GDP per capita (PPP) - it is a large country but not rich!  The 2011 gross domestic product (GDP) of the European Union, the United States and China together accounted for half of the world GDP in 2011. In 2011, the GDP of the 28-nations EU represented 18.6 percent of the world's GDP, expressed in Purchasing Power Standards (PPP). It was followed by the United States with a share of 17.1 percent and China with 14.9 percent.

China’s Economy Surpassing U.S.? Well, Yes and No. - There are a number of reports around Wednesday (here and here) that China’s economy, by one measure at least, is likely to surpass the U.S. in size sometime this year. The headlines will surprise many people, used to hearing China’s economy will overtake the U.S. sometime in the 2020s, or even later. On Wednesday, the International Comparison Program, a statistical project coordinated by the World Bank, announced new data on the size of economies by purchasing power parity that suggests China’s economy is bigger than previously thought. But the latest news is anything but surprising. Regular GDP power rankings are compiled by converting a country’s gross domestic product into U.S. dollars at market exchange rates. The U.S.’s economy in 2012 was valued at over $16 trillion, twice the size of China’s, according to World Bank statistics. It’s by these measures that China’s economy won’t overtake the U.S. for a decade or more. Some economists say this way of comparing economies is misleading because it doesn’t take fluctuating exchange rates into account. If you believe China’s yuan currency is undervalued, as U.S. Treasury does, then its GDP converted into U.S. dollars is likely to understate the true size of the economy. Likewise, just because a country’s currency devalues by 10% against the dollar, it doesn’t follow its relative economic size shrinks by 10%.Another way of comparing economies, employed by the ICP, uses a concept called purchasing power parity. PPP exchange rates make adjustments for the differing costs of goods and services across countries. They attempt to show what exchange rates would have to be to buy the same basket of goods in different places. As costs are much higher in the industrialized world, especially for nontraded goods, comparisons of GDP by PPP exchange rates tend to boost the relative size of poorer nations’ economies. In essence, money goes further in the developing world.

Sorry, China, the US is still the world’s leading economic power - The US economy has been the world largest since 1872 when it overtook the UK’s. A heckuva run, no doubt. But that may end this year, according to the Financial Times: The US is on the brink of losing its status as the world’s largest economy, and is likely to slip behind China this year, sooner than widely anticipated, according to the world’s leading statistical agencies. Both economies will have gross domestic products of around $16 trillion when you adjust for “purchasing power parity,” or the much cheaper cost of living in China. Economists previously thought China would pull ahead by 2019, but the glacial US recovery has allowed the gap to narrow more quickly. (All this analysis, of course, depends on the accuracy of Chinese economic statistics.) Some important context here: on a per person basis, PPP GDP is $51,000 in the US vs. $11,000 in China. Anyway you slice the data, China is still a much poorer nation than America. (More than 30 million Chinese, basically the population of Texas, live in caves.) And at market rates, the US economy is about twice as large as China’s. Also note that within two decades or so, China will have an older population than the United States. The Middle Kingdom has become old before it has become rich. In addition to demographic problems, China is still trying to transition to a sustainable, consumer-driven growth model. So the other team has its problems, too.

China inflates its GDP statistics -- New World Bank figures, based on Purchasing Power Parity measurements, suggest that China’s GDP has caught up with America’s. A forthcoming article by Jeremy Wallace in the British Journal of Political Science suggests that neither China’s subnational nor national GDP statistics are particularly reliable at moments of political turnover. However, this doesn’t mean that these indicators are biased over the longer run. China, like other authoritarian regimes, has strong incentives to gimmick its growth numbers. National leaders may want to maintain public support, while their underlings may want to keep the favor of their bosses. This leads to systematic pressures to overreport growth in times of crisis. Wallace argues that electricity and consumption data are less likely to be manipulated, since they get less attention. This provides us with some indication of when China is likely to play with the numbers. For example: National-level Chinese electricity and GDP statistics diverged conspicuously in the wake of the collapse of the US investment bank Lehman Brothers in September 2008. Many believed that the Chinese government was propping up its GDP growth rate estimates to ease concerns that its economy was grinding to a halt as demand for exports dropped with the Global Financial Crisis. The divergence between the GDP growth figure and electricity production growth suggests that the regime manipulated the closely-watched, headline figure to boost confidence while faithfully reporting the less-examined electricity series.

Cutting the Fudge: China’s Bloated Local GDP Numbers Go on a Diet - Questionable statistics, particularly those coming out of China’s provinces, have been a fixture of the Middle Kingdom for decades. But the latest local economic growth figures suggest fudge is out of fashion, at least for now. Since 2002, the sum of the provincial quarterly numbers has exceeded the national GDP figure, often by a significant margin. At the peak in 2012, the weighted average of provincial real growth rates were 11% higher than the national GDP figure – in other words, a fudged sundae deluxe. But first quarter GDP growth figures trickling out of China’s 31 provinces, autonomous regions and large cities over the past week suggest the gap has narrowed considerably. The weighted average of real provincial year-on-year GDP growth was 8% compared with real national GDP growth of 7.4%. This is also a significant narrowing from the first quarter of 2013, when the provincial-national gap was 1.8 percentage points.

China Is A True Mega-Trader [MAP] - China's exports and imports of goods amounted to $4.16 trillion in 2013, topping the U.S. for the first time. A new Standard Chartered report by Madhur Jha and other Standard Chartered economists, titled "Global Trade Unbundled," highlights just how much of a trading giant China has become. "China is a true mega-trader — a position last held by colonial Britain, with trade significant not only as a share of world trade (11.5%) but also of its own GDP (47%)," according to Jha. "China will likely become a champion of free trade." The U.S. is China's top export destination. China's trade with Latin America has risen more than 200 times since 1990 and is the fastest-growing corridor. China's trade is beginning to slow, however. Exports accounted for about 25% of GDP in 2012, down from 35% in 2007. And the slowdown is broad based. The good news is despite the slowdown, exports to Latin America and Africa are still growing at "double-digit levels." Jha and the other authors identity a few reasons they think China will continue to be a leader of world trade.

The Renminbi Goes Abroad - Signs of the growing international presence of the Chinese renminbi (RMB) have fueled speculation that the yuan will be the world’s next reserve currency. The Chinese economic miracle has catapulted the RMB to a spot among the top 10 traded currencies in the global economy, thanks to high GDP growth, consecutive current and capital account surpluses and an aggressive People’s Bank of China (PBoC) policy since 2009, a time when China found itself in the “dollar trap.”  However, the yuan’s rapid offshore growth, driven by increased trade settlement, offshore deposits, central bank currency swaps, and issuances of RMB-denominated bonds, may be a function of investor speculation, not organic acceptance of China’s economic weight in the international economy. Unless offshore RMB use becomes more international and less driven by speculation, it could threaten China’s internationalization timetable.  It has long been thought that the RMB is undervalued due to the PBoC’s policy of promoting the export-dependent tradable goods sector. By accumulating nearly $4 trillion in foreign exchange reserves through a “twin surplus” (current and capital account surpluses), China has been able to suppress the RMB’s value through sterilization. Foreign investors have relished the opportunity to invest in the RMB since 2005, when China unpegged the currency from the dollar, seeing appreciation as a certainty. If investors hold RMB or RMB-denominated assets, they can anticipate translation gains when converting those assets back into their local currencies. As of April 2014, the RMB had appreciated 34 percent versus the dollar since it was unpegged.

Some Economists See Bank of Japan Holding Fire All Year - Most economists have for some time expected the Bank of Japan to implement further monetary easing this year, so much so that the central bank governor’s comments this month that such a move wouldn’t come anytime soon helped send stocks sharply lower and the yen higher. But some opinions are shifting–toward no action at all. A few days after his initial comments, BOJ Governor Haruhiko Kuroda met with Prime Minister Shinzo Abe, and afterward said he had reassured Mr. Abe that the central bank would take the necessary steps to meet its target of achieving 2% inflation by next spring. The majority of 11 economists surveyed last week by The Wall Street Journal said they expected the central bank to take further action later this year. None said they expect it to do so at its one-day policy board meeting Wednesday. One expects action in the current quarter, five in the third quarter and one in the last quarter. Still, four of the 11 said they expected the BOJ to refrain from any further easing this year. That’s up from only one who took that position during January’s survey, although not all of the same economists were surveyed.

Japan’s manufacturing contracts for the first time in 14 months -- Japan's consumption tax hit the nation's manufacturing sector harder than economists had anticipated.  Markit: - Japanese manufacturing firms saw a decline in output for the first time in 14 months in April. Alongside this fall in output was a deterioration in new orders which also decreased for the first time in 14 months. In both cases, firms linked the reductions to the rise in the sales tax. Many of Japan's consumers are expected to stay out of stores for a while, having bought all they could prior to the tax hike (see story). The BOJ had factored some of that slowdown into their analysis. The full extent of the damage to the economy however remains uncertain.

Japanese Manufacturing PMI Collapses At Fastest Pace On Record; Drops To 14 Month Lows -- Not much to add to this total and utter disaster... Markit's Japan Manufacturing PMI plunged from 53.9 to 49.4 - it's first contractionary print since Feb 2013 and its biggest MoM drop on record. Under the surface the picture is just as bad with output falling at the fastest pace since December 2012 and New orders also down. The blame for all this - the tax hike... hhm (well, it's better than the weather we guess). Both prices charged and input prices rose in April with some panellists attributing inflation to an increase in raw material prices (stunned?). And if you think this terrible news is great news (because more QQE), forget it - Kuroda already say no and inflation is near the BoJ's target.

Japan Props Up More Power Utilities to Avoid Rate Increases - Japan moved to prop up another two unprofitable power companies after they posted losses of 159 billion yen ($1.6 billion), underscoring how the idling of atomic reactors is forcing losses on most of the nation’s utilities. Kyushu Electric Power and Hokkaido Electric Power will receive a combined 150 billion yen from a state-owned Japanese bank, joining Tokyo Electric Power Co., operator of the wrecked Fukushima plant, on the list of utilities to secure government aid. The investment comes as the government seeks to forestall electricity rate increases by utilities that could hinder the country’s fragile economic recovery. The investment from the Development Bank of Japan Inc. would help the utilities offset fossil fuel costs that have soared since the 2011 accident at the Fukushima Dai-Ichi nuclear plant idled their atomic plants.

President Obama Demanded Concessions from Prime Minister Abe on Free Trade Deal Based on Approval Ratings over $300 Sushi Dinner, Says Japanese Tabloid - Japan's tabloid daily Nikkan Gendai has an article with leaked information from Prime Minister Abe's ministers who anonymously shared their (and supposedly Prime Minister Abe's) disappointment over US President Obama, who was in Japan on a state visit.While the US reporters accompanying the president on his Asian excursion asked tough questions like "Did you like green tea ice cream?" Nikkan Gendai's reporter wrote up an article condemning the Abe administration of complaining about Mr. Obama. If what Nikkan Gendai reported is true, President Obama, instead of trying to foster personal ties with the Japanese prime minister on the occasion (private Sushi dinner at a sushi bar in Ginza, Tokyo where the minimum charge is $300 per person), dutifully represented the US multinational corporations who demand TPP, Trans-Pacific Partnership, or NAFTA on steroid, as if he were a working-level negotiator.  From Nikkan Gendai (4/26/2014; translated):Prime Minister Abe was joined by Finance Minister Aso and Chief Cabinet Secretary Suga on April 25 evening for a dinner at an exclusive steak restaurant in Ginza, Tokyo. Mr. Abe complained that "it was all business (with Obama)." According to Mr. Abe [as leaked by a participant to Nikkan Gendai reporter], Mr. Obama said to Mr. Abe on the sushi diplomacy on April 23 evening:

Did Japan’s Prime Minister Abe Serve Obama Beefsteak-Flavored Revenge for US Trade Representative Froman’s TPP Rudeness? - Yves here. I trust you’ll enjoy this long-form account of how President Obama put his foot in mouth and chewed in front of Japan’s Prime Minister Abe when he merely thought he was eating steak. What is appalling about both Obama’s and US Trade Representative Froman’s behavior isn’t merely that they didn’t understand that bullying gets you nowhere in Japan, which is the world leader in bureaucratic stonewalling. It’s that they also couldn’t be bothered to understand the basics about Japanese decision-making. Only in owner-controlled companies do you see anything resembling Western top-down processes. Western impulse, to go to the head man to get things resolved, is a sign of gaijin ignorance and presumption. Decisions are made at the staff level, and the decision-making takes place well below the top executive rank. Trying to short-cut that process is a non-starter. The Japanese are masters of sabotage when nemawashi (the consensus-building process) has been bypassed.

Japan, U.S. tiptoe into new phase of Pacific trade talks  (Reuters) - The United States and Japan are edging into a new phase of trade negotiations after U.S. President Barack Obama and Japanese Prime Minister Shinzo Abe's summit, people with knowledge of talks to create one of the world's biggest trade pacts said. Talks on the Trans-Pacific Partnership, a 12-nation bloc which would span 40 percent of the world economy and extend from Asia to Latin America, have been deadlocked as the United States and Japan stared off over farm and auto exports. Although Obama and Abe did not announce an end to the stalemate at Thursday's meeting in Tokyo, a joint statement issued shortly before Obama left on Friday said the two countries identified a "path forward" on key issues, a contrast to the "gaps" highlighted after previous talks. true Briefing reporters on the president's plane from Japan, a senior U.S. official said negotiators set the parameters for agreement on Japan's sensitive sugar, beef, pork, rice, dairy and wheat sectors, involving which trade barriers to eliminate, which to reduce, and over which time period. "There are these parameters, and there are trade-offs among parameters. The deeper the cut in the tariff, the longer time it may take to get there," he said. A U.S. congressional aide briefed on the negotiations said there was momentum heading into TPP negotiations in Vietnam in May, where concrete trade-offs could be made.

The principles for governing international trade - East Asia Forum: The success of President Obama’s swing through Japan on his Asia trip last week, he is supposed to have told Prime Minister Abe in The Hague recently, would be measured by whether it delivered a satisfactory conclusion to the Trans Pacific Partnership (TPP) negotiations between Washington and Tokyo. On that metric, the trip was an abject failure. There was no conclusion or agreement. Japan is not yet prepared to give sufficient ground on free trade in agriculture. Abe’s third arrow also looks distinctly limp after his failure to cut through Japan’s agricultural protectionism and the way in which he and the Japanese government continue to approach the TPP, a highly symbolic if relatively minor element in Japan’s revitalisation and structural reform. With President Obama undertaking to defend the status quo on the Senkaku/Diaoyu islands, Prime Minister Abe explicitly rationalising his Yasukuni visit in Obama’s presence and no clear outcome on TPP, there was awkwardly unrequited progress on the US-Japan security relationship. The Obama–Abe joint communique claimed that there had been ‘significant achievements’ and that the two sides had ‘defined a path forward’ on the TPP. In fact, the mess still outstanding on the trade front leaves the leaderships in both countries looking diminished. In the latest round of negotiations between Tokyo and Washington, the gap on one account, may have narrowed, though most other sources say it is as wide as ever. Whether the gap is still wide or now narrower, neither side has brought to the negotiations a sense of the bigger principles that should inform the ambitions of a high standard trade agreement between the largest and third largest economies in the world, or anything that contributes to bolstering the global trading system.

TPP Investment Map: New Privileges for 30,000 Companies? -- Under previous presidential administrations, the United States signed a number of free trade agreements (FTAs) that grant foreign corporations extraordinary rights and protections beyond the rights of domestic companies. A little-known FTA mechanism called “investor-state” enforcement allows foreign firms to skirt domestic court systems and directly sue governments for cash damages (our tax dollars) over alleged violations of their new rights before UN and World Bank tribunals staffed by private sector attorneys who rotate between serving as "judges" and bringing cases for corporations. Using this extreme system, corporations have sued the U.S. government in foreign trade tribunals for enacting laws or regulations that “interfered” with the corporations’ expected profits.  This “interference” has included essential environmental regulations, health laws, and domestic court decisions. These cases are not just threats to domestic U.S. policies. U.S. corporations have also used FTAs to attack public interest laws abroad.  If a corporation wins its private enforcement case, the taxpayers of the “losing” country must foot the bill. Over $380 million in compensation has already been paid out to corporations in a series of investor-state cases under U.S. FTAs. Of the nearly $14 billion in the 18 pending claims under U.S. FTAs, all relate to environmental, energy, public health, land use and transportation policies – not traditional trade issues. Below are the maps of the locations of multinational corporations that would get these new rights if Congress would pass the TPP.  More than 6,000 corporations with nearly 30,000 corporate affiliates would be able to use these rights, including over 300 financial services companies that could challenge essential financial sector regulations through investor-state provisions. These corporations could challenge the local zoning and environmental laws of your community, so zoom in using the "+" button to see which corporations are in your city.  Click on the dots to see the names of the corporations and their industry.

Flawed TPP trade deal a bridge too far - Despite the positive spin that has accompanied negotiations over the Trans-Pacific Partnership (TPP), reaching an agreement that would satisfy all 12 partners was always going to be difficult. The TPP originated with an agreement among four of Asia-Pacific’s smallest economies – Brunei, New Zealand, Chile and Singapore. It was later taken over by the world’s largest economy, with President Obama folding it into his “Asian pivot”. It also includes resource exporters, Australia, Canada and Peru and exporters of manufactured goods, Japan, Malaysia, Mexico and Vietnam. But of all the obvious divisions among the 12 TPP participants it is the clash of capitalisms that is the most difficult to overcome. The Anglo-American participants, especially the US, firmly believe in a market-led approach to economic growth. The Asian partners – notably Japan, Malaysia, Singapore and Vietnam – however, achieved much of their remarkable economic success by relying on a state-guided approach to economic development. These competing visions of how to advance economic growth affect nearly every one of the many issues that need to be negotiated – tariff elimination, reductions in non-tariff barriers, investment safeguards, protecting intellectual property rights and so on. Clearly the leaders of the Asian partners hoped that by joining the TPP negotiations they would gain access to the US market and force their own economies into further economic liberalisation without arousing too much opposition. But they have become trapped between the rigidity of the US negotiating position and increasing resentment at home as the details of the secret negotiations have been made available. Influential domestic coalitions have been keen to defend successful state-interventionist economic strategies and have become fearful that TPP proposals would undermine critical policies designed to maintain social harmony.

Obama’s Secretive, Corporate-Run TPP Trade Deal Got Stuck - President Obama is on a diplomatic tour of Asia this week and one of his top priorities is the Trans-Pacific Partnership (TPP), a trade agreement that includes restrictive copyright enforcement measures that pose a huge threat to users’ rights and a free and open Internet. In particular, he's seeking to resolve some major policy disagreements with Japan and Malaysia—the two countries that have maintained resistance against some provisions in the TPP involving agriculture and other commodities. Despite some reports of movement on some of the most controversial topics during meetings between Obama and Japanese Prime Minister Abe, it seems that the TPP is still effectively at a standstill. As negotiations continue to be shrouded in secrecy, the Pacific trade deal faces mass opposition both inside and outside of the U.S., and reports say little progress has been made for many months. State leaders and trade delegates have held dozens of closed-door meetings to discuss possible trade-offs and concessions over various tariffs and regulations, including some of the most controversial copyright enforcement provisions in the Intellectual Property chapter. Based upon the leaked text published by Wikileaks in November, several countries are resisting the extreme U.S. proposals on Digital Rights Management (DRM) and Internet Service Provider (ISP) liability.  This pushback is great news, and it comes thanks in large part to users around the world contacting their lawmakers and asking them to question and oppose TPP's secretive corporate-driven agenda. A new campaign this week called Stop the Secrecy collected users' petition signatures and messages about the TPP from various public interest groups; the final tally came out to over 2.8 million actions that have been taken over the last two years. The campaigners are projecting their message to “stop the secrecy” on U.S. capitol buildings. The aim is to get lawmakers and trade delegates to realize that if the agreement progresses, thousands of these users will be ready to stop it again in its tracks.

Americans Support the TPP, Trade With Japan - A majority of Americans want the U.S. to join the Trans-Pacific Partnership, according to a new poll. The Pew Research Center released a new public opinion poll it had conducted on Americans’ views of the TPP, the major free trade pact being negotiated between 12 Pacific Rim nations. As Pew explained the result “A recent survey from the Pew Research Center found that a majority of Americans (55%) believe the Trans-Pacific Partnership is a good thing, while just 25% think the agreement will be bad for the country and 19% don’t have an opinion.” That is slightly more than the percentage of Americans who support the TPP’s European counterpart, the Transatlantic Trade and Investment Partnership (TTIP). According to a Pew poll taken earlier this month, just 53 percent of Americans view the TPIP as a positive thing for their country. U.S. support for the TPP is also greater than support for growing trade ties with China. Pew also reported last week that in a recent survey only 51 percent of Americans advocated for greater trade with China compared with 45 percent who were against expanded commerce with Beijing. At the same time, Pew found greater U.S. support for trade in the abstract than for the TPP, TTIP or trade with China. According to Pew, no less than 74 percent of Americans recently told pollsters that greater trade is a good thing for their country. The sizeable support for the Trans-Pacific Partnership in the United States appears to be driven largely by a desire among the American public to expand trade ties with Japan. As Pew explained: “Fully 74% in the U.S. say increased trade with Japan would be a good thing, and 29% think it would be very good for the U.S. The belief that increased trade with Japan is a very good thing is shared across the political spectrum and has strong backing among the college-educated, 42% of whom hold that view.”

India is now third largest economy, ahead of Japan  --India is now the world’s third largest economy in terms of purchasing power partiy, ahead of Japan and behind the US and China which hold the top two spots. This was revealed by the 2011 round of the World Bank’s International Comparison Program (ICP) released on Tuesday. Read full summary of results and findings here “The United States remained the world’s largest economy, but it was closely followed by China when measured using PPPs. India was now the world’s third largest economy, moving ahead of Japan,” the report said.  It highlighted the fact that the largest economies were not the richest, as shown in the ranking of GDP per capita. The middle-income economies with large economies also had large populations, setting the stage for continued growth, it added. The report says India “went from the 10th largest economy in 2005 to the third largest in 2011. Incidentally, the economies of Japan and the United Kingdom became smaller relative to the United States, while Germany increased slightly and France and Italy remained the same.

World Bank: India Overtakes Japan as World’s Third Largest Economy - In a sliver of good economic news during an Indian election that is widely focused on economic growth, the World Bank announced in a report on Tuesday that India overtook Japan as the world’s third largest economy in terms of purchasing power parity (PPP). According to the World Bank’s International Comparison Program (ICP) data, India holds a 6.4 percent share of global GDP on a PPP basis. The United States remains in first place with a 17.1 percent share and China trails it at 14.9 percent. Japan, while still the world’s third largest economy in nominal terms, holds a 4.8 percent share of global wealth. The ICP’s data is from 2011. Overall, India went from 10th place in 2005 to 3rd place in 2011. ”The United States remained the world’s largest economy, but it was closely followed by China when measured using PPPs. India was now the world’s third largest economy, moving ahead of Japan,” the report noted. “Because economies estimate their GDP at national price levels and in national currencies, those GDPs are not comparable. To be compared, they must be valued at a common price level and expressed in a common currency,” the report explains, outlining the justification for a PPP-based comparative look at world GDPs. In exchange rate terms– that is, when all the national currencies are converted into U.S. dollars at current exchange rates– the Indian economy remains about a third of Japan’s in size, comparable to the Russian or Canadian GDPs.

India Central Bank Chief Warns QE "Has Been More Cause Than Cure" For Economic Weakness --Speaking at The Brooking Institution on April 12, Reserve Bank Of India Governor Raghuram Rajan  - no stranger to controversial truthiness (as we have noted here and here) - made clear his views on the rest of the world's central bankers as he concluded, "the first step to prescribing the right medicine is to recognize the cause of the illness. And, when it comes to what is ailing the global economy, extreme monetary easing has been more cause than cure. The sooner we recognize that, the stronger and more sustainable the global economic recovery will be." Authored by Raghuram Rajan via The Gulf Times, As the world struggles to recover from the global economic crisis, the unconventional monetary policies that many advanced countries adopted in its wake seem to have gained widespread acceptance. In those economies, however, where debt overhangs, policy is uncertain, or the need for structural reform constrains domestic demand, there is a legitimate question as to whether these policies’ domestic benefits have offset their damaging spillovers to other economies. More problematic, the disregard for spillovers could put the global economy on a dangerous path of unconventional monetary tit for tat. To ensure stable and sustainable economic growth, world leaders must re-examine the international rules of the monetary game, with advanced and emerging economies alike adopting more mutually beneficial monetary policies.

 Asia to remain 5.4 pct economic growth in 2014, IMF report - (Xinhua) -- Economic growth in Asia is projected to remain steady at 5.4 percent in 2014 and 5.5 percent in 2015, the International Monetary Fund (IMF) said in a report published on Monday. External demand is set to pick up alongside the recovery in advanced economies, and domestic demand should remain solid across most of the region, said the IMF's Regional Economic Outlook for Asia and Pacific. The report - Sustaining the Momentum: Vigilance and Reforms - said that the region has strengthened its resilience to global risks and will continue as a source of global economic dynamism. Provided it stays the course on reforms, Asia is well positioned to meet the challenges ahead and to secure the region's position as the global growth leader, the report said. Despite the growth momentum, the IMF report also warned that Asia will face higher interest rates and potential bouts of capital flow and asset price volatility with the expected upcoming tightening of global liquidity and Asian economies' external risks of a sudden tightening of global financial conditions.

Asia’s Factory Floor Surveys Augur Ill for Exports -- Asia’s export slump doesn’t appear likely to ease anytime soon, if the view from the region’s factory floors is any guide. The latest monthly surveys of purchasing executives at manufacturing companies reveal a largely gloomy view of global demand in April. The surveys, compiled by survey firm Markit Economics, found a weaker outlook for exports among executives in Japan, China, India and South Korea. That helped pull Markit’s closely watched purchasing managers index, or PMI, down for many countries last month (PMIs measure the relative pace of growth or contraction in factory activity):

  • - Activity in the region’s two largest economies, China and Japan, appears to be contracting;
  • - Growth in two of its most export-dependent economies, South Korea and Taiwan, is slowing;
  • - But activity in Asia’s less export-reliant economies, appears to be strengthening: India’s factory expansion is unabated and Indonesia’s is quickening.

That jibes with troubling trade data suggesting recovering global growth isn’t lifting regional exports. Overseas shipments from Asia’s top four exporters – China, Japan, Korea and Taiwan – dropped 2% in the first three months of 2014. . After serving the region reliably since the 1960s, Asia’s export engine is stuttering, economists warn. Export growth has typically rebounded in past economic recoveries to its usual double-digit growth rate as Western consumers regain their taste for manufactured imports. But things have changed. Asia’s labor costs have risen, making the region less competitive. And the recovery in the U.S. appears to be focused less on imports than on more domestic-oriented businesses like building new homes. The April PMI results reinforce the view that the slump in exports is anything but temporary.

Great Graphic: Asia’s Decline as an Export Machine - This Great Graphic was posted on Barry Ritholtz's  Big Picture blog.  He found it in the Wall Street Journal, which it got from Thomson Reuters.  The chart depicts year-over-year growth in quarterly exports from the four large East Asian economies.  Using quarterly instead of monthly data arguably helps reduce the noise to signal ratio.  The graph shows that Asian exports soared as fiscal and monetary stimulus in the US and Europe ended the deep down turn triggered by the end of the historic credit cycle in 2009. They peaked in 2010 and have simply not recovered.    Claims that the downturn is cyclical do not appear convincing.  The global recovery has deepened and broadened, yet export growth has steadily weakened. Such a decline has, in the past, only been associated with economic downturns.  This could be sign of a deeper structural shift in the world economy.  The G7 and G20 calls to reduce global imbalances has taken place.   The US current account deficit has been more than halved.  Japan has swung from the trade surplus to a trade deficit.  China's current account surplus has been halved.  The deficits of peripheral European countries have fallen through a combination of domestic demand compression and internal devaluation (i.e., deflation and/or disinflation).

'Where the World Is Headed' - This panel brings together prominent economists to debate a range of issues with global scope: from inequality and emerging markets to austerity policies and the impact of technology on employment. This will be a free-ranging discussion focused on where the world is headed and what can be done to improve economies and people's lives everywhere.

  • Speakers: Ken Rogoff, Professor of Economics, Harvard University; Former Chief Economist, International Monetary Fund
  • Nouriel Roubini, Chairman, Roubini Global Economics; Professor of Economics, Stern School of Business, New York University
  • John Taylor, Mary and Robert Raymond Professor of Economics, Stanford University; George P. Schultz Senior Fellow in Economics, Hoover Institution
  • Moderator: Gerard Baker, Managing Editor, The Wall Street Journal; Editor-in-Chief, Dow Jones & Company

New Zealand Exports Hit Record Highs - New Zealand’s exports hit fresh record highs in March as demand for the country’s basket of agricultural products continues to surge. While demand from China for all things dairy continues to be the mainstay of the country’s economy, meat, wood and fruit are all seeing strong growth, combining to push goods exports above 5 billion New Zealand dollars (US$4.25 billion) in March and NZ$50 billion on an annual basis – both records. “The broad merchandise trade themes should sound familiar: booming exports driven by very strong primary exports, underpinned by high international prices and rising volumes,” . Data released by Statistics New Zealand showed dairy exports were up 45% in March on the prior year, while meat was up 11.8%, wood rose 14% and fruit exports grew 34%. This led to the largest trade surplus recorded for a March month since data began, at NZ$920 million. Exports are compared to the same month in the prior year due to the seasonal nature of agricultural production. Demand for the New Zealand’s agricultural commodities has seen the island nation’s economy leap ahead of its peers, including neighboring Australia which was once nicknamed the “lucky country” due to the abundance of resources there.

Queues, shortages hit Venezuela’s homeless and hungry -- Huge queues at supermarkets and shortages of basic products have become the norm in Venezuela over the last year — and the most needy are increasingly at the sharp edge. Workers at soup kitchens for the homeless and hungry face an ever-more difficult task to find rice, lentils, flour and other staples to provide a free daily hot meal. “I queue for hours every day because you can only get one thing one day, another the next,” said Fernanda Bolivar, 54, who has worked for 11 years at the church-supported ‘Mother Teresa’ soup kitchen in a back-street of downtown Caracas. “The situation’s got terrible in the last year,” she said, in a dingy kitchen at the centre named for the Roman Catholic nun who helped the poor and dying in India.

Ukraine’s Russian Bonds – Another Pesky Clause Makes You Wonder - About a month ago, smart folks zeroed in on a single clause in Russia's two-year $3 billion loan to Ukraine. The December 2013 loan was documented as an ordinary-looking eurobond, apart from a promise by Ukraine to keep its debt under 60% of its GDP. No other Ukrainian bond had the debt/GDP clause, which naturally looked awkward when the sole bondholder started hacking at the denominator of the debt/GDP fraction (Crimea, about 3% of GDP; east and south, about 45%). Since then, I have communed a bit with Ukrainian bond prospectuses, and stumbled on another clause only found in the Russian bond. All of Ukraine's state and state-guaranteed foreign bonds cross-default to one another: if Ukraine skips a bond payment due in 2014, holders of the bond due in 2021 can accelerate. However, the Russian bond also cross-defaults to "any indebtedness ... owed to the Noteholder or to any entity controlled or majority-owned by the Noteholder". Compare the cross-default provision in this Ukrainian bond to this one  (search "Events of Default", "Indebtedness of Ukraine" and "Relevant Indebtedness"). One wonders whether they were thinking of Gazprom, majority-owned by the Russian government, and perennially claiming billions in arrears from Ukraine's Naftogaz. If Ukraine is late with its gas bills, Russia can accelerate its $3 billion. Since, according to Russia, Ukraine was already in gas arrears at the time the $3 billion bond was issued, that bond might have been callable at will all along.

U.S. Plans to Hit Putin Inner Circle With Sanctions - Deputy White House National Security Adviser Tony Blinken pledged “news for Monday” on sanctions as the focus on the ground in Ukraine turned to a team of international observers seized by pro-Russian separatists. Among those that may be hit are Russia’s third-largest lender, OAO Gazprombank, development lender Vnesheconombank, and Igor Sechin, the chief executive officer of OAO Rosneft (ROSN), according to people familiar with developments. Sechin is a confidant of the Russian president.  “We will be looking to designate people who are in his inner circle, who have a significant impact on the Russian economy,” Blinken said on CBS’s “Face the Nation” program today. “We’ll be looking to designate companies that they and other inner-circle people control. We’ll be looking at taking steps as well with regard to high-technology exports to their defense industry. All of this together is going to have an impact.” Representatives of the 28 European Union nations will also meet tomorrow to widen a list of people subject to asset freezes and travel bans, an official from the bloc said yesterday. The sanctions will target 15 Russians in positions of power, another diplomat said. Both asked not to be identified because of the sensitivity of the matter.

Ukraine: Fascists Lack In Math - Disgraced former Ukrainian President Viktor Yanukovych and his entourage, whose criminal regime was toppled on Feb. 22 after the three-month EuroMaidan revolution, took $32 billion in cash to Russia, said Ukraine’s Acting Prosecutor General Oleg Makhnitsky in an interview with the Financial Times on April 28. Hmm. Oleg Makhnitsky, the new prosecutor general, is a member of the fascist Svoboda party. These folks are known to be somewhat lacking in education, especially in math. $1 million in $100 notes, the highest nomination freely available, weights about 22 pounds or 10 kilogram. $32 billion in $100 notes are thereby some 320 metric tons. One would need some 20 big trucks to haul that stash around. I am quite sure that Yanukovich had no chance to assemble and load such a convoy on February 21 when he fled from being threatened with violence by the fascist paramilitary from Maidan square. How much can one trust a prosecutor general when that person makes such obvious ridiculous claims?

Ukraine Says That Militants Won the East - It is by now a well-established pattern. Armed, masked men in their 20s to 40s storm a public building of high symbolic value in a city somewhere in eastern Ukraine, evict anyone still there, seize weapons and ammunition, throw up barricades and proclaim themselves the rulers of a “people’s republic.” It is not clear who is in charge or how the militias are organized.Through such tactics, a few thousand pro-Russian militants have seized buildings in about a dozen cities, effectively establishing control over much of an industrial region of about 6.5 million nestled against the Russian border.Day by day, in the areas surrounding the cities of Donetsk and Luhansk, pro-Russian forces have defied all efforts by the central government to re-establish its authority, and on Wednesday, Ukraine’s acting president conceded what had long been obvious: The government’s police and security officials had lost control. “Inactivity, helplessness and even criminal betrayal” plague the security forces, the acting leader, Oleksandr V. Turchynov, told a meeting of regional governors in Kiev. “It is hard to accept but it’s the truth. The majority of law enforcers in the east are incapable of performing their duties.”

EU Commissioner Warns "Any 'Sensible' Person Should Oppose Further Russia Sanctions" - Obama won't be happy! "It would harm everybody, the Europeans and the Russians," warned Olli Rehn, the European Commissioner for Economic Affairs, adding that "any 'sensible' European Union citizen should oppose further sanctions on Russia because of the economic cost for Europe." As Merkel and Obama cozy'd up for discussions this morning, we can only imagine the promises being made if only she would support his crusade (which she clearly indicated she did not want to). Perhaps she should check in with her nation's CEOs (who have vociferously demanded no more sanctions) and, as Rehn acknowledges, the slowing Russian economy is already having a “negative impact” on Finland and Austria, and "that economic fallout probably will spread to Germany, Poland and the Baltic countries."

Putin Parties With German Ex-Chancellor, Sanctions Be Damned -- Russian President Vladimir Putin is a master at this game. Even as the sanction spiral concocted by the US and the EU is supposed to strangle his ambitions for the Ukraine, whatever they may be, and as the threat of war or civil war is hovering over the country, he set up a photo op of incomparable ingenuity. And his confidant, ex-Chancellor of Germany Gerhard Schröder stepped in it with gusto, sanctions be damned. Here is Schröder, laughing heartily, eyes closed in dedication, as he greets Putin. The photo shows Schröder from the front, Putin’s balding noggin from behind. It was taken Monday evening after Putin had climbed out of the limo that had pulled up at the Yusupov Palace in St. Petersburg, Russia, where Schröder was waiting for him. The occasion was a reception in honor of Schröder’s 70th birthday. It was hosted by Nord Stream AG.

Austerity and suicide: the case of Greece - A paper claiming that austerity in Greece had caused male suicide rates to rise significantly created something of a stir this week. Some people used it to support their argument that the structural reforms imposed by the “Troika” (IMF IMF, European Commission and ECB) as a condition of Greece’s bailout were economically destructive and should be abandoned. Others disputed the findings, claiming that there never was any austerity and the suicides were simply a response to difficult economic conditions. There is no doubt that six years of deep recession in Greece have taken their toll on the population. The paper shows a statistically significant positive correlation between unemployment and male suicide, and an even more significant negative correlation between economic growth and male suicide. Economic depression, it seems, does cause some men to end it all. However, that wasn’t what the authors set out to prove. There is already substantial evidence that suicide rates rise in recessions. For example, this paper published in the British Medical Journal shows positive correlation between the 2008 economic recession and higher suicide rates across a wide range of countries. No, the authors set out to prove that “austerity” is a DIRECT cause of suicide in general, and particularly for older people affected by cuts to their fixed incomes. And I’m afraid they failed. They simply did not adequately demonstrate correlation between government spending cuts and suicide rates, let alone a causative relationship. The best they could do was show statistical significance at the 5% confidence level between government spending cuts and male suicide rates only (not age-dependent) for data from 1968-2011. But they did not control for the effects of the 2008 financial crisis – which as the BMJ paper cited above shows, raised suicide rates in many countries. That omission alone means the data set is compromised.

Number of New Mortgage Loans in Spain Down 33% From Year Ago  - Those who think the Spanish economy is poised to turn around need only take one look at mortgage loans to see reality. Via translation from La Vanguardia please consider New Mortgages Drop 33% in February, 46 Consecutive Months of Declines New mortgages for home purchases fell in February by 33% over the same month in 2013. This marks 46 months of declines according to data released today by the National Statistics Institute (INE). The average amount of these loans reached 102,443 euros, 0.8% less than in January and only up 1.1% from a year earlier.

Spain: The Land Where Incipient Deflation Becomes Good News For Headline GDP - According to the bank of Spain, the Spanish economy continued to push forward with its recent expansion in the first quarter, and it do so at an accelerated rate, growing by 0.4% over the previous three months. This is certainly good news for everyone in Spain, and there is no doubt that this is the strongest expansion in economic activity (see PMI chart below) since the crisis started. The economy also grew by 0.5% over a year earlier, the first time it has done this in nine quarters. Nonethless many of the old doubts about the durability and sustainability of the Spanish expansion remain. Here I will focus on  three issues that strike me in connection with the latest GDP numbers: the stagnation in the export boom, the difficulties being encountered in reducing the deficit and the ongoing deflation issue. The big question still remains: is this a balanced recovery, an export lead one, or simply a government financed one? Here to help think about all this is the Bank of Spain breakdown of recent economic growth. GDP is a composite, derived by aggregating a number of components. Principal among these are private consumption and investment, public consumption and investment and net trade.  If we look at the composition of growth in Spain in the first three months of this year we find that private consumption grew, but less rapidly (0.3 vs 0.5) than in the preceding three months, government consumption and investment grew (vs contraction at the end of last year) but we don’t know by how much because, unfortunately, the BoS don’t tell us. Net trade was positive – despite the fact that both exports and imports were down (on a seasonally adjusted basis, by 0.6% and 1.2% respectively). Since imports were down by more than exports, net trade was positive and contributed an estimated 0.2 percentage points (or half) to growth. If imports had fallen by less, by say only 0.6%, then Spanish GDP would only have grown by half (0.2%), such are the quirks of GDP calculations. But it is surely not unequivocally good news if you have had to rely on a slump in imports to get that highest-growth-in-recent-years number.

Struggling Italian economy poses potential threat to whole of Europe - Italy may be the land of fast cars, high fashion and stunning design. But the country has been living the good life for far too long. It is now living on borrowed time. Italy's economy is in dire straits. The country is struggling to emerge from its longest post-war recession. Unemployment is at record levels. The nation is burdened by a groaning mountain of public debt. Italian politics remain a powder keg. Unless Prime Minister Matteo Renzi's centre-left government comes up with quick fixes, Italy will be heading for a new crisis. It could be the crisis that plunges the euro zone into a new realm of uncertainty and calamity. Italy is the Godzilla of event risk for the euro zone. The country's bond market is a behemoth worth roughly €2 trillion (HK$21.44 trillion) - the third-largest in the world after the United States and Japan. The European Central Bank did as much as it could to prop up confidence in Italian debt when the market imploded at the height of the euro-zone crisis in 2012. A repeat crisis in confidence would risk bringing the whole house of cards crashing down. When the euro-zone contagion was raging, the European Union, the International Monetary Fund and the ECB managed to pool sufficient resources to keep the minnows - Greece, Ireland, Portugal and Cyprus - afloat. Italy would be a different kettle of fish.

The Elephant In The Room: Deutsche Bank's $75 Trillion In Derivatives Is 20 Times Greater Than German GDP - It is perhaps supremely ironic that the last time we did an in depth analysis of Deutsche Bank's financial situation was precisely a year ago, when the largest bank in Europe (and according to some, the world), stunned its investors with a 10% equity dilution. Why the capital raise if everything was as peachy as the ECB promised it had been? It turned out, nothing was peachy, and in fact DB would proceed to undergo a massive balance sheet deleveraging campaign over the next year, in which it would quietly dispose of all the ugly stuff on its balance sheet during the relentless Fed and BOJ-inspired "dash for trash" rally in a way not to spook investors about everything else that may be beneath the Deutsche covers.  We note this because moments ago, Deutsche Bank did the same again when it announced that it would issue yet another €1.5 billion in Tier 1 capital.  The issuance will be the third step in a co-ordinated series of measures, announced on 29 April 2013, to further strengthen the Bank’s capital structure and follows a EUR 3 billion equity capital raise in April 2013 and the issuance of USD 1.5 billion CRD4 compliant Tier 2 securities in May 2013. Today’s announced transaction is the first step towards reaching the overall targeted volume of approximately EUR 5 billion of CRD4 compliant Additional Tier 1 capital which the Bank plans to issue by the end of 2015

How to fleece a government, Irish style - Via Brian Lucey comes this report that Allied Irish Banks (AIB) is having some difficulty servicing its debts. AIB was bailed out by the Irish government in February 2009 when its share price collapsed due to severe  liquidity problems and loss of market confidence. It was subsequently nationalised when the collapsing Irish property market destroyed its solvency. Currently, the Irish government owns over 99% of its ordinary shares. In three weeks' time, AIB is supposed to pay a cash dividend on 3.5bn euros of preference shares held by the National Pensions Reserve Fund Commission (NPRFC). AIB can't afford to pay the interest on them, apparently, despite the fact that it made an operating profit of 445m euros in 2013. AIB has a creative solution to this. Cash shortfall? No problem. Issue some ordinary shares to pay the interest. Sounds wonderful, doesn't it? But the NPRFC is a government organisation. So the Irish government not only owns 99.8% of the ordinary shares of AIB, it has £3.5bn of subordinated debt, too - the interest on which will be paid in the form of yet more ordinary shares.  In effect, the Irish government will be paying interest to itself. But the real question is - if AIB is already fully nationalised, and it STILL can't afford to service its debts, why is it still open for business? Why isn't it being wound up? After all, the only reason this solution is possible at all is that the debt is owed to the sovereign. If it were owed to private sector lenders, this would be another bailout. AIB can hardly be considered a going concern, whatever its management might say. It's the worst type of zombie bank - draining resources from the sovereign to keep it alive, while adding little value to the economy it is supposed to serve. Wouldn't Ireland be better off without it?

Recovery in Europe? - Greece has returned to the bond market, issuing $4.2 billion of five-year bonds at an interest rate of 4.95%. The government’s ability to borrow again is a “reward” for posting a surplus on its primary budget (although the accounting that produced the surplus has been questioned).  This has been viewed as a sign, albeit fragile, of recovery. Portugal has also sold bonds and hopes to exit its bailout program this spring. But what does recovery mean for these countries, and is it sustainable?  Growth for these countries reflects a rise from a brutally harsh downturn. Greece has an unemployment rate of 26.7%, with much higher rates for its youth. Portugal’s unemployment rate of 15.3% was achieved in part by emigration. A look forward indicates that the debt that drove these countries to borrow from their European neighbors and the IMF will fall in the next five years but continue at elevated levels. The latest Fiscal Monitor of the International Monetary Fund forecasts gross government debt to GDP ratios for these countries, as well as for the Eurozone:  Even if the debt/GDP ratios above the Reinhart-Rogoff 90% threshold do not pose a threat to growth, it is noticeable that the Eurozone’s debt does not fall below it until 2018, while debt/GDP in Greece and Portugal will be in triple digits for many years.

ECB’s Noyer Sees Strong Euro Weighing on Prices - European Central Bank governing council member Christian Noyer Monday said that while the euro’s strength is weighing on prices, the currency area isn’t about to enter a period of deflation. Mr. Noyer, who called the appreciation of the single currency “a challenge” for the euro zone, singled out the strong showing of the euro on foreign exchange markets as “one of the factors that is pulling down inflation.” “According to our calculations, if the euro had remained at his level of end 2012, about 10% lower, inflation would be today close to 1%,” Mr. Noyer said. The annual rate of inflation was 0.5% in March. But policy makers and many economists expect it to rise in April. Mr. Noyer ascribed the single currency’s appreciation to capital flows leaving emerging economies and directed to the euro zone. Peripheral countries in the currency bloc – those that suffered most during the economic crisis – are benefiting most from this move. ECB officials, including President Mario Draghi, have signaled they are worried about inflation rates much lower than the Bank’s target of an inflation rate of below but close to 2%, because of the risk of deflation, or a period of self-perpetuating price declines. ECB President Mario Draghi has signaled that the ECB could take bolder measures to stimulate the economy and make prices grow faster, including purchases of assets, a practice known as quantitative easing. A prolonged period of low inflation would make it harder for consumers, businesses and governments to pay down debts and could weaken profits.

LEAKED – Draghi’s Sudden Switcheroo On QE - Wolf Richter - Consumers in the Eurozone, who in many places had to tighten their belts as wages and benefits were whittled down, have been spared the scourge of steep inflation. A real benefit, given their squeezed incomes. But central bankers, corporations, and politicians in France and other countries abhor this scenario, and they clamored for more inflation and for the devaluation of the euro, and they made deafening noises to push the ECB to start printing some serious money and douse the lands with QE. With some effect: on April 3, ECB President Mario Draghi announced that the Governing Council had unanimously committed “to using also unconventional instruments within the mandate to cope with prolonged low inflation.” QE would start any minute. This led to more deafening noises about beating down the strong euro and stirring up inflation with a big bout of money printing and bond buying.  This kind of jabbering about money-printing makes a lot of Germans very nervous. So the leaders of the parties that make up Germany’s Grand Coalition – Chancellor Merkel’s CDU, its Bavarian sister party CSU, and the center-left SPD – met for a private two-day shindig  to discuss various politically tricky topics from foreign policy to consumer protection in financial matters. The idea was to do it away from the media, out of the spotlight, to hash out some deals, perhaps. At any rate, one of the guest speakers was Draghi. And while the meeting was private, a “euro-area official present at the meeting,” who didn’t want to be identified, told reporters, according to Bloomberg, that Draghi tried to assuage these skeptical Germans. He expected low inflation to continue, Draghi had told them, but he didn’t see any threat of deflation. The ECB would be ready to embark on QE if needed, Draghi said, but it wasn’t imminent and would be relatively unlikely for now.This switcheroo fits well into central-bank forked-tongue politics and market-manipulation: pacifying strong-euro Germans out of one side of the mouth, and out of the other side, promising financial markets “whatever it takes.”

Quantitative easing alone will not do the trick - Very low inflation poses a mounting threat to the economic stability of the eurozone. The rate of consumer price inflation has been below 1 per cent since October, and hence far below the European Central Bank’s (ECB) target of just below 2 per cent. This highlights the degree of weakness in the eurozone economy – and reinforces it – notwithstanding the optimism generated by a return to modest growth. And it further increases doubts over debt sustainability across the currency union: without a healthy dose of inflation, it is much harder for households, firms and governments to reduce their debt burdens. To make things worse, in the most indebted countries, such as Greece, Portugal, Spain and Italy, inflation is even lower than the eurozone average. In response, many observers argue that the ECB should employ unconventional tools like quantitative easing (QE) to boost inflation. The problem is that QE alone is unlikely to be effective without a significant change in the ECB’s approach to monetary policy. The ECB needs to manage people’s expectations about the future path of demand, income and inflation more forcefully if it is to generate a proper economic recovery across the Eurozone.

Null points for EU’s stress-test comedy - Be careful if you are planning to buy a house in France. The EU stress test for banks released this morning expects French property to fall 1.6pc this year and another 1pc in 2015 even if things go well. The “adverse scenario” is a cumulative drop of 31pc by the end of 2016. This reflects the worries of French regulators who fed the data to the European Banking Authority. Romania competes for horror. Italians deem their country less volatile. Property prices fall 3.4pc this year and 0.7pc next if all goes well, but only drop 16pc in a rout by 2016. Spain falls 4.3pc this year, then starts to recover. The worst case is a 10.4pc drop over the next two years with rebound by 2016 even in a crisis. The Spanish regulators are delightfully optimistic as usual, seemingly living in a parallel universe. So, if the EBA’s global shock were to occur – with a surge in 10-year US yields by 250 basis points this year, a further “tantrum” (the EBA’s word) in emerging markets that culminates in a “sudden stop”, and a fall in world trade – we are told that Spain could dodge the bullet deftly. This stretches credulity. Madrid consultants RR de Acuna say there is still an overhang of around 2m homes in Spain if you include the properties in foreclosure, on the books of banks, or yet to be finished. The EBA says Brits could see a 20pc drop by 2016. I fail to see how this could happen when there is a chronic housing shortage and when the central and all-consuming mission of the British government in the early 21st century is to prop up nominal house prices come what may, an objective that can always be met by a sovereign central bank, a printing press, and floating currency.

Low inflation concern continues in Europe - The Euro-zone inflation rate rose less then expected for April at a pace of 0.7%. It was expected, or hoped, to rise to 0.9%. Germany’s inflation rate stayed low at 1.1%, which makes cost adjustments more troubling for the periphery countries of Europe like Spain and Greece. Finding a cure for low inflation is imperative just like finding a cure for inequality. The knee-jerk response to lower inflation is to lower nominal rates and increase Quantitative Easing. Sooner or later Europe and other advanced countries will have to channel liquidity more broadly to society than just the financial sector. And if the Fisher Effect is stable this time, then lowering the nominal rates will be counter-productive.

IMF urges ECB to do all it can to tackle low inflation (Reuters) - The European Central Bank should do "everything it can" to tackle low growth and inflation but euro zone governments must also shape up their economies, a senior International Monetary Fund official said on Monday. Jose Vinals, director of the IMF's monetary and capital markets department, said a multi-pronged policy approach was needed to buoy the 18-country euro zone. In addition to the ECB playing a role, he said governments should pursue structural reforms that are "much talked but where there is little action", while remedies to address any capital deficiencies at banks after a sector health check were crucial. "I think that monetary policy should do everything it can in order to make sure that inflation goes back to fulfil the mandate of the ECB," Vinals told Reuters Insider television. "But I think that it is very important also to have other policy actions play their part," he added. Euro zone inflation is running at 0.5 percent - far below the ECB's medium-term target of just below 2 percent. April inflation data are due on Wednesday. A Reuters poll points to a reading of 0.8 percent.

Warning signals flash for ECB ahead of May meeting (Reuters) - A fall in euro zone lending, weaker-than-expected German inflation and signs of tightening in money markets compounded the European Central Bank's policy conundrum on Tuesday as it weighs up whether to act next week. ECB President Mario Draghi last week identified a weakening of the euro zone inflation outlook and tensions in short-term money markets as potential triggers for fresh policy action. Official data on Tuesday showed soft inflation in the euro zone's core economy, Germany, while the key overnight money market rate hit a level seen only rarely since 2011 on Monday. Tightening conditions prompted banks to load up on ECB weekly loans on Tuesday, while the central bank failed to draw sufficient funds to offset its past bond purchases. "Taken together - the German inflation data, the money market tensions, and the euro, which is still strong - that makes a good case for doing something," Nordea economist Holger Sandte said. German inflation hit 1.1 percent in April, up from 0.9 percent in March but below a consensus forecast of 1.3 percent.

The European Economy Needs Another ‘Whatever It Takes’ Moment -  European Central Bank president Mario Draghi's 2012 promise to do "whatever it takes" to save the euro was a turning point in the E.U.'s financial crisis.  Fear in financial markets about the unsustainable debt mounting on euro-zone governments was threatening to tear apart the beloved monetary union. But Draghi would have none of that. His central bank “is ready to do whatever it takes to preserve the euro,” he stated bluntly. That moment is widely regarded today as the turning point in Europe’s financial crisis. Since then, the turmoil that could have crushed the dream of European integration has receded. The yields on the sovereign bonds of Spain and Italy, which had risen to levels at which they would likely have required expensive bailouts, returned to normalcy, and the risk to the survival of the euro dramatically decreased. Draghi’s strong statement worked because it showed a degree of resolve that had until then been lacking in efforts to quell the debt crisis. But ironically, the resolve that ended one stage of that crisis has only perpetuated the next stage: fixing the damage inflicted on the average European family. The fact is that Europe has grown complacent in confronting its problems. The region’s political leaders are going about their business as if the crisis is over. It isn’t. Sure, the euro zone has climbed out of recession and, after six years of trauma, appears to be on the mend. The countries that required European Union-backed rescues are beginning to exit from them. But it’s hard to call what is happening a recovery. The latest forecast from the International Monetary Fund estimates GDP in the euro zone will expand a mere 1.2% in 2014, compared with 2.8% for the U.S. Some of the most important European economies aren’t even moving at that lackluster pace. The IMF expects France to grow a mere 1%, and Italy only 0.6%. Meanwhile, with prices barely rising, concerns have arisen that the euro zone could plunge into debilitating deflation, which would make the debt burden of Europe’s weakest economies even heavier.

The Eurozone: out of the ashes? - I was at a gathering a year or so back in which sensible economists were thinking about the transition path for the Eurozone to full fiscal (and banking) union. They viewed recent events as confirming that monetary union alone was not tenable, and that fiscal union was the way forward. Many share that view. I remember asking whether there was any likelihood that the treaty changes required for fiscal union would find democratic support, given recent events. To say that this interjection was regarded as unwelcome was an understatement.  In one sense this reaction was understandable. Democracy within the Eurozone is a strange thing. On occasions it has been of the ‘last time you voted you got the answer wrong, but don’t worry, we are going to give you a second chance by having another vote’ variety. On others it has been ‘if you vote the wrong way you will have to leave’ type. In these circumstances worrying about democratic opinion and fiscal union may seem beside the point.  But in a way, that is the point. My interjection at that meeting could have been far blunter. How can you be planning to move towards fiscal union when the governance structures of the Eurozone have clearly failed with a more limited set of tasks? That would be a classic economist’s mistake: of designing a set-up which works well in the hands of a benevolent social planner, but falls apart when run by actual politicians.

Our manifesto for Europe -  Thomas Piketty - The European Union is experiencing an existential crisis, as the European elections will soon brutally remind us. This mainly involves the eurozone countries, which are mired in a climate of distrust and a debt crisis that is very far from over: unemployment persists and deflation threatens. Nothing could be further from the truth than imagining that the worst is behind us. This is why we welcome with great interest the proposals made at the end of 2013 by our German friends from the Glienicke group for strengthening the political and fiscal union of the eurozone countries. Alone, our two countries will soon not weigh much in the world economy. If we do not unite in time to bring our model of society into the process of globalisation, then the temptation to retreat into our national borders will eventually prevail and give rise to tensions that will make the difficulties of union pale in comparison. In some ways, the European debate is much more advanced in Germany than in France. As economists, political scientists, journalists and, above all, citizens of France and Europe, we do not accept the sense of resignation that is paralysing our country. Through this manifesto, we would like to contribute to the debate on the democratic future of Europe and take the proposals of the Glienicke group still further. It is time to recognise that Europe's existing institutions are dysfunctional and need to be rebuilt. The central issue is simple: democracy and the public authorities must be enabled to regain control of and effectively regulate 21st century globalised financial capitalism. A single currency with 18 different public debts on which the markets can freely speculate, and 18 tax and benefit systems in unbridled rivalry with each other, is not working, and will never work. The eurozone countries have chosen to share their monetary sovereignty, and hence to give up the weapon of unilateral devaluation, but without developing new common economic, fiscal and budgetary instruments. This no man's land is the worst of all worlds.

ECB, BOE want to resurrect shadow banking in Europe -  Recently, the ECB and the Bank of England published a joint paper calling for the return of securitization markets in Europe (see below). This goes completely against the grain of the latest Basel accord which has started imposing much higher capital requirements for holding securitized paper. The media called it "bringing back the toxic sludge" (see story). What's going on here? With the Eurozone banking system on its back (see post), someone else needs to provide corporate and consumer credit. The central banks want to see the securities markets (shadow banking) take on that role. Some are outraged because securitized products are viewed to be one of the key causes of the financial crisis. However this is the case of "throwing out the baby with the bath water". It was a specific asset class, namely US subprime mortgages, that did most of the damage. But the media and many regulators have been applying the term "toxic" to all securitized credit. ECB/BOE: - Despite the low issuance and the modest take-up by investors, most European structured finance products performed well throughout the financial crisis, with low default rates. According to an analysis by Standard & Poor’s, the cumulative default rate on European structured finance assets from the beginning of the financial downturn, July 2007, until Q3 2013 has been 1.5%. Some asset classes such as consumer finance ABS, SME Collateralised Loan Obligations and RMBS have experienced default rates well below this average and the performance of European structured finance products has also been substantially better than US peers.2 By way of comparison, ABS on US loans experienced default rates of 18.4% over the same period, including subprime loans.

U.K. Economy: Goldilocks and the Three Charts - The British economy is in a sweet spot. Growth has been rising while inflation’s been coming down. And there’s no sign either’s about to change.   Growth is building on the back of a housing boom, kick-started by flows of foreign capital into the London market and more recently sustained by an uptick in credit supply. The first quarter GDP numbers released on Tuesday came in modestly below expectations, though they tend to be subject to large revisions. At the same time, a strong pound and–until recently at least–falling commodity prices have tamed inflation pressures after years of exceeding the Bank of England’s 2% target.  The result is that the Bank of England is content to keep its key policy rate on an ultra-accommodative setting for quiet a while yet. The market doesn’t anticipate the first rate hike until the end of the first quarter 2015. Of course everyone knows the story of Goldilocks. She meets the three bears.  The U.S. economy’s performance post the tech and telecom bust of 2001 was also referred to as a Goldilocks recovery. The result was extreme market excesses and an even bigger financial crisis. This time around, the Bank of England faces perhaps the biggest housing bubble London’s ever seen. And the longer rates stay low, the bigger it’s likely to grow. Goldilocks founds things just right for a while. But in the end she was left running scared.

A Monetary Puzzle - Paul Krugman - OK, color me puzzled. I’ve seen a number of people touting this Bank of England paper (pdf) on how banks create money as offering some kind of radical new way of looking at the economy. And it is a good piece. But it doesn’t seem, in any important way, to be at odds with what Tobin wrote 50 years ago (pdf) — indeed, the BoE paper cites Tobin extensively. And I have always thought of money in Tobinesque terms, even if I sometimes use shorthand descriptions that can be misread if you take them out of context; the same is true of many economists. Furthermore, the key Tobin insight — which is fully consistent with the BoE analysis — is that while banks are indeed more complicated creatures than the mechanical lenders of deposits we like to portray in Econ 101, this doesn’t mean either that they have unlimited ability to create money or that they are somehow outside the usual rules of economics. Don’t let monetary realism slide into monetary mysticism!

No comments: