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

Saturday, June 28, 2014

week ending June 28

Fed's Balance Sheet Punctuated by a Big Question Mark - In the midst of the Federal Reserve’s creative but controversial quantitative easing program — the five-year plan of buying billions of dollars in debt securities each month and forcing down interest rates to historically low levels — the central bank’s balance sheet has ballooned to nearly $4.3 trillion in assets from $800 billion, leaving one large unanswered question hanging over the marketplace: What does the Fed intend to do with all those bonds? Will it hold them to maturity? Will it sell them back into the market? Will the Fed’s balance sheet ever return to its pre-quantitative easing size? When interest rates inevitably rise after the Fed stops manipulating them, will the Fed take the mark-to-market losses on its huge portfolio, as, say, Goldman Sachs would if it owned the same securities? And if the Fed takes losses on its portfolio, does it matter? Can the Fed’s equity capital of $56 billion — yes, the Fed is leveraged 77 to 1 — be wiped out? A mere 1.3 percent change in the value of those $4.3 trillion in bonds would theoretically wipe out the Fed’s equity. Can the Fed go down the tubes, in the same way that Bear Stearns, Lehman Brothers and Merrill Lynch did?  To be clear, I am not suggesting that the assets on the Fed’s balance sheet are impaired or are in any danger of becoming impaired. And a bond held to maturity will pay off at par as long as there is no default. But as we all know from the events of 2008, the market value of bonds can swing drastically and quickly, and with devastating effect, at least for big securities firms in the private sector. Do the same rules of impaired valuation and acute loss of confidence apply to the Fed, which before the crisis had a balance sheet made up mostly of Treasuries but no longer does?

Is It Time for the Fed to Contract Its Balance Sheet - The Federal Reserve can keep their balance sheet at the current size (and keep the risk asset party going) or it can position itself to be able to hike rates — but it cannot do both. Last week, the Fed announced that purchases of agency mortgage-backed securities and US Treasuries would fall to $35 billion per month. If they continue reducing their purchases by $10 billion per month, the incremental purchases should be finished by October. So what will happen? Their current policy is to reinvest principal runoff and maturities from existing holdings, which means their balance sheet will stay roughly the same size once they stop buying new bonds. As we consider the future of fiscal policy in this country, one of the key questions will be what the Fed is capable of doing.JP Morgan’s CFO Marianne Lake recently described the impact on the industry, saying, “We should note that a significant portion of the growth in deposits that the industry has experienced has been as a direct result of the Fed’s QE policy and reserve bills. So if you look at JP Morgan, since the end of 2009, the firm’s deposit rate has grown by about $350 billion and we believe a significant portion of that growth has been a direct result [of] QE.” In that same call, she noted that JP Morgan (JPM) has estimated it may experience a deposit outflow as large as $100 billion in the second half of 2015.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- Thursday, June 26, 2014 -  Federal Reserve Statistical Release: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

How close is the Fed to “mission accomplished”? - The markets were little moved by Fed Chair Yellen’s press conference last week, though there was a slight sigh of relief that the Fed did not follow the example of the Bank of England in shifting towards hawkishness. The FOMC’s neutral stance, for the moment, was no great surprise.  More interesting is the fact that the FOMC’s “dot plot” showed that there is still a wide disparity of opinion among committee members about the appropriate level of interest rates in 2015 and 2016.  This disparity is much greater than the difference in the individuals’ economic forecasts would appear to justify, so it suggests that the policy reaction functions between the hawks and the doves remain very far apart. This argument has been shelved during the period of tapering, when the Fed is on autopilot. The dispute between hawks and doves about the participation rate is, of course, very familiar territory, and it shows no sign of being resolved. Ms Yellen did not change her view on this last week, when she said once again that she thought that part of the decline in the participation rate would be reversed as the economy recovers. She was also questioned on a related issue, which is why core and underlying inflation rates have been rising in the past three months, if there is still so much slack in the labour market. She dismissed the rise in inflation as statistical “noise”, which is slightly odd since it has shown up in several data series which have supposedly had the noise removed from the data. When pressed further (see page 15 here), Ms Yellen fell back on what she believed a “balanced approach” would imply for policy if inflation were above target: The manner in which she framed the “balanced approach” therefore reveals that Ms Yellen remains a convinced dove, even if inflation moves “temporarily” above 2 per cent. With the unemployment gap still very large in her opinion, she is clearly not ready to stand back and declare “mission accomplished”.

Dudley: Fed Rate Outlook Depends on Economy - Federal Reserve Bank of New York President William Dudley said Tuesday the market’s view that the U.S. central bank will first raise rates in the middle of next year is reasonable. What happens with short-term interest rates “very clearly depends on how the economy evolves,” Mr. Dudley said in response to an audience question after a speech on the state of the Puerto Rican economy. Mr. Dudley said it appears financial markets largely agree the Fed will first increase interest rates from what are near zero levels around the middle of 2015. “That sounds to me like a reasonable forecast, but forecasts often go astray,” so it’s hard to say with certainty when the Fed will begin to raise interest rates. Mr. Dudley is among the first Fed officials to speak in the wake of last week’s monetary-policy-setting Federal Open Market Committee meeting. At that gathering, central bankers pressed forward with their ongoing campaign to wind down their bond-buying stimulus program. They also maintained their near zero percent short-term rate stance and said it would be some time after the completion of bond buying before they raised interest rates. The Fed’s current forecast shows most officials support a first rate increase next year. But that same document shed little light on the potential timing of that action.

Fed’s Williams Upbeat on Economy, Vague on Rates - The U.S. economy is finally moving back to a healthy state after several years of subdued recovery, San Francisco Federal Reserve Bank President John Williams said Tuesday. Mr. Williams, who refrained from saying when he thinks the central bank should begin raising interest rates, said he was optimistic about the country’s economic prospects. “We are actually getting closer to being at a normal economy. We’re, I would say, about two years off from being at an economy that is at full employment, back to normal, inflation back to more normal levels,” he said during a panel at Stanford University. “So I am actually pretty optimistic about the medium-term outlook in terms of economic growth.” U.S. unemployment has fallen to 6.3% from a recession peak of 10%. Inflation has been running below the Fed‘s 2% target for some time, but has shown some signs of picking up recently. “I think inflation will stay very low and stable–we are doing our best on that,” Mr. Williams said.The Fed has argued a waning fiscal drag should be a key ingredient to better economic performance this year and next. Addressing those on corporate boards in the audience, Mr. Williams said the key thing to focus on, in terms of longer-term planning, is that interest rates are likely to start heading up — though he said he wouldn’t make any direct predictions on timing. “We’ve been in an extraordinary period of very low interest rates, you all know that, but this is a period that will eventually come to an end,” he said. “It’s pretty clear that interest rates are going to — over the next five years — head up, and not head down.”

Fed’s Lacker: Rates Could Rise Even If Economic Growth Remains Subdued - The Federal Reserve is likely to begin raising interest rates next year even if the U.S. economy doesn’t experience a substantial acceleration in growth, Federal Reserve Bank of Richmond President Jeffrey Lacker said Thursday. “Even if growth remains relatively subdued as it has been over the past five years, in the 2% to 2.5% range, even if that’s true, you can reach a situation in which real rates need to rise just to equilibrate the balance between pressure on current resources and pressure on future resources,” Mr. Lacker told reporters following a speech at Lynchburg College in Lynchburg, Va. “That can happen even without an increase in the rate of growth in the economy.” He said he expects the Fed will begin raising short-term interest rates, which have been pinned near zero since December 2008, in 2015. He said the precise timing will depend on incoming economic data. Mr. Lacker has been critical of the Fed’s easy-money policies in recent years. He will be a voting member of the central bank’s policy-making committee next year.

Fed’s Bullard: Time to Tighten Monetary Policy Nearer Than Many Expect - Federal Reserve Bank of St. Louis President James Bullard said Thursday that an improving economy and rising price pressures mean the U.S. central bank is getting closer to the time when it will need to raise short-term interest rates. “I don’t think financial markets have internalized how close we are to our ultimate goals, and I don’t think the [Federal Open Market Committee] has internalized how close we are to our ultimate goals,” Mr. Bullard said in a discussion after a speech at the Council on Foreign Relations. He said, after a dreadful first quarter, he sees the economy moving back to and sustaining a 3% growth rate, as inflation continues to move higher and breaches the Fed’s 2% target by next year. Meanwhile, he sees what is currently a 6.3% unemployment rate edging down to 5.8% by year’s end. If this is achieved, it would result in an economy that has moved back toward a far more normal state of affairs, even as Fed policy is still at emergency settings, he said. “I’m starting to think the economy could tolerate at least a little bit of the central bank getting back to a more normal stance” when it comes to monetary policy, Mr. Bullard said. Speaking to reporters after his speech, Mr. Bullard said that he continues to believe that the most likely timing for the Fed’s first rate boost remains near the end of the first quarter of 2015. He said he has left that view unrevised because he would like to see more data to confirm the weakness of the first quarter was temporary. But, if the economy performs as he expects, “I predict the conversation about monetary policy will change,” Mr. Bullard said.

Fed’s Plosser Says Current Policy Guidance May Be ‘Too Passive’ - Employment and inflation in the U.S. are likely closing in on the Federal Reserve’s goals faster than expected, which may soon force the central bank to alter its policy signals, a top Fed official said Tuesday. In a speech before the Economic Club of New York, Federal Reserve Bank of Philadelphia President Charles Plosser expressed concerns about the way the Fed is currently guiding the public about the future path of the policy rate, calling the so-called forward guidance “too passive.” “I believe that we are closing in on our goals—perhaps faster than some people might think. So, while I supported the recent policy statement, I have growing concerns that we may have to adjust our communications in the not-too-distant future,” Mr. Plosser said in prepared remarks. “Specifically, I believe the forward guidance in the statement may be too passive, given underlying economic conditions.”When asked to elaborate on what he meant by “passive,” Mr. Plosser said he felt the latest FOMC statement didn’t reflect progress made in the economic recovery, which raises risks as market participants try to gauge the timing of the first rate hike. “Our current language in the statement hasn’t addressed economic improvements. We need to take that message and adjust it to the fact that we are getting closer to our goals,” the official told the press after his speech. “If we are truly data-dependent, then we need to act like that.” Mr. Plosser, long an outspoken hawk about inflation, said Tuesday he is “fairly optimistic” about the economy, which supports remarks he made in May that a rate rise may come sooner than many market participants are anticipating.

The Fed's "Too Large & Too Illiquid" Bond Trap - The American financial establishment has an incredible ability to celebrate the inconsequential while ignoring the vital. Last week, while the Wall Street Journal pondered how the Fed may set interest rates three to four years in the future (an exercise that David Stockman rightly compared to debating how many angels could dance on the head of a pin), the media almost completely ignored one of the most chilling pieces of financial news that I have ever seen. According to a small story in the Financial Times, some Fed officials would like to require retail owners of bond mutual funds to pay an "exit fee" to liquidate their positions. Come again? That such a policy would even be considered tells us much about the current fragility of our bond market and the collective insanity of layers of unnecessary regulation.

Betting against the FOMC could end badly -- In spite of the dovish tone from Janet Yellen at the press conference last week, the short term rates markets are betting that the Fed will become even more dovish in the months to come. Fed funds rates trajectory implied by the futures markets is significantly below the median projection by the FOMC.  Fed funds and eurodollar futures traders are playing the carry game. Go long futures a couple of years out and ride them down the curve. The strategy had worked in the past. But is the Fed really going to turn more dovish? Barclays researchers believe that just the opposite will occur and the trajectory of rate hikes will steepen.  Barclays: - The “dots” also showed a faster pace for the hiking cycle. Notably, this occurred despite the fact that the revisions to the Fed’s inflation and UR [unemployment rate] projections were not very aggressive. We believe revisions are likely to continue in the same direction, i.e., lower UR and higher inflation; in turn, the path for the funds rate implied by the “dots” should continue to steepen.The spread between the market and the FOMC is now close to extreme levels. The Fed's projected rate "dots" have been rising, while the futures traders continue to ignore it.

Buying Up the Planet: Out-of-control Central Banks on a Corporate Buying Spree – Ellen Brown - When the US Federal Reserve bought an 80% stake in American International Group (AIG) in September 2008, the unprecedented $85 billion outlay was justified as necessary to bail out the world’s largest insurance company. Today, however, central banks are on a global corporate buying spree not to bail out bankrupt corporations but simply as an investment, to compensate for the loss of bond income due to record-low interest rates. Indeed, central banks have become some of the world’s largest stock investors. Central banks have the power to create national currencies with accounting entries, and they are traditionally very secretive. We are not allowed to peer into their books. It took a major lawsuit by Reuters and a congressional investigation to get the Fed to reveal the $16-plus trillion in loans it made to bail out giant banks and corporations after 2008. What is to stop a foreign bank from simply printing its own currency and trading it on the currency market for dollars, to be invested in the US stock market or US real estate market?  What is to stop central banks from printing up money competitively, in a mad rush to own the world’s largest companies?Apparently not much. Central banks are for the most part unregulated, even by their own governments. As former Federal Reserve Chairman Alan Greenspan quipped, “Quite frankly it does not matter who is president as far as the Fed is concerned. There are no other agencies that can overrule the action we take.”

Fitch Report: Fed’s Reverse Repos Are Reshaping the Securities-Borrowing Market - Although it’s only in a testing phase, a Federal Reserve program aimed at improving central bank control over short-term interest rates is already reshaping the markets where dealers go to finance their bond-trading positions. Fitch Ratings says in a new report that the central bank’s overnight reverse repurchase agreement pilot program is allowing big market participants to come to the Fed for government bonds they previously would have borrowed in the private market. There have been “significant shifts in investment allocations by money funds that invest exclusively in Treasury and agency securities” since the launch of the Fed’s so-called reverse repos, the report said. The Fed’s reverse repo transactions take in cash from eligible program participants in exchange for Treasury securities owned by the central bank. The reverse repos are essentially collateralized loans to the Fed, for a period of one day. The Fed has been testing these transactions since September and will continue through this year. Fed officials hope the interest rate they set on the reverse repos will set a floor underneath short-term interest rates generally. They have signaled this tool will likely be an important part of any campaign to push interest rates higher, when that day arrives. The Fed has long had some involvement in the broader repo market, where financial firms go to borrow and lend bonds and to invest cash short-term. The Fed has been pressing for reform in the repo market. That, in conjunction with other regulatory developments, has left the repo market under pressure and made the Fed an attractive alternative for financing that once would have been found largely in the private sector. Fitch credits this shift—increased borrowing of securities from the Fed rather than the private market—to increased dealer comfort with the Fed program, better terms offered on the transactions by the central bank, as well as regulatory changes that are shifting how financial firms approach short-term funding activities.

Corporate Bond Trading a Casualty of QE and ZIRP – Yves Smith - The Financial Times has an article on how corporate bond dealers are going to create a new trading hub to try to preserve their market position while “boosting liquidity” in the market. Narrowly speaking, there’s nothing wrong with the piece as a description of investor unhappiness and planned bank responses. But it curiously missed how Fed policy has helped generate conditions that are reducing corporate bond trading liquidity. A key section:Banks have agreed to create the venue, which includes new functions for exchanging large amounts of corporate bonds, at a time when their revenues from trading fixed-income products have fallen sharply thanks to a combination of low volatility, new regulation and competition from non-bank trading platforms such as Bloomberg and MarketAxess.Big investors in corporate bonds have complained that the retreat of so-called dealer-banks from trading debt has led to a dearth of liquidity in the market – meaning they are unable to transact in the bonds without greatly impacting the price of the securities.  However, even putting aside the impact of new technology entrants and every bank’s favorite scapegoat, ZIRP and unnaturally stable markets alone are sufficient to explain low liquidity. The article (and the investors) seem to accept the premise that it is the dealers’ job to generate liquidity. That is a backwards premise.The reason that many financial markets, such as corporate bonds, operate on an over-the-counter basis, where dealers make markets. That means that unlikes stock brokers, they acting as a principal and taking the other side of the trade, either taking the corporate bond into their inventory or selling the bond out of their inventory.

Is Monetary policy Keeping Real Wages and Productivity Low? Simon Wren-Lewis:..suppose that at the moment real wages or inflation begin to rise, the central bank tightens monetary policy. This would raise the cost of capital, and could be interpreted as an attempt to prevent real wages rising. ... Monetary policy, which in theory is just keeping inflation under control, is in fact keeping real wages and productivity low.Monetary policy makers would describe this as unfair and even outlandish. A gradual rise in interest rates, begun before inflation exceeds its target, is designed to maintain a stable environment. ...  I also have another concern about a monetary policy which tightens as soon as real wages start increasing. What little I know about economic history suggests an additional dynamic. As long as the firm is employing labour rather than buying a machine, there is no incentive for anyone to improve the productivity of machines. The economy where real wages and labour productivity stay low may also be an economy where innovation slows down. The low productivity economy becomes the low productivity growth economy.

There’s A Big Disagreement Between Wall Street And The Fed — And It Will Be The Story Of The Summer -- Here's what's on Wall Street's mind right now: Inflation is finally happening, and the Fed will end up being behind the curve. The events of the past week crystallized that above thought in the mind of economists and investors.   To step back, there were two big moments this week.

  • 1) There was the jump in Core CPI that was the biggest since 2009.
  • 2) And then there was the Janet Yellen press conference, in which she said that the CPI jump could be just "noise" and that the recent drop in the unemployment rate was not actually reflective of the true state of the labor market (which she regards as considerably weaker due to measures of worker discouragement).

In other words, despite data showing that the Fed is getting close to hitting its economic goals, Yellen doesn't believe the numbers.  But Wall Street does believe the numbers.   Hence the view that the Fed will be behind the curve.  Here's Deutsche Bank, on why it's highly skeptical that the recent data is "noise." Basically the numbers we've gotten on both the inflation and unemployment side are VERY rare individually, and it's particularly rare that they would happen together.  Janet Yellen dismissed the recent rise in inflation as “noisy" data. But if randomness is at play we can calculate some odds. It is ten years since American consumers have seen core prices rising faster than the current 0.3 per cent monthly rate, double the average over this period. Based on the volatility of the data there was only a 5 per cent chance of inflation being this high. For context an equivalent 1.7 sigma event would be 6 per cent annualized growth in quarterly output, or payrolls adding 500,000 jobs in one month - both occurring just once in the last decade.

Fed Watch: Inflation Hysteria -- It appears that a case of inflation hysteria is gripping Wall Street. Joe Weisenthal at Business Insider sums up the current state of play: Here's what's on Wall Street's mind right now: Inflation is finally happening, and the Fed will end up being behind the curve. ...there were two big moments this week.

    • 1) There was the jump in Core CPI that was the biggest since 2009.
    • 2) And then there was the Janet Yellen press conference, in which she said that the CPI jump could be just "noise" and that the recent drop in the unemployment rate was not actually reflective of the true state of the labor market.

Goodness, you would think it is 1975. It is probably instructive to stop and see what all the fuss is about:  Although core-CPI is about to brush up on 2%, core-PCE remains well below, and it is the latter that is most important to policy. You might note that the Fed was raising interest rates in the late 1990s despite sub-2% core PCE, apparently responding to high CPI inflation. But that episode needs to be considered in light of the job market at the time, which, if you recall, was clearly on fire. There was no concern that broader measures of unemployment were signalling excess slack: The current situation is different - there is excess slack in the labor market, as revealed by restrained wage growth. This is important. Wall Street might believe the CPI numbers that Yellen dismissed, but that is jumping the gun in any event.  As Across the Curve explains succinctly: The labor market remains less than robust and wage gains are stagnant. Until we see consistent wage gains which would foster spending which fosters revenue and net income and then the virtuous cycle fulfills itself via business investment it is hard to imagine that we get a sustained uptick in inflation.

British Lessons on Inflation Hysteria - Paul Krugman - Tim Duy tells us that “inflation hysteria is gripping Wall Street“; that matches my own observations. A modest uptick in core inflation has all the usual suspects declaring that the Fed will/must tighten now now now. Meanwhile, Janet Yellen is looking at wages, which are going nowhere, and sitting tight. There is actually a recent historical parallel, which I’m surprised hasn’t been pointed out: Britain in 2011, which had a much more pronounced inflationary bulge than anything we’re seeing here: But wages were going nowhere, and the Bank of England refused to tighten. I remember being given a great deal of grief for defending this policy, with many accusations of being blind to the terrible inflationary risks. In fact, however, it turned out that the inflation bump was a blip, that you can’t have an inflation takeoff with quiescent wages. And the BoE was right to stay the course. So Yellen has history on her side.

Fed’s Plosser Not Worried About Inflation -  Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said on Tuesday that he isn’t worried about inflationary pressures, despite a recent uptick in consumer prices. “I’m not worried about it in the short run,” Mr. Plosser told Fox Business in an interview. Key inflation indicators “have been drifting back up toward our target. We’re not there yet, but I think that’s encouraging that it’s stabilizing and moving back toward our target.” Still, he said interest rates should begin to rise as early as this year. “We are much closer to achieving our objectives than we used to be. We’ve made progress,” Mr. Plosser said. “We need to be adjusting our messaging about the adjustments to our funds-rate path that reflect the changes in the approaching objectives.” The U.S. inflation rate has been running below the Fed’s 2% objective for about two years but has been slowly gaining in recent months. Mr. Plosser, a self-avowed inflation hawk, downplayed a recent rise in the country’s consumer-price index, saying it could be reversed.

Fed Could Face Tougher Inflation Questions In Days Ahead - Here’s a question we in the press corps should ask Janet Yellen at her next press conference, or maybe some lawmaker should try at her semiannual testimony in July: Should the Fed have a memory? The Fed’s preferred measure of inflation has run below its 2% objective for 24 straight months. When the Commerce Department releases its May reading of the personal consumption expenditure price index on Thursday, it will likely extend that streak to 25 months. Should the central bank allow inflation to run above target for some time to make up for the long stretch it has been below target? That’s a pertinent because the inflation terrain could be shifting on the Fed. The PCE price index was up 1.6% in April from a year earlier, an uptick from gains of 1.1% in March and 0.9% in February. Fed officials expected inflation to firm to 1.5% by year end. If the March trend holds it might already be there, begging all kinds of questions. Ms. Yellen implied last week that if inflation moves to the 2% objective more quickly than the central bank expects, then it could raise short-term interest rates sooner than planned. “If the economy proves to be stronger than anticipated by the Committee, resulting in a more rapid convergence of employment and inflation to the FOMC’s objectives, then increases in the federal funds rate target are likely to occur sooner and to be more rapid than currently envisaged,” she said. But the Fed chairwoman also has implied the Fed will be patient about inflation as it approaches or even if it exceeds the target. She seems to see the mandate for patience encoded in the “balanced approach” officials say they’ll take in meeting their two objectives of low-steady.

PCE Price Index: Headline and Core Remain Below Target, But Continue Rising -  The Personal Income and Outlays report for May was published this morning by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate of 1.77%, up from the previous month's 1.61% (a slight adjustment from 1.62%). The Core PCE index of 1.49% is up from 1.42% 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 the two most recent months have broken above the range. Is this the beginning of a major trend reversal? This will be a closely watched series by the ongoing inflation/deflation debate. The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. I've highlighted the narrow 12-month range that appears to have been breached to the upside for the past two months.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.

Consumer Inflation Hits Highest Level Since 2012, Near Fed’s 2% Target - A key inflation measure climbed to the highest level since late 2012, approaching the central bank’s 2% target. The price index for personal consumption expenditures — the Federal Reserve’s preferred gauge — advanced 1.8% in May from a year earlier, the Commerce Department said Thursday. That was the highest since October 2012.The measure has undershot the mark for two years, but inflation has edged up steadily this spring. In February, year-over-year inflation was just 0.8%. Stronger inflation pressures could weigh on the Fed’s decision of when to raise short-term interest rates. Fed Chairwoman Janet Yellen said last week that if the job market continues to improve and inflation moves to the 2% objective faster than the central bank expects, “then increases in the federal funds rate target are likely to occur sooner and to be more rapid than currently envisaged.” Central bank officials consider 2% inflation a sign of healthy economic growth. The persistently low inflation of the past two years has signaled weakness. Stronger inflation likely gives policymakers confidence in winding down their monthly bond-buying program this year and could cause them to contemplate raising rates earlier than markets expect. A majority of Fed officials last week said they expect the first rate increase to come in 2015.

Fed's Key Inflation Indicator Hits 19-Month High -  Forget PPI (it's "cyclical"); ignore CPI (it's "noisy"); dismiss all the recent PMIs showing input prices surging and output prices dropping - that is the message the Fed is feeding the world over its 'inflation' concerns. However, the one indicator that the Fed really focuses on (or has said it does until now) - the PCE Deflator - just surged to 1.8% - its highest since October 2012 and nearing the Fed's 2% mandate-stumping level. Ignore that Janet!

US inflation has climbed. Now what? - The chart shows year-over-year core and headline inflation in both the Consumer Price Index and the Personal Consumption Expenditures Price Index since the recession.Following Thursday’s personal income and outlays report, the specific year-over-year inflation numbers through the end of May now look like this:

  • Headline CPI — 2.1 per cent
    Core CPI –2.0 per cent
  • Headline PCE PI — 1.8 per cent
    Core PCE PI — 1.5 per cent

The PCE PI is the Fed’s preferred inflation index, for reasons given by Ben Bernanke last year. The Fed targets headline inflation, but core inflation is more useful as a guide to the near-term path of headline inflation than is headline inflation itself. Core inflation is therefore also considered in making policy.The Dallas Fed’s helpful overview of the recent PCE trend notes that energy and food inflation spiked in May, but broader underlying prices also continued to rise, if not as dramatically. The gentler rise in core inflation was largely anticipated at the start of the year, but the more volatile non-core prices have bumped headline inflation up towards the Fed’s target more quickly than the FOMC has forecast. Will the recent climb continue? That’s hard to say. Tim Duy correctly notes that underlying wage pressures and market-based inflation expectations remain subdued, raising the likelihood that some of the recent gains are yet again transitory. They might be reversed, or perhaps inflation will just hold steady at its current levels.

The spontaneous combustion theory of inflation: In the last few weeks, ominous warnings of inflation's imminent resurgence have multiplied... On factual, theoretical and strategic grounds, I find the panic over inflation perplexing.  Yes, core CPI inflation has rebounded to 2% from 1.6% in February and today we learned that core PCE inflation has risen to 1.5% from 1.1%. What should we infer from this? Nothing. In the short run inflation oscillates...  The New Keynesian theory, to which the Fed subscribes, considers inflation a function of slack and expectations. The evidence is pretty persuasive that while slack has shrunk in the last five years..., it remains ample. Expectations, likewise, have oscillated but shown no trend up or down. ... What if you consider inflation always and everywhere a monetary phenomenon? I consider the money supply pretty useless for forecasting anything, but even if were a monetarist, I wouldn't be worried..., M2 is up just 6.5% in the last year..... Of course, the Fed might wait too long to tighten and inflation could eventually rise above the 2% target. But, overshooting inflation is clearly a lesser evil than undershooting inflation. This, more than anything else, is why the panic over inflation is misplaced.

Torturing CPI Data until They Confess: Observations on Alternative Measures of Inflation - Atlanta Fed's macroblog -- The purpose of my remarks was to describe the motivations and methods behind some of the alternative measures of the inflation experience that my coauthors and I have produced in support of monetary policy. In this, and the following two blogs, I'll be posting a modestly edited version of that talk. A full version of my prepared remarks will be posted along with the third installment of these posts. A useful place to begin this conversation, I think, is with the following chart, which shows the monthly change in the Consumer Price Index (CPI) (through April).   The monthly CPI often swings between a negative reading and a reading in excess of 5 percent. In fact, in only about one-third of the readings over the past 16 years was the monthly, annualized seasonally adjusted CPI within a percentage point of 2 percent, which is the FOMC's longer-term inflation target. (Officially, the FOMC's target is based on the Personal Consumption Expenditures price index, but these and related observations hold for that price index equally well.) How should the central bank think about its price-stability mandate within the context of these large monthly CPI fluctuations? For example, does April's 3.2 percent CPI increase argue that the FOMC ought to do something to beat back the inflationary threat? I don't speak for the FOMC, but I doubt it. More likely, there were some unusual price movements within the CPI's market basket that can explain why the April CPI increase isn't likely to persist. But the presumption that one can distinguish the price movements we should pay attention to from those that we should ignore is a risky business.

Torturing CPI Data until They Confess: Observations on Alternative Measures of Inflation (Part 2) =  Atlanta Fed's macroblog - Yesterday's post considered the median CPI and other trimmed-mean measures. Let me make two claims that I believe are, separately, uncontroversial among economists. Jointly, however, I think they create an incongruity for how we think about and measure inflation. The first claim is that over time, inflation is a monetary phenomenon. It is caused by too much money chasing a limited number of things to buy with that money. As such, the control of inflation is rightfully the responsibility of the institution that has monopoly control over the supply of money—the central bank.My second claim is that the cost of living is a real concept, and changes in the cost of living will occur even in a world without money. It is a description of how difficult it is to buy a particular level of well-being. Indeed, to a first approximation, changes in the cost of living are beyond the ability of a central bank to control.For this reason, I think it is entirely appropriate to think about whether the cost of living in New York City is rising faster or slower than in Cleveland, just as it is appropriate to ask whether the cost of living of retirees is rising faster or slower than it is for working-aged people. The folks at the Bureau of Labor Statistics produce statistics that can help us answer these and many other questions related to how expensive it is to buy the happiness embodied in any particular bundle of goods. But I think it is inappropriate for us to think about inflation, the object of central bank control, as being different in New York than it is in Cleveland, or to think that inflation is somehow different for older citizens than it is for younger citizens. Inflation is common to all things valued by money. Yet changes in the cost of living and inflation are commonly talked about as if they are the same thing. And this creates both a communication and a measurement problem for the Federal Reserve and other central banks around the world.

Torturing CPI Data until They Confess: Observations on Alternative Measures of Inflation (Part 3) This is the last of three posts. The first post reviewed alternative inflation measures; the second looked at ways to work with the Consumer Price Index to get a clear view of inflation. The full text of the speech is available on the Atlanta Fed's events web page. Let me close this blog series with a few observations on the criticism that measures of core inflation, and specifically the CPI excluding food and energy, disconnect the Federal Reserve from households and businesses "who know price changes when they see them." After all, don't the members of the Federal Open Market Committee (FOMC) eat food and use gas in their cars? Of course they do, and if it is the cost of living the central bank intends to control, the prices of these goods should necessarily be part of the conversation, notwithstanding their observed volatility.In fact, in the popularly reported all-items CPI, the Bureau of Labor Statistics has already removed about 40 percent of the monthly volatility in the cost-of-living measure through its seasonal adjustment procedures. I think communicating in terms of a seasonally adjusted price index makes a lot of sense, even if nobody actually buys things at seasonally adjusted prices. Referencing alternative measures of inflation presents some communications challenges for the central bank to be sure. It certainly would be easier if progress toward either of the Federal Reserve's mandates could be described in terms of a single, easily understood statistic. But I don't think this is feasible for price stability, or for full employment.

Mainstream Media Admits "The US Dollar's Domination Is Coming To An End" - The proof is clear. According to SWIFT, China’s renminbi is now the second most used currency in the world for global trade settlement, putting it ahead of even the euro. It’s happening. And based on the data, it’s completely obvious (as we continued to chronicle) to just about everyone but the US government. However, we were still surprised to see an article in the Financial Times’ banking intelligence subsidiary (‘The Banker’) entitled "The US’s dollar domination is coming to an end." This reality has become obvious to just about everyone... Reserve currencies come and go. So will the dollar. This is nothing new.

Chicago Fed: "Economic growth picked up in May" -- The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic growth picked up in May Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.21 in May from –0.15 in April. Three of the four broad categories of indicators that make up the index made positive contributions to the index in May, and three of the four categories increased from April.The index’s three-month moving average, CFNAI-MA3, decreased to +0.18 in May from +0.31 in April, marking its third consecutive reading above zero. May’s CFNAI-MA3 suggests that growth in national economic activity was somewhat above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed: Economic Growth Picked Up in May -- "Index shows economic growth picked up in May": This is the headline for today's release of the Chicago Fed's National Activity Index, and here are the opening paragraphs from the report:Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.21 in May from –0.15 in April. Three of the four broad categories of indicators that make up the index made positive contribuions to the index in May, and three of the four categories increased from April.   The index’s three-month moving average, CFNAI-MA3, decreased to +0.18 in May from +0.31 in April, marking its third consecutive reading above zero. May’s CFNAI-MA3 suggests that growth in national economic activity was somewhat above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year. The CFNAI Diffusion Index, which is also a three-month moving average, increased to +0.23 in May from +0.20 in April. Fifty-two of the 85 individual indicators made positive contributions to the CFNAI in May, while 33 made negative contributions. Fifty-five indicators improved from April to May, while 29 indicators deteriorated and one was unchanged. Of the indicators that improved, 17 made negative contributions. [Download PDF News Release]The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth. Negative values indicate below-average growth, and positive values indicate above-average growth. The first chart below shows the recent behavior of the index since 2007.

Economy Shrank Nearly 3% In First Quarter - Last month, the Commerce Department revised its initial assessment for economic growth in the First Quarter sharply downward with a report showing that the economy had shrunk by 1% during the first three months of the year. As with the anemic report that had been initially put out, much of the downturn was attributed to the unusually brutal winter that had impacted parts of the country ranging from the Northeast to the South and Mid-West. With the release of the final revision today, it is clear that the economy shrank by even more than first thought between January and March, but it isn’t clear what that means for the future:—The U.S. economy contracted at a worse pace than previously estimated in the first quarter, marking its sharpest pullback since the recession ended five years ago.Gross domestic product, the broadest measure of goods and services produced across the economy, contracted at a seasonally adjusted annual rate of 2.9% in the first three months of the year, according to the Commerce Department’s third reading released Wednesday. That was the fastest rate of decline since the first quarter of 2009, when output fell 5.9%. Commerce had previously estimated output fell by 1% in the first quarter as manufacturers drew down inventories rather than produce new goods and as unusually harsh weather kept consumers at home and shut down work sites. Exports also declined after a surge late last year. In its third GDP reading, based on newly available data, Commerce said first-quarter consumer spending and exports were even weaker than previously estimated. Economists surveyed by The Wall Street Journal had predicted Wednesday’s report would revise GDP growth down to a 2% decline.

GDP Q1 Third Estimate Plunges to -2.9% - The Third Estimate for Q1 GDP, to one decimal, came in at -2.9 percent (rounded from -2.93 percent), a substantial downward revision from -1.0 percent in the Second Estimate and a major plunge from the 2.6 percent of Q4. The Third Estimate of the GDP deflator used to calculate real (inflation-adjusted) GDP remained unchanged at 1.3 percent. had forecast -1.7 percent for today's GDP estimate and the deflator to remain unchanged at 1.3 percent. The general consensus among economists was a downward revision. However, the official third estimate is worse than even the more pessimistic mainstream economists expected. 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 -- decreased at an annual rate of 2.9 percent in the first quarter of 2014 according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2013, real GDP increased 2.6 percent.  The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP was estimated to have decreased 1.0 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was smaller than previously estimated, and the decline in exports was larger than previously estimated (for more information, see "Revisions" on page 3).   The decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, state and local government spending, nonresidential fixed investment, and residential fixed investment that were partly offset by a positive contribution from PCE. Imports, which are a subtraction in the calculation of GDP, increased. [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.  I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

BEA Reports 1st Quarter 2014 GDP Plunging at a Nearly -3% Annual Rate - In their third estimate of the US GDP for the first quarter of 2014, the Bureau of Economic Analysis (BEA) reported that the economy was contracting at a -2.94% annualized rate. When compared to prior quarters, the new measurement is down nearly 5.6% from the 2.64% growth rate reported for the 4th quarter of 2013, and it is now more than 7% lower than the 4.19% reported for the 3rd quarter of 2013 -- and it is by far the worse quarter since 2009. The largest revisions to the headline number were from consumer services (revised downward by -1.26%) and exports (down -0.42%). Unfortunately, nearly everything was revised downward: consumer spending on goods (-0.12%), inventories (-0.08% more) and imports (down an additional -0.17%). Only governmental spending and fixed investments escaped yet further downward revisions -- although both of those categories remain mired deeply in the red.The previously reported quarterly growth in real annualized per-capita disposable income was revised downward yet again to $78 (and that disposable income figure is now $244 per year lower than it was during the fourth quarter of 2012). And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.27%. 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 over a 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 -3.51% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter's contraction rate would have been an horrific -5.62%.

Economy in First Quarter Was Worse Than Everybody Thought : The beginning of the year was not just bad for the United States economy: It was, on paper at least, the worst quarter since the last recession ended five years ago.The Commerce Department revised its estimates of first-quarter gross domestic product Wednesday to show that the economy contracted at a 2.9 percent annual rate. A combination of shrinking business inventories, terrible winter weather and a surprise contraction in health care spending drove the first-quarter decline, which is the worst since the first quarter of 2009, when the economy shrank at a 5.4 percent rate.What makes the sharply negative number all the more stunning is that it didn’t feel like an economic contraction at all in the first quarter. Employers kept adding jobs. Many measures of business activity and consumer confidence were stable. And forecasters are expecting a healthy pop of growth in the second quarter, which ends next week.But the economy was hit by an unlikely combination of negative forces that conspired to turn what seemed set to be another quarter of so-so growth into a considerably more gloomy experience.Economists had expected the revised number to show contraction, though they expected a less bad number than the one that materialized. One key thing they missed: Consumer spending, the mainstay of economic activity, was far weaker than either government numbers or private analysts had thought — particularly spending on health care. Previous G.D.P. numbers, released in late May, showed that health care spending contributed 1 percentage point to economic growth. The new report now finds that health care spending actually subtracted 0.16 of a percentage point from the growth rate. The health care spending data in G.D.P. is a measure of how much President Obama’s health reform law is reshaping health care spending patterns, and it is now showing opposite results from those reported two months ago, when the first-quarter data was initially released.

Q1 GDP Revised Down to -2.9% Annual Rate -- From the BEA: Gross Domestic Product: First Quarter 2014 (Third Estimate) Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 2.9 percent in the first quarter of 2014 according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2013, real GDP increased 2.6 percent.... The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP was estimated to have decreased 1.0 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was smaller than previously estimated, and the decline in exports was larger than previously estimated ...The decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, state and local government spending, nonresidential fixed investment, and residential fixed investment that were partly offset by a positive contribution from PCE. Imports, which are a subtraction in the calculation of GDP, increased.Here is a Comparison of Third and Second Estimates. PCE growth was revised down from 3.1% to 1.0%. Ouch!

A Dismal^2 Q1 Final GDP Report (5 graphs) Today the BEA announced another large downward revision to first quarter GDP growth from -1.0% to -2.9%. The final estimate was primarily attributed to downward revisions in consumption (3.1% to 1.0%) and exports (-6.0% to -8.9%). In addition, there was a major hit to the late-2013 inventory overbuild and construction. All of this, obviously, leaves the FOMC and the administration in a tough position. While many analysts recount weather-related setbacks and changes in depreciation allowances (such as I.R.C. 179), there is certainly real concern that the weakness is, well, weakness.  Before today’s downward revisions, the weak Q1 GDP figures were already on the Fed’s mind. From Janet Yellen’s congressional testimony on May 8 (emphasis added): “Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity–a sector that has been recovering since 2011–have remained disappointing so far this year and will bear watching.” Real private domestic investment, after having just reached its levels from December, 2007, has been stagnant of late.  Both nonresidential and residential investment are culprits, though today both had upward revisions from -1.6% to -1.2% and -5.0% to -4.2%.  The numbers are nothing to cheer over, but there is also nothing in today’s report should change the Fed’s reading on the housing market from May.

Diving Into the GDP Report of -2.9% Growth -- The first quarter GDP initial projection was 0.1%. The second estimate came in at -1.0%. Today the third estimate came in at -2.9%. Gosh, the weather was far worse than anyone realized. How bad was the weather? Let's dive into the First Quarter 2014 Third Estimate from the BEA for some details. Real GDP declined 2.9 percent in the first quarter, after increasing 2.6 percent in the fourth. The downturn reflected a downturn in exports, a larger decrease in private inventory investment, a deceleration in PCE, and downturns in non residential fixed investment and in state and local government spending, partly offset by an upturn in federal government spending. The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.3 percent in the first quarter, the same increase as in the second estimate; this index increased 1.5 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent in the first quarter, compared with an increase of 1.8 percent in the fourth. Real personal consumption expenditures increased 1.0 percent in the first quarter, compared with an increase of 3.3 percent in the fourth.  Real nonresidential fixed investment decreased 1.2 percent in the first quarter, in contrast to an increase of 5.7 percent in the fourth. Nonresidential structures decreased 7.7 percent, compared with a decrease of 1.8 percent. Equipment decreased 2.8 percent, in contrast to an increase of 10.9 percent. Intellectual property products increased 6.3 percent, compared with an increase of 4.0 percent.  Real residential fixed investment decreased 4.2 percent, compared with a decrease of 7.9 percent. Real exports of goods and services decreased 8.9 percent in the first quarter, in contrast to an increase of 9.5 percent in the fourth.  Real imports of goods and services increased 1.8 percent, compared with an increase of 1.5 percent. Real federal government consumption expenditures and gross investment increased 0.6 percent in the first quarter, in contrast to a decrease of 12.8 percent in the fourth. Real state and local government consumption expenditures and gross investment decreased 1.7 percent; it was unchanged in the fourth quarter.The change in real private inventories subtracted 1.70 percentage points from the first-quarter change in real GDP , after subtracting 0.02 percentage point from the fourth-quarter change.

Whoa! Whassup With That Big Negative Q1 GDP Revision? - Yes, you read those headlines right: real GDP contracted at a 2.9% rate according to revised data released this AM.  That’s contracted, as in went down. So, are we, like, back in recession (granting that a lot of people think we never left)?  Nope.  That was a truly lousy quarter but it’s highly unlikely to be repeated any time soon.  The particularly bad winter weather played a role; both residential and commercial building were negative.  Heavy inventory buildups in earlier quarters were reversed, which usually implies a positive bounce-back in coming quarters.  Exports were revised down and imports up, so the trade deficit subtracted a large 1.5 points from the bottom line; that drag will likely diminish in coming quarters.  Health care spending, a strong contributor in earlier estimates of Q1 growth, went from contributing 1 percentage point to growth in an earlier vintage of Q1 GDP to subtracting 0.16 points in this update, suggesting earlier estimates of the pace of increased coverage were overstated.  That doesn’t mean they’re not happening; it just means they’ll be spread out over more quarters.    BTW, on this health care revision, I don’t think this is saying anything dramatic or structural about Obamacare.  There are just a lot of moving parts here.  As more people get insurance coverage and treatment, this will show up as more spending and higher GDP.  At the same time, cost controls, which have initially been found to be quite effective, push the other way.  Year-over-year—a good way to squeeze out some quarterly noise—real GDP is up 1.5%.  That’s better than the headline number, but it too is actually a weak number.  The trend over the last two years is 2.1% growth, which is about the economy’s underlying trend growth rate considering productivity and labor force growth.  I don’t believe today’s revisions really signal a decline in that trend rate and most analysts expect coming quarters to clock in at 2.5-3%.

GDP Hits Air Pocket: Recession Warning or False Alarm? - Yves Smith - In case you managed to miss it, the GDP revision yesterday morning was stunningly bad. The contraction was 2.9%, revised downwards from 1%. This was both the biggest fall since the fourth quarter of 2008, when GDP fell by 8.9%, and the largest revision of the second GDP estimate since the inception of this report, in 1976.  The Washington Post gave a good overview: But this recovery has a way of moving out of reach just when we think we’re getting close. The International Monetary Fund and the Federal Reserve have already pushed back their forecasts for liftoff from the grinding economy to next year. The new reading of first quarter GDP could move the ball even farther. A 3 percent annual growth rate is starting to seem like the promise made by the White Queen in “Alice in Wonderland”: Jam tomorrow and jam yesterday, but never jam today. Particularly disturbing in this revision was the downgrade in consumer spending. The American shopper was supposed to be the bright spot in this recovery, reliably trudging to the malls and filling their online shopping carts despite government shutdowns and wintry snowstorms. Consumer spending jumped 3.3 percent at the end of last year, and the data initially showed a similarly strong increase during the first quarter. Wednesday’s release showed the cracks in that pillar. Now after getting rattled, Mr. Market shrugged off the report. So what if we opened Schrodinger’s box and found out the cat was dead? That was first quarter’s cat. That cat might as well be dead for all we care now. Plus the weather was bad, so we’ll make all that up, and anyway, the Fed has our back, so if there really is something to worry about here, they’ll fix it, as least as far as security-owners are concerned.  

Bad to worse: US economy shrank more than expected in Q1 -  The U.S. economy contracted at a much steeper pace than previously estimated in the first quarter, but there are indications that growth has since rebounded strongly. The Commerce Department said on Wednesday gross domestic product fell at a 2.9 percent annual rate, the economy's worst performance in five years, instead of the 1.0 percent pace it had reported last month. While the economy's woes have been largely blamed on an unusually cold winter, the magnitude of the revisions suggest other factors at play beyond the weather. Growth has now been revised down by a total of 3.0 percentage points since the government's first estimate was published in April, which had the economy expanding at a 0.1 percent rate. The difference between the second and third estimates was the largest on records going back to 1976, the Commerce Department said. Economists had expected growth to be revised to show it contracting at a 1.7 percent rate. Sharp revisions to GDP numbers are not unusual as the government does not have complete data when it makes its initial and preliminary estimates. The latest revisions reflect a weaker pace of healthcare spending than previously assumed, which caused a downgrading of the consumer spending estimate. Trade was also a bigger drag on the economy than previously thought. The economy grew at a 2.6 percent pace in the final three months of 2013. With the first quarter in the rear view and the April-June period looking stronger, investors are likely to ignore the report.

QI GDP revised sharply downward to -2.9%; Flashback: Remember when ObamaCare saved us from contraction? - Remember when the Obama administration considered a GDP contraction of 1% in the first quarter just a hiccup, mainly caused by weather? Good times, good times. That itself was a rather sharp downward revision from the advance estimate of 0.1%, but that was just a mere stumble compared to the plunge in the final revision. The Commerce Department now states that GDP fell at an annualized rate of -2.9% in the first quarter, the worst in more than five years:Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 2.9 percent in the first quarter of 2014 according to the “third” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2013, real GDP increased 2.6 percent. …Real GDP declined 2.9 percent in the first quarter, after increasing 2.6 percent in the fourth. This downturn in the percent change in real GDP primarily reflected a downturn in exports, a larger decrease in private inventory investment, a deceleration in PCE, and downturns in nonresidential fixed investment and in state and local government spending that were partly offset by an upturn in federal government spending.This time the news is bad across the board. Exports dropped 8.9% in Q1, a huge drop from 2013, which wasn’t exactly spectacular either. Real final sales of domestic product dropped 1.3%, where in earlier estimates it had remained in positive territory. Business investment also fell: Real nonresidential fixed investment decreased 1.2 percent in the first quarter, in contrast to an increase of 5.7 percent in the fourth. Nonresidential structures decreased 7.7 percent, compared with a decrease of 1.8 percent. Equipment decreased 2.8 percent, in contrast to an increase of 10.9 percent. Intellectual property products increased 6.3 percent, compared with an increase of 4.0 percent. Real residential fixed investment decreased 4.2 percent, compared with a decrease of 7.9 percent. Reuters noted immediately that this is not just weather-related: While the economy’s woes have been largely blamed on an unusually cold winter, the magnitude of the revisions suggest other factors at play beyond the weather. Growth has now been revised down by a total of 3.0 percentage points since the government’s first estimate was published in April, which had the economy expanding at a 0.1 percent rate.

Fed’s Bullard Not Worried by GDP Drop - The Commerce Department downgraded the first-quarter gross domestic product to a 2.9% drop, but St. Louis Fed President James Bullard isn’t worried. It is likely to be an “aberration,” he said.“It’s giving me heartburn, but I think the market’s right to shake this off,” Mr. Bullard said Thursday in an interview on the Fox Business Network. “Looking forward over the next four quarters, most forecasters have 3%+ growth.”Mr. Bullard said the weak report for the first quarter was likely distorted by inventories, weather, and by the challenges of accounting for health-care spending under the new law.“Whatever is going on doesn’t seem to match up with the other data that we have,” he said, citing that payrolls have been rising by 200,000 or more a month. At their policy meeting last week, officials on the Federal Open Market Committee lowered their forecasts for growth in 2014, acknowledging the weakness at the beginning of the year. Most forecast growth of 2.1% to 2.3% this year, down from a forecast of 2.8% to 3% at their March meeting. If Fed officials, like Bullard, continue to assess that economic growth will pickup after the weak first quarter, they will be more comfortable continuing their strategy to cut their pace of monthly bond purchases by $10 billion a meeting, ending the program later this year.

"An Unforgettable Winter" - Bank Of America's "Explanation" For The 17th Worst GDP Print In US History - And so the polar bears penguins come out of hibernation, "explaining" today's disastrous GDP print. Randomly selected for your reading pleasure, here is Bank of Frigid America's Ethan Harris spiking the Kool Aid with an above Surgeon General recommended dose of hopium. We caution against reading too much into the weakness, as it is clear that special factors during the quarter distorted growth. The severe winter weather weighed heavily on consumption, fixed investment and trade. Furthermore, there was a notable inventory drawdown that amounted to a 1.7pp drag on growth, following two strong quarters of inventory build in 3Q and 4Q of 2013. Despite the deeper contraction in this final release, we are not revising 2Q GDP growth. We continue to expect a 4.0% rebound in the second quarter, and the recent data suggest that we are headed in that direction. However, uncertainty around this number remains elevated: there could continue to be special factors at play stemming from the weakness in 1Q. Moreover, benchmark GDP revisions, released with the first estimate of 2Q GDP in July, could alter the trajectory. Assuming 4.0% growth in 2Q and solid 3.0% growth in 2H, growth will still only average 1.7% this year. It certainly was not the start of the year we were hoping for.

Difficult Obamacare Measures Lead to Swing in GDP Reading - A sharp recalculation of health-care spending contributed to a drastic downward recasting of economic output in the first quarter, to one of worst readings in three decades. The move was partly due to the difficulty interpreting the impact on the economy of the new health-care law, which began to take effect in January. When hard data, first available this month, showed a reduction in revenues for hospitals, doctors and other providers, the Commerce Department revised down its estimates of health spending in a release Wednesday. Spending on health-care services declined at a 1.4% annualized pace in the first quarter, compared to an earlier estimate of a 9.1% increase. That revision contributed to a revision of gross domestic product to a 2.9% annualized decline from an earlier estimate of a 1% decline. The revision in the health-care category was the largest in recent memory, said Nicole Mayerhauser, an official that oversees GDP statistics at the Commerce Department’s Bureau of Economic Analysis. “Trying to initially estimate health care this first quarter was a very unique circumstance because of the rollout of the Affordable Care Act,” she said. “We made an adjustment from our normal methodology…(but) our assumptions ended up being too strong.”For the first two estimates of any quarter’s GDP, the Commerce Department doesn’t have direct figures on health-care output.  Initially, they considered Medicaid benefit figures and the number of Americans enrolling in coverage made available under the new health-care law. That data showed an increase in Medicaid outlays and that millions of Americans were signing up for healthcare insurance, leading the Commerce Department to forecast an increase for health outlays. In the initial reading of first-quarter GDP, released in April, the Commerce Department noted this methodology. With more reliable data now available from a Census survey, those early assumptions have essentially been replaced with more reliable figures. Ms. Mayerhauser said the Commerce Department doesn’t plan to regularly incorporate data related to the Affordable Care Act into its standard methodologies.

Why Did GDP Fall So Dramatically Last Quarter? - Yves Smith - Robert Pollin, professor of economics at the University of Massachusetts Amherst, gives a good high-level discussion of why the GDP results for last quarter were such a train wreck. Remember that analysts and economists were blindsided; no one expected to see GDP fall at that rate. As we wrote, the tendency among pundits has been to treat the results as of not much concern, since that period is past and some of plunge can be attributed to one-off factors, most importantly, abnormally cold weather. But Pollin explains why this is insufficient and why the bad results highlight how wrongheaded current austerity policies are. A key section of Pollin’s remarks: What happened in the last quarter was broadly consistent with the weakness of the recovery, just to give some evidence on that. In the previous eight recessions that the U.S. has had since World War II, you see strong recoveries after the recession ends, so that, say, three months after the recession ends, the economy is growing on average at about four and a half percent a year. That’s positive four and half percent growth on average. In this recession, after the recession ends in 2009, average growth has only been 2.3 percent–half the rate of improvement that we’ve seen in the eight previous recessions. So we could say that this massive one-quarter contraction was a blip, but it wasn’t just a blip, because it comes amid a very weak recovery that’s been going on now for five years.

First Quarter GDP Contraction was Less Severe than you Think - As discussed in an earlier post, my co-authors and I believe that our "GDPplus," obtained by optimally blending the noisy expenditure- and income-side GDP estimates, provides a superior U.S. GDP measure. (Check it out online; the Federal Reserve Bank of Philadelphia now calculates and reports it.) A few days ago we revised and re-posted the working paper on which it's based (Aruoba, Diebold, Nalewaik, Schorfheide, and Song, "Improving GDP Measurement: A Measurement Error Perspective," Manuscript, University of Maryland, Federal Reserve Board and University of Pennsylvania, Revised June 2014).  It's important to note that GDPplus is not simply a convex combination of the expenditure- and income-side estimates; rather, it is produced via the Kalman filter, which averages optimally over both space and time. Hence, although GDPplus is usually between the expenditure- and income-side estimates, it need not be. Presently we're in just such a situation, as shown in the graph below. 2014Q1 real growth as measured by GDPplus (in red) is well above both of the corresponding expenditure- and income-side GDP growth estimates (in black), which are almost identical.

Here Is The Reason For The Total Collapse In Q1 GDP -- Remember back in April, when the first GDP estimate was released (a gargantuan by comparison 0.1% hence revised to a depression equivalent -2.9%), we wrote: "If It Wasn't For Obamacare, Q1 GDP Would Be Negative." Well, now that GDP is not only negative, but the worst it has been in five years, we are once again proven right. But not only because GDP was indeed negative, but because the real reason for today's epic collapse in GDP was, you guessed it, Obamacare. Here is the chart we posted in April, showing the contribution of Obamacare, aka Healthcare Services spending. It was, in a word, an all time high. Turns out this number was based on.... nothing. Because as the next chart below shows, between the second and final revision of Q1 GDP something dramatic happened: instead of contributing $40 billion to real GDP in Q1, Obamacare magically ended up subtracting $6.4 billion from GDP. This, in turn, resulted in a collapse in Personal Consumption Expenditures as a percentage of GDP to just 0.7%, the lowest since 2009!

Two notes about Q1 GDP - As an initial matter, as Busikness Week pointed out:  The big surprise in the first quarter was the dip in health-care spending. The U.S. spent $6.4 billion less on health care in the first quarter than in the last quarter of 2013. Government statisticians initially forecast a 9.9 percent increase in health-care spending—and what we got was a 1.4 percent decline. Considering all the millions of previously uninsured people who are gaining access to health insurance under the Affordable Care Act, how can they be shrinking so dramatically? Health-care costs overall have been increasing more slowly in recent years compared with the pace before the 2007-09 recession. .... [T]he Bureau of Economic Analysis ... [, t]o estimate the effect of Obamacare in the first quarter,... initially relied on trends in Medicaid spending, because it could not directly capture spending by people newly enrolled in private insurance. In recent years, 15% of the entire US GDP has been spending on health care.  Reining in that spending has been something of a Holy Grail, and the Affordable Care Act a/k/a ObamaCare. was supposed to at least partially achieve that.  Since this was the first quarter that its effect had to be measured for GDP purposes, we are in terra incognita, and so was the BEA as indicated in the above quote.So a deceleration or outright decline in health care costs is we have been trying to achieve, and over the long term that will have a negative effect on GDP.  That  being said, that money should show up as savings or spending elsewhere.  The bottom line is, the big decline in health care spending may actually be a net good, at least over the longer term, but only  somebody with deep-in-the-reeds knowledge of health care spending is going to be able to figure that out.

Yes, the First Quarter GDP Figure Was An Anomaly: We’ve seen a fair amount of hyperventilating about the final 1Q GDP number printing a negative 2.9%. However, let’s take a deep breath and look at the facts and data to get an idea not only for what happened but it will continue. Let’s start with this: assume for a minute the weather is very cold and unpredictable. In fact, it’s unseasonably cold, even for northern regions. What wouldn’t happen in this environment? Anything that involved a person going out to get something aside from necessities. Any outdoor activities like building are also off the table. And businesses adding to their capital stock will occur at a far slower rate because adding to property, plant and equipment requires the movement of large items from point a to point b, which is difficult to do when the nation’s entire logistics chain is getting hit by inclement weather. Let’s look at the details of the report: Real GDP declined 2.9 percent in the first quarter, after increasing 2.6 percent in the fourth. This downturn in the percent change in real GDP primarily reflected a downturn in exports, a larger decrease in private inventory investment, a deceleration in PCE, and downturns in nonresidential fixed investment and in state and local government spending that were partly offset by an upturn in federal government spending. In other words, those activities that involved contact with the outside have slowed down because of the weather.

Real GDP Per Capita Sinks to -3.53% - Earlier today we learned that the Third Estimate for Q1 2014 real GDP came in at -2.93 percent (rounded to 2.9 percent), down from -1.0 percent in the Second Estimate and well below most forecasts. Real GDP per capita was even lower at -3.53 percent. Here is a chart of real GDP per capita growth since 1960. For this analysis I've chained in today's dollar for the inflation adjustment. The per-capita calculation is based on quarterly aggregates of mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data is available in the FRED series POPTHM. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale. I've drawn an exponential regression through the data using the Excel GROWTH function to give us a sense of the historical trend. The regression illustrates the fact that the trend since the Great Recession has a visibly lower slope than long-term trend. In fact, the current GDP per-capita is 11.6% below the regression trend and at a post-recession low. The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. The standard measure of GDP in the US is expressed as the compounded annual rate of change from one quarter to the next. The current real GDP is -2.9 percent (rounded from -2.93 percent). But with a per-capita adjustment, the data series is currently at -3.53 percent. Both a 10-year moving average and the slope of a linear regression through the data show that the US economic growth has been slowing for decades.

First-Quarter Output Drop Doesn’t Measure Up with First-Quarter Hiring - The 2.9% first quarter contraction in the annual rate of U.S. output growth was especially unusual when one considers how aggressively firms were hiring during this period.  Since the end of World War II, there have been 15 other quarters during which GDP contracted by this amount or more. In 14 of those 15 quarters, hiring contracted along with output, on average at a 3.5% annual rate. The only other time when payroll employment expanded during such a striking output contraction was the first quarter of 1974, when gross domestic product contracted at a 3.3% annual rate and hiring expanded at a 1.9% rate.  By simple arithmetic, when output is contracting and hiring is increasing, worker productivity is softening, as happened in the 1970s. Either the U.S. is now experiencing a productivity shock, or the numbers will somehow get revised again in the future.

This Has Never Happened Without The US Falling Into Recession -- With all eyes firmly focused on yesterday's disastrous GDP report (and ultimately dismissing it as 'weather' and one-off exogenous factors), we thought Bloomberg Brief's Rich Yamarone's analysis of a lesser-known (yet just as key) indicator of the state of US economic health was intriguing. As he notes, according to the latest data from the Bureau of Economic analysis, there has never been a time in history that year-over-year gross domestic income has been at its current pace (2.6 percent) without the U.S. economy ultimately falling into recession. That’s more than 50 years of history, which is about as good as one could ever hope for in an economic indicator.

Goldman Boosts Q2 GDP Forecast Due To Collapse In Q1 GDP -- In brief: Goldman just boosted their Q2 tracking GDP from 3.8% to 4.0% because Q1 GDP imploded. And scene.  Q1 GDP was revised down even more than expected, mainly due to lower-than-expected healthcare spending. The May durable goods report was a bit weaker than expected, although inventories rose more than expected. We increased our Q2 GDP tracking estimate by two-tenths to 4.0%.  1. Q1 GDP was revised to -2.9% in the third estimate (vs. consensus -1.8%), from -1.0% previously. The downward revision was concentrated in two categories: healthcare spending subtracted 1.2 percentage points (pp) relative to the second estimate, while net exports subtracted 0.6 pp. All other components of GDP combined contributed a further one-tenth to the revision. We had anticipated downward revisions to both healthcare spending and net exports—in particular in light of the weak healthcare numbers in the Q1 Quarterly Services Survey—but the extent of these revisions was larger than we expected. As we noted in yesterday's US Daily, we think that Q1 GDP was an aberration, and is not representative of the strengthening underlying trend in US growth.

The Avalanche Of Q2 GDP Downgrades Begins - With all eyes firmly focused on the dismal Q1 GDP print and summarily dismissing it as 'noise', backward-looking, 'weather', and 'exogenous'; today's worrying spending data has sent the serial extrapolators among the sell-side economist herd scrambling to downgrade over-exuberant Q2 GDP expectations (five so far). One glance at this chart is all one needs to know about the "bounce back" in pent-up demand spending (that is not there). As Bank of Tokyo-Mitsubishi's Chris Rupkey told Bloomberg, "Don’t start betting on those 3% GDP numbers yet." This only trumped Goldman Sachs 'oh-so-embarrassed-again' Jan Hatzius who slashed his exuberant 4% Q2 GDP growth estimate to 3.5% (for now). Five so far...

  • Goldman Sachs: We reduced our Q2 GDP tracking estimate by five-tenths to 3.5%. The May personal spending report was weaker than expected. . The available data on healthcare spending in Q2 has not been consistent with the way we assumed the Commerce Department would continue to account for the Affordable Care Act, which would have resulted in a boost to growth.
  • Action Economics: Q2 GDP 2.5% from previous 3% expectation
  • Bank of Tokyo-Mitsubishi: "Don’t start betting on those 3% GDP numbers yet"
  • Barclays: 2.9% annualized Q2 growth, down from 4%
  • TD Ameritrade: cut to 3% from 3.6%.

In The First Quarter $250 Billion In Federal Debt Bought Negative $74 Billion In GDP -As everyone knows by now, in Q1 the US economy "grew" (we use the term loosely because the correct term is shrank) by the lowest amount in Q1 since 2009. More to the point, the -2.9% collapse in GDP was the 17th worst quarterly print in US history.  That much is largely known by now. What may not be known is that while there has been at least one quarter in the past 5 years in which the US economy shrank on a CAGR basis (at least until a new and improved definition of GDP revises that away) since 2009 there has never been a quarter in which the economy shrank sequentially in nominal terms. Which is what it did in Q1, when it declined by $74 billion.  Which brings us to the topic of marginal utility of debt, extensively covered here in the past. In brief, it describes how much in "economic growth" every dollar in federal debt buys. The bad news: in Q1, US total Federal debt rose by $250 billion, to a record (duh) $17.6 trillion. This debt "bought" a negative $74 billion in GDP, which declined to $17.0 trillion. Said otherwise, this was the first quarter since the end of the recession when debt rose (by a whopping amount), and when GDP declined sequentially in nominal terms.

Keeping It Real: Law, Coercion, & The Frontiers of Public Finance -- “Where does money come from?” That’s our question. That’s the trump card Deficit Owls play to explain why the case for austerity is shallow and sadomasochistic, now and forever. When one spreads the true answer—that the Federal Reserve creates dollars with keystrokes, that the U.S. government, unlike like a state or a household, can’t possibly “go broke”, that Uncle Sam has to worry about inflation but doesn’t need to tax or borrow to spend—policy creativity explodes. The false choices of public finance are illuminated. We can decrease taxes AND increase expenditures. We can achieve full employment AND price stability at the same time. Once we align conversation with operational reality, and recognize that we can’t collectively run out of money, we can have an honest—if always antagonistic—conversation about what institutions should do to create, administer, and regulate stocks and flows of resources.. Descriptions of how money flows through the economy are inseparable from questions about the flux of claims of ownership. Because these questions are conflict-ridden, they are the province of the legal field, of lawyers, lawmakers, regulators, and judges, who hammer out the statutes, cases, and codes that undergird commercial activity. The questions are complex, yet intuitive. If the federal government creates money out of thin air, rather than taking it from some people to give it to others, as we have so often been told, then who owns the money? Who deserves the money? If money is not truly a commodity siphoned from the public, but a tool created and distributed by the government and its agents to the public, then who can claim ownership of the money currently wasting away in federal coffers? Deeper, still – who is entitled to the money that doesn’t even exist yet? If there is no money scarcity, only real resource scarcity, then most legal and philosophical conversations about distributive justice are anachronistic and impoverished.

To Consolidate or Not to Consolidate, That Is the Question (or maybe it isn’t) - This is another short post on MMT, a sort of follow-up to my post from a couple of days ago. There was an interesting response to various comments on my piece, which was posted up on Mike Norman’s website. We got the typical: “oh you MMTers always want to consolidate the Fed and Treasury, but really the Fed is a private institution that is not a part of government,” and “in reality the Treasury cannot spend unless the Fed will allow it to spend, otherwise it must get tax revenue before it can spend,” and hence “really, government spending is constrained by its revenue, just like a household or firm.” In reality, what MMT has shown—from the very beginning of the creation of the approach—is that you can consolidate or deconsolidate and the balance sheets end up in exactly the same place. The MMT logic holds no matter how you do it: government creates a money of account, imposes a tax in that unit, spends currency denominated in the unit, and collects taxes paid in its own currency.And, of course, the Fed is not a private institution but rather is a creature of Congress and no more independent of government than is the Treasury, the DOD, the DOT, or the IRS. The Fed is normally allowed to set the overnight interest rate target free from the everyday kind of politics—but all of these other branches of government also have some independence from party politics. Well, the IRS right now is being subjected to some of that. Anyway, the response was by someone called Calgacus, who often makes quite interesting and thoughtful comments. I thought it would be worthwhile to repost the response here, along with a few comments of my own. The angle taken here on the “consolidation issue” is pretty novel.

Obama Requests Nearly $60 Billion to Continue Endless War - President Obama on Thursday announced he would ask Congress for $58.6 billion in war funding for the 2015 fiscal year. A White House statement outlining the request for what is formally called the Overseas Contingency Operations (OCO) notes that it is $20.9 billion less than what had been figured in an earlier budget.  The OCO—re-branded from the Global War on Terror—fund is in addition to the nearly $500 billion base FY2015 budget for the Defense Department.The OCO fund request amount on its own represents 1.55 percent of the the total budget, but is part of the overall military spending that accounts for over 16 percent of the budget. The OCO budget "isn’t subject to caps or cuts or any restrictions at all," as Mattea Kramer of the National Priorities Projected has noted, and, as Defense News reported earlier this month, "The administration has never announced a final year for OCO funding."

Why did the White House pass up an opportunity to support a (mostly) good, bipartisan idea? - The latest deadline facing Congress is not the debt ceiling. Nor is it spending bills to keep the government open. It’s the Highway Trust Fund, and if this source of financing for road and transit projects across the land is not replenished soon — like, in a few weeks — states will have to start slowing down or delaying infrastructure projects, which is exactly the opposite of what we need them to do given our still-recovering job market. Since Congress has long been unwilling to come up with a solution to the bleeding Highway Trust Fund, the usual move in recent years has been to temporarily patch the hole with a transfer from general revenues, and that’s probably what will happen in this next round, too. But you really don’t need to be much of a budget wonk to understand the fundamental problem here: The federal gas tax that supports the trust fund was set at 18.4 cents per gallon in 1993, and it has not been updated since. Not for inflation, not for the improved mileage of the current fleet, and not for the fact that people are driving less (see this quite remarkable remarkable figure).  That’s why this bipartisan proposal from Sens. Bob Corker (R-Tenn.) and Chris Murphy (D-Conn.) to raise the federal gas tax by 12 cents over two years and then index it to inflation struck me as uncharacteristically bold and sensible. To be sure, their idea has a serious flaw in that it foolishly includes other tax cuts so as to meet the “no new taxes” pledge to uber-lobbyist Grover Norquist. But in these gridlocked and benighted times, when partisans come up with an idea that’s even partially smart, it should be viewed as an opening salvo over which policymakers should immediately start haggling.

Tax Gasoline, Save the Highway Trust Fund, and Help the Economy (and the Planet) -- Continuing its recent habit of allowing a foreseeable problem to become a full-blown crisis, Congress has so far done nothing to prevent the looming insolvency of the federal Highway Trust Fund (HTF). The HTF is a dedicated account from which the U.S. Treasury draws to pay for road construction (and provide support for mass transit). Because the gasoline tax—the HTF’s primary source of dedicated revenue—has not been increased since 1993, more has been spent from the HTF than it has taken in for years. Since 2008, Congress has needed to transfer $54 billion from the U.S. Treasury’s general fund to the trust fund to prevent its insolvency. Unless Congress again transfers general funds to the HTF, or otherwise closes its funding gap, the trust fund is expected to go bust this August. And if highway spending were to be reduced to the level of current revenues for one year, because the trust fund “has no authority to borrow additional funds,” it would cost our economy 160,000 to 320,000 jobs, using my colleague Josh Bivens’s methodology.  I should note two things about this short history. First, there’s no particular economic problem facing the federal government here. HTF spending is already factored into the federal budget’s baseline. Continuing to finance its operations with general fund transfers will hence do nothing to increase overall projected federal budget deficits. Instead, this is largely an accounting problem—spending is constrained by the fact that, by law, HTF spending is supported primarily by a dedicated tax. Second, if policymakers nevertheless object to the fiscal non-problem of continuing to finance highway spending in part with general fund transfers, there’s obviously a simple solution. No, not a huge corporate tax break. Instead, we could just raise the federal gasoline tax.

Good And Bad News About The ACA Penalty Tax -- An important feature of the Affordable Care Act (ACA) is the penalty tax imposed on people who do not have health insurance. But newly updated report from the Congressional Budget Office projects that just under 4 million people will pay the penalty in 2016, less than 15 percent of the estimated 30 million people who won’t have coverage that year. That’s both good and bad news. The good news is most people potentially subject to the penalty tax will obtain coverage. Of the 30 million people who CBO says won’t have insurance, 23 million—more than 75 percent—will be exempt from the tax. They include people with religious objections to health insurance, American Indians, people who are in jail, or are “not lawfully present” in the U.S., among others. There’s also no penalty if coverage would cost more than 8 percent of income. And in the many states that have refused to expand Medicaid coverage as the ACA allows, people who would have been covered under that program will also be exempt from the penalty. That leaves 7 million uninsured who will be subject to the tax in 2016, less than 3 percent of the nonelderly population. In other words, CBO says the combination of the individual mandate, premium subsidies, and the penalty tax will induce most people to obtain coverage. So what’s the bad news? Of the 7 million people who will owe tax, CBO says more than 40 percent won’t pay. Some will get exemptions for hardship or other reasons—that’s a good thing. But others will, in CBO’s understated words, “try to avoid payments.” Under the ACA legislation, the IRS has limited ability to collect the penalty. It cannot, for example, garnish wages as it could to recover other tax underpayments.

The Real IRS Flap Is About Dark Money, Not Emails -- Don’t get distracted by the political theater over lost IRS emails. There is little new about headline-seeking politicians berating IRS Commissioner John Koskinen. Like most of what happens in Congress these days, these second-rate star chambers do little more than create cable TV sound bites and base-motivating outrage.But get past the shouting and two very important issues remain on the table: The first is the IRS has been terribly managed for years and needs to be fixed. It’s easy to forget, but that’s why Koskinen is there. The second is that the commissioner appears undeterred in his efforts to rewrite the rules for 501(c)(4) non-profits that are engaged in political activities. That seemingly obscure effort will have an enormous impact on future U.S. elections and the balance of political power in the U.S. Let’s start with IRS operations. Poor management, low staff morale, archaic computer systems, insufficient funding, and a growing workload have stretched the agency to (and maybe past) a breaking point. The agency’s initial bungling of those tax-exempt applications and its self-destructive culture of secrecy—including its inexplicable delay in telling Congress about the lost emails– are just two examples of what’s wrong. Something has to change. Still, the second issue dwarfs the first. Despite all the noise surrounding the alleged scandal over IRS treatment of tea party and other non-profit political organizations, Koskinen seems committed to writing regulations aimed at curbing the use of non-profits as laundries for hundreds of millions of dollars in secret campaign money.

How Private Equity Outfoxes Investors and the IRS - Yves Smith - We’ve been chipping away at the bigger implications of information exposed via the release of a dozen private equity limited partnership agreements. The SEC warned in May that investors, as in limited partners, had done a lousy job of negotiating these documents and weren’t so hot at monitoring the general partners either. We wrote earlier about a major tax problem for the limited partners, and we’ve since come across information from an expert that works for private equity funds that confirms our original reading, which we will discuss in due course.  But the more interesting question is: How did supposedly sophisticated investors sign up for investments that have tax liability bombs in them? This seemingly arcane but actually important tax problem illustrates how utterly outmatched private equity limited partners are by the general partners and their top-tier hired guns. This tax problem, called UBTI, for “unrelated business taxable income,” comes about, perversely, as a result of the limited partners showing a rare bout of wanting to act like responsible investors and reduce the various fees that general partners charge over and above their management fees and carried income (the famed “2 and 20,” for the prototypical formula of 2% in management fees and 20% in carry, or upside fees*).

Greg Mankiw Says We Need Rich People Because They Won't Spend Their Money - Dean Baker - That's basically the punch line in a column telling us Thomas Piketty is wrong to worry about rising inequality. After a long digression on motivations for saving among the very rich, Mankiw tells readers: "When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers. "Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers." To summarize, the story is that by saving rather than spending their money, rich people will make more capital available to firms to invest, thereby raising productivity and wages. There are two important problems with this story. First, we are operating well below the economy's potential level of output and are likely to remain below potential for many years into the future according to most projections.  The other point is that moderate income and middle income people did actually use to save a larger share of their income. Back in the days when wages were keeping pace with productivity growth, savings rates were considerably higher than they have been in the last two decades when the wealthy got most of the benefits of growth. It tends to be the case that people save a larger share of their income when their income is rising rapidly. This means that we don't need rich people to not spend.

Sympathy for the Trustafarians - Krugman -  A number of people have asked me to comment on Greg Mankiw’s defense of inherited wealth. It’s a strange piece... But let me focus on two key problems... – one purely economic, one involving political economy.So, on the economics: Mankiw argues that accumulation of dynastic wealth is good for everyone, because it increases the capital stock and therefore trickles down to workers in the form of higher wages. Is this a good argument? ...In fact, what we’re really talking about here is taxation of wealth, and the question is what would happen to that revenue versus what happens if the rich get to keep the money. If the government uses the extra revenue to reduce deficits, then all of it is saved – as opposed to only part of it if it’s passed on to heirs. If the government uses the revenue to pay for social insurance and/or public goods, that’s likely to provide a lot more benefit to workers than the trickle-down from increased capital.The point is that you can only justify Mankiw’s claim that inherited wealth is necessarily good for workers by insisting that the government would do nothing useful with the revenue from inheritance taxes. I’d call that assuming your conclusions... But the larger criticism of Mankiw’s piece is that it ignores the main reason we’re concerned about the concentration of wealth in family dynasties – the belief that it warps our political economy, that it undermines democracy. ... If Mankiw wants to argue that the costs of any attempt to limit wealth concentration would exceed the benefits, fine. But “more capital is good” is not a helpful contribution to the discussion.

Did Multinationals Use a Foreign Earnings Tax Holiday To Burnish Their Financials Rather Than Reduce Taxes? -- We’ve known for years that the 2004 repatriation tax holiday did little to boost domestic investment or create U.S. jobs, as promised by its backers. Now we are learning that many multinational corporations were not even interested in using the temporary holiday to cut their taxes. Instead, according to a new study, it may have been little more than an easy way for them to manipulate earnings to polish their financial statements.  Yet Congress remains seduced by the idea. After all, it looks free money–a plan that raises revenue but can be promoted as a tax cut. That’s why a decade ago lawmakers enacted a temporary tax break for multinational firms that brought their foreign earnings back to the U.S.  It was a terrible idea back in 2004. It is still a terrible idea—and two very different analyses help explain why. The first, by the congressional Joint Committee on Taxation, estimates that while cutting taxes for one year on repatriated earnings briefly generates new revenue, it significantly increases the deficit even within Congress’ usual 10-year budget window.  According to a new JCT estimate, such a holiday would boost federal revenues by about $19 billion over the first two years as firms pay some tax on funds they would otherwise have kept overseas tax-free. But since multinationals are getting a tax break for bringing money back they would eventually have returned anyway (at higher rates), JCT figures the tax holiday would add almost $96 billion to the deficit over a decade. So much for free money. The second study, by financial accounting experts Michaele Morrow of Northeastern University and Robert C. Ricketts of Texas Tech, looks closely at how firms responded to the 2004 tax break. Their fascinating conclusion: For many multinationals, the benefit of the holiday was not primarily tax savings at all. Rather, it provided an easy way to manage the earnings they report to shareholders by manipulating their financial statements.

Bond Market Has $900 Billion Mom-and-Pop Problem When Rates Rise - It’s never been easier for individuals to enter some of the most esoteric debt markets. Wall Street’s biggest firms are worried that it’ll be just as simple for them to leave. Investors have piled more than $900 billion into taxable bond funds since the 2008 financial crisis, buying stock-like shares of mutual and exchange-traded funds to gain access to infrequently-traded markets. This flood of cash has helped cause prices to surge and yields to plunge. Now, as the Federal Reserve discusses ending its easy-money policies, concern is mounting that the withdrawal of stimulus will lead to an exodus that’ll cause credit markets to freeze up. While new regulations have forced banks to reduce their balance-sheet risk, analysts at JPMorgan Chase & Co. (JPM:US) are focusing on the problems that individual investors could cause by yanking money from funds. Video: Yellen `Told Us’ Stocks Still Going Up: Holland There’s a bigger risk “that when the the Fed starts hiking in earnest, outflows from high-yielding and less-liquid debt will lead to a free fall in prices,” JPMorgan strategists led by Jan Loeys wrote in a June 20 report. “In extremis, this could force a closing of the primary market and have serious economic impact.”

Are the Rating Agencies About to Get Their Comeuppance?: This week in encouraging news, we learn that the Securities and Exchange Commission may finally be pursuing one of the prime enablers of the financial crisis — the ratings companies. Previously, it was reported that disclosure violations were on the SEC’s radar, but truth be told, those are minor offenses. The SEC’s Office of Credit Ratings, a division whose sole purpose is essentially to oversee Moody’s and Standard & Poor’s, seems to be stirring. ... Multiple cases have reportedly been referred to the SEC’s enforcement division, and new regulations are due.And a welcome change it would be. Of all the players that helped cause the financial crisis, the ratings companies have gotten off scot-free. Banks have had massive fines while many mortgage and derivative underwriters have had their garbage securities put back to them at great cost. Since 2008, there have been 388 mortgage companies that have gone bankrupt. All of that junk paper found its way into AAA-rated securitized products and derivatives. The penalty for Moody’s and S&P has been essentially nil.

US to Fine BNP $8+ Billion, Suspend Access to Dollar Clearing - Yves Smith - While it is refreshing to see the authorities man up a bit in dealing with a miscreant bank, it’s also critical to recognize that the US show of spine with BNP is all about the US tightening control over international payments. In other words, the harsh settlement is all about the US projecting its power overseas via financial services. It is not a precedent for how the authorities will deal with other types of bank abuses.  Key elements of the deal, as told by the Wall Street Journal: BNP Paribas SA and U.S. prosecutors have agreed to broad terms of a deal in which the bank would pay $8 billion to $9 billion and accept other punishment based on what investigators say is evidence the bank intentionally hid $30 billion of financial transactions that violated U.S. sanctions, according to people close to the probe. The two sides in recent days reached a general outline of a deal that also would include a guilty plea to a criminal charge of conspiring to violate the International Emergency Economic Powers Act and a temporary ban—likely lasting a period of months—on the company’s ability to transact in U.S. dollars, according to several people familiar with the discussions. This chart illustrates that these settlements don’t appear to have much logic:

New York AG slaps Barclays with securities fraud suit  (Reuters) - The New York Attorney General on Wednesday filed a securities fraud lawsuit against Barclays PLC (BARC.L) for misrepresenting the safety of its U.S.-based alternative trading system, or "dark pool," to investors. The lawsuit alleges that in order to increase business in its dark pool, Barclays has favored high-frequency traders and has actively sought to attract them by giving them systematic advantages over other investors trading in the pool. "Barclays grew its dark pool by telling investors they were diving into safe waters," said Attorney General Eric Schneiderman. "According to the lawsuit, Barclays' dark pool was full of predators - there at Barclays' invitation." Barclays declined to comment. Broker-run trading systems known as dark pools, where participants are anonymous and trading information is hidden until after the trades are completed, are a key focus of Schneiderman's sweeping investigation into the U.S. stock market. His office is looking into whether dark pools operate in a way that is consistent with how they market themselves, that they have the interests of investors in mind and that brokers directing trades to their own dark pools do so in a way that does not present conflicts of interest.

The Case of the Missing White-Collar Criminal - The senior executives who played leading roles in the 2008 financial crisis can breathe a sigh of relief: If any committed crimes, the statute of limitations will run out for most of them this year. It's safe to say nobody will go to jail. One doesn't have to presume guilt to feel that the lack of prosecutions raises some nagging questions: Did prosecutors exhibit impressive restraint in refusing to satisfy the public's desire for retribution, or are they just incapable of punishing criminals in positions of power? Are changes needed in the way the criminal justice system handles white-collar crime? Prosecutors often argue that while executives may have acted recklessly and made mistakes, that doesn’t mean they committed crimes. If so, then the 2008 crisis would be unique in its immaculate conception. After the savings-and-loan bust of the 1980s, more than 1,000 people were charged, and more than 100 company officers and directors served prison terms. The accounting and other corporate scandals of the early 2000s led to criminal charges against at least 30 top-level executives, most of whom were convicted or pleaded guilty. Even where the government has demonstrated that crimes occurred in and around the crisis, individual culpability has been notably lacking. From 2009 through May 2014, federal prosecutors filed or threatened criminal charges in 21 separate actions against major financial companies, which admitted to such misdeeds as launderinghundreds of millions of dollars for Mexican and Colombian drug traffickers, systematically lying about their borrowing costs, anddevoting hundreds of employees to helping U.S. citizens commit tax fraud. A company typically can’t be charged unless a real person committed a crime. Yet in just eight cases did prosecutors pursue individuals -- none of whom were high-level executives:

Obama’s Latest Betrayal of America and Americans in Favor of the Big Banks: TISA - By William K. Black --TISA is designed to replicate, indeed, optimize the criminogenic environment that made fraudulent financial CEOs wealthy by “looting” “their” banks. The (effective) “regulators in the field” figured this out by 1983 – over 30 years ago. We wrote up our findings in great detail. Top economists and top white-collar criminologists studying those findings a decade later (1993) agreed with the findings. Since the original findings in 1983, we have the (prevented) “liar’s” loans crisis of 1991 when federal S&L regulators based in California drove what were then a brand new product called “low doc” loans out of the regulated industry. That “second front” – while the S&L regulators were containing the S&L debacle – was dealt with so effectively that there was no resultant financial crisis. Indeed, it is only with the benefit of the current crisis that we can understand that the containment of the overall S&L debacle (driven primarily by fraudulent commercial real estate loans and investments) and the incipient crisis is liar’s loans prevented a crisis that would have become similar in scope to the current crisis. The S&L debacle was contained before it caused even a minor national recession.Ask yourself this question: why would the bankers and heads of state have demanded, and received, “classified” treatment of a document that did not have any confidential information (there are no state secrets, no privacy issues, and nothing of proprietary value in the leaked TISA draft) and made no meaningful restriction on regulation and supervision due to the “nowithstanding” clause of Article 17? The demand for classified treatment makes it inescapable that the bankers and government officials involved in drafting TISA are trying to hide something they believe would outrage the public. The paradox is that the bankers’ and politicians’ rabid fear of disclosure to the public and Congress of TISA’s assault on regulation confirms beyond any reasonable doubt that subparagraph 2 of Article 17 and Article 20 combine to make TISA a grave threat to the global economy, workers, and honest bankers by making the financial world even more criminogenic.

Bank Regulator OCC Details Crazy Risk-Taking, Blames Fed -- Wolf Richter - Banks are again taking big risks, the same risks that helped trigger the financial crisis, and they’re understating these risks. It wasn’t an edgy blogger but a bank regulator of the Federal Government – the Office of the Comptroller of the Currency – that issued this warning. And it explicitly blamed the Fed’s monetary policy. The report fingered the stock market’s “fear index,” the VIX, which measures near-term volatility of S&P 500 index options; and it fingered the bond market’s “fear index,” the Merrill Option Volatility Estimate (MOVE), which measures volatility of Treasury options. They have been flirting with, or hit all-time lows. VIX levels below 20, “and especially below 15” – it’s now below 12 – “suggest complacency in the stock market, which often has led to sustained increases in risk appetite and subsequent market instability.” Complacency is at about the same level as it was in 2007. Back then, it was followed by “subsequent market instability” – a euphemism for the financial crisis. Reason? “The longer volatility remains low, the more likely investors are to chase yields to maximize returns, often selling options that expose them to losses if prices drop suddenly, or taking on increased credit risk.” As banks pile on these trading risks when volatility is low, something else happens:

Fed's Tarullo: Banks need to improve capital planning process -- Some U.S. banks still seem to be in the dark about the riskiness of their businesses, said Federal Reserve Governor Daniel Tarullo on Wednesday. "Some firms still lack reliable information about their businesses and exposures," Tarullo said during a speech in Boston at a conference on the Fed's stress test. "These deficiencies are, in some instances, compounded by weak oversight by senior management and boards of directors, and lack of effective checks and accountability in the process," he said. Tarullo said the stress test "is not a PGA tournament - there is no foreordained cut that some participants will miss." He said the Fed will work with the banks throughout the year on problems and "only in unusual circumstances" should banks be surprised by the outcome. Citigroup [s:c] officials said they were shocked in March when they learned that they had failed the more subjective or "qualitative" part of the latest stress test. Tarullo said that the Fed found that many firms "had a long way to go" to meet high standards of capital planning backed by strong risk management when the stress tests were first conducted in 2009. Given that gap, the Fed has allowed time for banks to work toward that goal. "We do, however, expect firms to continue to make steady progress each year," he said

Fed’s Tarullo: Regulator To Make Bank Stress Test Part of Year-Round Supervision -  Federal Reserve Gov. Daniel Tarullo said Wednesday the regulator intends to incorporate its stress testing program into year-round supervision of big banks. The move, announced in remarks prepared for a Fed conference in Boston, came after people close to some banks who failed this year’s test, including Citigroup Inc., said they were surprised by the results. “Only in unusual circumstances should supervisors learn for the first time during (the stress test program) of significant problems in the quality of the capital planning processes, and only in unusual circumstances should firms be surprised at the outcome,” Mr. Tarullo said. The Fed put the stress tests in place in the wake of the 2008 financial crisis and they have become a key part of the Washington oversight of big banks as well as a market-moving event on Wall Street. Giant financial firms have to prove they have enough loss-absorbing capital to keep lending in a downturn as well as a program for assessing and managing risks across their operations. A failure in either category can mean they are barred from rewarding shareholders with dividends or stock buybacks. At times, the process has been marked by what banks have perceived as poor communication. Mr. Tarullo said on Wednesday the Fed’s Board of Governors in Washington would lead an effort to make the stress tests “a culmination of year-round supervision” rather than a once-annual event.

Why Banks Must Be Allowed to Create Money -- Yves Smith - Ann Pettifor has penned an effective rebuttal of the Chicago Plan, which has been taken up in the UK as “Positive Money”. Its advocates call for private banks to have their ability to create money taken from them, and put in the hands of a committee, independent of the state, that would decide on the level of money creation. Banks would be restricted to lending money that they already have on deposit.  Pettifor explains how the enthusiasm for the Chicago Plan rests on a fundamental misunderstanding of the nature of money and confusion about its relationship to credit. While readers may not like the notion that credit, and therefore money creation, is best left in the hands of banks, the problem is much like the one that Churchill articulated about democracy: it looks like the worst possible system until you consider the alternatives.  Pettifor points out that banks’ ability to create money out of thin air dates from 1694 in England. In addition to helping lower the cost of financing wars, an objective was to reduce interest rates to help facilitate commerce and end usury. If you read the works of early economists, one of their favorite topics was the need to end usurious lending, since businesses could not afford to borrow at those rates and survive, and so the money typically went to the most unproductive activities imaginable, namely, financing gambling by aristocrats. Pettifor also stresses that she is no fan of banks and would support nationalizing them. But she points out that “…nationalising banks is a different proposition from nationalising (and centralising) money creation in the hands of a small ‘independent committee’.”

Have Banks Learned a Lesson on Easy Credit? -- The U.S. has suffered through a financial crisis and a disappointingly slow recovery largely because too many people borrowed too much money, primarily for residential mortgages but also to finance credit-card purchases, and lenders let them. A study released May 28 by three economists at the Federal Reserve Bank of New York reported that consumer non-mortgage debt has grown for three successive quarters, the first time this has happened since the onset of the Great Recession. More borrowing means more spending, which is unequivocally good for economic growth in the short run. But is the rise in non-mortgage debt a potential worrisome sign that banks are returning to their profligate ways? Early this year, the economists surveyed around 1,100 individuals about their recent experiences applying for credit, or not seeking credit, and combined that information with their credit scores. The bottom line is encouraging, at least for those who worry about bank safety. Banks have been increasing their acceptance rates for credit-card applicants with good credit scores but their rejection rates for those applicants with lower credit scores has also risen. This is good news for banks but highlights a challenge for the economy. Only with continued income and job growth will more individuals and households have access to credit. If and when they do, if banks behave prudently–as they have in the recent past–then maybe in this expansion they won’t go overboard and lay the seeds for the next credit bubble.

Making a withdrawal: Banks shut branches in poorer communities -- After the recession began, high-profile bank failures grabbed headlines, but another effect of the economic collapse has had a more direct impact here and communities around the country.Between 2008 and May 2013, more than 1,800 bank branches shut down nationwide – 93 percent of them in low-income neighborhoods, according to Bloomberg. More than one-fourth of all U.S. households are “under-banked” – forced to rely on alternative services like payday lenders, according to the Federal Deposit Insurance Corporation.  Living in an “unbanked” or “under-banked” area can be extremely expensive. Many people rely on pawnshops or payday lenders for banking tasks like paying bills and cashing checks, which can trap them in a cycle of serious debt. Overall, more than 68 million Americans live in “bank deserts” – defined by the U.S. Postal Service as communities with one bank or less. In 2012 alone, these Americans spent $89 billion on interest and fees, an average of $2,412 per underserved household, for alternative financial services – a market that the financially embattled USPS has considered entering. When people living check-to-check rely on pawnshops and payday lenders to make ends meet, the real cost is written in the fine print.

Unofficial Problem Bank list declines to 488 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.Here is the unofficial problem bank list for June 20, 2014.  A couple bank failures and an update from the OCC on its enforcement action activities contributed to several changes to the Unofficial Problem Bank List. In all, there were six removals that push the list count down to 488 institutions with assets of $152.6 billion. In comparison, there were 751 institutions with assets of $273 billion on the list a year ago. The OCC terminated actions against Eagle National Bank, Upper Darby, PA ($190 million); The First National Bank and Trust Company of Broken Arrow, Broken Arrow, OK ($189 million); Lee County Bank & Trust, National Association, Fort Madison, IA ($148 million); and First National Bank Northwest Florida, Panama City, FL ($108 million). Next week we anticipate the FDIC will release an update on its enforcement action activities. With it being the last Friday of the quarter, we will provide an update on transition matrix.  Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The list peaked at 1,002 institutions on June 10, 2011, and is now down to 494.

Black Knight: Mortgage Loans in Foreclosure Process Lowest since July 2008 - According to Black Knight's First Look report for May, the percent of loans delinquent was unchanged in May compared to April, and declined by 7.6% year-over-year. Also the percent of loans in the foreclosure process declined further in May and were down 37% over the last year.  Foreclosure inventory was at the lowest level since July 2008. Black Knight reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) was unchanged at 5.62% in May. The normal rate for delinquencies is around 4.5% to 5%. The increase in delinquencies was in the 'less than 90 days' bucket.The percent of loans in the foreclosure process declined to 1.91% in May from 2.02% in April.   The number of delinquent properties, but not in foreclosure, is down 204,000 properties year-over-year, and the number of properties in the foreclosure process is down 559,000 properties year-over-year. Black Knight will release the complete mortgage monitor for May in early June.

Freddie Mac: Mortgage Serious Delinquency rate declined in May, Lowest since January 2009 - Freddie Mac reported that the Single-Family serious delinquency rate declined in May to 2.10% from 2.15% in April. Freddie's rate is down from 2.85% in May 2013, and this is the lowest level since January 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  These are mortgage loans that are "three monthly payments or more past due or in foreclosure".  Although this indicates progress, the "normal" serious delinquency rate is under 1%.  The serious delinquency rate has fallen 0.75 percentage points over the last year - and at that rate of improvement, the serious delinquency rate will not be below 1% until late 2015.

Investors Who Bought Foreclosed Homes in Bulk Look to Sell -- A year ago, buying foreclosed homes to rent out was the sure-thing trade for investment firms backed by money from private equity companies, hedge funds and pension systems. But with the supply of cheap foreclosed homes dwindling, some early investors are looking to cash out a bit by flipping homes to competitors. The Waypoint Real Estate Group, one of the first companies to raise money from private investors to buy foreclosed homes, is quietly shopping as many as 2,000 houses in California that it acquired in the last few years in several private investment funds, said three people who had been briefed on the matter but were not authorized to discuss it. The homes, which are largely rented, are being shown to other companies backed by investor money that have also scooped up distressed houses in states including Arizona, California, Florida, Georgia, Illinois and Nevada. Waypoint is considering selling about half of its 4,000 homes. Some of the biggest institutional investors in the market for foreclosed homes — companies like the Blackstone Group, American Homes 4 Rent and American Residential Properties — have slowed their pace of acquisitions in response to an increase in home prices and a dearth of foreclosed homes that do not require significant renovation.

Real estate boom bill comes due -  During the peak of the housing boom, from 2004-07, interest-only mortgages gave some buyers access to bigger or better homes than they likely could have afforded with a traditional principal-and-interest monthly payment. The interest-only mortgage was meant for borrowers who had variable cash flow, such as independent contractors or salespeople who got large year-end bonuses. The loans attracted people who expected their income to rise over time, allowing them to handle principal payments later. But a product meant for a select few was oversold. Borrowers in high-price markets who had steady incomes and could afford a principal-and-interest payment instead opted for interest-only loans. Many borrowers who put down less than 20% with these loans were told that the rising real-estate prices would cover their lack of equity. An estimated $934 billion in jumbo interest-only mortgages of all types were sold during the peak years of the housing boom, averaging about $234 billion a year, according to Inside Mortgage Finance, a research group that publishes data on the mortgage industry. By comparison, just $55 billion in jumbo interest-only products were originated in 2002, and $140 billion in 2003, Inside Mortgage Finance says. Interest-only mortgages come in various forms, including five-year and seven-year initial periods, but the 10-year type, followed by a reset, was popular when the housing market was hot. Now with those loans starting to enter the principal-payment period, borrowers face a dilemma: They can refinance or take their chances on a new, possibly higher, payment. When the payment resets, the principal typically must be paid back over the remaining 20-year life of the loan, instead of over 30 years, Moreover, borrowers with adjustable 10-year interest-only mortgages will see their rate start to “float” from year-to-year. They could save money in the short term with current rates, but could be vulnerable to rate increases.

Weekly Update: Housing Tracker Existing Home Inventory up 13.6% year-over-year on June 23rd  -Here is another weekly update on housing inventory ... There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then usually peaking in mid-to-late summer.The Realtor (NAR) data is monthly and released with a lag (the most recent data released this morning was for May).  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 13.6% above the same week in 2013. (Note: There are differences in how the data is collected between Housing Tracker and the NAR). I expect inventory to be above the same week in 2012 at the end of the month (prices bottomed in early 2012). This increase in inventory should slow price increases, and might lead to price declines in some areas.

Black Knight (formerly LPS): House Price Index up 0.9% in April, Up 6.4% year-over-year -- Notes: I follow several house price indexes (Case-Shiller, CoreLogic, Black Knight (formerly LPS), Zillow, FHFA, FNC and more). 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 0.9 Percent for the Month; Up 6.4 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 increases have been getting steadily smaller for the last 7 months - as shown in the table below: The LPS HPI is off 12.0% from the peak in June 2006. Note: The press release has data for the 20 largest states, and 40 MSAs.

Case-Shiller: Comp 20 House Prices increased 10.8% year-over-year in April - S&P/Case-Shiller released the monthly Home Price Indices for April ("April" is a 3 month average of February, March and April prices).This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities).. From S&P: Rate of Home Price Gains Drop Sharply, According to the S&P/Case-Shiller Home Price Indices Data through April 2014, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices ... show that the 10-City and 20-City Composites posted annual gains of 10.8%. This is a significantly lower rate when compared to last month. Nineteen of the 20 cities saw lower annual gains in April than in March. The 10-City and 20-City Composites increased 1.0% and 1.1% in April. Seven cities – Cleveland, Las Vegas, Los Angeles, Miami, Phoenix, San Diego and San Francisco – reported lower returns than in March. ...  In April, all cities saw prices increase with twelve cities reporting higher returns than last month. Boston gained the most with an increase of 2.9%, its highest month-over-month gain. San Francisco and Seattle trailed at +2.3%. At the bottom of the list, New York gained only 0.1%. Dallas and Denver continue to set new peaks while Detroit remains the only city below its January 2000.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 17.8% from the peak, and unchanged in April (SA). The Composite 10 is up 24.4% from the post bubble low set in Jan 2012 (SA). The Composite 20 index is off 16.9% from the peak, and up 0.2% (SA) in April. The Composite 20 is up 25.2% from the post-bubble low set in Jan 2012 (SA). The second graph shows the Year over year change in both indices. value.

Housing Prices Are Rising Like Crazy Across the Country -- First the forest: The S&P/Case-Shiller Home Price Index, with data just released for April, continues to climb at a double-digit rate. Prices for the index, which aggregates 20 metro areas around the country, rose 10.8% year-over-year. That’s a slight slowdown from last month’s 11.5% year-over-year increase, but it’s still quite a strong showing. On a monthly basis, prices rose 0.2% on a seasonally adjusted basis. Keep in mind that it’s important to tweak this data for seasonality, since home sales typically peak in the spring and summer. The quality of those sales seems to be improving too—a recent report from the National Association of Realtors noted that foreclosures and short sales accounted for 11 percent of all home sales in May, compared with 18 percent of all home sales for the same month a year ago.  Now the trees: It’s possible to think of the housing market as three separate layers of activity: highly speculative cities, cities that were never really prey to the housing bubble in the first place, and cities in-between, that have seen a boom and bust, but at a relatively moderate pace. The highly speculative cities (think Las Vegas, Phoenix, Miami) continue to show blazing recovery, though at a more moderate pace than formerly. David M. Blitzer, the chairman of the committee that issues the Case-Shiller Indexes, stated in a release that “last year some Sunbelt cities were seeing year-over-year numbers close to 30%.” Arguably, the current data is still quite good—year-over-year, Vegas is up 18.8%, Miami up 14.7%, and Phoenix up 9.8%.

Case-Shiller Index Has Slowest Annual Home Price Increase In A Year - There is a reason why Case-Shiller titled its summary presentation of the April housing market based on its 20-City Composite index "Rate of Home Price Gains Drop Sharply." The reason is simple: in April the housing market, while still preserving some upward momentum, appears to stumbled severely in April, with the Y/Y increase in the 20-City composite rising "only" 10.8%, down from 12.37% the month before, and the lowest annual increase since April of 2013. And this time there is no snow to blame it on.

Slower home price increases in the US - A quick note on home price appreciation in the US. Prices are now rising at less than 6% per year and the pace is slowing. That’s a good thing - we want to avoid the affordability collapse taking place in the UK or France. In fact US home prices are still rising faster than homeowners’ expectations. The long-term housing price increases should be in line with wages. And we all know where that is.  Shiller likes the slower price increase: (video)

Rise in Home Prices Is Slowing, and That’s a Good Thing -- The latest readings on United States home prices are the latest confirmation of a slowdown in that area: Prices are still rising in most cities, but much more slowly than they were a few months ago. And that’s news we should cheer. The S&P/Case-Shiller index of home prices in 20 major cities rose 0.2 percent in April, down from 1.2 percent in March and well below the 0.8 percent that analysts forecast. Over the last year, prices have risen 10.8 percent, compared with a 13.7 percent gain in the year ended in November, the recent peak. A second report on home prices out Tuesday, from the Federal Housing Finance Agency, showed the same pattern.  Just two years ago, buying a home looked to be a screaming bargain across most of the country. But the gains in home prices since then have made it a much closer call, as we reported last month. Jed Kolko, the chief economist of Trulia, writes Tuesday that national home prices are only 3 percent undervalued relative to long-term fundamentals, and that a handful of markets, particularly in Southern California, are now significantly overvalued.This doesn’t mean that a bubble on the order of 2006 has returned, only that buyers in some of those higher-priced markets should be wary and consider renting a home instead if they are on the fence. “Orange County, today’s frothiest market,” writes Mr. Kolko, “is just 17 percent overvalued now versus being 71 percent overvalued” at the start of 2006.

House Prices: Real Prices and Price-to-Rent Ratio decline slightly in April - I've been expecting a slowdown in year-over-year prices as "For Sale" inventory increases, and it appears the slowdown has started.   The Case-Shiller Composite 20 index was up 10.8% year-over-year in April; the smallest year-over-year increase since early 2013.   Still, this is a very strong year-over-year change.On a seasonally adjusted monthly basis, the Case-Shiller Composite 20 index was up 0.2% in April - and the Composite 10 was close to unchanged - the smallest monthly increase since prices bottomed in early 2012.On a real basis (inflation adjusted), prices actually declined slightly for the first time since 2012.  The price-rent ratio also declined slightly in April for the Case-Shiller Composite 20 index. It is important to look at prices in real terms (inflation adjusted).  Case-Shiller, CoreLogic and others report nominal house prices.  As an example, if a house price was $200,000 in January 2000, the price would be close to $278,000 today adjusted for inflation (39%).  That is why the second graph below is important - this shows "real" prices (adjusted for inflation). In nominal terms, the Case-Shiller National index (SA) is back to mid-2004 levels (and also back up to Q2 2008), and the Case-Shiller Composite 20 Index (SA) is back to November 2004 levels, and the CoreLogic index (NSA) is back to December 2004. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q4 2001 levels, the Composite 20 index is back to August 2002, and the CoreLogic index back to December 2002. In real terms, house prices are back to early '00s levels.

Housing Inflation Monster Is ALIVE!!! World's Worst Housing Indicator Misleads Again! -- The recent report that the US housing inflation bubble has slowed is just another case of the pundits and the media running with bad data, in this case the worst housing indicator in the world, the Case Shiller Index. Every month I’m obligated upon the release of Case Shiller to correct the record. This index reports the 3 month average price of officially recorded sale prices at county courthouses. Here at the end of June, that’s data for February, March, and April, in other words the average price for the period with a time mid point of mid March. Since sales typically take about 45-60 days to close, the Case Shiller Index represents the average contract price for somewhere around mid to late February. It is now late June.  Remind me again why a 3 month average house price in February is relevant now? Based on the Case Chiller reporting “just” a 10.8% annual gain in (ahem cough cough) “April” the Wall Street captured media concluded that house price gains had slowed. That was based on the consensus guesstimate of Wall Street conomists for a “gain” of 11.6%. They call these increases “gains.” I call them “inflation.” But the government doesn’t count house prices in the CPI, and the standard conomic definition of inflation treats any asset prices as if they don’t exist. Inflation is conventionally defined as consumer prices. So if you define inflation to exclude that which is inflating, and furthermore even refuse to count ordinary things like house prices, then yes, there is no inflation. And hey, who doesn’t like “gains,” especially when it comes to the “value” of your house! But I digress. The 10.8% housing inflation rate Case Shiller reported represented the 3 month average contract price in February. Meanwhile indicators that are closer to real time tell a different story. Closed sale prices collected by Corelogic for April showed a 2.1% month to month gain. Contract prices showed a 1% gain, suggesting that May closed sale prices will be up by that amount.

Zillow: Case-Shiller House Price Index expected to slow further year-over-year in May - The Case-Shiller house price indexes for April were released Tuesday. Zillow has started forecasting Case-Shiller a month early - and I like to check the Zillow forecasts since they have been pretty close.   From Zillow: Case-Shiller Indices Will Continue to Show More Marked Slowdowns The Case-Shiller data for April 2014 came out this morning (research brief here), and based on this information and the May 2014 Zillow Home Value Index (ZHVI, released June 22), we predict that next month’s Case-Shiller data (May 2014) will show that the non-seasonally adjusted (NSA) 20-City Composite Home Price Index and the NSA 10-City Composite Home Price Index increased by 9.6 percent and 9.7 percent on a year-over-year basis, respectively. The seasonally adjusted (SA) month-over-month change from April to May will be 0.4 percent for both the 20-City Composite Index and the 10-City Composite Home Price Index (SA). All forecasts are shown in the table below. Officially, the Case-Shiller Composite Home Price Indices for May will not be released until Tuesday, July 29. So the Case-Shiller index will probably show another strong year-over-year gain in May, but lower than in April (10.8% year-over-year).

Existing Home Sales in May: 4.89 million SAAR, Inventory up 6.0% Year-over-year -- The NAR reports: Existing-Home Sales Heat Up in May, Inventory Levels Continue to Improve Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 4.9 percent to a seasonally adjusted annual rate of 4.89 million in May from an upwardly-revised 4.66 million in April, but remain 5.0 percent below the 5.15 million-unit level in May 2013. ... Total housing inventory at the end of May climbed 2.2 percent to 2.28 million existing homes available for sale, which represents a 5.6-month supply at the current sales pace, down slightly from 5.7 months in April. Unsold inventory is 6.0 percent higher than a year ago, when there were 2.15 million existing homes available for sale.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in May (4.89 million SAAR) were 4.9% higher than last month, but were 5.0% below the May 2013 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 2.28 million in May from 2.23 million in April. Inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer. The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Despite YoY Existing Home Sales Dropping 7th Month In A Row, Realtors Declare Sales Decline Is Over - Existing Home Sales beat expectations by the most in 11 months at 4.89 million annualized. This headline print is being greeted with exuberance as NAR declares "the sale decline is over." However, this is the 7th month in a row of year-over-year declines and the gains are anything but broad-based with the Midwest and South being the biggest driver as the West stagnates. The percent share of first-time buyers continued to underperform, representing less than one- third of all buyers at 27% in May, down from 29% in April (hovering near record lows). Not exactly the organic, non-flip-dat-house wealth building transmission mechanism the Fed is hoping to build the US 'recovery' on.

May existing home sales and the housing cycle - As Bill McBride a/k/a Calculated Risk has pointed out, mortgage rates are now lower than they were one month ago. While I expect that to lead to improvement in the housing market, I don't expect any sudden new surge in sales. The reason is shown in this first graph: This graph shows the YoY% change in mortgage rates (red) vs. the actual conventional mortgage rate (blue). While the YoY number has turned lower (and therefore positive for borrowers), the absolute number is still almost 1% higher than its post-recession lows. Simply put, even with this YoY improvement, there is still a certain pool of potential buyers who could afford a mortgage at their lowest rates, who can't afford a mortgage now. That helps put today's report on existing home sales in perspective. Here's the YoY% change in interest rates (scaled*10 for easier viewing) vs. the YoY% change in existing home sales: Although the relationship is somewhat noisy, it is easy to see that sales follow interest rates. During the housing bubble, the turn is sales was delayed, but when it turned, it turned more deeply. Thus the turn in rates suggests that housing sales will turn positive YoY in about the next 6 months. Although sales were YoY negative for the 5th straight month, prices and inventory have continued to rise. This next graph shows YoY sales (blue), compared with prices (red), and inventory (green): As I pointed out last week, prices lead inventory. HIgher prices bring out more inventory; lower prices cause potential sellers to hold back. The above graph adds the information that sales lead prices. The more sales increase (decrease), the higher (lower) prices go.  Finally, let's take a look at all four data series, graphed for the last 2 years (I didn't include a longer time scale because it would be too noisy).  This graph shows mortgage rates (inverted, bright red), sales  (blue), prices  (maroon), and inventory (green).

Comments on Existing Home Sales -- The two key numbers in the existing home sales report right now are: 1) inventory, and 2) the percent of distressed sales. The most important number in the report each month is inventory.   This morning the NAR reported that inventory was up 6.0% year-over-year in May.   This is a smaller increase than other sources suggest, and it is important to note that the NAR inventory data is "noisy" (and difficult to forecast based on other data).  A few other points:
• The headline NAR inventory number is NOT seasonally adjusted (and there is a clear seasonal pattern).
• Inventory is still very low, and with the low level of inventory, there is still upward pressure on prices.
• I expect inventory to increase in 2014, and I expect the year-over-year increase to be in the 10% to 15% range by the end of 2014 (maybe even higher).
The NAR does not seasonally adjust inventory, even though there is a clear seasonal pattern. Trulia chief economist Jed Kolko sent me the seasonally adjusted inventory. This shows that inventory bottomed in January 2013 (on a seasonally adjusted basis), and inventory is now up about 9.4% from the bottom. On a seasonally adjusted basis, inventory was up slightly in May compared to April.Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, many "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. Another key point: The NAR reported total sales were down 5.0% from May 2013, but normal equity sales were probably up from May 2013, and distressed sales down sharply.  The NAR reported that 11% of sales were distressed in May (from a survey that is far from perfect):

Seeing the Less Distressing Side of Existing Home Sales -- The pace of home sales is off sharply from a year ago, but strip away “distressed” sales–foreclosures and short sales–and the picture looks much brighter. Existing-home sales rose 4.9% in May to a seasonally-adjusted annual rate of 4.89 million, the National Association of Realtors said on Monday. That’s less than the 5.15 million pace in May 2013, but “the drop in distressed sales makes it harder to see the real trend,” says Jed Kolko, chief economist for Trulia. Distressed sales accounted for 11% of all sales in May, down seven percentage points in the past year, according to the National Association of Realtors. Such sales peaked at 49% of all sales in March 2009, the association said.  Excluding distressed properties, sales in May were 3% above the May 2013 level, says Kolko. In May, foreclosures on average sold at a discount of 18% to market value, according to NAR. Short sales sold at an 11% discount. To be sure, part of the drop in distressed sales might be for bad reasons. Because of the expiration of a key tax break, some underwater homeowners might be hanging on to homes that they’d rather unload in a short sale.

Guess Who Is Propping Up The US Housing Market -- Moments ago the NAR released its May data, which on first blush was widely lauded as bullish: the topline print came at a 4.9% increase, rising from 4.65MM to 4.89MM, above the 4.74MM expected. Great news... if only on the surface. So what happens when one drills down into the detail? As usual, we focused on the last slide of the NAR breakdown, located at the very end of the supplementary pdf for good reason, because what it shows is hardly as bullish. So how does this "housing recovery" in which the NAR has proclaimed the "sales decline is over" look on a granular basis. The answer is below, and it is even worse than the April data. Needless to say, what the chart showed was the symptomatic, and schizophrenic, breakdown of US housing into two camps: the housing market for the 1%, those costing $750K and above, where the bulk of transactions are mostly between non-first time buyers, and typically take place as all cash transactions, and the market for "everyone else" which continues to deteriorate.It also explains why first time buyers have dropped to even further cycle lows of just 27%, down from 29% both a month and year ago.

Housing Market Falters Amid Rising Prices, Lower-Paying Jobs - The two-year-old U.S. housing recovery is faltering. The Mortgage Bankers Association yesterday lowered its forecast for combined new and existing home sales in 2014 to 5.28 million -- a decline of 4.1 percent that would be the first annual drop in four years. The group also cut its prediction on mortgage lending volume for purchases to $595 billion, an 8.7 percent decrease and the first retreat in three years. Bullish forecasts in early 2014 from MBA,Fannie Mae and Freddie Mac have been sideswiped by rising home prices and an economy that isn’t producing higher paying jobs. The share of Americans who said they planned to buy a home in the next six months plunged to 4.9 percent last month from 7.4 percent at the end of 2013, the highest in records going back to 1964, according to the Conference Board, a research firm in New York. “The big housing rally wiped itself out because prices increased too quickly for buyers to keep up,” The pool of eligible new buyers is collapsing” because of stagnant incomes and lack of credit, The best-qualified homebuyers jumped into the market last year to grab near-record low mortgage rates that averaged about 3.5 percent after delaying their moving plans during the housing slump

When Will New Home Sales Pick Up? - If Monday’s home-sales report showed how a rough winter was partly to blame for a slow spring start, Tuesday’s report on new home sales may provide new clues to an even more important question: Can housing pass the baton from investors to owner-occupants this year? Monday’s report on existing home sales provided some evidence that housing was shaking off a tough winter. Sales jumped 4.9% to a seasonally adjusted annual pace of 4.89 million in May, though they were still running 5% below the levels of a year earlier, the National Association of Realtors reported. So far, existing home sales this year are running above their levels of 2010-12, but below their levels of 2013. For much of the past three years, housing has been buoyed by investors buying up cheap homes, especially foreclosures. Housing revved up briskly in 2012 as low mortgage rates unleashed pent-up demand, sending traditional buyers into bidding wars with investors as they competed for a shrinking supply of homes. This may have given false signals about the true health of the demand side of the market. Sales—but not prices—cooled down after mortgage rates jumped last summer. Some big investors stepped back, too, as rising prices made the buy-to-rent or buy-and-flip trades less appealing. The good news for housing is that the foreclosure pipeline continues to shrink. The number of homes entering the foreclosure process is at an eight-year low. Even though total sales are below their levels of a year earlier, much of the drop stems from big declines in distressed sales.

New Home Sales Surge By 18.6% In May, Now Only 63% Below Pre-Crisis Highs - While we will have much more to say about the price dynamics in the West in a follow up post, where the Western housing market appears to be appreciated right now is in the just released New Home Sales report, which showed that in May new home sales soared by a whopping 18.6%, orders of magnitude above the 1.4% increase expected, and resulting in some 504K new houses sold, far above the 439K expected, and certainly above the downward revised April print of 425K. What caused this surge? Simple: the West, which saw a 34% surge in new home sales, from 97K to 130K, the highest one month jump since February 2013.

New Home Sales increase sharply to 504,000 Annual Rate in May - The Census Bureau reports New Home Sales in May were at a seasonally adjusted annual rate (SAAR) of 504 thousand. April sales were revised down from 433 thousand to 425 thousand, and March sales were revised up from 407 thousand to 410 thousand. Sales of new single-family houses in May 2014 were at a seasonally adjusted annual rate of 504,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 18.6 percent above the revised April rate of 425,000 and is 16.9 percent above the May 2013 estimate of 431,000. Click on graph for larger image. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. This is the highest sales rate since May 2008. Even with the increase in sales over the previous two years, new home sales are still just above the bottom for previous recessions. The second graph shows New Home Months of Supply. The months of supply decreased in May to 4.5 months from 5.3 months in April. The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal). "The seasonally adjusted estimate of new houses for sale at the end of May was 189,000. This represents a supply of 4.5 months at the current sales rate."

New home sales: mortgage now or be forever priced out?: New single family home sales reported this morning were a blowout. There's no doubt about that. Just take a look at the raw regional numbers from the Census Bureau. On both a monthly and a YoY basis, there were *extremely* sharp increases in 3 out of 4 regions. So what happened to the housing slowdown? Actually I think it is still here, although with mortgage rates lower YoY I expect it to abate (not completely) by the end of the year. Two months ago, new home sales for March were reported as the worst new home sales report in two years: ... plunging -14% from February, down to 384,000. Flash forward to today, and March has been revised upward by 26,000, or nearly +7%, to 410,000. The simple fact is that new home sales are quite volatile month to month. So are housing starts. The least volatile of the three similar indicators is housing permits. Here's a graph of permits for single family homes (blue), new home sales (red), and housing starts for single family homes (green) normed to 100 as of January 2013: It's easy to see how comparatively volatile both starts and new home sales are. While permits for single family homes increased significantly in May, it wasn't nearly so much of an increase as sales. So a substantial revision of this month's number wouldn't be a surprise at all. Secondly, in May,mortgage rates were at their lowest levels since June of last year, and down almost half a percent since the beginning of the year:

Baby Boomers Aren’t (Yet) Downsizing in Droves - There’s a popular perception that housing inventory could surge in the coming years as the Baby Boom generation — those born between 1946 and 1964 — downsizes, trading in larger single-family homes for urban condos. But two reports suggest that such downsizing has yet to materialize and that it may not happen, at least not to the extent that many have assumed. The idea behind the downsizing theory is simple enough: It assumes that as the boomers’ children graduate from college and move out, they’ll no longer “have a need for the abundant living space, quality schools, and other amenities typically associated with single-family suburban residency,” And the Fannie analysis of Census Bureau data finds that, sure enough, the boomers are becoming empty-nesters “in droves,” as the proportion of the oldest half of the boomer households that have a married couple with at least one child under age 18 declined to 3% in 2012 from 10% in 2006. The trend holds for younger boomers, too, with the rate dropping to 20% in 2012 from 35% in 2006.The Fannie analysis also shows a similar trend when it comes to boomers’ participation in the workforce. The share of Boomers who weren’t in the labor force, meaning they were neither working nor looking for work, increased by 9 percentage points, with an even bigger jump for the oldest half of the boomer cohort. But while their households are shrinking and they are working less, boomers were just as likely to be living in detached single-family housing in 2012, the most recent year for which data is available, as they were in 2006.

Rental home shortage is America's next housing crisis - The US is facing a new housing crisis. No, it has nothing to do with subprime mortgages or bloated home equity balances. This time the nation is dealing with shortages of rental housing, a problem that will become increasingly acute in years to come and may result in a material drag on economic growth. Americans are simply not building enough homes to accommodate the population's needs. The number of housing units completed per capita in the United States remains a fraction of historical averages. The slight improvements from the lows of 2011 have barely scratched the surface. Similarly, in spite of recent increases, residential construction spending as a fraction of the GDP remains at the lowest levels than at any time since WWII. At the same time demand has been on the rise. As an indicator, the chart below shows Google search frequency for rent related phrases. The myth out there is that this problem is somehow limited to some of the coastal areas of the United States - NY, Florida, California, etc. It is not. Just take a look at the rental vacancy trend in the Midwest. The last point represents Q1, 2014 This shortage is of course is translating into rising costs of shelter across the country. The overall shelter CPI is headed toward 3% and the rate of just rental cost increases is even higher. It is materially above the overall CPI rate and expected to rise further. This trend, combined with massive amounts of student debt (see discussion) will be increasingly taking a bite out of consumer spending. The percentage of "housing cost burdened" households (those who spend more than 30% of their income on shelter) has been rising rapidly.

Census Bureau: Largest 5-year Population Cohort is now the "20 to 24" Age Group - As follow-up to my previous post, earlier today the Census Bureau released the population estimates by age for 2013: As the Nation Ages, Seven States Become Younger, Census Bureau Reports The median age declined in seven states between 2012 and 2013, including five in the Great Plains, according to U.S. Census Bureau estimates released today. In contrast, the median age for the U.S. as a whole ticked up from 37.5 years to 37.6 years. I think the headline should have been something like: Baby Boomers lose Title as Largest 5-Year Cohort! Note: This is a positive for apartments, see: The Favorable Demographics for Apartments and Apartments: Supply and Demand The table below shows the top 11 cohorts by size for 2010, 2013 (released today), and Census Bureau projections for 2020 and 2030.  As I noted earlier, by 202 8 of the top 10 cohorts will be  under 40 (the Boomers will be fading away), and by 2030 the top 11 cohorts will be the youngest 11 cohorts (the reason I included 11 cohorts). As the graph in the previous post indicated, even without the financial crisis we would have expected some slowdown in growth this decade (just based on demographics).  The good news is that will change soon.  There will be plenty of "gray hairs" walking around in 2020 and 2030, but the key for the economy is the population in the prime working age will be increasing again soon.

After years of contraction, credit card balances at large US banks are starting to rise - The pace of US consumer credit expansion remains brisk. A quick look at consumer loan balances at large US commercial banks shows a spike that started in February of this year.  It is useful to look at the breakdown of this growth. As discussed earlier (see post), we know that auto loans have been the darling of large US banks, particularly as mortgage refinancing slowed. The steady growth in auto finance at these institutions continues. But auto loans only partially explain the spike in consumer finance in recent months. The other component of consumer finance on banks' balance sheets is revolving credit, which is mostly credit cards. In late March of this year, credit card debt balances at large US banks have bottomed - after years of declines. With credit card and auto finance both expanding now, the overall US consumer credit expansion has accelerated.

Last Time Lenders Did This, They Triggered The Financial Crisis: During the first quarter, 3.7 million credit cards were issued to subprime borrowers, up a head-scratching 39% from a year earlier, and the most since 2008. A third of all cards issued were subprime, also the most since 2008, according to Equifax. That was the glorious year when “subprime” transitioned from industry jargon to common word. It had become an essential component of the Financial Crisis. As before, subprime borrowers pay usurious rates. These are people who think they have no other options, or who have trouble reading the promo details, or who simply don’t care as long as they get the money. In the first quarter, the average rate was 21.1%, up from 20.2% a year ago, while prime borrowers paid an average of 12.9% on their credit cards, and while banks that are lending them the money paid nearly 0%. These usurious rates and the fees that are artfully tacked on to the bill at every remotely possible occasion make it nearly impossible that the borrowers can ever pay off their credit cards. They’ll just keep paying the minimum payment, while balances balloon. And they’ll balloon even if the holder no longer charges to the card. Subprime credit cards are there to be maxed out, and the only thing that keeps these folks out of trouble is getting more cards, juggling cards, transferring balances, taking out cash advances on one card to make the minimum payments on the others.... Banks play along, whipped into a frenzy by the sweet smell of usury. Their credit-card promos are once again clogging up mailboxes around the country, and profits on these cards soar, and everyone is happy – banks, borrowers, and of course the American economy that thirstily laps up borrowed money.

No, Business Insider, consumer credit is not a leading indicator - I think I am going to have to start a list of rules called How to Spot Crappy Economic Analysis on the Internet.  One such rule would be "Ignore any analysis that only includes a chart going back one recession." Regrettably, Joe Weisenthal of Business Insider is the prime example of this type of crappy analysis this week, and even more regrettably, his crappy analysis got favorable treatment by my friend Jeff Miller of a Dash of Insight. On Friday, Weisenthal highlighted the recent acceleration in bank lending to consumers as the "best news of the week" because "The total amount of loans and leases held at commercial banks in the United States just hit yet another post-crisis high," citing this graph: He then went on to say that "More exciting, perhaps, is the year-over-year change in the amount of total credit," and provided this graph of the YoY% change in consumer credit: This analysis is so bad, it is even contradicted right within the first graph above. Take a look at when the prior peak was, and the time period of the upward trend to that peak. Weisenthal's graph shows that consumer credit grew for almost a year into the worst recession in the last 75 years, and peaked in the middle of that recession. Furthermore, it continued to decline for more than two years after the recession ended. Wow! Some forward-looking indicator, huh? But, in reference to my rule, let's take a look at what the long-term graphs of bank loans for consumer credit, going back over 40 years, show. Here's Joe's first graph extended back 40 years (log scale to better show the trend): This graph shows that bank loans for consumer credit have risen into every single recession in the last 40 years, and remained flat for a period after the recession ended.Looking at the same data YoY, as Joe's second graph does, make the lagging pattern even more clear:

FEDS Notes: Deleveraging: Is it over and what was it?: Anyone who has followed the commentary on consumer spending in recent years has heard a lot about household deleveraging. In my opinion, much of the deleveraging talk shifts the focus from spending to debt without adding much new on what is driving household behavior. Yet, there are some aspects of debt that I do think economists' models of consumption often miss. Economists generally think of debt (or savings) as a way to move consumption from one point in time to another, but it is not so simple in an uncertain world. Leverage amplifies shocks (good and bad). If you buy a house with little money down and then house prices rise rapidly, your "return on investment" is great. If you do the same thing and house prices suddenly drop or worse you lose your job, it is a financial disaster. As these two examples illustrate, leverage (or debt) is not always bad, but it can magnify shocks. The rest of this post summarizes three new research papers that shed a bit more light on deleveraging. When will deleveraging be over?

Personal Income increased 0.4% in May, Spending increased 0.2% - The BEA released the Personal Income and Outlays report for May: Personal income increased $58.8 billion, or 0.4 percent ... in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $18.3 billion, or 0.2 percent....Real PCE -- PCE adjusted to remove price changes -- decreased 0.1 percent in May, compared with a decrease of 0.2 percent in April. ... The price index for PCE increased 0.2 percent in May, the same increase as in April. The PCE price index, excluding food and energy, increased 0.2 percent in May, the same increase as in April. ... The May price index for PCE increased 1.8 percent from May a year ago. The May PCE price index, excluding food and energy, increased 1.5 percent from May a year ago. The following graph shows real Personal Consumption Expenditures (PCE) through May 2014 (2009 dollars). The dashed red lines are the quarterly levels for real PCE. Note: Usually the two-month and mid-month methods can be used to estimate PCE growth for the quarter (using the first two months and mid-month of the quarter). However this isn't very effective if there was an "event", and in Q1 PCE was especially weak in January and February - and then surged in March. Still, using the two-month method to estimate Q2 PCE growth, PCE was increasing at a 2.3% annual rate in Q2 2014 (using the mid-month method, PCE was increasing less than 1.5%). Since the comparison to March will be difficult, it appears PCE growth will be below 2% in Q2 (another weak quarter).

Consumer Spending Weaker Than Expected, Autos Still Holding Up; What About Housing? - Curve Watcher's Anonymous has its eye on the yield curve following a disappointing (to those who believe consumption drives the economy) consumer spending report. Let's start with a look at the department of commerce spending report on Personal Income and Outlays.

  • Personal income increased $58.8 billion, 0.4 percent in May.
  • In April, personal income increased $49.9 billion, or 0.3 percent.
  • Real DPI increased 0.2 percent in May, the same increase as in April.
  • Disposable personal income (DPI) increased $55.6 billion, 0.4 percent, in May.
  • Personal consumption expenditures (PCE) increased $18.3 billion, 0.2 percent in May.
  • DPI increased $50.8 billion, or 0.4 percent.
  • PCE increased $2.3 billion, or less than 0.1 percent, based on revised estimates.
  • Real PCE - adjusted to remove price changes - decreased 0.1 percent in May, compared with a decrease of 0.2 percent in April.
  • Purchases of durable goods increased 1.0 percent, in contrast to a decrease of 0.9 percent in April.
  • Purchases of motor vehicles and parts accounted for more than half of the [durable goods] increase in May, and more than accounted for the decrease in April.
  • Purchases of nondurable goods decreased 0.3 percent in May, compared with a decrease of 0.1 percent in April.
  • Purchases of services decreased 0.2 percent, compared with a decrease of 0.1 percent.

What Consumer Comeback? Personal Spending Disappoints For Two Out Of Three Months In Q2 -- When "justifying" the abysmal Q1 GDP print, one after another economist has scrambled to explain that this number is irrelevant, due to a spending halt during the "harsh winter", following which the US consumer has been spending like mad in Q2, and the PCE, which in Q1 was an abysmal 1.0%, and the worst since 2009, is set for a major rebound. Well, guess what: after last month's huge miss (originally -0.1% now revised to 0.0%, on expectations of a 0.2% rise), the month of May - the second month of Q2 - just showed that US consumer still refuses to spend. In fact, while personal income came in line with expectations in the month of May, rising 0.4%, same as expected, and disposable income in current dollars rising by $56 billion to $12,877 billion, it was spending which missed for the second month in a row and the 4th miss in the past 6 months rising only 0.2%, half the expected 0.4%! This was the fourth spending miss in the past six months.

Mid-cycle consumer spending shift continues: Early in economic expansions, YoY real retail sales growth far outstrips YoY PCE growth. As the economy wanes into contraction, YoY real retail sales grow less and ultimately contract more than YoY. Retail sales minus PCE's are always negative BEFORE the economy ever tips into recession. That's 11 of 11 times. Further, in 10 of those 11 times (1957 being the noteworthy exception), the number was not just negative, but was continuing to decline for a significant period before we tipped into recession. This makes perfect sense, as retail sales generally include many far more discretionary purchases. As the economy accelerates, consumers make more discretionary purchases. As it slows, the more discretionary retail purchases are the first things cut. Here's the update based on yesterday's personal spending report: It appears that the mid-expansion transition is taking place this year, similarly to 2005 in the last expansion.

The Latest on Real Disposable Income Per Capita: With this morning's release of the May 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 May nominal 0.40% month-over-month increase shrinks to 0.17% when we adjust for inflation. The year-over-year metrics are 3.54% nominal and 1.74% 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 58.2% since then. But the real purchasing power of those dollars is up only 19.7%.

Paul Krugman on Savings, Investment, and the Trade Balance - Dean Baker - Paul Krugman may have misled readers of his blog yesterday with the comment: "the trade balance is a macroeconomic phenomenon, determined by the excess of savings over investment." As an accounting identity the trade deficit is equal to the excess of national investment over national savings. However it would be wrong to conclude that the U.S. trade deficit is caused by our failure to save enough, especially in the current context where the economy is well below its potential level of output. When considering these accounting identities it is important to keep the stories on causation straight, otherwise you get some really bad policies. Paul Krugman of course knows this and has made the same point many times (here for example), but we must work hard to prevent confusion on the topic.

Consumer Confidence Surges To Highest Since Jan 08; Under-35s At Lowest In 2014 - The American consumer has not been as confident as this since January 2008... can you feel the confidence? The reaching for credit, the spending beyond your means; what could go wrong? Oddly, despite the exuberance, fewer people expect an increase in income (borrow or charge we assume?). The biggest driver of this confidence appears to be the spike from 79.7 to 99.5 in the Pacific region's confidence... but plunged in the Mountain and Central regions. Only 26.7% believe stocks can fall from here - near the lowest since 2009. Furthermore, those aged under-35 saw confidence plunge to 2014 lows.

Consumer Confidence Highest Since January 2008 -  The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through June 13. The headline number of 85.2 was an improvement over the revised May final reading of 82.2, a downward revision from 83.0. Today's number beat the forecast of 83.5. The current level is the highest since January 2008. Here is an excerpt from the Conference Board press release. “Consumer confidence continues to advance and the index is now at its highest level since January 2008 (87.3). June’s increase was driven primarily by improving current conditions, particularly consumers’ assessment of business conditions. Expectations regarding the short-term outlook for the economy and jobs were moderately more favorable, while income expectations were a bit mixed. Still, the momentum going forward remains quite positive.” Consumers’ appraisal of current conditions improved in June. Those claiming business conditions are “good” increased to 23.0 percent from 21.1 percent, while those stating business conditions are “bad” decreased to 22.8 percent from 24.6 percent. Consumers’ assessment of the job market was also more favorable. Those stating jobs are “plentiful” edged up to 14.7 percent from 14.2 percent, while those claiming jobs are “hard to get” declined to 31.8 percent from 32.2 percent.  Consumers were more positive about the outlook for the labor market. Those anticipating more jobs in the months ahead increased to 16.3 percent from 15.2 percent, while those anticipating fewer jobs edged down to 18.7 percent from 18.9 percent. Fewer consumers expect their incomes to grow, 15.9 percent versus 18.0 percent, but those expecting a drop in their incomes also declined, to 12.1 percent from 14.5 percent.

Final June 2014 Michigan Consumer Sentiment Shows a Small Improvement - The final University of Michigan Consumer Sentiment for June came in at 82.5, a small improvement over the May final of 81.9. Today's number came in slightly above the forecast of 82.2.  See the chart below for a long-term perspective on this widely watched indicator. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.  To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now 3 percent below the average reading (arithmetic mean) and 2 percent below the geometric mean. The current index level is at the 40th percentile of the 438 monthly data points in this series. The Michigan average since its inception is 85.1. During non-recessionary years the average is 87.4. The average during the five recessions is 69.3. So the latest sentiment number puts us 13.2 points above the average recession mindset and 4.9 points below the non-recession average. Note that this indicator is somewhat volatile with a 3.1 point absolute average monthly change. The latest 0.6 point change is not statistically significant. For a visual sense of the volatility, here is a chart with the monthly data and a three-month moving average.

Beating Expectations, Michigan Survey Finds Consumers Upbeat - U.S. consumers are less worried about the economy as June draws to a close, according to one survey of households released Friday. The Thomson-Reuters/University of Michigan final June sentiment index increased to 82.5 from an unexpectedly weak preliminary reading of 81.2 and a final-May reading of 81.9, according to an economist who has seen the numbers. The end-June reading is better than the 81.9 reading expected by economists surveyed by The Wall Street Journal but still below the recent high of 84.1 posted for April. This month’s final current conditions index advanced to 96.6 from an early-June reading of 95.4. The expectations index rose to 73.5 from 72.2. According to Friday’s sentiment readings, along with Tuesday’s Conference Board confidence index, households are feeling better about the economy and labor markets. Still, that view is not translating to faster spending. Real consumer spending in May fell 0.1%. One reason is that more money is going to paying for costlier staples such as gasoline and food.

And Now, What The Consumer Really Thinks: Gallup Poll Finds Confidence Tumbles To 2014 Lows -- With stocks at record-er and record-er highs, TPTB must be confused as as to how confused the American public is. While 'government' data showed confidence at Jan 08 highs, Gallup's latest survey shows, only one in five Americans (22%) say the economy is excellent or good, while 34% say it is poor; and worse still, Americans continue to be less optimistic about the economy's future - 38% say the economy is getting better, while 58% say it is getting worse - the worst differential since 2013. Gallup's U.S. Economic Confidence Index lost another point last week, the third week in a row, dropping to its lowest in over 2 months. The bottom line, sadly, is that in spit of all the sound and fury, Americans may not have shifted much in their perceptions of the economy's current status, but over the past month, they have become more negative about the economy's future.

Social Media Advertising A Dud: 62% Of Americans Say "Social" Ads Have No Impact On Purchasing Decisions -- One of the great "paradigms" of the New Normal tech bubble that supposedly differentiated it from dot com bubble 1.0 was that this time it was different, at least when it came to advertising revenues. The mantra went that unlike traditional web-based banner advertising which has been in secular decline over the past decade, social media ad spending - which the bulk of new tech company stalwarts swear is the source of virtually unlimited upside growth - was far more engaging, and generated far greater returns and better results for those spending billions in ad bucks on the new "social-networked" generation. Sadly, this time was not different after all, and this "paradigm" has also turned out to be one big pipe dream. According to the WSJ, citing Gallup, "62% of the more than 18,000 U.S. consumers it polled said social media had no influence on their buying decisions.

Americans Still Aren’t Saving for a Rainy Day -- Families in the U.S. still don’t have a substantial amount of cash tucked away for a rainy day despite the beating the economy took in the Great Recession, according to a new survey. The Financial Security Index from shows half of American families have no savings or less than three month’s worth of expenses saved for emergencies. The survey’s findings, analysts note, haven’t changed since 2011, when the company first began inquiring about the saving habits of American families. “Americans continue to show a stunning lack of progress in accumulating sufficient emergency savings,” Analysts say the recession—during which Americans lost about $16.4 trillion in household wealth by 2011—should have been a learning experience, but the struggle of juggling household expenses has left many without extra funds to put away. Not all Americans are failing to save. About 23% of those surveyed have savings that will last them six months or more in case of a financial emergency—the recommended stash amount. What’s more, the majority of those saving big have larger incomes, though only about 46% of those making $75,000 or more have over six months worth of expenses stored away.

Tourism Spending Drops; Summer Getaways Likely To Provide Boost - With the economy taking a sharp turn downward in the first three months of 2014, tourists in the U.S. kept their pocketbooks closed. Spending on travel and tourism decreased at a 1% annualized rate in the first quarter, adjusted for inflation and seasonal factors, the Commerce Department said Friday.The downturn  comes after a 4.5% gain the prior quarter and was the weakest figure since the last quarter of 2009, when tourism spending declined by 1.8%. The drop in tourism spending was less severe than that experienced in the overall economy, which contracted by 2.9% in the January-March period. The first quarter’s downturn in tourism spending was driven by a 11.2% decline in spending on recreation and entertainment as well as a 3.5% drop in spending on food and drinks. However, the quarter’s drop may be a temporary blip. In the Federal Reserve’s latest “Beige Book” summary of economic activity, the central bank said tourism “was steady to stronger across most of the country” – especially in the eastern states. Tourists in mid-Atlantic states appear eager to open their wallets, the Fed said in the June 4 report. Prolonged winter weather has “increased cabin fever and demand for summer getaways along the shore,” the Fed said. “In addition, some boat owners are bringing their boats back to the shore following recession belt-tightening.”

How Americans Spend Their Day: Less Work, More Sleep And TV  -- This week the BLS released its latest "American Time Use Survey" and unlike last year, this time we were not surprised to learn that not only are Americans far more preoccupied with sleeping and watching TV than working, but they have never slept more and worked less in the past decade. Perhaps in addition to obesity, the ongoing deterioration in the fundamentals of the US economy, already crushed by the Fed's central planning capital misallocation, may have something to do with this latest disturbing trend. Just perhaps. As John P. Robinson, a sociology professor at the University of Maryland, correctly observes,  "The data defies popular expectations. People say they're too busy for leisure and don't have time to sleep, but that seems not to be the case."

Inflation? Only If You Look At Food, Water, Gas, Electricity And Everything Else - Have you noticed that prices are going up rapidly?  If so, you are certainly not alone.  But Federal Reserve chair Janet Yellen, the Obama administration and the mainstream media would have us believe that inflation is completely under control and exactly where it should be.  Perhaps if the highly manipulated numbers that they quote us were real, everything would be fine.  But of course the way that the inflation rate is calculated has been changed more than 20 times since the 1970s, and at this point it bears so little relation to reality that it is essentially meaningless.  Anyone that has to regularly pay for food, water, gas, electricity or anything else knows that inflation is too high.  In fact, if inflation was calculated the same way that it was back in 1980, the inflation rate would be close to 10 percent right now.

Gasoline Price Update: Up Two Cents - 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 both up two cents. Prices have been hovering in a narrow range for the past seven weeks. Regular is up 51 cents and Premium 48 cents from their interim lows during the second week of last November. According to, Hawaii, Alaska and California have Regular above $4.00 per gallon, unchanged from last week, and five states (Washington, Oregon, Connecticut, New York, Illinois) and DC are averaging above $3.90, with DC being this week's addition. South Carolina has the cheapest Regular at $3.39. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's a visual answer.

Gas Prices Hit a High for 2014—but the News Isn’t All Bad -- According to the federal Energy Information Administration, as of Monday, the national average for a gallon of regular gasoline reached $3.70. That’s 13¢ higher than a year ago at this time, and it matches the previous high thus far in 2014, set in late April.  The bad news, beyond the obvious—you know, having to pay more to fill up and all—is that prices have been creeping upward just at a time the opposite was supposed to happen. The expectation was that gas prices would actually decrease in June, as they have in each of the past three years. The summer forecast from AAA called for a 10¢ to 15¢ per-gallon drop in prices at the pump this month, and predicted that the national average would remain in the vicinity of $3.55 to $3.70 through the summer. We’ve already hit the high end of the predicted price range long before anticipated—and gas prices have tended torise toward summer’s end in recent years.  That said, prices at the pump aren’t exactly spiking. Nationally, the per-gallon price is only up a few pennies compared to a week ago, or even a month ago for that matter. Still, because everybody was expecting a significant decline this month, drivers are justified in feeling like they’re paying a lot more than they should to gas up right now. Turmoil in Iraq is being blamed for the persistently high gas prices.

Gas Prices Hit Six-Year Seasonal High -- The national average price for regular unleaded gasoline has hit the highest price for early summer in six years, AAA has reported. Almost one month into the 2014 summer driving season, the national average has hit $3.68 per gallon. AAA noted that the average has bumped up for the past 12 consecutive days by a total of 4 cents per gallon (CPG), approaching 2014's current retail price peak of $3.70 per gallon, hit in late April. The current national average represents a 2-CPG increase from a week ago, 3 CPG greater than a month ago and 11 CPG vs. a year ago. The drivers' advocacy association cited a spike in global oil prices for the U.S. gas price increase; crude prices have risen because of concerns about violence spreading in Iraq toward its southern regions, where most of its oil production takes place. Iraq is the second-largest producer among members of the Organization of Petroleum Exporting Countries (OPEC). Previously, before the crisis in Iraq flared up, AAA had projected that the national gas price average would actually drop 10 to 15 CPG for the month of June. "This means that even though the national average has only increased a few cents per gallon since the Iraq violence intensified, drivers are likely to pay substantially higher gas prices than they would have otherwise," AAA's Michael Green said. Three states have seen gas prices of more than $4 per gallon for over a month: Hawaii (current state average is $4.34 per gallon), California ($4.15 average) and Alaska ($4.10 average). Meanwhile, AAA reported that prices have risen in 43 states and the District of Columbia vs. the previous week, with a 5-CPG or greater increase in 18 of them.

Gasoline price calculator - What do recent developments in Iraq imply for the price U.S. motorists should expect to pay for gasoline? For the last two years I’ve been using a simple summary of the long-run relation (sometimes described as a “cointegrating relation”) between the U.S. retail price of gasoline and the price of crude oil. The relation implies that a $10 increase in the price of a barrel of Brent crude oil is typically associated with a 25 cent increase in the average U.S. retail price of a gallon of gasoline. The relation only captures the long-run tendency, and leaves out seasonal factors that for example brought the price of gasoline temporarily lower this last winter. But since this spring U.S. gasoline prices have moved back in line with what you’d expect given the long-run fundamentals. Here’s a little calculator courtesy of Political Calculations that you can use to get the predicted gasoline price plotted in blue in the graph above. Just enter the current price of Brent to see the implied long-run gasoline price.

DOT: Vehicle Miles Driven increased 1.8% year-over-year in April - The Department of Transportation (DOT) reported: Travel on all roads and streets changed by 1.8% (4.6 billion vehicle miles) for April 2014 as compared with April 2013.  Travel for the month is estimated to be 254.9 billion vehicle miles. Cumulative Travel for 2014 changed by 0.0% (0.3 billion vehicle miles). The following graph shows the rolling 12 month total vehicle miles driven.  The rolling 12 month total is still mostly moving sideways ...

Vehicle Sales Forecasts: Over 16 Million SAAR again in June - The automakers will report June vehicle sales on Tuesday, July 1st.  Sales in May were at 16.71 million on a seasonally adjusted annual rate basis (SAAR), and it appears sales in June will be above 16 million (SAAR) again. Note: There were only 24 selling days in June this year compared to 26 last year.    Here are a few forecasts: From Wards Auto: Forecast Calls for Strong June SalesA new WardsAuto forecast calls for strong U.S. light-vehicle sales in June, with competition in the midsize car segment and healthy inventories across all segments fueling growth. ... The projected 16.4 million-unit seasonally adjusted annual rate would be less than May’s 87-month-high 16.7 million SAAR ... From J.D. Power: J.D. Power and LMC Automotive Report: New-Vehicle Sales Continue Year-over-Year Growth Total light-vehicle sales in June 2014 are expected to approach 1.4 million units, a 5 percent increase from June 2013. The pace of fleet volume growth continues to be lower than retail, with a 1 percent increase year over year, accounting for 19 percent of total sales in June. ... [16.3 million SAAR]From TrueCar: June SAAR to Hit 16.4 Million Vehicles, According to TrueCar; 2014 New Vehicle Sales Expected to be up 1.0 Percent Year-Over-Year Seasonally Adjusted Annualized Rate ("SAAR") of 16.4 million new vehicle sales is up 3.2 percent from June 2013 and down 1.8 percent over May 2014.

More than one in every 10 vehicles on the road has been recalled since January - It's becoming the year of the recall: Automakers have recalled more than 28 million vehicles in the United States this year--more than one in 10 vehicles on the road -- putting the industry on track to trample the 2004 record of 30.8 million. Just on Monday, Japanese automakers Honda and Nissan recalled close to 3 million vehicles worldwide to repair an air bag problem. Coupled with a recent Toyota recall to fix a similar problem, it means that in just the past month Japan's three largest automakers have called back more than 5 million vehicles worldwide to fix faulty air bags. It's unclear how many of those vehicles are in the United States. Industry analysts see two big factors behind the flood of recalls: Automakers everywhere are being extra careful after seeing Toyota get slapped by a $1.2 billion fine earlier this year to settle charges that it hid safety problems from customers and regulators. And, of course, there's the debacle confronting General Motors, which is facing multiple investigations for taking more than a decade to recall cars equipped with a defective ignition switch linked to at least 13 deaths. In February, GM started recalling 2.6 million Chevrolet Cobalts and other small cars equipped with defective ignition switches. But that was just the beginning. So far this year, GM has ordered 44 recalls covering 17.7 million vehicles in the United States and more than 20 million in North America, the automaker said. The U.S. recalls account for nearly two-thirds of all recalls in the country this year.

Orders for US durable goods fall 1 pct, driven by sharp drop in demand for military equipment - Orders for U.S. durable goods tumbled 1 percent in May as demand for military equipment fell sharply. But excluding defense-related goods, orders actually rose, and orders in a key category that signals business investment also increased. The gains outside of military goods suggest business spending is picking up, which could give the economy a much-needed boost.  The Commerce Department said Wednesday that orders, excluding defense, rose 0.6 percent in May, after falling 0.8 percent in April. Orders for core capital goods, which reflect business investment, increased 0.7 percent, after a 1.1 percent drop. Factories reported higher demand for steel and other metals, computers, and autos. Orders for defense equipment surged in April, so the sharp fall in May isn't a total surprise. Durable goods are items expected to last at least three years. Factory production rose at a steady pace last month, according to the Federal Reserve, as manufacturers cranked out more cars, machinery, furniture, computers and appliances. More output of those goods points to rising demand from consumers and businesses. And auto sales reached a nine-year high in May as Americans ramped up purchases of SUVs and pickup trucks.

Durable Goods Report: May Weakness - The June Advance Report on May Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders:New orders for manufactured durable goods in May decreased $2.4 billion or 1.0 percent to $238.0 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, followed a 0.8 percent April increase. Excluding transportation, new orders decreased 0.1 percent. Excluding defense, new orders increased 0.6 percent. Transportation equipment, also down following three consecutive monthly increases, led the decrease, $2.3 billion or 3.0 percent to $74.4 billion. Download full PDF. The latest new orders number came in at -1.0 percent month-over-month, well below the forecast of 0.2 percent. Year-over-year new orders are up only 2.7 percent.If we exclude transportation, "core" durable goods came in at -0.1 percent MoM, below the forecast of 0.4 percent. The YoY core number was up 4.4 percent.For a happier metric, if we exclude both transportation and defense, durable goods were up 2.5 percent MoM and up 3.8 percent YoY. The Core Capital Goods New Orders number (nondefense capital goods used in the production of goods or services, excluding aircraft) was up 0.7 percent MoM. The YoY number was up 4.0 percent.The first chart is an overlay of durable goods new orders and the S&P 500. We see an obvious correlation between the two, especially over the past decade, with the market, not surprisingly, as the more volatile of the two. Over the past year, the market has certainly pulled away from the durable goods reality, something we also saw in the late 1990s.

Durable Goods Orders Tumble; Biggest Miss In 2014 - Following last month's far-stronger-than-expected 'defense-spending-stuffed' Durable Goods orders, which were subsequently revised downwards, they plunged in May (at the heart of Q2 GDP creation). Against expectations of no gain, Durable Goods Orders tumbled 1.0% - the biggest miss in 2014. It seems the brief bounce back from weather has now gone entirely as it seems no submarines were ordered this month or excess Blackhawks to save the day. Not exactly great news for Q2 GDP (especially after the Q1 collapse). New orders ex transportation dropped for the first time since January - again hardly differentiating Q1 'weather' from Q2 'rebound'.

US Manufacturing PMI Surges To Highest Since May 2010 - Comfortably beating expectations, and in Markit's words, USA is "booming again... as data suggests that GDP should be set to rise by at least 3.0% after the 1.0% decline in the first quarter," US Manufacturing PMI printed 57.5, its highest since May 2010. Despite the "booming" economy, employment rose only very marginally and new export orders growth dropped as prices rose once again. The Fed's "you don't need QE anymore, the economy is doing great on its own" meme is confirmed. The market seems disappointed at the 'good news' and did not react at all.

Richmond Fed Manufacturing Composite: "Grew Mildly in June" - The Fifth District includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia. The Federal Reserve Bank of Richmond is the region's connection to the nation's Central Bank.  The complete data series behind the latest Richmond Fed manufacturing report (available here) dates from November 1993. The chart below illustrates the 21st century behavior of the diffusion index that summarizes the individual components. The May update shows the manufacturing composite at 3, down from 7 last month. Numbers above zero indicate expanding activity. Today's composite number was below the forecast of 6.Because of the highly volatile nature of this index, I like to include a 3-month moving average, now at 5.7, to facilitate the identification of trends.Here is a snapshot of the complete Richmond Fed Manufacturing Composite series.

Kansas City Fed: Regional Manufacturing "Activity Slowed Somewhat" in June -  From the Kansas City Fed: Growth in Tenth District Manufacturing Activity Slowed Somewhat The Federal Reserve Bank of Kansas City released the June Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that growth in Tenth District manufacturing activity slowed somewhat, while producers’ expectations for future factory activity showed little change and remained at solid levels. “We saw some moderation in factory growth in June and many contacts mentioned difficulties finding qualified workers,” said Wilkerson. “However, many respondents noted solid expectations for future months.” The month-over-month composite index was 6 in June, down from 10 in May and 7 in April. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. ... The production index dropped from 14 to 2, and the new orders, employment, and new orders for exports indexes also declined.

Seventh District R&D: Manufacturing the Leader - Chicago Fed - To stay ahead of their competitors, virtually all enterprises engage in innovation of one form or another. Such innovations take the form of improvements to products, services, and internal processes of production and delivery. In the case of start-ups or new enterprises, the proportion of activity devoted to innovation can be the dominant activity for years prior to its actual operation and revenue generation. Start-up firms have captured the imagination of cities that are encouraging entrepreneurs in their pursuits.[1] Recently, the State of Illinois has offered funds to expand Chicago’s prominent new business incubator, which is named “1871” in reference to re-building from the great fire of that year. Similarly, the City of Detroit will seek to designate and boost its “TechTown” as a major part of its economic redevelopment. In tracking R&D performance as measured in dollars that can be allocated across states, the table below ranks Seventh District states by the dollar amount of R&D for each of four major categories for the latest year available, 2011.[3] The business sector dwarfs others in 2011, accounting for almost 70 percent of R&D performed. By this measure, each District state is ranked above the national average, with Michigan’s sixth place and Illinois’ eighth place figuring very prominently. Based largely on the strength of their performance in the business sector, these states also rank highly in overall R&D performed, at seventh for Michigan and eighth for Illinois. Significant contributions to their rankings are also evident from universities and colleges and federally funded R&D Centers (Illinois), and in the case of Michigan, universities and federal government operations.

U.S. Manufacturing Importing As Many Jobs As It Exports, Says Group - America is now luring as many factory jobs back from overseas—a process known as reshoring—as it’s losing to continued offshoring.  That’s the assessment of the Reshoring Initiative, a Chicago-based nonprofit that encourages companies considering moving work back to the U.S. The group says 2013 was a turning point, with roughly 40,000 jobs added in the U.S. by the return of jobs that were previously moved offshore—equal to the number of jobs lost from the continued movement of work abroad. In 2003, an estimated 150,000 factory jobs left, while only 2,000 were brought back. A story in today’s Wall Street Journal details some of the difficulties companies find when bringing jobs back. In one case, a crib manufacturer misjudged the willingness of Americans to pay a premium for their U.S.-made goods and has faced far stiffer prices for wood and other raw materials than expected. Another company, a candlemaker headed by Chinese immigrants to the U.S., has struggled to find workers suitable for their assembly lines.Even industry giants sometimes struggle. When Otis, the elevator division of United Technologies, announced it would relocate a plant from Mexico to South Carolina in late 2012, it was hailed as a sign of the rebound of U.S. manufacturing. But the move led to production delays as Otis simultaneously reorganized two other U.S. facilities and narrowed its product line. Company executives have acknowledged that they struggled to set up a new supply chain and had trouble at first hiring a skilled workforce.

The Enormous Wage Potential of Infrastructure Jobs - Brookings Institution -- This month marks five years since the U.S. economic recovery began, but we clearly have a long way to go to address our nation’s jobs deficit. Even though more workers are gradually finding employment, their wages continue to stagnate and hold back widespread economic growth. This spring, wages have remained consistently low and increased only 0.2 percent, dragging down consumer spending and adding pressure to an already-strained labor market.  However, the search for more and better jobs is gaining new momentum throughout the country, as several states and metropolitan areas look to revise minimum wage laws in lieu of federal action. Although it will take some time to gauge the full effects of these changes, issues of inequality still loom large nationally, and metropolitan leaders will need to consider a wide range of policy options—and employment opportunities—to address our ongoing workforce needs.  Cutting across multiple industries and geographies, infrastructure jobs offer needed stability. Since these jobs also typically require less formal education and pay competitive wages across a variety of occupations, they give workers from all backgrounds a chance to make a decent living in today’s unforgiving economy. As our recent report reveals, infrastructure jobs tend to pay 30 percent more to lower income workers—wage earners at the 10th and 25th percentile—relative to all jobs nationally, but the differences are especially striking when looking at specific occupations.

Why the Rich Aren’t Job Creators - Yves Smith - This is a short talk by venture capitalist Nick Hanauer, who among other things, was the first non-family investor in Amazon. Hanauer in very simple and effective terms debunks the "rich are job creators" myth. Even though the video is going viral (now at over 1 million views on YouTube, it is important enough that I wanted to make sure NC readers saw it and circulated it. Hanauer's remarks illustrates the degree to which propaganda has overcome commercial common sense.

Imminent Wage Increases? - How tight is the labor market? A recent article summarizes the argument that wage pressures are building. From K. Madigan in WSJ Real Time EconomicsEconomists now are debating whether the Fed has set its Nairu sights too low. And they point to two reports out Tuesday as proof. The May survey showed optimism among business owners is the highest since before the Great Recession and a few labor-market indicators have also left the recession behind. A cycle-high percentage of business owners report having problems filling certain job openings. The share saying they cannot find qualified candidates was the highest since October 2007.Another sign that the U.S. is closer to full employment came from the Job Openings and Labor Turnover survey from the Labor Department. The Jolts report showed a large gain in job openings in April. … It may very well be that the labor market is signalling higher wage growth. However, those signals have not yet shown up in price indicators. Figure 1 depicts the costs from the productivity and costs release, as well as from the employment release. We have certainly seen higher wage inflation in the past.  In addition to muted compensation growth thus far, it’s interesting to observe that the level of unit labor costs, an important indicator of production costs (and hence price level trends) is only 1% (log terms) higher than they were half a decade ago. Obviously, one wants to be careful about extrapolating these trends. The deceleration in productivity growth has clear implications for unit labor costs, so one might see a jump in unit labor costs. However, as John Fernald has observed, the deceleration has already occurred, so there is no a priori reason to expect a further deceleration.

Weekly Initial Unemployment Claims decrease to 312,000 -- The DOL reports:In the week ending June 21, the advance figure for seasonally adjusted initial claims was 312,000, a decrease of 2,000 from the previous week's revised level. The previous week's level was revised up by 2,000 from 312,000 to 314,000. The 4-week moving average was 314,250, an increase of 2,000 from the previous week's revised average. The previous week's average was revised up by 500 from 311,750 to 312,250. The previous week was revised up from 312,000. The following graph shows the 4-week moving average of weekly claims since January 1971.
New Jobless Claims at 312K, A Bit Above Forecast - Here is the opening statement from the Department of Labor:In the week ending June 21, the advance figure for seasonally adjusted initial claims was 312,000, a decrease of 2,000 from the previous week's revised level. The previous week's level was revised up by 2,000 from 312,000 to 314,000. The 4-week moving average was 314,250, an increase of 2,000 from the previous week's revised average. The previous week's average was revised up by 500 from 311,750 to 312,250. There were no special factors impacting this week's initial claims. [See full report]Today's seasonally adjusted number at 312K was slightly above the forecast of 310K. The less volatile four-week moving average is now 3,750 above its nearly seven-year interim low set three weeks ago. 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.

The Truth Behind Today’s Long-term Unemployment Crisis and Solutions to Address It - Earlier this week, EPI economist Heidi Shierholz spoke on a Congressional Full Employment Caucus panel about policy fixes to the nation’s long-term unemployment crisis, convened by Rep. Conyers (D-Mich.). Other panelists included Betsey Stevenson, Member of the White House Council of Economic Advisers, and Judy Conti, Federal Advocacy Coordinator at the National Employment Law Project. Below is an excerpt of her comments, which explain why we remain in a long-term unemployment crisis, why the long-term unemployed will continue to face tough job odds without substantial policy intervention, and what can be done to address it. Read the full commentary.

U.S. Bridges Crumble Despite Muni Rates at Lowest Since 1960s - No state is needier than West Virginia when it comes to fixing crumbling highways, airports and water works, with annual repair needs of $1,035 per resident that’s three times the national average. Yet even with borrowing costs hovering close to four-decade lows, lawmakers rejected a January proposal to sell $1 billion of bonds to repair roads that run through the Appalachian Mountains. Budget cuts were a more immediate concern, they said. Across the U.S., localities are refraining from raising new funds in the $3.7 trillion municipal-bond market after the worst financial crisis since the Great Depression left them with unprecedented deficits. Rather than take advantage of Federal Reserve (FDTR) policy that’s held benchmark interest rates at historic lows since December 2008, they’re repaying obligations by the most on record. “When you’re trying to be frugal, it’s probably not the time to eat caviar,” said Margaret Staggers, head of West Virginia’s House transportation committee, who said she was unable to persuade Democratic colleagues to support the bond plan. The legacy of the 18-month recession that ended in June 2009 still looms large for America’s states and cities. While revenue has revived, governments are under pressure to increase funding for education and other services after years of cuts. They’re balancing those needs against required payments toward entitlements such as pensions, having set aside $1.4 trillion less than they’ve promised to retirees, according to Fed data.

These Ages of Shoddy - Paul Krugman - Henry Petroski, an engineer who’s also a fine writer, has a lament about the decline of good construction in today’s Times. It’s a great read; I’m trying to figure out whether I believe in his premise.One thing is clear: there has been a shocking and inexcusable decline in public investment at a time when we should be doing far more investment. Construction workers are suffering high unemployment; public borrowing costs are at record lows; the economy is essentially awash with excess labor and capital, begging to be used. And here’s what’s happening to public construction:But Petroski argues that private construction is also in a bad way, with cheap materials and poor workmanship. It’s easy to collect anecdotes to that effect, and almost everyone has the sense that we used to build things better. But I worry about biased samples. Yes, the old buildings we know seem to be better built than the new ones. But isn’t there an issue of survivorship bias? Cheaply constructed buildings of the past are much more likely to have collapsed or for that matter torn down than the quality structures, so what we see now is the best of the bunch. The years after the Civil War were described at the time as the Age of Shoddy (originally a word for cheap fabric produced by war profiteers), and surely there were a lot of badly built tenements going up.

America's roads are running out of money -   The latest battle over taxes is hitting the road.That's because the Highway Trust Fund, which provides transportation funding to every U.S. state, is at risk of running out of money in August, creating a fiscal cliff for the nation's transportation sector. If the fund isn't replenished, states ranging from Vermont to Nebraska will be hit hard, and likely forced to put off road construction and repair projects. So how did the fund end up in such dire straits? The problem is that the fund isn't receiving enough money through gasoline taxes, thanks to more fuel-efficient cars and a dip in how much Americans drive. That has led to a 6 percent decline in gasoline consumption since 2007. For some states that rely heavily on the federal government for transportation funding, the Highway Trust Fund's grim outlook is cause for alarm."It's something we are very, very concerned about," "In our fiscal year that starts July 1, we anticipate spending $685 million to improve our system across the state, and nearly 60 percent of those are federal dollars."

As Working Families Take White House Stage, Paid Sick Leave Battle Continues: As the White House convenes its summit on the issues facing working families this week, it’s easy to feel discouraged. The proposals topping the agenda–paid leave, flexible work, childcare–are all great ideas. The problem is they’re the same great ideas advocates have been suggesting for years—decades, even. Sure, there’s been more recognition of the need for early education. And it’s huge that, over the past ten years, California, New Jersey and Rhode Islandhave instituted state paid family leave programs. But the United States still lags behind the rest of the developed world when it comes to making life more livable for working families. Though there’s been some progress, it’s achingly slow. There is one front on which the work/life war has been escalating in recent years, however, one issue that has regularly bubbled over into legislative activity and news stories, while the rest have continued to simmer: paid sick days. Proposals allowing workers to earn paid time off to use when they’re sick or caring for a sick child have whipped through city councils and state legislatures. Paid-sick-leave laws have passed in the State of Connecticut as well as the District of Columbia; in Portland, Oregon; Newark, New Jersey; Jersey City; San Francisco; Seattle, and New York City. After Bill de Blasio became mayor of New York, a strengthened version of the law passed there. According to the mayor, it covers an additional 500,000 workers.

The Central Paradox of the 21st Century -- “Stop whining young people, you’ve never had it so good”. That’s the debate topic sponsored by The Spectator last week at the British Museum. On the one hand, the statement is insane and insulting.  60% of the unemployed are under 35, recent university graduates on average owe £45,000 for their education and more than a quarter live with their parents because they can’t afford the rent. Entry-level jobs are evaporating, and even internships require impressive resumes.   Most young university graduates with paying work are in jobs that could have been filled by high school graduates.  Older workers have it tough too.  A friend of mine, over 50, a graduate from a top university, head of PR at a Wall Street firm took a voluntary redundancy a few years ago, confident his skills and talent would soon land him an equivalent job.   Today, he is slicing bologna at his local deli. My father and grandfather had jobs for life.  They gave their youth to the corporation and in return the corporation took care of them until retirement.  Today, no one has a lifetime contract. Lean and mean firms hire freelancers and even staff have few guarantees.  You can be on top this year, unemployed the next.  No matter your age, no matter your skills, our work lives are evermore precarious.  It seems the typical career path is interning in your 20s, finally getting a paying job and rising up the ladder in your 30s, over the hill by 45.  Unless you are a premiership football player, the person who had your job ten years ago got paid more, worked less and had more fun than you do. Each generation of workers seems worse off than its predecessor.

Inequality Is Not Inevitable, by Joseph Stiglitz - An insidious trend has developed over this past third of a century. A country that experienced shared growth after World War II began to tear apart, so much so that when the Great Recession hit in late 2007, one could no longer ignore the fissures that had come to define the American economic landscape. How did this “shining city on a hill” become the advanced country with the greatest level of inequality?One stream of the extraordinary discussion set in motion by Thomas Piketty’s timely, important book, “Capital in the Twenty-First Century,” has settled on the idea that violent extremes of wealth and income are inherent to capitalism. In this scheme, we should view the decades after World War II — a period of rapidly falling inequality — as an aberration. This is actually a superficial reading of Mr. Piketty’s work, which provides an institutional context for understanding the deepening of inequality over time. Unfortunately, that part of his analysis received somewhat less attention than the more fatalistic-seeming aspects. Over the past year and a half, The Great Divide, a series in The New York Times for which I have served as moderator, has also presented a wide range of examples that undermine the notion that there are any truly fundamental laws of capitalism. The dynamics of the imperial capitalism of the 19th century needn’t apply in the democracies of the 21st. We don’t need to have this much inequality in America

Congrats, America. You have less economic opportunity than you did in 1970 - Americans today have more social and educational opportunity than they did 40 years ago -- but they have less economic opportunity, thanks to a bruising recession and the alarming economic trends that preceded it. That's the sobering conclusion of  a detailed study out today from Opportunity Nation and Measure of America, which quantifies the evolution in community, educational and economic opportunity from 1970 to 2010. The Historical Report of Opportunity sizes up the nation's progress on 10 factors, including school graduation, violent crime, poverty, access to health care, jobs, wages and economic inequality. The report factors each component into an overall score called the Opportunity Index. That index, the report finds, has increased over the decades, meaning the United States as a whole enjoys more opportunity today than it did four decades ago. But the findings include two red flags for policymakers: Opportunity overall decreased from 2000 to 2010, largely because the economic component of the index is lower now than in any previous decade. The report blames the Great Recession for "part but not all of this poor performance." It notes that wages have fallen over the last decade and inequality has risen steadily across the country since 1970

Gaming the Poor - In a referendum in November, voters approved as many as seven new casinos to join New York State’s existing nine gambling facilities. And New York is hardly alone. In recent years, 23 other states have legalized and licensed commercial (as opposed to Native American) gambling facilities. In the casino-dense Northeast and mid-Atlantic regions, where 26 casinos have opened since 2004 and at least a dozen more are under development, most adults now live within a short drive of one. Not surprisingly, the closer casinos come to where people live, the more likely people are to gamble at one. As casinos have spread into de-industrialized cities, dying resorts and gritty urban areas, the rate of gambling participation has grown among lower-income groups. In America’s increasingly two-tier economy, casino industry leaders realized that they didn’t have to cater exclusively to well-heeled consumers in order to rake in profits. Payday lending, rent-to-own stores, subprime credit cards, auto title loans and tax refund anticipation loans all evolved to extract high profits from low-income groups. And the newly established state-licensed casinos have their methods, too. A research team from the University at Buffalo and SUNY Buffalo State has conducted studies that offer new evidence of the exploitative effects of casino gambling on lower-income Americans. For example, the researchers found that the rates of casino gambling participation and frequency of visits have increased among lower-income groups. Easy access to casinos is a key factor. Living within 10 miles of one or more casinos more than doubles the rate of problems from excessive gambling. Another factor is easy access to slot-machine gambling. Women and the elderly have become more likely to gamble in recent years, partly because of a preference for nonskill slot-machine gambling.

States Undo Food Stamp Felon Bans: -- Two states are taking small steps away from a little-known aspect of the war on drugs. The California Legislature has just passed a bill that will allow people convicted of drug-related felonies to receive welfare and food stamps. And last week, Missouri Gov. Jay Nixon (D) signed legislation lifting the state's ban on food stamps for felons. The felon bans were relics of the tough-on-crime politics of the 1990s, and their demise is partly due to waning support for the harsh treatment of drug users. "In a lot of cases, the law enforcement community is supportive and feels this is a way to reduce recidivism,"  Since 1996, federal law has banned anyone with a drug-related felony conviction from receiving benefits from the Temporary Assistance for Needy Families program or the Supplemental Nutrition Assistance Program. But the law allows states to waive or modify the bans, and most states have done so. According to The Sentencing Project, a drug law reform group, California was one of 24 states with modified bans on SNAP and TANF in place. Missouri, previously one of the nine states with full bans, will now let drug felons get SNAP if they stay clean.

In Prisons, Sky-High Phone Rates and Money Transfer Fees - Inside the razor wire on Eagle Crest Way, in rural Clallam Bay, Wash., telephone calls start at $3.15. Emails out, beyond the security fence, run 33 cents. Money transfers in, to what pass for bank accounts, cost $4.95. Within that perimeter lies the Clallam Bay Corrections Center, a state prison — and an attractive business opportunity. One private company, JPay, has a grip on Internet and financial services. Another, Global Tel-Link, controls the phones. These companies are part of a new breed of businesses flourishing inside American jails and prisons. Many of these players are being bankrolled by one of the most powerful forces in American finance: private equity. Private investment firms have invested many billions of dollars in the prison industry, betting — correctly — that it is a growth business. Wall Street previously championed companies like Corrections Corporation of America, the nation’s largest private corrections company. But unlike companies that have thrived by running prisons, the likes of Global Tel-Link and JPay are becoming de facto banks, phone companies and Internet service providers for inmates and their families across the nation.It is a lucrative proposition, in part because these companies often operate beyond the reach of regulations that protect ordinary consumers. Inmates say they are being gouged by high costs and hidden fees. Friends and families say they have little choice but to shoulder the financial burden.

California: 39 Woman Prisoners Were Sterilized Without Consent - Physicians in California prisons illegally sterilized at least 39 women during an eight-year period, with cases recorded as late as 2011, according to a to a report put out last week by the state's own auditing office.  Cynthia Chandler, co-founder of the Oakland-based group Justice Now, which has been raising concerns about prison sterilization processes for years, said that the report's release "feels like an incredible step and vindication for people who work toward challenging human rights abuses.” The audit found problems in 39 cases, which account for more than a quarter of the 144 women who underwent the sterilization procedure between fiscal years 2005-6 and 2012-13. In 27 of the cases, inmates' physicians had failed to sign the necessary consent form detailing that the patients were mentally competent, had understood the lasting effects of the procedure, and that the required 30-day waiting period after initial inmate consent was given had passed. Eighteen cases potentially violated that required waiting period, which is intended to give female prisoners time to think about their decisions before their surgeries take place. In some cases there is even evidence that doctors falsified records, claiming that the waiting period had elapsed when it actually had not. According to the report, the federal receiver’s office, which has overseen medical care in the state’s prisons since 2006, argues it has no legal obligation of ensuring prison physicians or other employees obey the consent procedures, a claim which state Sen. Ted Lieu (D-Redondo Beach) said was "ludicrous."

Fed's Dudley sounds alarm over Puerto Rico's high debt load -(Reuters) - New York Federal Reserve Bank President William Dudley warned Puerto Rico about its growing debt load and questioned if the island can sustain its high level of borrowing in remarks delivered to an accounting group on Tuesday. "Persistent deficits in the Commonwealth's fiscal accounts as well as mounting deficits in the operation of the several major public corporations have substantially raised the island's overall level of public debt and led to serious concerns about whether the island's fiscal position is sustainable," he said. He added the bank is working on a report to "examine the factors leading to the sizeable buildup of public debt" and "its future trend." true During questions after the speech, Dudley declined to speculate on whether Puerto Rico would default, but said "the next three to six months are going to be very, very important." He also would not comment on restructuring. Some believe the island cannot turn things around without restructuring $70 billion in outstanding debt - a move akin to filing for bankruptcy - and in the spring Puerto Rico hired Wall Street restructuring consultants. "The time is right to make some of the tough decisions," he said. "You can be in a much better place even six months or a year from now."

Detroit Lighting Debt Illuminates Bankruptcy Stigma: Muni Credit - A debt sale by an agency responsible for illuminating the streets of bankrupt Detroit will put a spotlight on bondholders and their willingness to lend after investors took an unprecedented cut on city general obligations. On its face, the $186 million deal has no mention of Detroit: The Michigan Finance Authority will sell the bonds today for the Public Lighting Authority, an agency the state established. The debt has an A- grade from Standard & Poor’s, four steps above junk, and the utility taxes that repay the debt flow to the agency’s trustee before the city. Detroit, which hasn’t had a rating that high in 15 years, can’t lower the levy over the life of the securities. Yet even with those protections, bond investors say there’s no sure thing when it comes to Detroit. Last year, the city defaulted on general obligations before agreeing in April to pay 74 cents on the dollar on some debt. It may also push water and sewer bondholders into a distressed-debt exchange. Dan Solender at Lord Abbett & Co. said if he were to buy the bonds, it would be for a high-yield fund.  “You have to take into account how they treated the water bonds, the sewer bonds and the general-obligation bonds,” he said. “It’s hard to know what to trust and what not to trust.”

Bankrupt Detroit hit with new debts involving dump trucks and nuclear research: (Reuters) – As if it’s not bad enough that Detroit acknowledges it owes its creditors $18 billion, another batch of would-be creditors says the city owes them much more, for garbage trucks worth $150 million to nuclear research materials valued at an alleged $1 trillion. The city disputes those claims – along with several others scheduled for a hearing on Wednesday before U.S. Judge Steven Rhodes, who is presiding over Detroit’s bankruptcy. The biggest municipal bankruptcy case in U.S. history is chock full of more customary creditors: city unions and pension funds, bondholders and businesses. But on Wednesday, Detroit’s attorneys will ask Judge Rhodes to disallow claims from creditors who have not provided evidence to back up their demands.

Shutting Off Water To 150k Residents - Ukraine? No, Detroit! -- The news that hundreds of thousands of people will lose water supplies is not a stunning headline anymore - poor old Ukraine... or Iraq. However, this time, the 'it couldn't happen here' crowd might be stunned to hear that The Motor City is playing serious hardball with residents who have fallen behind on paying their water bills. Detroit’s Water and Sewerage Department has begun turning off the taps of 150,000 residents who are at least two months behind on payments. As one advocate notes, "sick people have been left without running water and working toilets. People recovering from surgery cannot wash and change bandages. Children cannot bathe, and parents cannot cook." Of course, given that these are generally voting members of the US public, we would be stunned if the Federal government did not create a new fund to 'help' them out of this 'unfairness'.

Detroit activists call for UN help as city shuts off water for thousands - Detroit has too much of some things – stray dogs, abandoned houses – and not enough of others, such as residents who pay their water bills. The latest sign of Detroit’s decline came from the city’s water department, when it said in March it would begin shutting off water for up to 3,000 homes and businesses a week in an attempt to stop the utility from sliding even further into debt. The announcement sparked outrage among activists groups, who say the Detroit Water and Sewerage Department (DWSD) is going after the city’s most vulnerable citizens to shore up its bottom line. Now those groups have called on the United Nations to intervene. In a letter sent to the U.N. Special Rapporteur on the Human Right to Safe Drinking Water and Sanitation last week, local nonprofit Detroit People’s Water Board, Food and Water Watch and Canada-based Blue Planet Project pleaded for the world body to weigh in on the shutoffs. "What we see is a violation of the human right to water," said Meera Karunananthan, an international campaigner with the Blue Planet Project. "The U.S. has international obligations in terms of people’s right to water, and this is a blatant violation of that right. We’re hoping the U.N. will put pressure on the federal government and the state of Michigan to do something about it."

Nearly Half Of Detroit Water Customers Can’t Pay Their Bill -- It’s a basic human right: water. But could the United Nations soon help the Detroit Water and Sewerage Department provide the service to struggling customers?  Water department spokeswoman Curtrise Garner says it’s a possibility — but for now, the water bills must be paid.  “We do have programs that do help those that are just totally in need; can’t afford it — but we also know that there are also people who can’t afford it would can not pay and we know this because, once we shut water off, the next day they are in paying the bill in full.  So we do know that that has become a habit as well,” said Garner.“   At the DWAS Department — it’s not our goal to shut off water. We want people’s water on, just like they do; but you do have to pay for your water…That’s the bottom line.”  Garner said the reality is that nearly half of Detroit Water and Sewerage customers can’t pay their bills; and that has led activists to lobby the UN to step up and take action.“If they do contact us we are willing to speak with them,” she said, adding “We owe it to the customers that are paying to collect from those that aren’t. Somebody has to pay for the water.”

No Money, No Water: Detroit’s Shutting Off H2O to 150,000 Residents - The Motor City is playing serious hardball with residents who have fallen behind on paying their water bills. Detroit’s Water and Sewerage Department has begun turning off the taps of 150,000 residents who are at least two months behind on payments. People are being left without a drop to drink and no ability to bathe or use the toilet. Now a coalition of water and human rights activists has banded together to ask the United Nations to step in and end the disconnections. Last week, advocates from the Detroit People’s Water Board, Food and Water Watch, Blue Planet Project, and Michigan Welfare Rights Organization submitted a comprehensive report to the U.N.’s special rapporteur that details the dire situation facing folks whose water has been cut off.  “Sick people have been left without running water and working toilets. People recovering from surgery cannot wash and change bandages. Children cannot bathe, and parents cannot cook,” write the report’s authors. And “families concerned about children being taken away by authorities due to lack of water and sanitation services in the home have been sending their children to live with relatives and friends, which has an impact on school attendance and related activities.” Half of the 323,000 customers served by the city’s Department of Water and Sanitation have either paid their bills late or simply can’t afford service, to the tune of $175 million. Back in March, the department announced that it would be cutting service to residents who hadn’t paid up. Although the city claims that it started sending out notices about the disconnections in March, the report’s authors write that they heard “directly from people impacted by the water cutoffs who say they were given no warning and had no time to fill buckets, sinks, and tubs before losing access to water.” “We really don’t want to shut off anyone’s water, but it’s really our duty to go after those who don’t pay, because if they don’t pay, then our other customers pay for them,”

UN panel: Detroit water cutoffs violate human rights -- A United Nations team of experts said Wednesday that Detroit officials’ decision to shut off water service to thousands of residents who are late in paying bills is an affront to human rights. “Disconnection of water services because of failure to pay due to lack of means constitutes a violation of the human right to water and other international human rights,” the U.N. officials said in a news release. “Because of a high poverty rate and a high unemployment rate, relatively expensive water bills in Detroit are unaffordable for a significant portion of the population.” The U.N. assessment comes days after a coalition of welfare rights groups — including the Detroit People’s Water Board, Food and Water Watch and Canada-based Blue Planet Project — pleaded in an open letter for the world body to intervene. The coalition issued a report on June 18 that contained the testimony of people who were affected by the service shutoffs and said they were given no warning. “Sick people have been left without running water and working toilets,” the report said. “People recovering from surgery cannot wash and change bandages. Children cannot bathe and parents cannot cook.”

Is This What America Has Come To?: There is no doubt you've heard about how poorly the city of Detroit, Michigan is fairing now that the automotive sector has all but closed up there. Yesterday, news came that the city has started cutting off water to about 150,000 people. About half of the city's 324,000 water customers are delinquent on paying their water bill, so the city is turning off their taps. (Source: Financial Post, June 24, 2014.) In protest, residents are appealing to the United Nations High Commission for Human Rights, saying their human right to water has been denied. (Unfortunately, the right of access to water is not in our Constitution or our Charter of Rights.) I think what's happening in Detroit, while it's not getting much publicity, is very important. It should be a warning to us all. At the very core, it tells me that if a government is not taking in enough money to pay its bills, it will increase the financial burden on its citizens…and if you can't pay, you're cut off. In the case of Detroit, last week, city council approved a nine-percent hike in what it charges for water. (And the government tells us inflation is below two percent!) This lesson teaches us that if you can't pay the increased costs the government levies on you, it will cut you off. The question is at what point do the poor say enough is enough and rebel against the rich? We now have 92 million people in the U.S. who are able to work who are not working. The labor participation rate in this country is at a 35-year low! If I had to look deep into my crystal ball to the future, unfortunately, I see an America that looks a lot more like Detroit than anything else. This is what America has come to.

Black and Hispanic Kindergartners Are Disproportionately in High-Poverty Schools - Growing up black or Hispanic in the United States today means high odds of living in concentrated poverty: in neighborhoods in which at least 40 percent of the residents are poor. This connection between minority status and being surrounded by poor peers is true, as well, in the school setting. Not only do most U.S. kids begin school in classrooms that are heavily segregated—white kids in heavily white classrooms, minority kids in heavily black and Hispanic classrooms—black and Hispanic kindergartners are also disproportionately surrounded by poor peers. Nationwide, 25 percent of kindergartners are from low-income households. If schools reflected this makeup regardless of the racial composition of classrooms, students would be in classes in which about one in four of their peers were low-income. Yet most white students (three in five) are in classrooms in which just a little more than one in ten of their classmates are poor. Only 11 percent of Hispanic and only 7 percent of black students enter school into such low-poverty classrooms. By contrast, most Hispanic and black students are in classrooms in which at least two thirds of their peers are also minorities, and virtually half are poor: 56.5 percent of black students and 55.2 percent of Hispanic students enter kindergartens in which 48.9 percent of  their peers are poor.  Only a fraction of white students (5 percent) attend these schools. To learn more about the racial and socioeconomic status (SES) composition of our nation’s kindergarten classes, see the full report, Segregation and Peers’ Characteristics in the 2010-2011 Kindergarten Class: 60 Years After Brown Versus Board.

Armed Missouri teachers will have ’90 percent’ accuracy, firearm instructors promise: Dozens of armed teachers will be sent into Missouri schools next fall, and firearm instructors have promised that they will have an accuracy rate of 90 percent. The Kansas City Star reported that 10 districts have already paid $17,500 each to have Shield Solutions train two staffers. Those staffers become employees of the firearms training school, and will receive pay in addition to their regular teacher’s salary. Three more districts have signed up for taking the training, and other districts were expected to follow before the school year begins. Shield Solutions founder Greg Martin, a former Missouri Highway Patrol trooper, told the paper that teachers needed to be armed because school shooters would take out “soft targets” like security guards first, and law enforcement could not respond to threats quickly enough. Martin said that the identity of teachers would be concealed “like air marshals on planes.”

Why inequality might make kids drop out of high school - Here's a depressing fact: As the gap between poor and middle-class incomes grows, the less likely it is that low-income students, particularly boys, will graduate from high school. Now, there isn't a perfect relationship between inequality and dropouts. But a state's "lower-tail inequality" — the difference between its 50th and 10th income percentiles — and its intergenerational mobility together explain a good deal of its graduation rate. You can see this in the chart below from Melissa Kearney and Phillip Levin's new paper: the more inequality, the more dropouts. The question is whether this is just a correlation, or something more. It could be that low-income families are even more segregated in states with more lower-tail inequality, and that's what's causing more dropouts. Or that their schools are even more poorly-funded in these states. Or that they have parents who are in jail. In other words, that inequality itself isn't causing dropouts, but rather that things associated with inequality are. Well, Kearney and Levine controlled for all these other factors, including race, and the relationship between inequality and graduation rates still stood. So something else must be going on.

Income Inequality and High School Dropout Rates - Does the presence of income inequality convince boys from poor families that it’s not worth finishing high school? A new paper has raised interesting questions about how the educational system interacts with the economic environment. Simply put, they show a correlation between high school dropout rates and the local gap between the middle class and the lower class. Their other key finding is that the effect predominantly influences boys. The correlations for girls are small and statistically insignificant. The paper is more sophisticated than just a few correlations. The authors use individual-level data so they can control for gender, race, mother’s education, parents’ marital status and even an intelligence test. But because the characteristics in question (including dropout rates) are mostly persistent features, it’s not possible to make a post hoc ergo propter hoc fallacy. One straightforward explanation for the data is that states with persistently high dropout rates have, as a direct consequence, lots of young men who lack both hard skills (algebra and art) and soft skills (persistence and comfort with authority) typically acquired in high school. These young men have few marketable skills and are less reliable, so they earn less. Because most dropouts come from poor backgrounds, mobility is lower. And because many of them are not working, middle-to-bottom inequality is higher.

Starbucks baristudents should beware the green mermaid bearing gifts -- Starbucks' newest innovation is a blend of private capital, public higher education and neoliberal technocracy: the Starbucks College Achievement Plan, which the company and its CEO have been advertising all week as a clever recipe for making college "free" for its upward-striving baristas. The plan offers employees a partial discount on tuition and at the same time, polishes the Starbucks brand as a player in the online college industry.  With the same modern convenience that fuels their coffee empire, Starbucks scholars can obtain their liberal arts education via wifi, on demand, through a cutting-edge online program designed to maximize "inclusivity". And by funneling workers into a new commercial model for distance learning, the company, in partnership with Arizona State University (ASU), is helping reshape the business of higher education, industrializing the college degree the same way Starbucks industrialized the corner café. But the results smack more of academic mass-marketing than educational inclusion.   Right now, about 70% of Starbucks workers are either trying to complete a college degree or want to, making a tuition-reimbursement program seem like an excellent fit for Starbucks "partners" (their empowering name for workers). More than 130,000 staffers currently clocking at least 20 hours per week might qualify for the plan, through which they could earn their degrees from ASU's burgeoning online undergraduate program. For individual students, the mechanics of the program may be state-of-the-art, but the finances are surprisingly conventional. For the first two years of their education, Starbucks students will qualify for a small scholarship from ASU, but the balance of their tuition payments will have to come from loans and students' own financial resources (aka their take-home pay as baristas). Students who are finishing up the final portion of their coursework – the equivalent of their junior and senior years – will be reimbursed for about $480 to $540 per credit, which is much pricier than the typical community college tuition.

The Reality of Student Debt Is Different From the Clichés -- The deeply indebted college graduate has become a stock character in the national conversation: the art history major with $50,000 in debt, the underemployed barista with $75,000, the struggling poet with $100,000.The anecdotes have created the impression that such high levels of student debt are typical. But they’re not. They are outliers, and they’re warping our understanding of bigger economic problems.In fact, the share of income that young adults are devoting to loan repayment has remained fairly steady over the last two decades, according to data the Brookings Institutions is releasing on Tuesday. Only 7 percent of young-adult households with education debt have $50,000 or more of it. By contrast, 58 percent of such households have less than $10,000 in debt, and an additional 18 percent have between $10,000 and $20,000. “We are certainly not arguing that the state of the American economy and the higher education system is just great,” Matthew Chingos, a Brookings fellow and one of the authors of the new analysis, told me. “But we do think that the data undermine the prevailing sky-is-falling-type narrative around student debt.” The misperceptions matter because they distract us from the real trouble with our higher education system. It’s not the graduates of expensive colleges who are struggling to get started on a career. Such graduates make for good stories (and they tend to involve the peer group of journalists), but history suggests that most of them will do just fine.

Is a Student Loan Crisis on the Horizon? - Brookings Institution - College tuition and student debt levels have been increasing at a fast pace for at least two decades.  These well-documented trends, coupled with an economy weakened by a major recession, have raised serious questions about whether the market for student debt is headed for a crisis, with many borrowers unable to repay their loans and taxpayers being forced to foot the bill. In this report, Beth Akers and Matthew Chingos analyze more than two decades of data on the financial well-being of American households and find that in reality, the impact of student loans may not be as dire as many commentators fear.   The authors draw on data from the Survey of Consumer Finances (SCF) administered by the Federal Reserve Board to track how the education debt levels and incomes of young households evolved between 1989 and 2010. Their analysis produces three particularly noteworthy and new findings:

  1. Roughly one-quarter of the increase in student debt since 1989 can be directly attributed to Americans obtaining more education, especially graduate degrees.  The average debt levels of borrowers with a graduate degree more than quadrupled, from just under $10,000 to more than $40,000..
  2. Increases in the average lifetime incomes of college-educated Americans have more than kept pace with increases in debt loads.  Between 1992 and 2010, the average household with student debt saw an increase of about $7,400 in annual income and $18,000 in total debt.  .
  3. The monthly payment burden faced by student loan borrowers has stayed about the same or even lessened over the past two decades.  The median borrower has consistently spent three to four percent of their monthly income on student loan payments since 1992, and the mean payment-to-income ratio has fallen significantly, from 15 to 7 percent.  The average repayment term for student loans increased over this period, allowing borrowers to shoulder increased debt loads without larger monthly payments.

Brookings Study on Student Debt Misses Lifelong Consequences - America has gone through a rapid social experiment over the last 20 years. We have created a system, in large part through public disinvestment, where our young people take on large amounts of student debt in order to achieve a college degree. The sea change has been so quick it’s been difficult to gather even basic, solid numbers on it, making the consequences of such massive student debt subject to intense debate. A new report from Beth Akers and Matthew M. Chingos of the Brookings Institution has further fueled that debate, arguing that the conventional story of escalating debt burdens due to student loans are overstated. Even though the number of young households with debt has increased from 14 percent to 36 percent between 1989 and 2010, the percentage of monthly income those people put toward their student debt payments is largely the same. Even though student loan debts are going up, they've been accompanied by rising incomes, largely balancing out the burden. The focus shouldn’t be on student loans broadly, and instead on more targeted solutions like focusing on those who drop out of college but still have debt. But this study, like many arguments along these lines, suffers from a major problem: It focuses on a month-to-month comparison. When we look at the effects of a major economic change—whether it’s government debt, taxes, or replacing a system of publicly funded free colleges with a system of debt for a diploma—we can’t just look at what immediately happens. We need to also consider how people behave in the long run. And when we look at student loans from the point of view of a lifetime, the results are more worrisome.

Whether Student Debt Is $100K or $5K, We Still Need Reform - Over the past few years, we’ve heard several reports of students who are unable to find employment while they owe $50,000 to $100,000 in student debt. Accounts of waitresses, bartenders or retailer clerks with bachelor’s degrees and hefty student loans became fairly common during the recession, as the unemployment rate among recent college graduates hit 12.6 percent in 2011. Upon hearing the stories and having some personal experience with the issue, either directly or indirectly, many Americans have come to agree that student loans are a cause for concern. The Washington Post published campaign polling results that indicate 87 percent of Democrats and 84 percent of Republicans are in favor of lowering student loan interest rates. While most people acknowledge the issue, a recent study attempts to downplay its severity. The Brookings Institution in June released a report analyzing the individual household’s student loan debt. The group based its report findings on data gathered from Survey of Consumer Finances (SCF) data, which analyze the finances of U.S. families every three years. In the report, the Brookings Institution said: “College tuition and student debt levels have been increasing at a fast pace for at least two decades. These well-documented trends, coupled with an economy weakened by a major recession, have raised serious questions about whether the market for student debt is headed for a crisis, with many borrowers unable to repay their loans and taxpayers being forced to foot the bill. … Our analysis of more than two decades of data on the financial well-being of American households suggests that the reality of student loans may not be as dire as many commentators fear.”

NY Fed’s Bogus Estimate of Return on College and the Neglect of the Intellectual Commons -  Yves Smith - Yesterday, the New York Fed released a new report by Jaison R. Abel and Richard Dietz, Do the Benefits of College Still Outweigh the Costs? which is getting good coverage in the mainstream media. Its major finding is that despite the fall in wages to college graduates due to the crappy economy, a college degree is still worth the expense because wages of high-school graduates have fallen too, keeping the wage premium of a college education high while reducing the opportunity cost of staying in school. But while the media is repeating the findings of this report uncritically, in fact it relies on a discredited methodology for calculating returns, and also promotes the view that the only reason to get a higher education is to get a better job.  But the conclusion that is getting the most notice is its study of four-year versus two-year technical or “associate” degrees. The authors found, based on comparing results in public schools, that the returns on both were similar, roughly 15%, which they argued made higher education an attractive investment. And even the much-derided liberal arts degree showed a good, but lower return, at 12%. In fact, the text repeatedly describes liberal arts degrees as a poor investment, when the data actually indicates that it is a classic low-risk, lower-return strategy: you won’t do as well as specialists, but you have markedly less unemployment downside exposure:

NY Fed’s Bogus Estimate of Return on College and Brookings Misses the Student Loan Crisis  - Yves at Naked Capitalism writes “NY Fed’s Bogus Estimate of Return on College and the Neglect of the Intellectual Commons” Yesterday, the New York Fed released a new report by Jaison R. Abel and Richard Dietz, Do the Benefits of College Still Outweigh the Costs? which is getting good coverage in the mainstream media. Its major finding is that despite the fall in wages to college graduates due to the crappy economy, a college degree is still worth the expense because wages of high-school graduates have fallen too, The assumption is college educated students with student debt are still coming out ahead over the long term. In an earlier post on Angry Bear using graphs as taken from Student Debt is Challenging the Reason for Getting that Long Sought After College Degree I was able to show those without student loan debt appear to come out financially better over the years. “Based on its projections, the indebted household will suffer a lifetime wealth loss of nearly $208,000, compared to “baseline” of the debt-free household. Nearly two-thirds of this loss ($134,000) comes from the lower retirement savings of the indebted household, while more than one-third ($70,000) comes from lower accumulated home equity; because of the two withdrawals from savings later in their lives, the liquid savings gap is just $4,000. The gap in retirement savings is particularly large because the household with student debt was forced to save significantly less for retirement early in their working lives while paying back their student loans, a gap which was exacerbated because of the significant compound interest that would have been earned had they been able to save the same amount as the household without student loan debt.” Simply stated, Abels and Dietz assumptions do not appear to be true.

What The $1+ Trillion Student Debt Bubble Is Being Spent On -- By now everyone knows there is an unprecedented student debt bubble, amounting to well over $1 trillion and rising at a rate of nearly $200 billion per year. However, what is far less known, is what all these hundreds of billions in government loan proceeds are being spent on. The following two charts should shed some light on this all important matter just how Government money goes from Point A to Point B, using indebted to the hilt students as a pass-thru. First, the change in the number of higher education employees since the mid-1970s, broken down by job category. One can almost see why preserving the status quo of the Keynesian religion is the lifetime goal of most professors. And then, the change in average salaries across the higher education spectrum.

Obama’s Move to Help Students Is Not as Forgiving as It Seems -- If you’re a student loan-burdened recent college graduate putting the final touches on a note to President Obama, thanking him for his recent executive order on debt repayment, don’t get too excited. Mr. Obama formally widened the pool of eligible participants in the Pay as You Earn program (PAYE) and said it could save recent graduates hundreds of dollars every month, helping an additional five million people manage their student debt. It fulfills a promise — made in a chipper, animated advertisement posted to Mr. Obama’s YouTube channel in 2011 — that graduates would not have to make student loan repayments greater than 10 percent of their income. But if you look at the numbers closely, PAYE saves you money only if you borrowed big and earn little. The revised program caps monthly loan payments at 10 percent of discretionary income, defined as income exceeding 150 percent of the federal poverty level for a single person. Well-paid graduates and those working minimum-wage jobs will dedicate equal proportions of their income to paying off debt.But does the 10 percent cap make that much of a difference? It looks like PAYE saves money only for those low-income borrowers who have incurred an unusually large federal debt — so much debt that the federal government agrees to forgive whatever you haven’t paid off after 20 years. That certainly helps, but it isn’t going to help a majority of college graduates.

Expected Bill Would Allow Private Student Loan Debt To Be Discharged In Bankruptcy – Just two weeks after a bill to allow private student loan borrowers to refinance at lower interest rates failed to gain traction in the Senate, a new bill expected to be introduced this week takes things a step farther. The bill, from Iowa senator Tom Harkin, would create an option in which private student loans could be discharged through bankruptcy proceedings,  according to the Wall Street Journal. While that might seem like a dramatic measure, the impact would be rather small when looking at total student loan debt in the United States. Private lenders only hold about 10% to 15% of all student loan debt; the rest is held by the U.S. Education Department. Under current federal law, neither federal nor private student loans can be discharged in bankruptcy. Other debts such as money owed on mortgages, credit cards and auto loans can be discharged in bankruptcy. Consumer advocates have long said the prohibition of discharging student debt in the case of bankruptcy is keeping borrowers buried under high debt burdens that they have little chance of digging themselves out of. On the other hand, those who support the status quo have argued it reduces the risk that borrowers will walk away from debts and in turn keeps interest rates in check.

Illinois public pension fund lowers investment return rate (Reuters) - Illinois' biggest state pension fund on Tuesday lowered its expected investment return rate, a move that will increase its unfunded liability. The Teachers' Retirement System (TRS) board of trustees lowered the rate to 7.5 percent from 8 percent, calling the reduction prudent following a recent review of its asset liability model and revised capital market assumptions. "The board's decision takes into consideration extensive input from our actuaries and investment consultants," TRS Executive Director Dick Ingram said in a statement. "It is one of the most important elements of the fiduciary duty we have to keep the system as strong as possible." The lower rate will increase the system's unfunded liability, which was $54 billion at the end of fiscal 2013, but the amount of the increase is not yet known, according to TRS spokesman Dave Urbanek. true A $100 billion collective unfunded liability in Illinois' five state pension funds led to the passage in December of comprehensive reforms aimed at saving nearly $145 billion over 30 years. However, a state judge in May suspended the law until lawsuits brought by labor unions, retirees and others challenging the constitutionality of the reforms are resolved.

Judge lets Christie cut pension payment this year: - A Superior Court judge ruled Wednesday that Gov. Christie's executive order last month reducing the state's payment to the pension system was justified to address a "staggering" revenue shortfall for the fiscal year that ends Monday. In rejecting a motion by more than a dozen unions for a preliminary injunction against Christie's order, Judge Mary C. Jacobson said the governor's need to protect the state's fiscal health outweighed his impairment of a contract that requires bigger pension payments. Left unanswered is what might happen to Christie's plan for the state's payment in fiscal year 2015, which begins Tuesday. He proposed last month slashing the payment from $2.25 billion to $681 million to help fill a $1.7 billion shortfall. Jacobson did rule that Christie breached the state's contract with the unions, included in a 2011 law that changed the pension system, violating statute and the New Jersey constitution. She did not dismiss the complaint and said her ruling was specific to fiscal 2014. A "different analysis could very well be required" for the next fiscal year, Jacobson wrote. The unions said they would consider an appeal, but they seemed intent on challenging Christie's 2015 pension-payment cut. Democrats, who control the Legislature, expect to pass a budget Thursday that would include the full payment for the next fiscal year and pay for it by raising taxes on the state's highest earners. Christie has said he would veto the tax increases.

Why Government Pension Funds Became Addicted to Risk: A public pension fund works like this: The government promises to make payments to its employees after they retire; it invests money now and uses those investments, and the returns on them, to make those promised payments later. Back when interest rates were high, this was fairly simple to do. Pension funds could buy bonds — ideally bonds that would mature around the time they would need the money to pay pensioners — and use the interest on those bonds to fund the payouts. In 1972, more than 70 percent of pension fund investment portfolios consisted of bonds and cash, according to a new analysis.But as interest rates began their long fall, pension funds faced a dilemma. Staying heavily invested in bonds would force governments either to set aside more cash upfront or to cut pension promises. So instead, pension funds radically changed their investment strategies, embracing investments that produce higher returns but also involve more risk. This shift has replaced an explicit cost with a hidden one: that lawmakers will have to divert more tax dollars into pension funds, cut back on benefits or both when stock market crashes cause pension fund asset values to decline. The shift has allowed public pension funds to adjust to a sharp drop in bond interest rates. Between 1992 and 2012, the yield on 30-year Treasury bonds fell 4.75 percentage points; on average, large government pension funds cut their investment return targets by just 0.7 of a percentage point over that period.

A Secret Plan to Close Social Security’s Offices and Outsource Its Work -  For months there have been rumors that the Social Security Administration has a “secret plan” to close all of its field offices. Is it true? A little-known report commissioned by the SSA the request of Congress seems to hold the answer. The summary document outlining the plan, which is labeled “for internal use only,” is unavailable from the SSA but can be found here. Does the document, entitled “Long Term Strategic Vision and Vision Elements,” really propose shuttering all field offices? The answer, buried beneath a barrage of obfuscatory consultantese, clearly seems to be “yes.” Worse, the report also suggests that many of the SSA’s critical functions could soon be outsourced to private-sector partners and contractors.

Proposal would end license requirements for some health care workers — When respiratory therapist Nicky Cope rolls a mechanical ventilator into a room, the situation is already life and death. "I help the doctor put a breathing tube down into the patient's airway and put the patient on life-support," she said. A new recommendation from the Texas Sunset Advisory Commission would deregulate her profession, along with 18 others — including X-ray technicians and medical physicists who calibrate MRI machines and other radiologic equipment. The commission was established in 1977 to evaluate state agencies and make fundamental changes to their missions or operations, if needed. Seventy-nine agencies have been abolished since 1977, saving Texas an estimated $945.6 million. In a report released by the commission, the system that provides licensing for these medical professions is under-funded and understaffed. The commission believes hospital and private agency oversight would protect patient safety.

How big cities will suffer in states that snubbed Obamacare’s Medicaid expansion - Cities stood to be among the biggest beneficiaries of a provision of the Affordable Care Act expanding access to Medicaid. The low-income are disproportionately concentrated in urban America. So are major regional medical centers like Grady Memorial Hospital in Atlanta that provide care for and attract the uninsured from far outside of cities. Urban residents also frequently foot the bill for local taxing districts that help pay for this care. For all these reasons, the Medicaid expansion contained in the law was a no-brainer for big-city mayors: The federal funding promised to cover anew tens of thousands of residents in many cities who had otherwise been turning up in hospitals with no insurance at all. Some of the country's biggest cities, though -- Atlanta, Miami, Houston, Dallas, Philadelphia -- are so far missing out on these benefits. Governors and state legislatures in their states have rejected the Medicaid expansion, following a Supreme Court ruling that allowed them to do so. The scenario highlights two conflicts: one between Democratic cities and their Republican-leaning state capitals; the other between local officials steeped in the practical reality of governing, and state officials for whom Medicaid opposition has been much more philosophical.

VA performance reviews showed no bad senior managers - (CNN) -- No matter what you call it -- bonuses, incentives, market or performance pay -- the Department of Veterans Affairs gave out a lot to senior managers in recent years despite sometimes deadly waits for health care and other problems faced by American veterans. A top VA official confirmed to a congressional committee on Friday that 78% of VA senior managers qualified for extra pay or other compensation in fiscal year 2013 by receiving ratings of "outstanding" or "exceeds fully successful," and that all 470 of them got ratings of "fully successful" or better. Such widespread laudatory performance appraisals occurred shortly before CNN started reporting in November how veterans waited excessive periods for VA health care, with some dying in the process. The VA has acknowledged 23 deaths nationwide due to delayed care. In Phoenix, CNN reported in April that the VA used fraudulent record-keeping -- including an alleged secret list -- that covered up the waiting periods. A fatal wait: Veterans languish and die on a VA hospital's secret list That didn't stop the head of the Phoenix VA medical center, Sharon Helman, from getting an $8,500 bonus last year.

Veterangate: VA whistleblower says records of deceased vets were altered - A Veteran Affairs employee has come forward claiming that government officials doctored the medial records of deceased veterans in order to hide the fact that they died waiting for medical care. Speaking during an interview with CNN that aired Monday, scheduling clerk Pauline DeWenter of the Phoenix, Arizona veterans facility said she has “surrendered evidence” to the Federal Bureau of Investigation revealing that vets were not only placed on a secret waiting list for the purposes of maintaining the illusion that patients were receiving timely care, but also that those who died waiting for appointments had their records changed to indicate they were still alive.  According to DeWenter, there were at least seven different occasions in which the records of deceased veterans were altered. Originally, she documented the details of a veteran’s death only to find her work written over by another individual. This practice had even occurred as recently as a few weeks ago, she said, amid investigations into whether or not delayed medical appointments really did result in fatalities. To DeWenter, the reason for the doctored records was clear: Someone wanted to place the deceased veterans back on the electronic waiting list so that it looked like they were still alive.

$50 billion price tag proves a stumbling block in VA bill - House and Senate negotiators met Tuesday to try to hammer out a compromise bill to gain a handle on the reports of problems piling up at the VA, but they immediately began stumbling over the potential $50 billion-a-year price tag. Some lawmakers questioned whether the Veterans Affairs Department’s problems could be solved by an infusion of cash, while others were skeptical of the official cost estimate from the Congressional Budget Office.  “This is ludicrous. It is impossible for us to even start an intelligent conversation on what we put in legislation when we have numbers that are so grotesquely out of line,” said Sen. Richard Burr, North Carolina Republican and ranking member of the Senate Committee on Veterans’ Affairs. The House and Senate overwhelmingly passed legislation earlier this month to let veterans seek care outside the VA in certain circumstances as well as to increase accountability for senior executive employees. Both bills have a hefty price tag — the Congressional Budget Office estimated the Senate bill would cost at least $35 billion and up to $50 billion a year if fully implemented, and the House bill would cost about $44 billion. With those numbers in mind, nearly 30 House and Senate lawmakers met for the first time as part of the conference committee given the task of hammering out a compromise.

For some, Obamacare delivers ​”sticker shock” -  Is health insurance bought through Obamacare really as affordable as it could be, or are prices higher than what was available before the federal program took effect in January? At least for some Americans, new research suggests, Obamacare is delivering a hefty dose of sticker shock.  According to a working paper published by the National Bureau of Economic Research, insurance premiums rose from about 14 percent before the Affordable Care Act was implemented to as high as 28 percent post-Obamacare for plans bought in California and states using federally run insurance marketplaces. Those figures are before tax credits, it's worth noting.  The higher rates are likely caused by insurers creating plans with more benefits, and therefore carrying a higher price tag, than the types of coverage bought by individuals before the ACA, the report notes.

Obamacare Premiums Are Going Up—Here’s Why - Insurers are calculating what to charge for health plans in 2015, which is no simple task. Actuaries can’t easily forecast how often the millions of new Obamacare enrollees will go to a doctor. New federal rules and expensive drugs will also increase costs. Wrong guesses could wipe out profits.

1. Cost of claims This one’s easy. Insurers know what they paid in claims for the previous year and use it as a basis for the year to come.

2. Benefit changes Past payouts are no longer a reliable predictor, though, especially with so many new Obamacare patients. And doctor visits will increase, because plans that didn’t cover maternity care and mental health must do so under the health-care law. That will bump up the premiums of some plans.

3. Rising prices Actuaries adjust for what they call medical trend, or how fast the cost of care* is rising. From 2014 to 2015 it’s expected to rise as much as 6.8 percent. That includes changes in cost (the price of an MRI) and utilization (how many MRIs are performed).

Health-care inflation heating back up - Health-care inflation has hit a low point and is poised to start rising again, but it’s unclear whether annual medical cost hikes are heading back to the double-digit increases of years past. That’s the conclusion of a study released Tuesday by consultant PricewaterhouseCoopers’ Health Research Institute, which says medical costs will rise 6.5% this year and 6.8% in 2015. Actual medical spending growth, however, could be 4.8% when benefit plan changes are taken into account, but that figure still will be up from 2014, the report says. iStockThe expected increase in inflation is the first the medical community will see since the downturn hit all sectors of the economy in 2009. A number of changes in health care — including the advent of Obamacare, doctors and hospitals consolidating operations, and a push toward higher-deductible health plans that force patients to act more as consumers — have brought down medical inflation from the annual double-digit hikes of the 1990s and 2000s. What has analysts puzzled, though, is whether the measures taken will prevent a return to what many viewed as out-of-control inflation rates. While cost increases are down, health-care inflation remains double to triple that of the rest of the economy. “There’s still a lot to do,” said Rick Judy, principal for PricewaterhouseCoopers’ health-care advisory practice. Judy says a move toward higher-deductible plans will keep patients more engaged as health-care consumers than before, thus keeping better controls on costs.

Health Care Spending, Real and Otherwise --Using imprecise language, I managed to confuse some folks in my discussion of that lame GDP report from the other day.  I wrote: As more people get insurance coverage and treatment, this will show up as more spending and higher GDP.  At the same time, cost controls, which have initially been found to be quite effective, push the other way.  Sentence one, fine.  Sentence two, confusing, because it sounds like I’m just saying something about slower growing prices when the issue is real, i.e., price-adjusted, GDP.  What I had in mind was real utilization of health care, as shown in the figure below, which feeds right into GDP through consumer spending.  As you can see it was a big negative in the quarter, but you can also see what an outlier it was. The point of the excerpted sentences is that while greater coverage will bring more people into the health care system, other reforms to health care delivery—ones that favor quality over quantity—are targeted at reducing wasteful utilization (see this discussion of examples of these reforms and their impact on spending). Some of these reforms will, in fact, mean less real GDP.  For example, working with discharged patients to improve their aftercare appears to be significantly reducing hospital readmission rates (see figure in above link).  Since aftercare is cheaper than a hospital readmission this means less real spending and less GDP (though one could argue that this is an artifact of GDP measurement, which doesn’t distinguish between wasteful and efficient spending). Therefore, to oppose such reforms because they lower GDP suggests a bit of a fetishistic relationship with this big aggregate called GDP.  And this being a family blog, we cannot entertain such fetishes.

Group health plan costs to increase 5.3% this year: Survey -- PwC's survey of more than 1,200 employers found health plan costs increased — before plan changes — 7.8% in 2013 and 8% in 2014. But after employers made design changes, such as increasing plan deductibles, net plan costs rose 4.5% in 2013 and are expected to increase 5.4% in this year. The growing economy is a key factor in the expected increases. “As more people become employed, job stability increases a family's discretionary income and allows family members to return their attention to long-postponed health needs,” PwC said in its analysis. However, employers continue to take steps to keep plan costs from soaring. For example, 44% of surveyed employers said they are considering making a high-deductible plan the only offering to employees within the next three years. Through greater cost-sharing, health plan enrollees have a strong financial incentive to use health care services more carefully, Michael Thompson, a PwC principal in New York, said in an interview. Another plan design — placing a dollar cap on how much an employer will reimburse plan enrollees for expensive medical procedures — also can change enrollee behavior.

U.S. healthcare profit outlook brightens on Obamacare, drug prices -  (Reuters) - U.S. healthcare companies are winning higher profit forecasts, bucking a wider trend on Wall Street, as pricey new biotech drugs hit the market and insurance enrollment rises under the Affordable Care Act. Analysts' profit expectations for the group have risen sharply since the start of the year, while estimates for most of the other nine Standard & Poor's 500 macro sectors have fallen, according to Thomson Reuters data. The jump in forecasts has come in the past two months, thanks largely to rising estimates for biotechnology companies such as Gilead , and for insurers, including Aetna . It provides some early evidence that President Barack Obama's signature healthcare overhaul could be a long-term source of profit growth for managed care providers. "Now you're actually seeing real numbers grow and that population start to take off," said Betsy Pecor, portfolio manager at Eagle Asset Management, based in St. Petersburg, Florida. Companies "are actually seeing that growth." About 8 million people have signed up for the plans, which are provided by commercial subscribers and come with income-based government subsidies, above the 2 million who had enrolled by January. Aetna and other insurers have said they lost money on the plans this year, but insurers are heading into new markets for 2015 to add customers.

The US Healthcare System: Most Expensive Yet Worst In The Developed World - One month ago we showed that when it comes to the cost of basic (and not so basic) health insurance, the US is by far the most expensive country in the world and certainly among its "wealthy-nation"peers. It would be logical then to think that as a result of this premium - the biggest in the world - the quality of the healthcare offered in the US among the best, if not the best, in the world. Unfortunately, that would be wrong and, in fact, the reality is the complete opposite: as a recent study by the Commonweath Fund, looking at how the US healthcare system compares internationally, finds, "the U.S. fails to achieve better health outcomes than the other countries, and as shown in the earlier editions, the U.S. is last or near last on dimensions of access, efficiency, and equity." In other words: most expensive, yet worst in the developed world.

Consumers Will Spend More on Health Care in 2015, Report Predicts - Growth in health care spending is expected to tick upward next year, in part because consumers who delayed treatment during the economic downturn are now seeking care they postponed, according to a report released on Tuesday.The report, from PricewaterhouseCoopers’s Health Research Institute, forecasts medical cost growth of 6.8 percent over all in 2015, compared with the institute’s estimate of 6.5 percent for this year.The projected increase is modest compared with the double-digit annual increases in medical inflation commonly seen before the economic downturn. But the rate of growth had been slowing in the past five years, so the upward shift is worth noting, said Ceci Connolly, managing director of the institute, the research arm of PricewaterhouseCooper’s health consulting practice.This so-called medical cost trend is the projected change in the cost to treat patients from one year to the next, and it’s a major factor used to determine plan premiums. The analysis measures spending growth in the employer-based health plan market, which covers about 150 million people. The forecast reflects the cost of services, as well as the amount of services used.Now that the economy has improved, Ms. Connolly said, people are better able to afford treatments. “Folks who postponed some services — some elective, some more serious — are going ahead and taking care of it,”

After A Lull, Health-Care Spending is Poised to Pick Up, Study Says - Health-care spending will accelerate next year for the first time since the recession ended, a reversal of a trend that could have broad implications for employers and the economy, a new study says. Spending for identical employee health coverage as this year will rise by 6.8% in in 2015, a study the PricewaterhouseCoopers Health Research Institute released Tuesday found. The gain is only modestly higher than the institute’s 2014 forecast of 6.5% growth, but marks the first acceleration in medical outlays since 2007—when costs were estimated to increase 11.9%. Even during the post-recession recovery, PricewaterhouseCoopers’ projections of health-care spending rose at more than 8% a year until 2013, when it fell below that level for the first time. The accounting firm’s calculation is designed to prepare employers for anticipated price changes if they leave medical plans unchanged. In reality, when facing heftier burdens, many companies adjust their offerings—such as pushing employees toward lower-cost, high-deductible plans. PricewaterhouseCoopers projects that actual growth rate in spending, when incorporating plan changes, will be 4.8% next year. The study offers clues about health-care usage and inflation, both which appear to be growing more quickly after several years of only modest increases. The slowdown in medical price increases has been a factor limiting overall consumer inflation to less than 2% over the past two years.

Hospital Networks Are Leaking Data, Leaving Critical Devices Vulnerable  - Two researchers examining the security of hospital networks have found many of them leak valuable information to the internet, leaving critical systems and equipment vulnerable to hacking. The data, which in some cases enumerates every computer and device on a hospital’s internal network, would allow hackers to easily locate and map systems to conduct targeted attacks. In at least one case, a large health care organization was spilling info about 68,000 systems connected to its network. At this and every other facility that was leaking data, the problem was an internet-connected computer that was not configured securely. Quite often, the researchers found, these systems also were using unpatched versions of Windows XP still vulnerable to an exploit used by the Conficker worm six years ago. “Now we know all the targeted info and we know that systems that are publicly connected to the internet are vulnerable to the exploit,” says Scott Erven, one of the researchers, who plans to discuss their findings today at the Shakacon conference in Hawaii. “We can exploit them with no user interaction… [then] pivot directly at the medical devices that you want to attack.” Attackers could, for example, infect one of these systems and use it as a launchpad to find and hack the control system that manages embedded pacemakers. Such systems, Erven says, generally require no authentication to administer test shocks to patients or to configure thresholds that determine when a shock is automatically administered. An attacker could therefore alter the settings that determine when a patient is going into cardiac arrest in order to administer shocks when they aren’t needed or prevent life-saving shocks from occurring.

Ebola Outbreak: Doctors Without Borders Has 'Reached The Limit Of What It Can Do' In West Africa -- The outbreak, which began in February, is the largest and most deadly ever in terms of numbers of dead and cases of infection. Between Guinea, Liberia and Sierra Leone, 567 cases and 350 dead have been reported, according to the World Health Organization (WHO). Guinea, where the outbreak was first reported, has been hit the hardest with 258 confirmed cases and 267 deaths. The first recorded outbreak of Ebola occurred in 1976 and killed 280, no outbreak until now has surpassed that count. MSF has identified cases in 60 locations in Guinea, Sierra Leone and Liberia. The organization has 300 staff members working in the three countries, but says it is the only organization treating patients with Ebola. Janssens calls on WHO and neighboring countries to contribute resources to fight the outbreak. Currently the organization says it is providing “technical expertise” to regional governments and supporting their efforts to combat the outbreak. The United Nations Children’s Fund (UNICEF) has sent medical supplies to the region. 

Mapping Africa's "Totally Out Of Control" Ebola Epidemic - "The epidemic is totally out of control," warns medical charity Médecins Sans Frontières of the deadly Ebola outbreak in Guinea, Liberia, and Sierra Leone. "There is a real risk of it spreading to other areas...Ebola is no longer a public health issue limited to Guinea: it is affecting the whole of West Africa." As of Friday, the Centers for Disease Control and Prevention put the number of cases at 362 — more than any other outbreak on record. Here's everything you need to know about Ebola...

Autism Risk Higher Near Pesticide-Treated Fields, Study Says - Babies whose moms lived within a mile of crops treated with widely used pesticides were more likely to develop autism, according to new research published today.The study of 970 children, born in farm-rich areas of Northern California, is part of the largest project to date that is exploring links between autism and environmental exposures. The biggest known contributor to autism risk is having a family member with it. Siblings of a child with autism are 35 times more likely to develop it than those without an autistic brother or sister, according to the National Institutes of Health. By comparison, in the new study, children with mothers who lived less than one mile from fields treated with organophosphate pesticides during pregnancy were about 60 percent more likely to have autism than children whose mothers did not live close to treated fields. Most of the women lived in the Sacramento Valley.

Scientists Release Landmark Worldwide Assessment Detailing Effects of Bee-Killing Pesticides -- Today, on the heels of last week’s celebration of National Pollinator Week and the Presidential Memorandum that followed, the first wide-scale analysis of harmful pesticides known to contribute to declining bee populations has been released. The Worldwide Integrated Assessment (WIA), issued by the Task Force on Systemic Pesticides, documents significant damage to bees and the environment stemming from the wide-spread use of neonicotinoid pesticides (neonics). The report stresses that even at very low levels, neonics and the products resulting from their breakdown in the environment are persistent and harmful, and suggests that the current regulatory system has failed to grasp the full range of impacts from these pesticides. The authors analyzed more than 800 peer-reviewed publications before coming to their consensus.   “This report should be a final wake up call for American regulators who have been slow to respond to the science,” said Emily Marquez, PhD, staff scientist at Pesticide Action Network North America. “The weight of the evidence showing harm to bees and other pollinators should move EPA [U.S. Environmental Protection Agency] to restrict neonicotinoids sooner than later. And the same regulatory loopholes that allowed these pesticides to be brought to the market in the first place—and remain on the shelf—need to be closed.”

Don’t Forget Butterflies! Our Pollination Crisis Is About More Than Honeybees - When President Obama signed an order last week creating a task force that will seek to promote pollinator health, honeybees grabbed the headlines. “Obama announces plan to save honeybees,” CNN proclaimed. “White House creates new honeybee task force,” the Wire echoed. “White House task force charged with saving bees from mysterious decline,” the Guardian added, referencing the colony collapse disorder that contributed to the death of 23 percent of managed honeybees last winter. But those headlines overlooked the most important part of the presidential order: it encompassed all pollinators, including birds, bats, native bees, and butterflies — not just honeybees. The memorandum will spur the creation, within the next 180 days, of a National Pollinator Health Strategy that will lay out ways for the U.S. to better study and better tackle the problems facing pollinators, both wild and managed. While the plight of bees has gotten deserved attention of late, many species of pollinators face the same threats: habitat destruction, climate-induced changes in flowering and weather patterns, and in some cases, pesticides.

Will GM Crops Collapse the Food System? - While everyone is supposed to accept the altruistic justification for GM, that it will “feed the world," I doubt they ever planned to give any GM technology away in developing countries or even sell the new technologies at cost. Their rigorous control of GM through patents and legions of lawyers waiting to sue for any possibility of patent infringement attest to the fact that this is a profitable science and they intend to play it to the bitter end. World grain prices plummeted due to the increased world supply of corn and soy, which was in no small part made possible by the introduction of GM crops. Many countries have refused shipments of GM grain from the U.S. further tightening the margins for grain farmers. The vast majority of the world grain glut was fed to animals, putting more meat into diets around the world. The use of corn for ethanol production (in the guise of a renewable fuel) was also clearly made possible by vast acreages of GM. GM seed is expensive and it needs herbicide application ( higher levels every year) and heavy fertilizer applications in order to maximize its yield potential. These inputs also cost money. Pesticides and manufactured fertilizer are made from oil, and inputs are transported from production site to farms worldwide, using more oil. Grain and grain fed animal products are marketed world wide using more oil. Given that oil sources are drying up, or located in unstable parts of the world, the U.S. is seeking more domestic production through fracking which among its many drawbacks is the fact that it uses tremendous amounts of water.

Monsanto Tries to Patent Natural, Non-GMO Tomatoes -- In an appalling attempt to patent yet another seed, Monsanto has resorted to fraud to try to gain rights to a tomato which contains a naturally occurring resistance to a fungal disease called botrytis. The tomato is not genetically modified, but Monsanto manipulated documents to to make the plant look ‘invented’ by biotech when the plant’s true maker is Mother Nature, herself. Representatives of No Patents on Seeds!  have called attention to this shady play of the biotech industry to try to outrun their failing genetic experiments. The original tomatoes used for this patent came from the international gene bank in Gatersleben, Germany, and they have shown this resistance for ages, well before biotech started monkeying with our food supply. “Because crossing tomatoes is not patentable, Monsanto deliberately rephrased the patent during the period of examination to make it appear as if genetic engineering was involved. However, careful reading of the patent shows that this is simply fraudulent. These tomatoes were not produced by transferring isolated DNA. The European Patent Office should have picked up on this,” says Christoph Then for No Patents on Seeds!. “This patent shows just how easy it is for companies like Monsanto to avoid existing prohibitions in patent law.”

U.S. FDA seeks ideas for nanotech use in livestock feed (Reuters) - The U.S. Food and Drug Administration is opening the door for livestock feed manufacturers and pharmaceutical companies to roll out nanotechnology products that could make animals gain weight faster or absorb medications more quickly. Nanotechnology, which involves the manipulation of materials on an atomic or molecular level, is increasingly being tested by food manufacturers, pharmaceutical companies and cosmetic firms as a means of improving the shelf-life of food, altering the look of make-up or changing the impact of medicated animal feeds. The agency's draft guidance on nanotechnology products for animal foods, released on Tuesday, takes a cautious approach and highlights "ongoing questions about the safety issues for humans and animals if such altered products were included into livestock and animal feed." FDA told Reuters it is "particularly interested" in the use of nanotechnology to intentionally change the chemical, physical or biological properties of animal feed and livestock drugs.

Millions Of Crop-Devouring Caterpillars Invade West Africa - It sounds like a scene ripped from a hysterical sci-fi thriller — thousands of people fleeing their homes as an army of ravenous caterpillars take over town. But that’s exactly what’s happening in northern Liberia, in west Africa. Millions of caterpillars, believed to be related to the devastating crop pest the african armyworm are munching through fields and marching into homes, causing many people to abandon their houses until the flood of caterpillars recedes. There are also public health concerns as the sheer quantity of caterpillars means massive amounts of excrement is washing into rivers and other fresh water supplies.  Both Dr. Sizi Subah, deputy agriculture minister for technical services in Liberia and Winfred Hammond, a senior entomologist with the U.N. Food and Agriculture Organization, have said that the recent and unprecedented caterpillar outbreaks may be linked to disruptions in the rainy and dry seasons, fueled by climate change. “The biggest concern is the fact that this is becoming a regular occurrence,” Hammond told AllAfrica. “It’s about time we seriously consider putting in place early warning systems and looked at how we can contain or check this problem from becoming a big national concern.”In 2009, a state of emergency was declared as a similar caterpillar outbreak, the worst seen in over 30 years, devastated coffee and cocoa farms. There were so many of the pests that year that they actually clogged wells and waterways with excrement. The pests also attacked key food crops like rice, cassava, and maze, exacerbating the fragile food security situation in Liberia which is still recovering from years of civil war. In all, about 80 towns in Liberia were affected by the plague, which spilled over into neighboring Guinea.

KCBS Cover Story Series: California Drought Turning Central Valley Farmland Into Dust Bowl - Water is often described as the lifeblood of the Central Valley; it’s one of the world’s most productive agricultural regions. But after three consecutive dry years, water supplies—from both the state and federal governments—are almost gone and the impact of the drought can be felt everywhere.“It’s everybody’s in this valley’s livelihood; it’s affected everybody,” Ralph Smith, who has lived in the small town of Chowchilla all of his 73 years, said. He said he’s never seen it this dry. Wells are now the only option for many communities and Tom Vanhoff, who also lives in Chowchilla, said all the extra pumping is dropping the water levels to depths never seen before. “I’m in a community out there with about 20 homes. We’re on one deep well ourselves and we lost it two years ago,” Vanhoff said. “We were at 200 feet and now we are down to 400 but all these new guys are going down to six, 800 and 1000 feet; it’s going to suck us dry here again pretty soon.” Fergus Morrissey, a water engineer from the Orange Cove Irrigation District, calls the drought a natural disaster but that unlike a earthquake or a hurricane, it moves in slow motion. “Unlike a (Hurricane) Katrina, which kind of happens all at once, a drought is a slow moving disaster and you almost don’t recognize what damage it’s going to do until you’re far into it and it’s already passed. So it’s a very slow, slow sort of death,”

Calif. drought expected to push food prices higher across U.S. -- California's prolonged drought is hurting the state's agricultural sector hard, which will likely push food prices higher across the United States. The Golden State accounts for nearly 50 per cent of the country's total produce of fruits and vegetables. The state alone produces 95 per cent of the country's broccoli, 81 per cent of its carrots, and almost all (99 per cent) of its walnuts and almonds. In addition, the Golden State accounts for significant amounts the country's total cattle and dairy products. Daniel Sumner, director of the Agriculture Issues Center at the University of California Davis, cautioned that prices of rice would likely jump 10-20 per cent this year. A fresh study by the University of California, said, "Without access to groundwater, this year's drought would be truly devastating to farms and cities throughout California." Prices of fruits and vegetables are expected to increase by 3 per cent this year, while prices of beef and eggs will likely become dearer by 6 per cent and 5 per cent, respectively. As the state is suffering draught for the third year in a row, the water distribution authorities have issued water-rights curtailment orders on a massive scale throughout the state. Shortage of water forced farmers to decrease the area of their crops.

USDA Forecasts Higher Fruit, Dairy Prices Due to Bad Weather, Disease - U.S. consumers face higher prices for oranges and other fresh fruit because of adverse weather and widespread disease in Florida and California, federal forecasters said Wednesday. The Agriculture Department said fresh fruit prices will rise between 5% and 6% this year, a sharp increase over its estimate last month of 3.5% to 4.5%. The government also elevated its forecast for dairy prices after an especially chilly winter curbed milk output in the Midwest, and it warned that prolonged drought in California could have significant, lasting effects on fruit, vegetable, dairy and egg prices. Rising costs for both fruit and dairy products drove U.S. food prices upward in May, the USDA said in a report that expands on last week’s monthly report from the U.S. Bureau of Labor Statistics on overall inflation, including food prices. U.S. retail food prices have risen for six straight months since December 2013, said USDA economist Annemarie Kuhns. Food prices in May increased 0.4% from the prior month and were up 2.5% from a year earlier, the USDA said. The agency maintained its forecast for U.S. food prices to rise as much as 3.5% for the year, which would mark the biggest gain in three years. Fresh fruit posted some of the strongest price gains last month, as a citrus greening disease afflicted Florida’s orange and grapefruit trees, and a bitter cold snap wiped out parts of California’s orange and lemon crops. Fruit prices rose 2% in May and 7.3% from a year earlier.

Climate change: May breaks global temperature record - Driven by exceptionally warm ocean waters, Earth smashed a record for heat in May and is likely to keep on breaking high temperature marks, experts say. The National Oceanic and Atmospheric Administration Monday said May's average temperature on Earth of 15.54 C beat the old record set four years ago. In April, the globe tied the 2010 record for that month. Records go back to 1880.   May was especially hot in parts of Kazakhstan, Indonesia, Spain, South Korea and Australia, while the United States was not close to a record, just about half a degree warmer than the 20th century average. El Nino weather event brewing Georgia Tech climate scientist Kim Cobb and other experts say there's a good chance global heat records will keep falling, especially next year because an El Nino weather event is brewing on top of man-made global warming. An El Nino is a warming of the eastern tropical Pacific Ocean that alters climate worldwide and usually spikes global temperatures.  Ocean temperatures in May also set a record for the month. But an El Nino isn't considered in effect till the warm water changes the air and that hasn't happened yet, NOAA said.

May 2014: Earth's 2nd Consecutive Warmest Month on Record | Weather Underground: May 2014 was Earth's warmest May since records began in 1880, beating the record set in 2010, said NOAA's National Climatic Data Center (NCDC) and NASA. The planet has now had two back-to-back warmest months on record, since NOAA also rated April 2014 as being tied for the warmest April on record. This is the first time Earth has experienced back-to-back warmest months on record since a four-month stretch during March, April, May, and June 2010. Global ocean temperatures during May 2014 were 0.59°C (1.06°F) above the 20th century average; this ties with June 1998, October 2003, and July 2009 for the greatest departure from average of any month in recorded history. Global land temperatures were the 4th warmest on record in May 2014, and the year-to-date January - May period has been the 5th warmest on record for the globe. Global satellite-measured temperatures in May 2014 for the lowest 8 km of the atmosphere were 6th or 3rd warmest in the 36-year record, according to Remote Sensing Systems and the University of Alabama Huntsville (UAH), respectively. Northern Hemisphere snow cover during May was the 6th lowest in the 48-year record.

Last Month Was the Hottest May Ever Recorded - U.S. temperatures have been recorded since 1880, and last month’s results were hotter than any May that preceded it. The National Oceanic and Atmospheric Administration on Monday issued a report stating that the land and ocean temperatures recorded in May 2014 combined to make it the hottest May in recorded history. The combined average was about 1.33 degrees higher than the 20th century average of 58.6 degrees. While the previous record was set in 2010, four of the last five years have included the hottest May months in recorded history. May 2012 was the third warmest, followed by 1998 and 2013. The global land surface temperature was 2.03 degrees above the 20th century average of 52 degrees, the fourth highest for May on record. For the ocean, the May global sea surface temperature was 1.06 degrees above the 20th century average of 61.3 degrees, making it the record highest for May and tying with June 1998, October 2003, and July 2009 as the highest departure from average for any month on record. May 2014 marked the 39th consecutive May and 351st consecutive month (more than 29 years) with a global temperature above the 20th century average. The last below-average global temperature for May took place in 1976. The last below-average temperature for any month was February 1985.

Worrisome Growth Pattern - Every spring, as the weather warms, trees up and down the East Coast explode in a display of bright green life as leaves fill their branches, and every fall, the same leaves provide one of nature’s great color displays of vivid yellow, orange, and red. Thanks to climate change, the timing of those events has shifted over the last two decades, Harvard scientists say.Andrew Richardson, an associate professor of organismic and evolutionary biology, and research associate Trevor Keenan worked with colleagues from seven different institutions on a study that found that forests throughout the eastern United States are showing signs of spring growth dramatically earlier, and that the growing season in some areas extends further into the fall. The expanded growing season, they say, has enabled forests to store as much as 26 million metric tons more CO2 than before. The work is described in a June 1 paper published in Nature Climate Change. “What we find in this paper is an increase in the growing season of forests in the eastern U.S. due to recent climate change,” Keenan said. “This has been beneficial for forests in the past, but we do not expect the response to continue unchecked in the future. It must also be kept in mind that this positive effect of warming is but one amid a barrage of detrimental impacts of climate change on the Earth’s ecosystems.”

Climate crisis: Arizona may run out of water in 6 years - Republican Hank Paulson thinks the time to act on climate change is now. What does Republican Arizona think? Let’s check. Republican Arizona could run out of water in six years, making Paulson’s point. The water supply of the state of Arizona, it seems, is making Hank Paulson’s point, that we need to act now — actual-now, as in “this minute.” From the Smithsonian Magazine: Prolonged drought and a rapidly expanding population are pushing Arizona’s water system to its limit  Arizona is bone dry, desiccated by the worst drought ever seen in the state’s 110-year long observational record. The Grand Canyon State has been in drought conditions for a decade, and researchers think the dry spell could hold out for another 20 to 30 years, says the City of Phoenix.That people have not been fleeing Arizona in droves, as they did from the plains during the 1930s Dust Bowl, is a miracle of hydrological engineering. But the magic won’t last, and if things don’t start to change Arizona is going to be in trouble fast, says the New York Times. A quarter of Arizona’s water comes from the Colorado River, and that river is running low. There’s not enough water in the basin to keep Arizona’s crucial Lake Mead reservoirs topped up. If changes aren’t made to the entire multi-state hydrological system, says the Times, things could get bad.  Here’s the New York Times on the same subject:Lake Mead has begun a sharp decline; the principal upstream reservoir, Lake Powell, now holds only 42 percent of its capacity, and Lake Mead about 45 percent.If upstream states continue to be unable to make up the shortage, Lake Mead, whose surface is now about 1,085 feet above sea level, will drop to 1,000 feet by 2020. Under present conditions, that would cut off most of Las Vegas’s water supply and much of Arizona’s. Phoenix gets about half its water from Lake Mead, and Tucson nearly all of its.

A quarter of India's land is turning into desert - minister: (Reuters) - About a quarter of India's land is turning to desert and degradation of agricultural areas is becoming a severe problem, the environment minister said, potentially threatening food security in the world's second most populous country. India occupies just 2 percent of the world's territory but is home to 17 percent of its population, leading to over-use of land and excessive grazing. Along with changing rainfall patterns, these are the main causes of desertification. "Land is becoming barren, degradation is happening," said Prakash Javadekar, minister for environment, forests and climate change. "A lot of areas are on the verge of becoming deserts but it can be stopped." Land degradation - largely defined as loss of productivity - is estimated at 105 million hectares, constituting 32 percent of the total land. According to the Indian Space Research Organisation that prepared a report on desertification in 2007, about 69 percent of land in the country is dry, making it vulnerable to water and wind erosion, salinization and water logging. The states of Rajasthan, Gujarat, Punjab, Haryana, Karnataka and Andhra Pradesh are the among the most arid. These are some of the cotton and rapeseed growing states of India.

Atmosphere May Be Getting in Gear for El Niño -  The atmosphere over the Pacific Ocean may be getting its act together and finally cooperating with shifting ocean waters to signal that an El Niño has arrived, climate scientists with the National Oceanic and Atmospheric Administration reported in their latest outlook.Animation of sea surface temperatures in the tropical Pacific Ocean. El Niño watchers have been waiting for the climate phenomenon to show up since an El Niño Watch was issued back in March, meaning that conditions were favorable for one to develop in the next six months. Potential El Niño events are so closely watched because of the influence they can have on the world’s weather. Depending on when this El Niño develops, it could also bump up Earth’s already warming temperature enough to make 2014 or 2015 a record warm year, scientists have said. An El Niño is characterized by warmer-than-normal sea surface temperatures in the central and eastern tropical Pacific. It is the warm phase of a larger cyclical climate phenomenon called the El Niño-Southern Oscillation; La Niña is the cool phase and is characterized by colder-than-normal temperatures in the same parts of the Pacific.

El Nino's return could change everything- -- Indications from the tropical Pacific suggest that the first El Nino event in five years is happening. And this looks to be not any normal El Nino, but one that could rival the abnormal conditions from the spring of 1997 to the spring of 1998. Experts also note that global warming could accelerate if this year's El Nino triggers a "regime shift," the term used for a sudden, massive change in the global climate.It would be hard to predict the strength of the El Nino event that may be developing without closely watching the situation for some more time, but scientists estimate that the episode, if happening, will peak next winter. When an El Nino event occurs in the summer, the region subject to strong ascending air currents shifts eastward due to rising ocean temperatures, and the high-pressure system in the Pacific weakens. For Japan, this means a prolonged rainy season and a cooler summer. It also means fewer sunny days, which is bad for crops. When an El Nino event occurs in the winter, the continental high-pressure system that brings cold air to Japan can fail to gain strength, resulting in a mild winter. The JMA's forecast for this summer, excluding southern areas such as Okinawa, is for July to have a higher-than-average number of rainy and cloudy days. There was a powerful El Nino event in the summer of 1997, but June and July were still hot in Japan that year. Although many regions recorded lower-than-normal temperatures in August, the summer as a whole was hot -- which runs counter to many El Nino forecasts.

How will El Niño impact weather patterns? -- Confidence remains high that El Niño is developing and that this will impact global weather patterns during the upcoming year. For more information on what El Niño is, see my previous article.  However, there is uncertainty regarding just how strong El Niño will become later this year.  The ultimate strength of El Niño is critical to forecasting the impact on our weather across Canada as we head into the fall and winter. As we look to the past, we can see that a weak to moderate El Niño often has the opposite impact on some regions compared to what we typically see from a strong El Niño.During the past few months there has been a steady trend towards warmer than average sea surface temperatures in the Equatorial regions of the Pacific Ocean. The black oval on the map below highlights the region of the Pacific Ocean to the west of South America that is evaluated to determine whether we are in an El Niño or La Niña pattern.  While the sea surface temperatures are starting to take on the look of an El Niño pattern, we still have quite a ways to go before we will officially have El Niño.The temperature anomaly for this region is calculated based on average water temperatures over a 90 day period. For El Niño, the 90 day average must be at least 0.5ºC above average for five consecutive months. So, we will likely be well into the autumn season before that criteria is fulfilled. However, the weather certainly will not wait until this official declaration before it is impacted by the warming of the ocean water temperatures in this region.Typically, El Niño years are associated with fewer tropical storms and hurricanes in the Atlantic Ocean and Gulf of Mexico. In addition, sea surface temperatures this year in the tropical Atlantic between the Caribbean and Africa (where many tropical cyclones develop) are running at to below average. This is a notable pattern reversal from what we have seen during most years since the 1990s and should also contribute to fewer total storms for the upcoming hurricane season.

Water war bubbling up between California and Arizona - The next water war between California and Arizona won't be such an amusing little affair. And it's coming soon. Nineteenth-century water law is meeting 20th-century infrastructure and 21st century climate change, and it leads to a nonsensical outcome.  The issue still is the Colorado River. Overconsumption and climate change have placed the river in long-term decline. It's never provided the bounty that was expected in 1922, when the initial allocations among the seven states of the Colorado River basin were penciled out as part of the landmark Colorado River Compact, which enabled Hoover Dam to be built, and the shortfall is growing. The signs of decline are impossible to miss. One is the wide white bathtub ring around Lake Mead, the reservoir behind Hoover Dam, showing the difference between its maximum level and today's. Lake Mead is currently at 40% of capacity, according to the latest figures from the U.S. Bureau of Reclamation, which operates the dam. At 1084.63 feet on Wednesday, it's a couple of feet above its lowest water level since it began filling in 1935. But the rules governing appropriations from the river are unforgiving and don't provide for much shared sacrifice among the states, or among farmers and city dwellers. The developing crisis can't be caricatured as farmers versus fish, as it is by Central Valley growers irked at environmental diversions of water into the region's streams. It can't be addressed by building more dams, because reservoirs can't be filled with water that doesn't come. And it can't be addressed by technological solutions such as desalination, which can provide only marginal supplies of fresh water, and then only at enormous expense.

Acid seas threaten creatures that supply half the world's oxygenWhat happens when phytoplankton, the (mostly) single-celled organisms that constitute the very foundation of the marine food web, turn toxic? Their toxins often concentrate in the shellfish and many other marine species (from zooplankton to baleen whales) that feed on phytoplankton. Recent trailblazing research by a team of scientists aboard the RV Melville shows that ocean acidification will dangerously alter these microscopic plants, which nourish a menagerie of sea creatures and produce up to 60 percent of the earth's oxygen. The researchers worked in carbon saturated waters off the West Coast, a living laboratory to study the effects of chemical changes in the ocean brought on by increased atmospheric carbon dioxide. A team of scientists focused on the unique "upwelled" zones of California, Oregon and Washington. In these zones, strong winds encourage mixing, which pushes deep, centuries-old CO2 to the ocean surface. Their findings could reveal what oceans of the future will look like. The picture is not rosy. Scientists already know that ocean acidification, the term used to describe seas soured by high concentrations of carbon, causes problems for organisms that make shells. “What we don't know is the exact effects ocean acidification will have on marine phytoplankton communities,” . “Our hypothesis is that ocean acidification will affect the quantity and quality of certain metabolities within the phytoplankton, specifically lipids and essential fatty acids.” Acidic waters appear to make it harder for phytoplankton to absorb nutrients. Without nutrients they're more likely to succumb to disease and toxins. Those toxins then concentrate in the zooplankton, shellfish and other marine species that graze on phytoplankton.

World must act within five years to save oceans from pollution and overfishing: watchdog: The world’s oceans need saving from pollution and overfishing, and an independent panel warned on Tuesday that urgent action was needed within five years. The Global Ocean Commission said cutting down on single-use plastics products, restricting fishing on the high seas, and establishing binding regulations for offshore oil and gas exploration are key parts of the rescue plan. In all, the former heads of state and business leaders offered eight proposals for ocean health in their report, “From Decline to Recovery – A Rescue Package for the Global Ocean.” “The ocean provides 50 per cent of our oxygen and fixes 25 per cent of global carbon emissions. Our food chain begins in that 70 per cent of the planet,” said Jose Maria Figueres, co-chair of the commission and a former president of Costa Rica. “Unless we turn the tide on ocean decline within five years, the international community should consider turning the high seas into an off-limits regeneration zone until its condition is restored.”

On N.C.’s Outer Banks, scary climate-change predictions prompt a change of forecast -  The dangers of climate change were revealed to Willo Kelly in a government conference room in the summer of 2011. By the end of the century, state officials said, the ocean would be 39 inches higher and her home on the Outer Banks would be swamped. The state had detailed maps to illustrate this claim and was developing a Web site where people could check by street address to see if their property was doomed. There was no talk of salvation, no plan to hold back the tide. The 39-inch forecast was “a death sentence,” Kelly said, “for ever trying to sell your house.” So Kelly, a lobbyist for Realtors and home builders on the Outer Banks, resolved to prove the forecast wrong. And thus began one of the nation’s most notorious battles over climate change. Coastal residents joined forces with climate skeptics to attack the science of global warming and persuade North Carolina’s Republican-controlled legislature to deep-six the 39-inch projection, which had been advanced under the outgoing Democratic governor. Now, the state is working on a new forecast that will look only 30 years out and therefore show the seas rising by no more than eight inches. Environmentalists are appalled, and North Carolina has been lampooned as a hotbed of greedy developers trying to “outlaw” the rising tide. Some climate-change experts are sympathetic, however, calling the rebellion an understandable reaction to sea-level forecasts that are rapidly becoming both widely available and alarmingly precise.

Lessons for Climate Change in the 2008 Recession - Henry M. Paulson -- The key is cooperation between the United States and China — the two biggest economies, the two biggest emitters of carbon dioxide and the two biggest consumers of energy. When it comes to developing new technologies, no country can innovate like America. And no country can test new technologies and roll them out at scale quicker than China. The two nations must come together on climate. The Paulson Institute at the University of Chicago, a “think-and-do tank” I founded to help strengthen the economic and environmental relationship between these two countries, is focused on bridging this gap. We already have a head start on the technologies we need. The costs of the policies necessary to make the transition to an economy powered by clean energy are real, but modest relative to the risks. A tax on carbon emissions will unleash a wave of innovation to develop technologies, lower the costs of clean energy and create jobs as we and other nations develop new energy products and infrastructure. This would strengthen national security by reducing the world’s dependence on governments like Russia and Iran. Climate change is the challenge of our time. Each of us must recognize that the risks are personal. We’ve seen and felt the costs of underestimating the financial bubble. Let’s not ignore the climate bubble. 

Former Bush Treasury Secretary: We Can Prevent A ‘Climate Crash’ With A Carbon Tax -- There is an amazing op-ed in Sunday’s New York Times, “The Coming Climate Crash: Lessons for Climate Change in the 2008 Recession.” What’s amazing isn’t so much the content — the climate crisis is real, we’re close to crossing catastrophic and irreversible tipping points, we have the technology to start slashing carbon pollution now, and we need a carbon price to jumpstart the process.  But this piece is by Henry M. Paulson Jr., Treasury Secretary from July 2006 to January 2009 under President George W. Bush and Vice President Dick Cheney. Whereas Tea-Party-driven Republicans on the Hill are stuck in denial, the ever-worsening reality of human caused climate change is leading even the most mainstream Republicans like Paulson to sing a much different tune.We are building up excesses (debt in 2008, greenhouse gas emissions that are trapping heat now). Our government policies are flawed (incentivizing us to borrow too much to finance homes then, and encouraging the overuse of carbon-based fuels now). Our experts (financial experts then, climate scientists now) try to understand what they see and to model possible futures. And the outsize risks have the potential to be tremendously damaging (to a globalized economy then, and the global climate now). What are these outsize risks? Paulson explains that scientists have identified a number of “potential thresholds that, once crossed, could cause sweeping, irreversible changes.” He points out “already, observations are catching up with years of scientific models, and the trends are not in our favor.” And, Paulson notes, these changes are quickly accelerating in recent years. “Fewer than 10 years ago, the best analysis projected that melting Arctic sea ice would mean nearly ice-free summers by the end of the 21st century,” he writes. “Now the ice is melting so rapidly that virtually ice-free Arctic summers could be here in the next decade or two.” “Even worse, in May, two separate studies discovered that one of the biggest thresholds has already been reached,” Paulson writes. “The West Antarctic ice sheet has begun to melt, a process that scientists estimate may take centuries but that could eventually raise sea levels by as much as 14 feet.”

The Big Green Test, by Paul Krugman -- On Sunday Henry Paulson, the former Treasury secretary and a lifelong Republican, had an Op-Ed article about climate policy... In the article, he declared that man-made climate change is “the challenge of our time,” and called for a national tax on carbon emissions... Considering the prevalence of climate denial within today’s G.O.P., and the absolute opposition to any kind of tax increase, this was a brave stand to take. But not nearly brave enough. Emissions taxes are the Economics 101 solution to pollution problems... But that isn’t going to happen in the foreseeable future. ... Yet there are a number of second-best things ... that we’re either doing already or might do soon. ... Let me give some examples of what I’m talking about. First, consider rules like fuel efficiency standards, or “net metering” mandates requiring that utilities buy back the electricity generated by homeowners’ solar panels. Any economics student can tell you that such rules are inefficient compared with the clean incentives provided by an emissions tax. But we don’t have an emissions tax, and fuel efficiency rules and net metering reduce greenhouse gas emissions. So a question for conservative environmentalists: Do you support the continuation of such mandates, or are you with the business groups (spearheaded by the Koch brothers) campaigning to eliminate them and impose fees on home solar installations? Second, consider government support for clean energy via subsidies and loan guarantees. ... Are you O.K. with things like loan guarantees for solar plants, even though we know that some loans will go bad, Solyndra-style? Finally, what about the Environmental Protection Agency’s proposal that it use its regulatory authority to impose large reductions in emissions from power plants? ... Are you willing to support this partial approach?

Why a Carbon Tax is Better Than Obama’s Cap and Trade --  Yves Smith - This weekend, former Treasury secretary Hank Paulson weighed in at the New York Times about the need for more urgent action on the climate front, and described how various indicators of how quickly climate change is taking place, such as the speed of Arctic and Antarctic ice melt, are moving much faster than models had predicted.  Paulson, who has long been an ardent conservationist (and in contrast to his alpha Wall Street male standing, lives modestly), made a forceful pitch for carbon taxes. The irony of this proposal is that we have a Republican showing what a right-winger Obama really is. Without mentioning the recent Administration carbon scheme directly, Paulson’s article make the case for more forceful and effective intervention than cap and trade, a central part of the Administration’s proposed “pay to pollute” program.…viewing climate change in terms of risk assessment and risk management makes clear to me that taking a cautiously conservative stance — that is, waiting for more information before acting — is actually taking a very radical risk. We’ll never know enough to resolve all of the uncertainties. But we know enough to recognize that we must act now.….We need to craft national policy that uses market forces to provide incentives for the technological advances required to address climate change. As I’ve said, we can do this by placing a tax on carbon dioxide emissions. Many respected economists, of all ideological persuasions, support this approach. We can debate the appropriate pricing and policy design and how to use the money generated. But a price on carbon would change the behavior of both individuals and businesses. At the same time, all fossil fuel — and renewable energy — subsidies should be phased out. Renewable energy can outcompete dirty fuels once pollution costs are accounted for…

How much do we care about future generations?, by Mark Thoma - Former U.S. Treasure Secretary Henry Paulson's recent warning that "We're staring down a climate bubble that poses enormous risks to both our environment and economy" and his call for a carbon tax brings up an important question. How do we assess the benefits to future generations from taking action on climate change now, especially benefits that may be decades or even centuries away? To answer this question, it's necessary to consider what's known as the "discount rate" on such policies. Consider a simple example. Suppose an individual is going to receive $1.10 in the future, say a year from now, and that the interest rate on risk-free assets is 10 percent. That would allow the person to invest $1 today and, at a 10 percent interest rate, receive $1.10 a year from now. So when the interest rate is 10 percent, the present value of a certain promise of earning $1.10 in a year is $1.00. Stated another way, an individual would only be willing to pay $1 for a promise of $1.10 a year later when the interest rate is 10 percent.

How good a climate change solution do we need? - I would put it this way: climate change is like neither the financial crisis nor the Obama health care plan, but above all it is an international problem requiring an international solution.  And it’s not like banning land mines, where most countries have little reason to continue with the practice.  It is also not like ozone, where a coordinated solution is relatively low cost, more or less invisible to voters, threatens few jobs, and involves few incentives for defection.  A climate change solution requires a lot of countries to turn their back on coal-generated pollution long before we did (as measured in per capita income terms) and long before the Kuznets curve suggests they otherwise are going to.  A climate change solution, if done the wrong way, will look to China like a major attempt to unfairly deindustrialize them and, if it is backed by trade sanctions, it will look like an act of war.  Trade agreements do best when most or all of the countries already wish to act cooperatively toward much lower tariffs.  For a green energy solution, China (among others) in fact has to want to solve the problem, as do we.  And the already-installed or in-process coal base in China is…forbidding. The problem isn’t just coming up with “something better.”  Think of today’s fossil fuels as a stock in the ground.  The problem is coming up with something “better than the lower and falling prices for the fossil fuel stock once some countries start going green.”  That’s really tough, because it means competing against a lower fossil fuel price than what we see today.  What will Africa choose? In other words, a climate change solution has to involve a relatively cheap form of energy, relative to the status quo.  Not just cheap to citizens because it is subsidized, but cheap to governments and cheap at the national level too.  Alternatively, you could regard all of this as reason to be pessimistic.  But in the meantime, it is entirely reasonable to insist on solutions which can generalized, and that means solutions which are relatively cost-effective.

Bloomberg’s New Report Shows Why Waiting on Climate Action is ‘Risky Business’ - A new report from entrepreneur and former New York City Mayor Michael Bloomberg and a committee of economists and former politicians explains why anything other than immediate action on climate change presents risky business. Released Tuesday morning, Risky Business: The Economic Risks of Climate Change in the United States contains the comprehensiveness and interactivity of the federal government’s National Climate Assessment, but centers on the economic risks presented by a warming planet, rising sea level and other climate factors. For instance, one graphic shows the value of state properties below the mean sea level in Florida, Louisiana, Massachusetts, Maryland and New York now and projections for 2100.“Damages from storms, flooding, and heat waves are already costing local economies billions of dollars—we saw that firsthand in New York City with Hurricane Sandy,” Bloomberg said in a statement. “With the oceans rising and the climate changing, the Risky Business report details the costs of inaction in ways that are easy to understand in dollars and cents—and impossible to ignore.”The report found that between $66 billion and $106 billion worth of existing coastal property will likely be below sea level nationwide by 2050. About $238 billion to $507 billion worth of property could be below sea level by 2100.

“Risky Business” Climate Report: Paulson, Bloomberg, Rubin, Schultz Late to Combat the Denialists - Yves Smith  -- Those who have been involved in trying to raise awareness of the risks of global warming might have to repress a "Beware of Greeks bearing gifts" response to a new, accessible, and well written report on the probable impact of climate change on the US. The effort, called "Risky Business" has Hank Paulson, Michael Bloomberg, and Thomas Steyer, retired chairman of Farallon Capital, as co-chairs, with its other committee members including Bob Rubin, George Schultz, Henry Cisneros, Gregory Page (the executive chairman of Cargill), Donna Shalala, and Olympia Snowe. In other words, when Hank Paulson looks like the best of a bunch, there's reason to be cautious. Nevertheless, the report is meant to demonstrate that the US is long past having the luxury of debating whether global warming is happening, and that a sober look at the seriousness of the outcomes says we need to do something, pronto. If nothing else, it presents some important new analysis and represents a split among the elites, always a welcome development.

Bipartisan Report Tallies High Toll on Economy From Global Warming-- More than a million homes and businesses along the nation’s coasts could flood repeatedly before ultimately being destroyed. Entire states in the Southeast and the Corn Belt may lose much of their agriculture as farming shifts northward in a warming world. Heat and humidity will probably grow so intense that spending time outside will become physically dangerous, throwing industries like construction and tourism into turmoil.That is a picture of what may happen to the United States economy in a world of unchecked global warming, according to a major new report released Tuesday by a coalition of senior political and economic figures from the left, right and center, including three Treasury secretaries stretching back to the Nixon administration.  At a time when the issue of climate change has divided the American political landscape, pitting Republicans against Democrats and even fellow party members against one another, the unusual bipartisan alliance of political veterans said that the country — and business leaders in particular — must wake up to the enormous scale of the economic risk. “The big ice sheets are melting; something’s happening,” George P. Shultz, who was Treasury secretary under President Richard M. Nixon and secretary of state under President Ronald Reagan, said in an interview. He noted that he had grown concerned enough about global warming to put solar panels on his own California roof and to buy an electric car. “I say we should take out an insurance policy.”

Climate Change Report Warns of Economic Tidal Wave in U.S. - Rising seas and extreme weather could lead to billions of dollars in economic losses, according to a new climate change report that strives to reframe the debate in economic terms.   The study was commissioned by the Risky Business Project, a research organization chaired by a bipartisan panel of former officials, including ex-Treasury Secretary Henry M. Paulson, former New York mayor Michael Bloomberg and hedge-fund billionaire turned climate change advocate Tom Steyer.   The study estimates that climate change will have a disparate impact across different regions and industries. Rising seas could swallow up an estimated $66 to $106 billion worth of coastal properties by 2050, the report estimates. Rising temperatures, particularly in the South, Southwest and Midwest, could reduce the productivity of outdoor workers by 3 percent. Absent a change in crops, yields could decline by 14 percent.

Today's Global Warming Propaganda Is Brought To You By...It’s going to get a lot hotter in the United States over the next 100 years, and worse going forward," notes a report cited by Bloomberg.The report, below, fearmongers the mutually assured destruction that will happen if something is not done right now about global warming (despite the implications being out to the year 2200) concluding... "The risks are much more perverse and cruel than we saw with the financial crisis, because they accumulate over time...a business-as-usual approach is actually radical risk-taking." Can you guess who sponsored the report and used those M.A.D. words? First, the report via Bloomberg, In a report published today called “Risky Business,” commissioned by some of America’s top business leaders to put price tags on climate threats. For example, by the end of the century, between $238 billion and $507 billion of existing coastal property in the U.S. will likely be subsumed by rising seas, and crop yields in some breadbasket states may decline as much 70 percent.  But perhaps the biggest way Americans will physically experience global warming is, well, the warming. By 2050, the average American is likely to see between two and more than three times as many 95 degree days as we're used to. By the end of this century, Americans will experience, on average, as many as 96 days of such extreme heat each year. And in case you were wondering who would create such scaremongery (rightly or wrongly) and Mutaully Assured Destructive words?  Today’s report was funded by Hank Paulson, the former head of Goldman Sachs and Treasury Secretary under George W. Bush, by former hedge fund manager Tom Steyer and by Michael Bloomberg, former mayor of New York and founder of Bloomberg LP.  Backers also include former U.S. Treasury Secretaries George Shultz and Robert Rubin.

Carbon Cuts Now Won’t Stop Climate Change, but Could Limit Damage -  Climate change is not an event in your children’s future. It is bearing down upon you now. And there is nothing you — or anyone else — can do to prevent the hit.Over the next quarter-century, heat-related death rates will probably double in the southeastern states. Crop losses that used to happen only once every 20 years because of cataclysmic weather will occur five times as often.This is our future even if every person on the planet abruptly stopped burning coal, gas, oil, wood or anything else containing carbon today and we hooked the world economy onto the wind and the sun tomorrow. The change is baked in, caused by CO2 spewed into the air long ago. This stark future is rendered vividly in  a comprehensive report released on Tuesday by the Risky Business Project, a coalition of political and business luminaries representing widely different political views — including the former Treasury secretaries George P. Shultz, Robert E. Rubin and Henry M. Paulson Jr. — that is intended to raise awareness about the impending perils of a changing climate. Together with the latest assessment from the Intergovernmental Panel on Climate Change, reported in April, last month’s National Climate Assessment and the new rules proposed by the Obama administration to combat carbon pollution from power plants, it contributes to a new picture of climate change. And it is not pretty, puncturing the hopes held by some of the most uncompromising environmentalists and the most compromising politicians that humanity can still prevent climactic upheaval if we only start replacing fossil fuels today.

The Public Relations Debate About Global Warming Heats Up - Forbes: The denial of man-made global warming is one of the greatest PR campaigns in history. With echoes of the industry-funded research from tobacco companies that denied links between smoking and lung cancer, the well-coordinated PR plan has delayed new regulations for coal and petroleum industries and influenced millions of Americans. In simple terms, man-made global warming can be described as “the increase in Earth’s average surface temperature due to rising levels of greenhouse gases,” according to NASA. “The most popular explanation for global warming is the burning of fossil fuels, mainly petroleum and coal, which produces carbon dioxide as one of the by-products. As of 2010, the concentration of carbon dioxide is about 50% higher than it was before the start of the industrial revolution in the late 1800′s.” The deniers have masterfully labeled themselves as “Pro-Business” and “Anti-Government” while painting their adversaries as meddling intellectuals and bureaucrats intent on imposing their unproven beliefs on everyone else. It’s a well-funded group.  Drexel University completed a study that concluded conservative foundations and others have bankrolled their case with $558 million between 2003 and 2010.  “Money amplifies certain voices above others and, in effect, gives them a megaphone in the public square,” writes environmental scientist Robert J. Brulle, the study’s author.  “Powerful funders are supporting the campaign to deny scientific findings about global warming and raise public doubts about the roots and remedies of this massive global threat,” the study noted.

The new environmentalism will lead us to disaster --So profound has been the influence of humans, Nobelist Crutzen and his colleagues later wrote, that the planet has entered a new geologic epoch defined by a single, troubling fact: The “human imprint on the global environment has now become so large and active that it rivals some of the great forces of nature in its impact on the functioning of the Earth system.” The science behind Crutzen’s claim is extensive and robust, and it centers on the profound and irreversible changes brought by global warming. Yet almost as soon as the idea of the Anthropocene took hold, people began revising its meaning and distorting its implications. A new breed of ecopragmatists welcomed the epoch as an opportunity. They have gathered around the Breakthrough Institute, a “neogreen” think tank founded by Michael Shellenberger and Ted Nordhaus, the authors of a controversial 2004 paper, “The Death of Environmentalism.” They do not deny global warming; instead they skate over the top of it, insisting that whatever limits and tipping points the Earth system might throw up, human technology and ingenuity will transcend them. As carbon dioxide concentrations pass 400 ppm for the first time in a million years, and scientists warn of a U.S. baking in furnacelike summers by the 2070s, Shellenberger and Nordhaus wrote that by the end of the century “nearly all of us will be prosperous enough to live healthy, free and creative lives.” The answer, they say, is not to change course but to more tightly “embrace human power, technology and the larger process of modernization.”

EU carbon price collapses: Carbon trading is not the solution to climate change -- The EU Emissions Trading Scheme is in crisis. Yesterday, the European Parliament voted against the backloading proposal which was aimed at increasing the price of carbon permits. After the vote, the price of carbon permits dropped by about 40% to its lowest ever price of €2.63. New Energy Finance predicts that it might fall as low as €1. Mark Whitaker (BBC): Today, European MPs vote no to a plan to boost the idea of carbon trading as the weapon to combat climate change. Tamra Gilbertson (Carbon Trade Watch): Perhaps this can be a signal to the rest of the world that emissions trading and market-based solutions are not the solution to climate change. Mark Whitaker: Not everyone is convinced it actually works, but the cornerstone of Europe’s effort to combat climate change is something called carbon trading, which works on the idea that companies are allowed to buy permits to cover any carbon emissions they make. It’s based on the principle that the polluter pays. The trouble is, the price of carbon permits has dropped so low that there was scarcely any deterrent at all to pumping out carbon. Today, the European Parliament voted not to intervene in the carbon permit market to prop up the price of the permits. MEPs had been invited to vote for something called backloading, that’s a plan to delay the issue of any more permits in order to boost the price. It was an invitation that they declined.

Coal's share of energy market at highest level since 1970 -- Coal has reached its highest market share of global energy consumption for more than 40 years, figures reveal, despite fears that its high carbon emissions make it a prime cause of climate change. The use of coal for power generation and other purposes grew by 3% in 2013 – faster than any other fossil fuel – while its share of the market breached 30% for the first time since 1970, the BP Statistical Review reports. The figures were published as Prof Nick Stern, author of the influential climate change report the Stern Review, said his latest research indicated the economic risks of unchecked climate change were bigger than previously estimated. Europe is among the regions using more coal, increasing imports from the US, where coal has been displaced in power stations by even cheaper shale gas. But developing countries such as China and India are also huge coal users, although BP pointed out that energy growth overall in China dropped to 4.7% last year from 8.4% in 2012. Christof Ruhl, BP's chief economist and author of its statistical review, said this "dramatic slowdown" put a question mark over China's official economic growth figure for 2013 of 7.7%. The accuracy of Chinese economic statistics have long been a subject for debate but few are willing to directly challenge them for fear of upsetting such an important emerging powerhouse. "It is not easy to reconcile the slowdown in energy growth numbers and official [gross domestic product] numbers ... you can draw your own conclusions from that,"Ruhl said.

Why What You Know About The Global Energy Game Is Wrong - U.S. oil production will beat output from the Middle East for the rest of the decade. And while that gives the United States some leverage on the international stage, at least one prominent global analyst thinks it's wrong to assume oil could be used as a foreign policy tool. The U.S. Energy Information Administration (EIA) said domestic oil production for the week ending June 13 averaged 8.47 million barrels per day, up 17,000 bpd from the previous week and 18 percent higher year-on-year. The rise in production has fueled the debate over what to do about legislation enacted in the 1970s that restricts crude oil exports. Critics say the ban would lead to higher prices at home, specifically at the gasoline pump. A January report from the Center for a New American Security, however, said the economic connection that would come from oil exports could manifest itself as "coercive political influence" in foreign affairs. Paul McConnell, principal analyst for Wood Mackenzie’s global trends service, said U.S. oil production gains are unprecedented, but not necessarily in a way that reshapes the global balance of power. "Our forecasts show the United States will remain dependent on imported crude oil until beyond 2030," . "So while it's clear the U.S. is emerging as a new and important source of global energy supply, I think it's incorrect to suggest that this supply could become a foreign policy tool." The International Energy Agency (IEA) said it expects the United States to be the world's leading oil producer by next year, passing Russia and Saudi Arabia. The United States is also on its way to energy self-sufficiency, which would make it less vulnerable to oil shocks like the one that prompted the 1970s export ban.

Wingnuts and liberals’ bizarre role reversal: Why Export-Import Bank politics are so perverse -- A fascinating game of role reversal is playing out in Congress, where Democrats are teaming up with the Chamber of Commerce, and Republicans are using phrases like “stop corporate welfare.” Many of the same politicians lined up on the other side of the debate just a few years earlier. What has turned Washington into a wonky remake of Freaky Friday? The reauthorization of the Export-Import (Ex-Im) Bank, a government-run enterprise that grants loans and insurance at below-market rates to facilitate large trade deals.Defenders of Ex-Im argue that the financing it offers, which they say would be difficult to obtain on the private market, helps open new markets to U.S. products and create jobs. That was the main point of White House Press Secretary Josh Earnest yesterday, who cited Ronald Reagan’s past support for the bank. “It helps us meet our export goals,” Earnest said, “at no cost to taxpayers.” Indeed, interest on the loans finances the bank’s activities, which made $1 billion while supporting around $37 billion in export sales last year.But pre-Internet liberals might want to get out their back issues of the Nation and Mother Jones at this point to jog their memory, for they will see article after article condemning the 80-year-old institution as a slush fund that allows the government to fund a series of nasty activities. Here’s one from 1981 (“The Ex-Im helps sell nuclear reactors to dictatorships like the Philippines”). Here’s another from 1992, about the Reagan administration using Ex-Im to funnel loans to Saddam Hussein’s Iraq during their war with Iran. Even more recently, in 2011, Mother Jones reported on how Ex-Im loan guarantees helped build one of the largest coal plants in the world, in South Africa.

Great Lakes Communities Struggle in Fight Against Proposed Nuclear Waste Facility --  For the past 15 years, Ontario Power Generation—one of the largest producers of electricity in North America—has been working to obtain approval from the Canadian government to build an underground repository near the Great Lakes to store its nuclear waste. As the approval process for the Deep Geologic Repository (DGR) nears an end, some concerned citizens have started a petition asking lawmakers in Canada, as well as the U.S., to block the approval of the proposed nuclear waste repository near the Bruce Nuclear Power Plant site in Kincardine, Ontario. Almost 61,000 people have signed the petition so far, including Dr. David Suzuki, a famous Canadian environmentalist.  Much of the concern is focused on the proposed repository’s location—just about a half mile from the shores of Lake Huron. Groups such as Stop The Great Lakes Nuclear Dump argue that if radioactive nuclear waste leaked into the water, the 40 million Canadians and Americans who depend on the Great Lakes for their drinking water, would find themselves without access to a source of clean freshwater.

Report Exposes Companies That Dumped 206 Million Pounds of Toxic Chemicals Into U.S. Waterways  - Research from Environment America shows that 2012 was a bigger year for toxic chemical dumping than most of us could have imagined. Industrial facilities across the U.S. dumped more than 206 million pounds of toxic chemicals into waterways in 2012, according to the “Wasting Our Waterways” report. The figures about the nation, as a whole, are stark, as are figures about individual regions and companies. For instance, Tyson Foods Inc. alone dumped more than 18.5 million pounds—about 9 percent of the nationwide total. “America’s waterways should be clean—for swimming, drinking and supporting wildlife,” said Ally Fields, clean water advocate for Environment America’s Research and Policy Center. “But too often, our waters have become a dumping ground for polluters. The first step to curb this tide of toxic pollution is to restore Clean Water Act protections to all our waterways.” Hope for such a legislative restoration explains the report’s timing. It arrives as the U.S. Environmental Protection Agency considers restoring protections to about 2 million miles of waterways. The public comment period for the proposal ends in October.

NC Senate passes bill pushing Duke Energy to close coal ash pools by 2029: . (Reuters) – North Carolina’ state Senate on Wednesday unanimously approved a bill calling for the closure of Duke Energy’s 33 coal ash ponds in the state within 15 years, legislation spurred by a massive spill at a retired power plant earlier this year. Members of the chamber touted the measure as the nation’s toughest law regulating coal ash, a byproduct of coal-based power production that contains toxic materials such as arsenic and lead. “This is a change that’s going to have North Carolina leading the country when it comes to getting rid of coal ash,” said Republican state Senator Tom Apodaca, who sponsored the bill. Environmentalists raised doubts, however, that the provisions are strong enough to put a dent in the nation’s coal ash problem. The clean-up plan uses a tiered approach to dictate when ponds at 14 sites statewide must be closed. At the most dangerous sites, including four named in the bill, coal ash would have to be moved to lined landfills or reused as building material by 2019.

Governor signs bill blocking levee board lawsuit - Louisiana Gov. Bobby Jindal signed Senate Bill 469 on June 6 prohibiting state government entities from filing lawsuits to enforce environmental protection laws. This bill effectively blocks a lawsuit brought by the Southeast Louisiana Flood Protection Authority-East against 97 oil and gas companies The SLFPA-East is an independent government authority responsible for flood protection for the New Orleans area east of the Mississippi River. The authority, which consists of geology, engineering and environmental experts, was created in 2006 to be independent of political pressure. The authority filed a lawsuit last summer against oil and gas companies for the destruction of coastal wetlands protecting the city. According to the Bureau of Ocean Energy Management, Regulation, and Enforcement, canal dredging and levee construction due to oil and gas activity accounts for 8 to 17 percent of coastal wetlands loss in Louisiana. Though the authority didn’t specify the amount it sought for damages, the Coastal Protection and Restoration Authority estimated the cost of restoring and protecting the coastal wetlands in its 2012 Coastal Master Plan to be $250 billion.

U.S. House Approves Faster LNG Exports - The U.S. House of Representatives on Wednesday passed a bill that will speed up the process of liquefied natural gas (LNG) exports. Under the bill, sponsored by Rep. Cory Gardner (R-CO), the Department of Energy will have 30 days to approve LNG exports to non-Free Trade Agreement countries after an environmental review of the LNG facilities. The bill received bipartisan support, passing 266 to 150.“The economic impacts alone make natural gas exports a winning policy, but the geopolitical impacts are an incredible benefit as well and have been ignored for far too long,” Gardner said, according to The Hill. “Allies around the world have told us that they would greatly benefit from American LNG. It is time to help our friends abroad. It is time to create jobs here at home.” Opponents, however, say the jobs talk is used to cloud the government’s desire to expand fracking and natural gas. They fear more incidents like the LNG explosion near the Washington-Oregon border earlier this year when shrapnel struck a 14.6-million-gallon storage tank, causing a slow leak that displaced nearly 1,000 residents and workers.

New evidence: fracking health impacts are worse than we thought - There are some important new studies about how fracking-enabled drilling harms health. Information is coming so fast it’s hard to keep up with it all. Air pollution ‘can cause changes in the brain seen in autism and schizophrenia’

  • Male brains are more strongly affected by pollution than female brains
  • Pollution exposure could cause memory and learning problems in people
  • It causes ‘rampant’ inflammation throughout the brain

That air pollution effects the brain is not new news. If you live in the gas patch, you might have a dirty mind. Hormone-disrupting activity of fracking chemicals worse than initially found. Remember all those anecdotal stories about how fracking kills your thyroid and even your dog’s thyroid? From the same study: Human thyroid functions at risk in exposure to fracking fluidsAmong the chemicals that the fracking industry has reported using most often, all 24 that we have tested block the activity of one or more important hormone receptors,” said Christopher Kassotis, a PhD student at the University of Missouri, Columbia. “The high levels of hormone disruption by endocrine-disrupting chemicals that we measured, have been associated with many poor health outcomes, such as infertility, cancer and birth defects. Federal safety investigators have determined that fumes from tanks at oil and gas wells are hazardous to human health but they don’t want us to panic and think those same fumes might harm people who live nearby.

Gassed in New York --  One compressor station at a time. Studies show that fracking can potentially poison the water, soil, and air, contaminate the food supply, and even cause earthquakes—basically everything short of awakening a giant, prehistoric lizard. With these negative effects in mind, fracking is under a moratorium in New York State. Yet even though New York has so far prohibited fracking, Leanne and Robert Baum are still suffering its consequences—and it is threatening to stomp out their country way of life. Just 15 miles across the border from Minisink, where New York’s fracking restrictions are not in place, the state of Pennsylvania’s been cashing in on a frack-zilla invasion. In 2013, Pennsylvania exported 3.3 trillion cubic feet of gas from nearly 5,000 wells. Penn State’s Marcellus Center for Outreach and Research estimates that by 2015, 4.5 trillion cubic feet worth of gas will be fracked out of the state’s shale formations. Much of that fuel will go through Minisink, which has emerged as a nexus point for the expanding spider web of natural gas transmission lines that started spreading up and down the Eastern Seaboard when federal restrictions on fracking were lifted in 2005.  The compressing site across from the Baum’s home pressurizes the natural gas to increase the amount Millennium can carry and optimize the speed with which it is transported. However, compressors and the pipelines that feed them tend to blow up. Last year, fires broke out at compressors in Williams, New Jersey, Bradford County, Pennsylvania, and Tyler County, West Virginia.   All the more disconcerting for locals: Minisink does not have a professional fire department, but relies on an all volunteer force instead.  When they are not exploding, compressors also emit volatile organic compounds, nitrogen oxides, and poly-aromatic hydrocarbons that can stick around in the surrounding environment and cause respiratory illnesses, cancer, and chronic skin disease.

Derelict Oil Wells May Be Major Methane Emitters --  A study of abandoned oil and gas wells in Pennsylvania finds that the hundreds of thousands of such wells in the state may be leaking methane, suggesting that abandoned wells across the country could be a bigger source of climate changing greenhouse gases than previously thought.The study by Mary Kang, a Princeton University scientist, looked at 19 wells and found that these oft-forgotten wells are leaking various amounts of methane. There are hundreds of thousands of such oil and gas wells, long abandoned and plugged, in Pennsylvania alone, and countless more in oil and gas fields across the country. These wells go mostly unmonitored, and rarely, if ever, checked for such leaks. A growing list of studies conducted over the past three years has suggested that crude oil and natural gas development, particularly in shale formations, are significant sources of methane leaks — emissions not fully included in U.S. Environmental Protection Agency greenhouse gas inventories because they are rarely monitored. Scientists say there is inadequate data available for them to know where all the leaks are and how much methane is leaking. Methane is about 34 times as potent as a climate change-fueling greenhouse gas than carbon dioxide over a span of 100 years. Over 20 years, it’s 86 times more potent. Of all the greenhouse gases emitted by humans worldwide, methane contributes more than 40 percent of all radiative forcing, a measure of trapped heat in the atmosphere and a measuring stick of a changing climate.

Abandoned Oil Wells Leaking Methane - Exhausted and abandoned oil wells in Pennsylvania may be leaking methane, one of the most potent of the greenhouse gases, but are not accounted for in inventories drawn up by the U.S. Environmental Protection Agency. A recent study by Princeton University environmental researcher Mary Kang found that 19 plugged wells in Pennsylvania are emitting methane in various amounts.   Pennsylvania alone has hundreds of thousands of such wells, and there are many more scattered across the United States, though few if any of them are ever checked to ensure the plugs are working. The study is the latest conducted during the past three years that suggest crude oil and gas extraction, especially by hydraulic fracturing, or fracking, can be a major source of methane emissions. Methane is far more potent a greenhouse gas than carbon dioxide and its impact is lasting on the environment, according to Climate Central, a non-profit news organization.

Methane Tops as Global Warmer - Researchers no longer dispute the high gas leakage rates of aging gas fields, they just find it hard to believe that such leakage rates are the norm. That the high rates differ from the “best practices” rates of new wells. There is a very simple explanation for this: as wells age, they get sold. To avoid the plugging liability, many of them end up being sold to a shell company, who does not maintain them, just pumps them, shuts them in and abandons them – and skips out on the plugging liability. In the process, the well leaks.  This process of sequentially deteriorating ownership leading to neglect and abandonment happens on many wells sooner or later. Everywhere in the world. New  York state has thousands of such abandoned wells.   Natural gas fields globally may be leaking enough methane, a potent greenhouse gas, to make the fuel as polluting as coal for the climate over the next few decades, according to a pair of studies published last week.  An even worse finding for the United States in terms of greenhouse gases is that some of its oil and gas fields are emitting more methane than the industry does, on average, in the rest of the world, the research suggests.  “It is an industrialized country, probably using good technology, so why are emissions so high?”  The natural gas industry globally was leaking between 2 and 4 percent of the gas produced between 2006 and 2011, the studies found. Leakage above 3 percent is enough to negate the climate benefits of natural gas over coal, so the findings indicate there is probably room for the industry to lower emissions.

New Study: Fracking Causes Air Pollution. Imagine That. - Fracking operations are a textbook way to create air pollution. Everything on a drilling/ fracking site is run by diesel engines. The trucks, the electric generators, the motors that drive the pumps, and the drill rig itself – all start with diesel power – used either directly or to drive generators. There are no pollution control devices on those diesel motors – no catalytic converters, no urea capture systems – just straight black diesel exhaust. 24/7/365.  And then the drilling process produces gas which bubbles up in the drilling mud and is vented – not flared – to whomever is in the neighborhood.  On a windless night, all that pollution floats right into the neighborhood. Gassing you while you sleep.  Air Pollution Spikes in Homes Near Fracking Levels of particulate matter spike at night inside homes near gas wells in Southwest Pennsylvania, the director of an environmental health monitoring project said Wednesday.  The Southwest Pennsylvania Environmental Health Project (SWPA-EHP) has been conducting a “pretty aggressive” indoor air monitoring project since 2011 in the midst of Pennsylvania’s gas drilling boom, particularly near unconventional wells that employed hydraulic fracturing,  The project has documented sudden increases in particulate matter within homes, she said.  The spikes may last three to four hours, and they cannot be explained by typical household activities like cooking, The spikes occur at night, she believes, because of stable atmospheric conditions that hold particulate matter low to the ground instead of dispersing it.  SWPA-EHP employs a nurse practitioner who conducts exams and offers consultations at people’s homes and offices. In 2012-13, they determined 27 health complaints were likely attributable to gas drilling activities, including dermal, respiratory and neurological symptoms and eye irritation.

Fracking planned at Morgan County spill site as cleanup ends — Tanker trucks and vacuums are still whirring on a piece of Morgan County land, trying to clean up thousands of gallons of oil and chemicals that spewed eight weeks ago from a not-yet-completed natural-gas well into surrounding fields and streams. Cleanup efforts are almost finished, according to the Ohio Environmental Protection Agency. But some of the oil is still bubbling from the soil around the well into a streambed that leads to a creek that drains into the Muskingum River, and crews were still at the site last week trying to remove oil-saturated dirt. Emergency crews plan to finish cleaning the stream in the next week or so, said Ohio EPA spokeswoman Heidi Griesmer. PDC Energy, the Colorado-based company that was drilling the well, did not respond to requests for comment. The well, though, will not be used again; the company filled and sealed it because it couldn’t remove a drill bit and couldn’t stop the flow of oil, mud and gas, a spokesman for the Ohio Department of Natural Resources said. A “vapor cloud” of toxic chemicals — including some known to cause cancer — that had hung over the well after the spill has disappeared, according to the Ohio EPA. PDC plans to frack the other two wells in the coming weeks, sources close to the operation said. Last week, pipelines that will carry water from the river to the property for fracking already ran along one side of Center Bend Road.

ODNR settles lawsuit with anti-frackers - A settlement has been reached between the Ohio Department of Natural Resources and a local anti-fracking group in a lawsuit over records regarding two injection wells in eastern Athens County. Meanwhile, the anti-fracking group is moving forward with a motion for the state oil and gas commission to reconsider a related appeal that was dismissed earlier this month. On Friday, an agreement was filed wherein the ODNR will pay $1,000 to the Athens County Fracking Action Network regarding the records lawsuit, though it stipulates that the payment is not an admission of liability in the case. Moreover, ACFAN attorney Rick Sahli said in an interview Monday that he has received documents from the ODNR that he said shines a light on the agency's successful argument to the Ohio Oil and Gas Commission to dismiss an ACFAN appeal on approval of one of the Torch-area injection wells in question. Earlier this month, the commission voted to dismiss the appeal on the grounds that a permit issued for the well was for drilling of the well only and not the actual injection permit.

Fracking flowback could pollute groundwater with heavy metals: The chemical makeup of wastewater generated by “hydrofracking” could cause the release of tiny particles in soils that often strongly bind heavy metals and pollutants, exacerbating the environmental risks during accidental spills, Cornell University researchers have found. Previous research has shown 10 to 40 percent of the water and chemical solution mixture injected at high pressure into deep rock strata, surges back to the surface during well development. Scientists at the College of Agriculture and Life Sciences studying the environmental impacts of this “flowback fluid” found that the same properties that make it so effective at extracting natural gas from shale can also displace tiny particles that are naturally bound to soil, causing associated pollutants such as heavy metals to leach out. They described the mechanisms of this release and transport in a paper published in the American Chemical Society journal Environmental Science & Technology.  Images and video are available at:

Fracksylvania’s Dumping Grounds: New York -- Original audio source Neither the waste haulers nor the  NY DEC can be trusted regarding frack waste. There is simply more frack waste coming out of Fracksylvania than the frackers know what to do with. Fracksylvania’s DEP does not track the filth beyond state lines, so once the truck is in New York, it’s home free.  The hauler will say that it is “salt water” that it is “brine” that it smells like roses.  The haulers get paid by the load, not by the hour, so it is in their best interest to simply make the stuff go bye-bye as expeditiously as possible. When it comes to fracking, the lead agency within the NY  DEC is the Division of Mineral Resources - which is literally a revolving door to fracking. The DMR is the fracker’s auxiliary in Albany. Full stop.The result is that loads of frack waste are coming across the border into New York state. Most of it untested, Some of it entirely unaccounted for. There is only one plausible solution: ban the disposal of oil and gas waste products – at the town, county and state level. Take your pick. Radioactive Frack Waste In New York Landfills Cut open a hole in the ground, even a very narrow one, and you will be left with a pile of dirt. These are called drill cuttings. Natural gas drillers in Pennsylvania’s Marcellus shale have a lot of these cuttings leftover. And therein lies a problem. Because that dirt is naturally radioactive, and that radiation can get into water supplies if it isn’t properly treated. Even though the Empire State has a moratorium on drilling, its landfills are taking in plenty of solid waste from Pennsylvania’s gas boom. As Richmond found out, that has some people there worried.

Gov. Christie Vows to Block Frack Waste Ban Legislation at the Toll Booth  - The state Assembly Thursday overwhelmingly passed a bill designed to ban the treatment and disposal of waste generated by hydraulic fracturing. The Senate had already approved the measure last month, which now faces a final hurdle – the signature of Governor Christie, who vetoed a similar bill in 2012.  Supporters think this time around Christie may be slightly more inclined to approve the bill, or at least conditionally veto it, rather than dismiss it entirely.  In addition, both the Assembly and Senate passed the bill this time with enough votes to show there might be support to override a Christie veto if it came to that.Fracking is a controversial process to extract natural gas from fissures in bedrock. It involves pumping a mixture of water and chemicals deep into the ground to break the bedrock apart and let the trapped gas escape.  But critics have warned that the chemicals used in fracking could mix with groundwater and contaminate drinking water supplies. The waste water produced from the procedure has often been shipped to Ohio and pumped into the ground. Many sewer treatment facilities are not equipped to treat fracking wastewater. Some fracking waste was sent to a facility in Kearny in 2011 operated by Clean Earth, but the state has not received fracking waste recently.  Christie vetoed the ban on bringing fracking waste into the state in 2012 because he said the bill was unconstitutional, since the contaminated water would be coming from other states and New Jersey can’t regulate interstate commerce.

Why Are Four In Ten High-Risk Oil And Gas Wells Not Being Inspected?  - Despite a new report showing that 40 percent of all high-risk oil and gas wells on public lands across the United States did not pass a safety inspection from 2009 to 2012, a powerful oil and gas industry trade group has doubled down on its opposition to the Obama Administration’s proposal to fix the problem.  E&E News reported last week that the Western Energy Alliance (WEA), a Denver-based trade association that represents oil and gas producers in the West, insists that oil and gas companies already pay enough fees and royalties to operate on federal lands and that taxpayers — not companies — should continue to cover the cost of safety inspections and environmental enforcement activities conducted by the Department of the Interior’s Bureau of Land Management (BLM). Recent reports suggest that the industry’s exemption from paying inspection fees is only one of several subsidies that benefit oil and gas companies drilling on federal lands. The federal royalty rate for oil and gas production, for example, is lower than that of many states, and half of what the State of Texas charges. It also costs less than a cup of coffee to rent an acre of federal land for a year to drill.

States Confront Worries About Fracking, Quakes - States with historically few earthquakes are trying to reconcile the scientific data with the interests of their citizens and the oil and gas industry. Seismologists already know that hydraulic fracturing — which involves blasting water, sand and chemicals deep into underground rock formations to free oil and gas — can cause microquakes that are rarely strong enough to register on monitoring equipment.However, fracking also generates vast amounts of wastewater, far more than traditional drilling methods. The water is discarded by pumping it into so-called injection wells, which send the waste thousands of feet underground. No one knows for certain exactly what happens to the liquids after that. Scientists wonder whether they could trigger quakes by increasing underground pressures and lubricating faults.Another concern is whether injection well operators could be pumping either too much water into the ground or pumping it at exceedingly high pressures.ExxonMobil subsidiary XTO Energy has pumped an average 281,000 gallons — about 94 tanker truckloads — of wastewater into its Azle wells nearly every day for more than two years, according to data published by the Railroad Commission earlier this month.In recent weeks, nighttime shaking in Oklahoma City has been strong enough to wake residents. The state experienced 145 quakes of 3.0 magnitude or greater between January and May 2, 2014, according to the Oklahoma Geological Survey.That compares with an average of two such quakes from 1978 to 2008.

Oklahoma residents seek answers on quakes - Oklahoma residents whose homes and nerves have been shaken by an upsurge in earthquakes want know what's causing the temblors — and what can be done to stop them.  Earthquakes used to be almost unheard of on the vast stretches of prairie that unfold across Texas, Kansas and Oklahoma, but they've become common in recent years. Oklahoma recorded nearly 150 between January and the start of May. Though most have been too weak to cause serious damage or endanger lives, they've raised suspicions that the shaking might be connected to the oil and gas drilling method known as hydraulic fracturing, especially the wells in which the industry disposes of its wastewater. Now after years of being harangued by anxious residents, governments in all three states are confronting the issue, reviewing scientific data, holding public discussions and considering new regulations.  States with historically few earthquakes are trying to reconcile the scientific data with the interests of their citizens and the oil and gas industry. Regulators from each state met for the first time in March in Oklahoma City to exchange information on the quakes and discuss toughening standards on the lightly regulated business of fracking wastewater disposal.In Texas, residents from Azle, a town northwest of Fort Worth that has endured hundreds of small quakes, went to the state Capitol earlier this year to demand action by the state's chief oil and gas regulator, known as the Railroad Commission. The commission hired the first state seismologist, and lawmakers formed the House Subcommittee on Seismic Activity. After Kansas recorded 56 earthquakes between last October and April, the governor appointed a three-member task force to address the issue.

Residents In Fracking States Concerned About Rise In Quakes: — Central Oklahoma residents are demanding to know whether earthquake swarms that have shaken their homes and their nerves in recent months are caused by oil and gas drilling operations in the area. About 500 people attended a meeting with regulators and research geologists Thursday night in Edmond. Many urged the Oklahoma Corporation Commission, which regulates the oil and gas industry, to ban or severely restrict the wells that are used to dispose of wastewater from drilling and that some scientists say could be linked to the quakes. "We're going to have people hurt and damaged," said Angela Spotts of Stillwater, who has collected names for a petition calling for a ban on deep-well injections of wastewater. Edmond resident Mary Fleming said she has experienced dozens, "maybe 100," earthquakes and said they shake her house several times a week, causing cracks inside the home. "The house rocks. The bed lurches," Fleming said. Earthquakes used to be almost unheard of on the vast stretches of prairie that unfold across Texas, Kansas and Oklahoma, but they've become common in recent years. Oklahoma has recorded 230 so far this year, including a magnitude 3.6 earthquake southwest of Guthrie recorded by the U.S. Geological Survey early Thursday. Though most have been too weak to cause serious damage or endanger lives, they have raised suspicions that the shaking might be connected to the oil and gas drilling method known as hydraulic fracturing, especially the wells in which the industry disposes of its wastewater.

Colorado suspends oil and gas wastewater disposal well after quake (Reuters) - Disposal of wastewater from oil and gas drilling into a Colorado well was ordered halted this week after seismic activity was detected in the area, state regulators said on Tuesday. The Colorado Oil and Gas Conservation Commission ordered High Sierra Water Services to stop disposing wastewater for 20 days into the well in Weld County after seismologists detected a small 2.6-magnitude temblor on Monday. That came after a 3.4-magnitude earthquake shook the area on May 31. It is the latest in a string of events linking oil and gas operations with seismic activity in the United States as energy drilling increases, but likely the first instance of its kind in quake-prone Colorado, a spokesman for COGCC said. "We believe it is probably the first time," that seismic activity has been linked to wastewater disposal, he said. Hydraulic fracturing, or fracking, is an increasingly common oil and gas production technique that involves pumping millions of gallons of water underground to release oil and gas. Much of that water comes back to the surface after drilling and is disposed of in large underground wells. There were about 145,000 of these wells in the United States in 2012 and 309 in Colorado, according to the Colorado Geological Survey.

Colorado Regulators Halt Fracking Wastewater Injection Operation After Earthquake Strikes Area For Second Time in One Month -  The Colorado Oil and Gas Conservation Commission (COOGC) has directed High Sierra Water Services to stop disposing wastewater into a Weld County injection well as a result of a 2.6 magnitude earthquake striking the area Monday morning, about five miles away from Greeley, CO, the Colorado Independent reported. The earthquake marked the second one in just one month.  Colorado regulators halted the operation of a wasterwater injection well after an earthquake struck the area for the second time in less than a month.  High Sierra agreed to a 20-day halt after University of Colorado seismologists found evidence of low-level seismic activity near the injection site, including a 2.6-magnitude quake. “In light of the findings of CU’s team, we think it’s important we review additional data, bring in additional expertise and closely review the history of injection at this site in order to more fully understand any potential link to seismicity and use of this disposal well,” COGCC Director Matt Lepore said.  To environmentalists, the connection between injection and earthquakes is as indisputable now as it was following the event on May 31

 Damaged Storage Tank Spills 7,500 Gallons Of Oil Into River In Colorado -- A storage tank damaged by flooding spilled 7,500 gallons of oil into Colorado’s Cache la Poudre River on Friday. According to the Colorado Department of Natural Resources, high floodwaters caused the Noble Energy storage tank to dip down onto a bank, damaging a valve that caused oil to leak out of the tank. The oil has gathered on vegetation up to a quarter mile downstream, but officials say the spill isn’t ongoing. Cleanup crews are working to remove oil from the riverbanks with vac-trucks and absorbent materials, and officials say no drinking water has been affected. Right now, it’s unclear what the extent of the spill’s ecological impacts will be. Noble Energy has drained the oil from a tank nearby to the damaged tank as a precaution.  Flooding has been a contributor to oil spills in Colorado before. Last fall, historic floods ravaged Colorado and damaged oil and gas tanks, leading to at least 10 spills. Two tank batteries spilled about 5,225 gallons into the state’s South Platte River, and more tanks spilled 13,500 gallons near Platteville, CO. The flooding hit one of the most densely-drilled areas in the country, and as of October, the full extent of the spills was unknown, though official numbers stood at 43,000 gallons of oil and more than 18,000 gallons of fracking wastewater spilled.

Northern Gateway Approval Flies in Face of Democracy and Global Warming - David Suzuki - There was little doubt the federal government would approve the Enbridge Northern Gateway pipeline project, regardless of public opposition or evidence presented against it. The prime minister indicated he wanted the pipeline built before the Joint Review Panel hearings even began. Ad campaigns, opponents demonized as foreign-funded radicals, gutted environmental laws and new pipeline and tanker regulations designed in part to mollify the B.C. government made the federal position even more clear. Canadian resource policy is becoming increasingly divorced from democracy. Two infamous omnibus bills eviscerated hard-won legislation protecting Canada's water and waterways and eased obstacles for the joint review process, which recommended approval of the $7.9-billion project, subject to 209 conditions. The government has now agreed to that recommendation. The time-consuming hearings and numerous stipulations surely influenced the government's decision to restrict public participation in future reviews, making it difficult for people to voice concerns about projects such as Kinder Morgan's plan to twin and increase capacity of its Trans Mountain heavy oil pipeline from Alberta to Burnaby from 300,000 to 900,000 barrels a day, with a corresponding increase in tanker traffic in and out of Vancouver. And to keep democracy out of fossil fuel industry expansion, the government switched decision-making from the independent National Energy Board to the prime minister’s cabinet. Probably the most egregious omission from the review process is the dismissal of impacts such as climate change and rapid tar sands expansion. Here’s how the panel justified not taking these into account:“We did not consider that there was a sufficiently direct connection between the project and any particular existing or proposed oil sands development or other oil production activities to warrant consideration of the effects of these activities.”

Fracking Goes Global (video) While families across the U.S. continue suffering from the effects of the country’s fracking boom, the practice is expanding to other nations. Naturally, earthquakes, sickness and resistance will accompany that expansion. Take South Africa, for example, where the Karoo Basin is believed to be covering 400 trillion cubic feet of shale gas. A moratorium on natural gas exploration was lifted in 2012, prompting companies to line up for a piece of what should be a large pie.Earth Focus takes a look at how fracking has gone global and what that as meant to Poland, the United Kingdom and South Africa.

Could Gang Violence End Mexico's Shale Dream? - Violence in Mexico could thwart hopes of a budding shale boom, as oil and gas companies operating in Texas may think twice about moving south of the border.  Mexico holds an estimated 545 trillion cubic feet of technically recoverable shale gas and 13 billion barrels of shale oil, but progress in developing those resources has been slow.  The obstacles to kick-starting Mexico’s shale industry have dampened the once lively enthusiasm surrounding Mexico’s historic energy reform. Mexico passed legislation last year that opened up the country’s oil and gas sector to private investment, ending a 75-year monopoly by state-owned Petroleos Mexicanos (Pemex).  But the secondary laws that the government must pass to actually implement the legal framework for oil and gas development are proving much more contentious.  Political disputes over what could be 21 separate laws have thus far delayed passage, threatening to push back Mexican President Enirque Pena Nieto’s goal of producing 3 million barrels of oil per day by 2018. That would be roughly a 25 percent increase from the current output level of 2.4 million barrels per day, but it is looking increasingly difficult to achieve.  “We can increase, of course, but not enough to arrive at 3 million [b/d],” Fluvio Ruiz Alarcon, an independent board member at Pemex, told Platts. “I'm sure we're going to produce over 3 million [b/d] but not by 2018. Maybe 2020, but not before,” he added.

Big Oil Is Cashing In On Iraq Violence - The spike in instability in several oil producing regions around the world is threatening to knock some production offline, but it is also boosting profits for drillers operating in trouble-free zones.   Oil prices have hit their highest levels in almost 9 months as places like Iraq, Syria, Ukraine and Libya continue to experience violence and political upheaval. For companies with heavy investments in these regions, the situation is perilous, but for oil companies elsewhere, the higher price is good news.   This past weekend, militants from the radical Sunni organization ISIS gained control over another town in Iraq, along the Syrian border. As news of their victory was still being reported, Brent crude closed just below $115 per barrel (June 22) and West Texas Intermediate (WTI) rose to nearly $107.   Oil markets could be looking at an extended period of elevated prices, which is bad news for companies with billions invested in Kurdistan or other parts of Iraq. ExxonMobil and BP already started evacuating some of their workers from southern Iraq, despite the fact that militants remain north of Baghdad.  But for companies drilling far from the violence – in Texas for example – a $5 per barrel increase in prices can be the difference between whether or not an oil project is economically viable.  Oil companies are using the opportunity to step up drilling. The Eagle Ford shale in southern Texas, for example, saw four more oil rigs and one gas rig come into operation over the past week. Across the U.S., the number of oil rigs in use reached 1,545 -- the highest level since record keeping began in 1987.  Total dollars invested are also expected to reach record levels. Oil services firm Baker Hughes, Inc. projects that oil and gas companies will pour $165 billion into exploration and production this year.

U.S. Eases Longtime Ban On Oil Exports - For the first time in almost 40 years, the U.S. Commerce Department has given two American companies permission to export ultralight oil, known as condensate.The beneficiaries of the move so far are Texas-based Pioneer Natural Resources Co. and Enterprise Products Partners LP. The decision, reported June 24 by The Wall Street Journal, is expected to prompt requests from other companies to export their oil.  Congress banned the export of most U.S. crude oil, except under special circumstances and with specific licensing, in response to the economically crippling Arab oil embargo on shipments of oil to Western countries that supported Israel during the Yom Kippur War of 1973. Since then, only refined petroleum products such as gasoline and diesel could be exported. Exports of all crude or refined oil to Canada continued without interruption if an exporter had a special permit.Today, though, so much U.S. oil is being extracted from shale that the price of ultralight oil has dropped appreciably, leading U.S. oil producers to petition for a relaxation of the export ban, arguing that foreign customers would pay more for their product than refiners in the United States.

Why The US Will Never Become A Net Oil Exporter - "According to the U.S. Energy Information Administration's reference scenario, domestic oil production is going to peak at 14.6 million barrels a day in 2019 and then drop to 12.7 million barrels a day in 2040. Given the 2013 consumption level of 18.9 million barrels of crude a day, the U.S. will never be a net oil exporter under this scenario,... The U.S. crude producers need the flexibility of exporting oil or selling it domestically. As for the political dreams of making the U.S. a major oil exporting power, or even of energy independence backed by the shale boom, they are just that -- dreams."

Turmoil in Iraq could engulf global oil market - Having fought President Assad’s Alawites, Isis is now focused on Prime Minister Nouri al-Maliki’s Shiite Iraqi government. The stated aim of Isis is to establish an Islamic Caliphate from eastern Syria and across western and central Iraq, wiping what remains of Sykes-Picot off the map. Perhaps the oil price will force us to confront what’s really happening in the Middle East. Brent crude hit almost $116 a barrel on Thursday, its highest level since September 2013. Prices are up 10pc over the last fortnight, since this new insurgency kicked-off, with crude steadily approaching the $120-$125 danger zone. At that level, oil starts to impose serious economic damage on the major energy importers. Over the last half century, pretty much every oil price spike has been followed, relatively quickly, by a recession in the Western world. More recently, a related pattern has emerged. In 2011 and again in 2012, it was the rise of oil to around $125 that triggered a return to “risk off” and a significant downward correction of equity market. What we’re now seeing is precisely what financial analysts feared during last summer’s Syrian crisis.

WTI Crude Spikes Higher: US Deploys Special Ops Troops In Iraq, Obama Eases Oil Export Ban - It is unclear for now what the catalyst for the $1.70 spike in oil prices is but WTI just touched $107.50 in a hurry. It appears a combination of a WSJ story reporting the Obama administration has quietly cleared the way for the first exports of unrefined American oil in four decades, allowing energy companies to chip away at the long-standing ban on selling U.S. crude overseas (which could theoretically enable them to buy crude (bid price up) and sell for higher prices abroad as we show below); and and Reuters reports that the U.S. military began deploying assessment teams to Iraq with about 40 special operations personnel already in the country (which could mean risks are

Equity markets capping further energy price increases - The Iraq crisis has pushed oil prices up some 5% since the start of the militant Sunni uprising. The "disruption" premium is now built into the prices. Some blame the risks of regional conflict escalation on today's equity selloff in the US. But Brent oil has since stabilized and some are asking whether this is the extent of the Sunni rebellion impact. There is no quick solution to the situation in Iraq we are likely to see violence persisting for months to come. But the equity markets are telling us that the risks of significant energy price increases from here are not likely. The massive outperformance of the energy sector in recent days has almost vanished.

Iraq a minor bump on the road to an inevitable oil price surge - The ISIL excursion into Iraq and the images of the columns of black smoke around the Beiji refinery, the country’s largest, jolted the oil markets from their slumber. For about five years, oil was hardly the centre of attention. Prices were well below their 2008 peak, a new American oil rush was under way and the “peak oil” scare had vanished. The highways were safe again for SUVs with the fuel economy of an Abrams tank.  After loitering around $110 (U.S.) a barrel (the price for Brent crude, the effective global benchmark) since 2011, oil prices are moving up. Since the start of June, they have climbed 5 per cent. But that’s not the scary bit; the scary bit is that even if Iraq were not on the verge of an all-out sectarian war, prices were probably on the verge of climbing, if not surging. The oil markets have been unusually tight – demand has been climbing while inventories have gone in the opposite direction. Meanwhile, a lot of the “oil” from the vast U.S. shale formations is not really oil at all; it is a very light hydrocarbon called condensate that has dubious commercial use. Don’t believe the propaganda – the world is not really awash in oil.

The Significance of Iraq's Oil Production -- With ISIS overrunning key parts of Iraq including attacks on the 310,000 barrel per day Baiji oil refinery which happens to be Iraq's largest, we've already seen the impact of the conflict on the world's oil prices as shown on this chart:  How much oil does Iraq have and how significant is it to the world's energy markets now and in the future?  According to OPEC's Annual Statistical Bulletin from 2013, of OPEC's twelve member states, Iraq has the fourth largest proven oil reserves after Venezuela, Saudi Arabia and Iran at 140.3 billion barrels.  Overall, Iraq has the world's fifth largest proven crude oil reserves in the world.  By way of comparison, in 2012, the United States had 23.267 million barrels of proven oil reserves and Canada had 4.9 billion barrels of proven oil reserves.  Here is a graph from the U.S. Energy Information Administration showing how Iraq's proven oil reserves have risen since 1980:  It is interesting to note that Iraq's reserves have only risen by 25 billion barrels since hostilities broke out in 2003.    In 2012, Iraq exported $94.03 million worth of petroleum, up from only $39.3 million in 2009.  This represents nearly 100 percent of the value of Iraq's total exports.  In 2012, there were 228 wells completed in Iraq, up from 76 in 2011, the largest increase among all twelve OPEC members.  This brought Iraq's total number of oil producing wells to 1700 compared to 3407 in Saudi Arabia and 14,959 in Venezuela.  As an aside, in 2012, Iraq also had 3.158 billion cubic metres of proven natural gas reserves, about one-third of the total proven natural gas reserves in the United States and twice the proven natural gas reserves in Canada. Here is a graph showing daily oil production in Iraq since 1980 (in thousands of barrels per day): Daily oil production in 2013 was at the highest level ever, hitting 3.054 million BOPD, up from 2.983 million BOPD in 2012 and more than double the 1.308 million BOPD seen in 2003 as Operation Iraqi Freedom broke out.  Here is a graph showing domestic consumption of oil in Iraq:

11 Years On, We’re Still in ‘Shock and Awe’ Over Iraq: By June 19, the Iraqi Oil Report was twittering that the Iraqi security forces were inside the refinery, but that the Sunni militants from the Islamic State of Iraq and the Levant (ISIS) and their loose alliance with local tribes were controlling everything around the refinery, and that production had been completely halted. What does it mean for global markets? Well, not much—yet, at least in direct relation to the Baiji refinery. Baiji is billed as Iraq’s largest refinery, but that’s skewing the picture a bit. It is perhaps Iraq’s largest refinery in terms of square footage. But it refines products for consumption on the domestic market only—not for export. The wider story, though, should have global markets extremely anxious, but no one should be surprised. OP Tactical has been advising its clients for years, certainly since the outbreak of conflict in Syria, that Iraq was heading towards civil war. The response has always been one of disbelief because regular Iraqis so badly wanted life to be normal and were ready for business. But civil war is a snowball from hell that regular citizens cannot stop; rather they can only be bowled over by it and sucked into it.Still, Washington is surely by this point wondering whether it should come to Iraq’s aid or let Iran do it. And, of course, Saudi Arabia is not keen on have the US launch air strikes on Sunni insurgents it helped to build up for the conflict in Syria. But everyone knows that Iraqi Prime Minister Nouri al-Maliki’s Shi’ite dominated government has only a very shaky hold on power as it is, so there’s not much to stabilize on those terms. As it stands, though, with the violent insurgency raging, Iraq will not be able to make any strategic decisions on its oil expansion plans.

Oil prices spark economic growth concerns - Islamist militant gains in Iraq sent world oil prices higher Monday, sparking concerns that this could hurt global economic growth, especially in Europe where the recovery seems to be faltering. Crude oil prices in London and New York touched levels not seen since last September after militants from the Islamic State in Iraq and Syria (ISIS) seized city after city over the weekend as they continued their march towards Baghdad. Costlier energy could spell trouble for European economies still struggling to regain momentum after the region's debt crisis. Growth in the eurozone has slowed to its weakest pace in six months, according to a June survey of purchasing managers released Monday. Companies across manufacturing and services reported higher input prices. "Both sectors reported higher oil prices as a key cause of rising costs," survey compiler Markit noted. Rising energy costs may ease fears of deflation, which prompted the European Central Bank to unveil an unprecedented range of stimulus measures earlier this month. But they add to worries about growth in countries such as France, where business activity contracted for a second month running in June.

ISIS: Iraq today and possibly Jordan tomorrow - Don't be fooled by its name: The terror group "Islamic State of Iraq and Syria" plans to attack well beyond the borders of those two countries. After snatching an Iraq-Jordan checkpoint, Amman is on high alert. The Jordan-Iraq border crossing is a solitary post, located in the endless yellow-brown desert between Jordan's capital, Amman, and Baghdad, Iraq. The Iraqi customs officials there are supposed to monitor entry and exit to the country. But the Iraqi-Jordan border crossing has nothing more to report to Iraq's central government: Members of a Sunni militia allied with the terror group Islamic State of Iraq and Syria (ISIS) are now in control. While the overrun border outpost is just , it is raising alarm in Amman. Jordan's interior minister announced that his country is now "surrounded by extremists." Troops stationed on Iraq's border have been placed on high alert. According to domestic military sources, the kingdom has mobilized dozens of units along the border.

ISIS: Is It All About The Oil? -- The Islamic State of Iraq and Syria (ISIS) – the radical Islamist group in control of large swaths of the two countries from which it takes its name -- has released a map on its web site projecting where it wants to be just five years from now.  If it manages to achieve just a fraction of what its intentions are, there is much to worry about.  Is it a coincidence that almost all the countries this radical Islamist group aspires to rule are oil-producers? I reported last week why I believe ISIS, or as it is also called in English, ISIL --- the Islamic State of Iraq and the Levant — would not stop at controlling part or even all of Syria and Iraq.  The map made public by ISIS shows a large swath of black-shaded countries stretching from the Atlantic to the Pacific oceans, and includes all of North Africa, Nigeria and Cameroon in West Africa, and Chad, Sudan, Ethiopia and Somalia on the continent’s eastern coast.  The desired territory then crosses over the Mediterranean and Red seas to engulf the entire Arab world. Saudi Arabia, Kuwait, Iraq, Syria, Lebanon, Palestine – and Israel – as well as Bahrain, the United Arab Emirates, Oman and Yemen would all be part of one big, unhappy family.  Big. But not big enough for ISIS. To that parade of nations, they add Turkey, Iran, and parts of the Caspian region, such as Turkmenistan. Then they swing southwards, swallowing India, Pakistan, Singapore, Myanmar and Indonesia. Now draw a straight line across the globe; the countries ISIS wants to rule extend from Nigeria to Indonesia. Such a realm would give this new “caliphate” unprecedented oil riches. With that kind of money and infrastructure, acquiring nuclear weapons, or other weapons of mass destruction, should not be a great difficulty.

Iraq: The U.S. Has No Role In This -- The ISIS/former Baathist/Sunni alliance in Iraq is consolidating its position in north-west Iraq. It has captured border post towards Syria and now also towards Jordan.  The ridiculous position of the United States, supporting, arming and training Jihadi insurgents in Syria while seeing them as a danger in Iraq and elsewhere, is coming more to the front. What are we to think of such lunatic headline? Kerry Arrives in Cairo on Trip to Help Form New Iraqi Government  Nobody wants Kerry's "help". The threat thereof unites even strong antagonists. Iran as well as the Saudis are against any U.S. intervention or "help" in Iraq. The Iraqi Prime Minister Maliki would probably like some U.S. support for his disintegrating army but will rather go it alone if such support is connected with demands for him to leave his position. And is Kerry really asking Sisi, the new brutal dictator of Egypt, for support?  Sisi will simply take the bribes Kerry brings in support of Israel and leave it at that. There is nothing Kerry can do for Iraqis. Unites States policies in the Middle East have run their course. Their impotence was shown through two lost wars in Iraq and Afghanistan. Its incompetence demonstrated in the contradictoriness of "promoting democracy" on one side while supporting radical religious dictatorships in the Gulf. A step out of that would be an U.S.  alliance with Iran but such a radical policy change would likely be ripped apart within Washington's polical circus.

Iran rejects U.S. action in Iraq, ISIL tightens Syria border grip (Reuters) - Iran's supreme leader accused the United States on Sunday of trying to retake control of Iraq by exploiting sectarian rivalries, as Sunni insurgents drove towards Baghdad from new strongholds along the Syrian border. Ayatollah Ali Khamenei's condemnation of U.S. action came three days after President Barack Obama offered to send 300 military advisers to help the Iraqi government. Khamenei may want to block any U.S. choice of a new prime minister after grumbling in Washington about Shi'ite premier Nuri al-Maliki. The supreme leader did not mention the Iranian president's recent suggestion of cooperation with Shi'ite Tehran's old U.S. adversary in defense of their mutual ally in Baghdad. true On Sunday, militants overran a second frontier post on the Syrian border, extending two weeks of swift territorial gains as the Islamic State of Iraq and the Levant (ISIL) pursues the goal of its own power base, a "caliphate" straddling both countries that has raised alarm across the Middle East and in the West.

Middle East: Falling to pieces - The surge of the Islamic State of Iraq and the Levant, the group known as Isis, poses a threat to all countries in the Middle East as well as to western interests. The Sunni jihadi group, whose rapid takeover of swaths of northwestern Iraq could lead to all-out civil war, considers not only Shia Muslims as its enemy. Isis’s aim is to dismantle existing borders among Sunni states and demolish prevailing power structures. If left unchecked and with territory under its control, its agenda might well expand to include global violent jihad. In the twisted world of Isis, no one wins – not the Shia clerical regime in Tehran nor the Sunni theocracy in Saudi Arabia. Both have an interest in ridding the region of the new wave of jihadi extremism. But, this being the Middle East, having a common enemy is not sufficient to establish unity of purpose. It was in Iraq just over a decade ago that the balance of power in the region was radically altered. The shift unleashed a power struggle that has taken on Sunni-Shia sectarian overtones and has been played out across the Middle East, from Syria to Lebanon, Bahrain and Yemen. The 2003 US-led invasion of Iraq removed a Sunni-dominated regime that was, through elections, replaced with a government led by the Shia majority. Since then, Iraq has been a battleground for regional score-settling, with Gulf monarchies supporting Sunni tribes and parties and Iran bolstering Shia groups. The power struggle has shifted to Syria over the past three years with Iran and the Gulf powers backing opposing sides of a civil war.

Qatar recruiting, sending 1,800 African terrorists to Iraq: New documents show that Qatar has recently recruited and plans to send 1,800 terrorists from Morocco and North Africa to Iraq to join the Islamic State of Iraq and the Levant (ISIL) terrorists. A document signed by Qatari Charge d'affaires in Tripoli Nayef Bin Abdullah al-Amadi and recently found from Qatar's embassy in Libya showed that the militants have received trainings in al-Zantan, Bin Ghazi, al-Zawiya and Musurata military bases in Libya on how to use heavy weaponry. The document also revealed that the Qatari diplomat has proposed his country to send the terrorists to Turkey through the Libyan ports and then to Iraq's Kurdish regions in three groups. The diplomat has stressed in the document that the groups are ready to be dispatched to Iraq by the next week. Media reports earlier this month said that the foreign-backed militants fighting against the Iraqi government in the Western parts of the Arab country are receiving monthly salaries in cash from Riyadh and Doha. The ISIL militants fighting against the Iraqi government in the city of Fallujah in Anbar Province in Western Iraq receive a monthly salary of $700 from the governments of Riyadh and Doha, the Iraq Al-Qanoun news website quoted member of Fallujah Liberation Council Maki Al-Issawi as saying.

25,000 Indians 'ready to fight in Iraq to defend Shia holy sites' - Telegraph: More than 25,000 Indian Shia Muslims are on standby to fly to Iraq and defend its holy shrines, one of the country’s largest Shia organisations claimed today. There are more than 50 million Shia Muslims in India whose leaders have close ties to Iran and Iraq, home of their faith’s holiest shrines. Their recruitment campaign to defend the Shia-led Iraqi government of prime minister Nouri Maliki mirrors the recruitment of his militant Sunni insurgents in Britain and Europe. Three Sunni volunteers who appeared in a recruitment video last week included two young men from Cardiff and one who grew up in Aberdeen. The drive to lure protagonists from each side of the rift in Islam, including Iraq’s Shia Mahdi Army fighters returning from Syria, highlights the potential for the conflict to become the biggest Sunni-Shia sectarian battle since Saddam Hussein’s forces invaded Ayatollah Khomeini’s Shia revolution in Iran in 1980. Isis leaders have vowed to take their insurgency to Karbala and Najaf, home of two of Shia Islam’s holiest shrines, where they claim they have “scores to settle”.

Asia’s Rising Resilience to Oil Prices - With fighting in Iraq threatening to drive oil prices higher, Asia’s external balances could come under pressure. Brent crude hit $115 per barrel last week and the risk of a further rise can’t be discounted due to the deteriorating security situation in Iraq, which has large oil reserves and controls roughly 3% of global supplies, largely through its southern fields around Basra. India, China and South Korea are among the Asian economies that rely heavily on oil from Iraq, but spillovers will affect the entire region, as Asia’s industrialized, exporting countries are large net importers of oil. Malaysia is the region’s only net exporter of energy commodities, making it a beneficiary of higher oil prices (note that we do not adjust our analysis for the possibility that demand could fall as oil prices rise). The immediate impact of higher oil prices will be felt in current-account balances – and, against a backdrop of Fed tapering, persistently higher prices could create financing issues. Even so, the resilience of Asia’s balance of payments has strengthened in recent years, along with the “brand premium” of many of the region’s exports. If oil averages $130 per barrel in the second half or the year, versus our base case of $110 per barrel, we estimate that the region’s cumulative current-account surplus would fall by $60 billion — to a still-hefty $293 billion. That means oil prices would need to rise dramatically before Asia’s external surplus came under pressure; indeed, we estimate oil prices would need to average $190 a barrel for a full year to cut Asia’s current account surplus to zero. By way of comparison, in 2011 it would have required a terminal oil price of just $120 per barrel to wipe out Asia’s current-account surplus

Despite its Investments, China Won’t Feel Big Energy Pinch from Iraq -- China has found itself an unwitting participant in the drama unfolding in Iraq – though its economy may be less vulnerable than its neighbors’ to the crisis there.  China has said it will move some of its 10,000 citizens in Iraq away from areas it considers dangerous. China’s investments in Iraqi oil production grew so dramatically in the aftermath of the U.S.-led 2003 invasion that politicians have quipped that China, not the U.S., won the war against former dictator Saddam Hussein. Chinese state-owned companies have invested $10 billion in Iraq, according to the American Enterprise Institute. China’s imports of Iraqi crude have doubled since 2009, according to Chinese customs data. But Iraqi oil still represents just a small percentage of China’s oil imports, and a minuscule portion of its overall energy supply. The greater risk appears to be not from a disruption of supplies from Iraq but rather that events there push global oil prices higher, raising China’s overall import bill and the cost of subsidizing domestic fuel. The risk posed by higher global oil prices is even higher for China’s Asian neighbors — especially Japan, India and Indonesia — which are more reliant on imported crude from the Middle East. China’s investments include China National Petroleum Corp.’s $5.6 billion purchase of a stake in the vast Rumaila field in southern Iraq in 2009. That same year, China Petroleum & Chemical gained control of fields in Iraq’s northern Kurdish region with its $7.2 billion purchase of Swiss company Addax Petroleum. According to the latest data from the U.S. Energy Information Administration, 13% of Iraq’s oil exports went to China in 2012.

After port fraud, China's vast warehouse sector under scrutiny (Reuters) - Shaken by a fraud investigation into metal financing in the world's seventh-busiest port, banks and trading houses have been made painfully aware of the risks they face storing commodities in China's sprawling warehouse sector. The probe at Qingdao port centers around a private metals trading firm suspected of duplicating warehouse certificates in order to use a metal cargo multiple times to raise financing. Some banks have asked clients to shift metal, used as collateral for loans, to more regulated London Metal Exchange (LME) warehouses outside China or those owned and operated by a single warehouse firm to limit their exposure. "The banks still haven't looked under the hood," said an executive at a bank involved in commodity financing in China, referring to China's warehousing sector. At the heart of the issue is China's roaring commodity financing business, which has helped drive up stockpiles of commodities at ports to record levels, stored in warehouses not always regulated to the same extent as elsewhere. Using commodities as collateral in financing in China is common practice and not illegal, but issuing receipts to repeatedly mortgage an asset is fraud and could leave more than one creditor holding claims to the same collateral.

China scandal weighs on iron ore price: Hopes of a recovery in the iron ore price could be dashed by reports that a financing scandal has put the brakes on imports of iron ore and copper at key Chinese ports. Just days after iron ore minnow Termite Resources shuttered its Cairn Hill iron ore mine in South Australia, reports in the Wall Street Journal suggest that banks are examining allegations that a Chinese trading company pledged metal as collateral to more than one lender. Chinese traders have long used commodities such as iron ore and copper as collateral to borrow from overseas, thus avoiding both China's capital controls and its higher interest rates. It is estimated that as much as 40 per cent of the iron ore sitting at Chinese ports is being used as collateral, and Goldman Sachs estimates $US100 billion ($106.5 billion) has been borrowed in this way since 2010.While Chinese banks have been clamping down on the practice of borrowing using commodities for some months – this is one reason the iron ore spot price has fallen more than 30 per cent since the start of the year – the fraud allegations present a new issue. According to the commodities traders cited by The Wall Street Journal, the financing scandal appears to have put the brakes on copper and iron ore moving through ports, with customs officials now taking 15 to 20 days to clear shipments, up from seven to 10 days previously. Still, the fraud allegations and the ensuing slowdown at the port of Qingdao, are only part of the reason for the fall in the iron ore price. Major producers, led by BHP Billiton, Rio Tinto and Brazil's Vale, are ignoring the falling iron ore price and the slowing Chinese economy and ramping up production in a bid to wipe out higher-cost, lower-quality producers in China and around the world.

China's Port-Ponzi-Probe Spreads To Entire Warehousing Sector - "The banks still haven't looked under the hood," warns one executive as the probe at Qingdao port (centering around the duplication of warehouse certificates in order to use a metal cargo multiple times to raise financing) begins to spread to the entire Chinese warehousing sector. As Reuters reports, even if banks or their customers have insurance for the metal, some warehouse sources said they might struggle to get paid if fraud is uncovered or their agents are implicated. Though many global firms are involved in the warehouse industry in China, there has been outsourcing to local firms to cut overheads and avoid dealing with complex local regulations. That appears to have back-fired. One thing looks certain, however, banks involved in commodity financing in China are set to charge higher fees: "The cost is certainly going to go up, whether it's going to be from local banks or international."

Up To $80 Billion Gold-Backed Loans Are Falsified, Chinese Auditor Warns - As the probe into alleged fraud at Qingdao continues to escalate (with liquidity needs growing more and more evident as Chinese money-market rates surge), Bloomberg reports that China’s chief auditor discovered 94.4 billion yuan ($15.2 billion) of loans backed by falsified gold transactions, in "the first official confirmation of what many people have suspected for a long time - that gold is widely used in Chinese commodity financing deals." As much as 1,000 tons of gold may have been used in lending and leasing deals in China and Goldman reports that up to $80 billion false-loans may involve gold. As one analyst noted, this was unlikely to have a significant impact on the underlying demand for gold in China and as we have pointed out before, any unwind of the Gold CFDs would lead to buying back of 'paper' gold hedges and implicitly a rise in prices.

China Builds World's Most Powerful Nuclear Reactor; Regulators "Overwhelmed" -- We are sure this will end well. Just as China took the 'if we build it (on free credit), they will come' growth model to extremes in real estate; it appears their ambitions in nuclear energy production are just as grandiose. However, just as they lost control of the real estate market, Bloomberg reports China is moving quickly to become the first country to operate the world’s most powerful atomic reactor even as France’s nuclear regulator says communication and cooperation on safety measures with its Chinese counterparts are lacking. France has a lot riding on a smooth roll out of China’s European Pressurized Reactors (EPRs) as it is home to Areva, which developed the next-gen reactor, and utility EdF, which oversees the project. French regulators, speaking in parliament, warned, "the Chinese safety authorities lack means. They are overwhelmed."

China Manufacturing Gauge Climbs in Sign of Pickup - A Chinese manufacturing gauge rose to a seven-month high in June, supporting PremierLi Keqiang’s contention that the economy will avoid a hard landing as the government steps up efforts to spur growth. A preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.8, exceeding the 49.7 median estimate of analysts surveyed by Bloomberg News and a final reading of 49.4 in May. A number above 50 indicates expansion. JPMorgan Chase & Co. and Barclays Plc raised growth forecasts after the report suggested the government’s measures will help protect its 2014 target of about 7.5 percent even as fixed-asset investment gains slow and the property market slumps. Li said last week that his officials are making adjustments to aid expansion without resorting to “strong” stimulus.

China Beige Book, HSBC Manufacturing PMI Paint Diametrically Opposing Pictures Of China's Economy S&P 500 futures are jumping exuberantly as Japan and China PMIs print above expectations and back in expansion territory (Japan best in 3 months, China best in 7 months). This is China's best 2-month PMI rise since Oct 2010 (which makes perfect sense amid the collapsing housing market and CCFD ponzi probe) - which provides the perfect propaganda meme that targeted RRR cuts workl. However, while stocks don't care to scratch the surface, there are 2 glaring similarities that could become a problem. Both China and Japan saw employment drop (Japan's first in 11 months) and furthermore both China and Japan saw input prices rise and output prices decline - not exactly the margin expansion dream everyone is hoping for... and all this as China's Beige Book shows the slowdown deepening on most pronounced quarter-on-quarter drop in 10 quarters of surveys.

China's central govn't may struggle to meet 2014 fiscal target --- China may struggle to make this year's fiscal revenue target, the finance minister warned on Tuesday.The central treasury received 2.9 trillion yuan (472 billion US dollars) from January to May, an year-on-year growth of 6.3 percent and 0.7 percentage points lower than the budgeted target, said Lou Jiwei, when briefing lawmakers on the final accounts for 2013.This year's budgeted growth of central fiscal revenue is 7 percent.The government is "under heavy pressure", Lou said.Difficulties lie in the downward pressure on the economy and the program to replace business tax with value-added tax (VAT) in some service sectors, which will reduce tax revenue by some degree, Lou said.Despite the poor central performance, total national fiscal revenue has reached 6.12 trillion yuan, up 8.8 percent and higher than the 8 percent bugeted for.

China Central Bank’s ‘Targeted Easing’ Leads to Finger Pointing - China’s central bank says it’s using “targeted easing” policies to let banks pump more money into the sluggish economy. The trouble is, it seems to be a moving target. The People’s Bank of China is letting some banks lend more of their deposits – but it seems the standards for deciding which banks get the privileged treatment are not very clear. That has left the central bank open to criticism. In recent weeks China’s central bank has unveiled measured cuts in the proportion of deposits banks must hold on reserve, effectively making it easier for farmers and small companies to borrow money. The central bank is trying to support the sluggish economy after growth slipped to 7.4% on-year in the first quarter of the year, from 7.7% in the final quarter of 2013. Major banks are supposed to keep 20% of their deposits on reserve, but that figure has been cut by a half-percentage point for certain banks. The PBOC wants to avoid an across-the-board cut, fearing it would unleash too much fresh lending and create more problems with bad debt. In theory, the qualifications for banks to be part of the “targeted easing” are pretty straightforward. According to PBOC guidelines, over 50% of a bank’s new loans and 30% of its outstanding loans must have been made to small businesses or to the farm sector during the past year. In practice, the central bank appears to wield significant discretion in deciding which institutions qualify for the lower reserve requirement. That has led some banks not immediately qualified to try to elbow their way into the club. The state-run China Securities Journal reported Friday that more banks are lobbying the central bank to be part of the lower rate.

Population decline seen hindering China's growth potential - -- Although China has been a major driver of the global economy since the 2008 financial crisis, Organization for Economic Cooperation and Development projections show its potential growth rate slipping and Southeast Asian countries catching up. The OECD used population and various economic indicators to predict the potential growth rates of member nations and major developing countries through 2060. The annual potential growth rate for emerging markets as a whole averaged 7% between 2008 and 2013, well above the 1.7% of their industrialized counterparts, shoring up global demand. But it is projected to tumble to 4.8% for 2014 to 2030, a development the OECD sees as resulting from structural rather than cyclical factors. This is particularly clear for China, whose potential growth rate is expected to fall by nearly half, from 9% for 2008 to 2013 to 5% for 2014 to 2030. The figure is seen dropping further to 2.4% for 2031 to 2060. The one-child policy will lead to a downturn in the working population, and the impact of technology transfers from developed economies will lose steam, slowing productivity growth. Indonesia, a member of the Association of Southeast Asian Nations, is expected to log steady expansion thanks in part to undiminished population growth. That country's current potential growth rate of 5.8% is projected to edge down to 5.5% by 2030. Even looking ahead to 2031 to 2060, it is expected to see a relatively small decline to 3.7%. Indonesia will in all likelihood become an engine of the global economy, with its potential growth rate seen surpassing China's by 2030.

Rebalancing China’s Economy? Fuhgeddaboudit - If there is one economic tonic that’s prescribed over and over for China, it’s this: rebalance the economy. In layman’s terms, that means China should rely less on investment in infrastructure and capital-intensive industries and more on domestic consumption. (Any journalist covering China’s economy has written that prior sentence enough times to make his or her wrists hurt.) Why? Excessive investment has led to the construction of subways, bridges, airports and real estate projects that have no reason for being. The investment focus has also made the air over every major Chinese city foul with pollution. If people spent more and saved less, the theory goes, they would spend more on services and high-tech goods, which produce more employment and less pollution than, say, steel mills. At least one major bank thinks the rebalancing theory is wrong. “We believe the obsession with rebalancing China’s economy is leading to misguided policy recommendations that are too blunt and may carry unintended consequences,” including, perhaps, reducing savings, write HSBC economists Qu Hongbin and John Zhu in a new report.Sure, China’s investment rate is ultra-high at around 48% of GDP, they acknowledge. Sure the household consumption rate is ultra-low at roughly 34%–about half the level of the U.S. ( Some economists think that China’s consumption rate is lower than U.S.’s ever was, in its entire history.) But Messrs. Qu and Zhu argue that China is a poor country and investment is still necessary. “There are still more useful infrastructure projects to be built before the country gets overrun by bridges to nowhere,” they write.

China, New Zealand Trade Exceeds Hopes - China’s trade with New Zealand is growing beyond hopes set out by leaders of the two nations as recently as four years ago. Two-way trade between the countries exceeded 20 billion New Zealand dollars (US$18 billion) in the year through May, a level New Zealand Prime Minister John Key and then-Chinese Premier Wen Jiabao didn’t expect to reach before 2015. The two nations are now aiming to reach NZ$30 billion in two-way trade by 2020, Mr. Key said on Friday after the latest import-and-export data was published. Trade between the countries has roughly doubled since 2010. “We have seen rapidly escalating demand from China,” Mr. Key said in a statement. “The growth is showing no signs of slowing.” China surpassed Australia as New Zealand’s main trading partner less than a year ago, and the relationship has continued to strengthen. In May 2013, New Zealand’s exports to Australia were 13% higher than those to China. Exactly a year later, the country’s exports to China were 30% ahead of those to Australia. Exports to China jumped 50% in the year through May, while those to Australia fell by 6.4%. New Zealand sells mainly dairy produce to China, mostly milk powder for use in items ranging from confectionary to baby formula.

Central Banks Buying Stocks - The Beginning of a Major Trend? In case you haven’t heard already, another report has been released showing that central banks around the world are becoming new long-term buyers in the stock market. The findings come after a comprehensive survey of $29.1 trillion worth of investments by 157 central banks, 156 public pension funds and 87 sovereign funds by the Official Monetary and Financial Institutions Forum (OMFIF). Released a couple weeks ago, the report states: Central banks around the world…are buying increasing volumes of equities as part of diversification by official asset holders that are now a global force on international capital markets. Who’s doing most of the buying? Surprise, surprise—not the Federal Reserve. According to the Financial Times:China’s State Administration of Foreign Exchange [SAFE] has become “the world’s largest public sector holder of equities”, according to officials quoted by Omfif. Safe, which manages $3.9tn, is part of the People’s Bank of China. “In a new development, it appears that PBoC itself has been directly buying minority equity stakes in important European companies,” Omfif adds. The shift of central banks into the stock market has been taking place for several years now, although it is probably starting to gain momentum. Based on an earlier survey, Bloomberg wrote last year in Central Banks Load Up on Equities:Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk-averse investors toward equities. In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. Ironically, this push into the stock market is being fuelled by the ongoing commitment of central banks to keep rates low, which, in turn, is now forcing them to diversify into stocks as well—what we refer to as a "positive" feedback loop.

Central Bank Stock Buying Binge -- Central banks have shifted into stocks and are buying up everything that isn’t bolted to the floor. That’s the gist of the story that breathlessly appeared in the Financial Times about a week ago and swept across the blogosphere like a Santa Anna brushfire. And there’s some truth to it too, if taken with a large grain of salt. Here’s a clip from the Omfif’s report the FT’s cites in the article: “A cluster of central banking investors has become major players on world equity markets,” says a report to be published this week by the Official Monetary and Financial Institutions Forum (Omfif), a central bank research and advisory group. The trend “could potentially contribute to overheated asset prices”, it warns.” (Financial Times) So, there you have it; stocks are rising, central banks are buying stocks like mad, therefore, central banks are driving the market. That’s all there is to it, right? And we’re not talking chump change here either. According to the Omfif”s press release “global central banks and public sector institutions now account for an eye-watering “$29.1tn worth of investments … in 162 countries.” Hmm. It’s easy to read that statement and assume that central banks have purchased $29 trillion in stocks, isn’t it? That’s what the folks over at Zero Hedge did. Check out the headline they ran shortly after the story appeared in the FT: “Cluster Of Central Banks” Have Secretly Invested $29 Trillion In The Market”  But that’s not what the press release says, is it? It says “global central banks and public sector institutions”. There’s a big difference between the stocks a bank buys and all the investments in public pension funds, 401Ks, sovereign wealth funds etc. A huge difference. It looks like someone might be engaging in a bit of fear-mongering to get a rise out of readers.

Pension Money Already Flowing In To Prop Up Japan's Stocks - With almost metronomic regularity, Japan will gush forth a headline proclaiming the ever-closer time when all the nation's retirees savings will be greatly rotated to the stock market and away from the nation's largest bond market in the world. This week was no exception; however, as Nikkei Asian Review reports, it appears the "all-talk" has turned to action...The Government Pension Investment Fund and other public pensions sold about 1.8 trillion yen ($17.4 billion) more in Japanese government bonds than they bought in the first three months of the year, fueling speculation that the GPIF may be rebalancing its portfolio sooner than expected. It seems rotating away from government bonds (which the GPIF has been worried about since 2011) into junk bonds and junk stocks is a far better use of 'wealth' - we can only imagine the GPIF risk models just got switch to '11'. As we explained last year, Japan's Plan B is not only not a panacea, but it is a House of Bonds Cards that would not survive an even modest gust of wind, and an even more modest contemplation into its true internal dynamics. We would urge Messrs Abe and Kuroda to come up with a fall back plan to the fall back plan before it, once again, becomes too late.

Japan's Employment and Wage Situation Is On Solid Ground --Abenomics has been in place for about two years now.  Its central goal was to get the Japanese economy out of its near two decade malaise by using three "arrows:" a stimulative monetary policy, fiscal stimulus and policy reform, with the ultimate desired end result being to get the country out of its deflationary spiral.  One of the ways to increase inflationary pressure is to get the economy to beyond full employment, thereby forcing employers to raise wages in order to attract a declining number of applicants.  The graphs below indicate this situation is beginning to develop in the Japanese economy. The above two graphs are from the monthly Bank of Japan report, and they show a rather envious employment situation.  The top graph shows an unemployment rate that has been steadily declining since 2009, from a bit over 5% to the current level of around 3.6%.  At the same time, the number of job openings has been steadily increasing over the same period fo time.  The bottom chart shows that the number of job openings (the solid black line) has been increasing while the number of applicants (the less dense line) has been decreasing. The sum total of these graphs is that with the number of available jobs increasing and the total number of applicants decreasing we should be getting an increase in wages.  And these graphs show that relationship.  The top chart shows the Y/Y percentage change in both hourly and monthly wages.  The hourly wages (top chart, dark line) have been increasing for about a year and a quarter.  The monthly wages (top chart, less dense line) have started to increase in the most recent reading.  The reason for the descrepency is most likely due to the hours worked per week being held back until recently.

Japan's households stung by consumption tax - Japan's household spending fell sharply in May as the consumption tax hike took its toll. While some decline was expected, the 8% year-on-year drop puts the BOJ's optimistic economic forecast in doubt. As inflation cools with the diminishing impact of weaker yen (discussed here), the central bank is likely to accelerate asset purchases later this year.

Inflation in Japan rises to 30-year high - Inflation in Japan has hit a three-decade high and unemployment has dipped further, as the government's bid to jumpstart the economy takes hold amid warning from analysts that it was too early for celebrations. Japanese consumer inflation, stripping out volatile fresh food prices, rose 3.4pc year-on-year in May, the fastest pace in 32 years, according to data from the internal affairs ministry. The rise, which matched market expectations, was largely driven by a consumption tax hike in April that took the rate from 5pc to 8pc. Other data from the ministry showed household spending plunged 8pc in May year-on-year after a pre-rise shopping spree. The tax rise was seen as crucial for shrinking Japan's mammoth national debt, proportionately the worst among wealthy nations. However there have been fears it will derail a budding economic recovery by taking a bite out of consumer spending.

Now, Japan Must Figure Out How to Pay for Abe’s Growth Plan -- Aiming to give corporate Japan a shot in the arm, Prime Minister Shinzo Abe formalized a growth plan Tuesday that includes an aggressive corporate tax cut, a move that has sparked a stock-market rally and won praise from big business.  Now the debate moves to a more difficult phase: figuring out how to pay for it.Mr. Abe’s plan calls for reducing the corporate tax rate from 35.64% to below 30%, but doesn’t specify an exact level. Many observers say a tax cut could at least partially pay for itself if it stimulates business activity and attracts foreign direct investment, thus bringing in more revenue. But some doubt that would fully offset the revenue lost by lowering the rate. That means either alternative revenue sources will need to be found or some spending will have to be cut to keep the government’s massive fiscal deficit from growing further.  Mr. Abe has postponed those difficult decisions until the end of the year, by which time all the details — including next year’s budget – must be fleshed out.Also due by year-end are other tax-related policies that are unpopular with the public. They include a planned increase in the sales tax to 10% from 8% in October 2015, cuts to pension benefits and a review of various tax and social-security benefits currently offered to full-time homemakers.

WikiLeaked Doc Reveals Wall Street Plan for Global Financial Deregulation --WikiLeaks published a previously tightly-held and secretive draft of a trade document on Thursday that, if enacted, would give the world's financial powers an even more dominant position to control the global economy by avoiding regulations and public accountability.Known as a Trade in Services Agreement (TISA), the draft represents the negotiating positions of the U.S. and E.U. and lays out the deregulatory strategies championed by some of the world's largest banks and investment firms.According to WikiLeaks:Despite the failures in financial regulation evident during the 2007-2008 Global Financial Crisis and calls for improvement of relevant regulatory structures, proponents of TISA aim to further deregulate global financial services markets. The draft Financial Services Annex sets rules which would assist the expansion of financial multi-nationals – mainly headquartered in New York, London, Paris and Frankfurt – into other nations by preventing regulatory barriers. The leaked draft also shows that the US is particularly keen on boosting cross-border data flow, which would allow uninhibited exchange of personal and financial data. TISA negotiations are currently taking place outside of the General Agreement on Trade in Services (GATS) and the World Trade Organization (WTO) framework. However, the Agreement is being crafted to be compatible with GATS so that a critical mass of participants will be able to pressure remaining WTO members to sign on in the future. Conspicuously absent from the 50 countries covered by the negotiations are the BRICS countries of Brazil, Russia, India and China. The exclusive nature of TISA will weaken their position in future services negotiations.

Wikileaks Analysis Article - Secret Trade in Services Agreement (TISA) -  This memorandum provides a preliminary analysis of the leaked financial services chapter of the Trade in Services Agreement dated 14 April 2014. It makes the following points:

  • The secrecy of negotiating documents exceeds even the Trans-Pacific Partnership Agreement (TPPA) and runs counter to moves in the WTO towards greater openness.
  • The TISA is being promoted by the same governments that installed the failed model of financial (de)regulation in the WTO and which has been blamed for helping to fuel the Global Financial Crisis (GFC).
  • The same states shut down moves by other WTO Members to critically debate these rules following the GFC with a view to reform.
  • They want to expand and deepen the existing regime through TISA, bypassing the stalled Doha round at the WTO and creating a new template for future free trade agreements and ultimately for the WTO.
  • TISA is designed for and in close consultation with the global finance industry, whose greed and recklessness has been blamed for successive crises and who continue to capture rulemaking in global institutions.
  • A sample of provisions from this leaked text show that governments signing on to TISA will: be expected to lock in and extend their current levels of financial deregulation and liberalisation; lose the right to require data to be held onshore; face pressure to authorise potentially toxic insurance products; and risk a legal challenge if they adopt measures to prevent or respond to another crisis.

Thanks to Wikileaks, public can debate alarming new trade deal - Wikileaks last week again pierced the veil of official secrecy that surrounds global trade negotiations. The peek it gave us should alarm everyone.Big Business and national governments wanted to conceal the terms of the proposed Trade in Services Agreement (TISA) while keeping consumers, unions, environmentalists and the vast majority of businesses in the dark. Thanks to Wikileaks, they failed. The draft agreement Wikileaks released on June 19 is fresh, written in May. It is a model of secret law, blatant in its disregard for transparency, democratic process and history. Its opening page says the terms are to remain secret for five years after negotiations formally end or the proposed new rules take effect. Talks to refine that agreement were to resume Monday in Geneva. Even the secrecy-shrouded Trans Pacific Partnership that President Barack Obama and his Big Business allies want to ram through Congress without changes and only perfunctory debate does not include a five-year veil of secrecy after adoption. Wikileaks has released a portion of TPP draft documents to the public. It is impossible to obey a law or know how it affects you when the law is secret. And that is what this agreement would be, a new rulebook for trade in services — principally banking, insurance and trusts. The 18-page draft agreement involves 50 nations, which produce more than two-thirds of officially measured global economic activity. That means the consequences of the new rules would be enormous, especially for those living in the more than 140 countries not taking part in the talks. Whether people can get loans or buy insurance and at what prices as well as what jobs may be available will be affected by any new trade rules.

Trade Treaties and the Coming Rule of the Global Corporatocracy - Quietly, subtly, almost imperceptibly, the rules governing global trade and financial markets are changing. It is not happening by accident, but by willful design. Despite the enormous impact it will have on all our lives, the public is not being consulted on any aspects of the process. Most people are not even aware it is happening. The main driver of this change are the bilateral and multilateral trade and investment treaties being negotiated in complete secrecy and behind closed doors between corporate lobbyists, free trade activists and our own elected “representatives” (a term I use in the loosest possible sense, especially given the context). The ultimate goal of these treaties is to reconfigure the legal apparatus and superstructures that govern national, regional and global trade and business – for the primary, if not exclusive, benefit of the world’s largest multinational corporations. Corporations have long been powerful economic and political entities, but in recent decades some have grown to dwarf even middling-sized national economies. According to a ranking published by Global Trends, 58 percent of the world’s biggest 150 economic entities in 2012 were corporations. They include oil, natural gas, and mining majors, banks and insurance firms, telecommunications giants, supermarket behemoths, car manufacturers, and pharmaceutical companies. Right now, the representatives of many of these firms are engaged in late-stage negotiations with the U.S. and European political leaders that would make it financially calamitous for a nation-state to take any actions against the interest of corporations. If passed — and at this rate, it almost certainly will be — it will be the biggest bilateral trade deal in the history of mankind.

Report Shows Obama's Negotiators in Trans-Pacific Trade Scheme Being Paid Millions by Big Banks --  The Trans-Pacific Partnership (TPP) trade agreement is widely believed to be in the process of transferring significant regulatory power from sovereign governments to private industry, specifically to large banks and other corporations who want to operate as sovereign entities themselves -- if not above the law, then creating the laws that govern they way they do business.Negotiations of terms for the TPP are secret, so no one -- not even members of Congress -- are sure what powers are being transferred from the people to these powerful private interests. Almost everyone agrees, though, that the TPP will eventually be fast-tracked and passed with almost no public debate and little coverage in the media. This recent report sheds some light on how high-ranking officers from banks and other companies came to be involved in the process -- and indeed have actually assumed the position of writing the trade agreement terms and negotiating, farcically of course, on "behalf" of the American people. Officials tapped by the Obama administration to lead the Trans-Pacific Partnership trade negotiations have received multimillion dollar bonuses from CitiGroup and Bank of America, financial disclosures obtained by Republic Report show. Yes -- you heard it. U.S. officials leading the trade negotiations are actually being paid real cash, by banks and other entities. If this isn't corruption, what is?

South Korea Becomes Biggest Investor in Vietnam, Beating Japan -- Vietnam is rising as a manufacturing hub for South Korean companies. While electric and electronic industries are leading investments in Vietnam, many textile and shoe companies are returning to Vietnam from China. As consumption increases with higher income levels, large distribution companies are also actively investing in Vietnam. On June 19, Foreign Investment Administration in Ministry of Investment Planning of Vietnam announced that investment from South Korea during January-March period in 2014 reached US$765.6 million, which accounts for 22.9 percent of the entire investment amount in Vietnam. When it comes to new investment amounts and the number of investments, South Korea recorded 26 percent and 30 percent, respectively. This made South Korea the #1 investor in Vietnam out of a total of 32 countries. Traditional top investor Japan, with a cautious attitude towards new project investments, has become the #2 country, as the total investment amount was counted at US$414 million. As South Korean companies increase the investments to Vietnam, South Korea is rapidly following Japan in terms of accumulated investment amount as well. The total accumulated investment amount of South Korea is now US$30.4 billion, right behind the Japanese at US$35.3 billion.

Bad Debts Continue to Weigh on Vietnam’s Growth - Banks in Vietnam are struggling to boost lending, weighed down by a stubbornly high ratio of bad debt as well as weak demand, which may make it difficult to meet the economy’s growth target for the year. Total outstanding loans rose by just 1.3% in the first five months of this year, well below the full-year target of 12%-14%, according to the State Bank of Vietnam, the country’s central bank. “Banks are facing difficulties in finding businesses that are qualified for new loans,” Le Duc Tho, chief executive of Vietnam Joint Stock Commercial Bank for Industry and Trade, or Vietinbank,  told The Wall Street Journal. Vietnam’s gross domestic product has grown by an average of 7.0% per year over the past decade, but in the past three years the average has slowed to 5.5%. This year’s GDP growth is expected to remain sluggish — the government is projecting 5.8% growth for the year, while the IMF says 5.5% — considering that Vietnam’s economy still relies heavily on loans for growth. GDP rose 4.96% from a year earlier in the first quarter of 2014, down from 6.04% in the final quarter of 2013. Second-quarter GDP data is due this week.

Move on Money-Market Rates Shows Philippines Intent on Tightening - The Philippine central bank’s decision to pay higher interest on its special deposit accounts—a tool it uses to control liquidity in the market – represents a change of direction for the Bangko Sentral ng Pilipinas, and an intensification of recent moves to tighten policy. Even after last Thursday’s increase, however, SDA rates are barely half their level of three years ago. That’s because until this week the bank had been steadily reducing the interest it pays on the accounts, aiming to force money into the broader economy and support economic growth. The special deposit accounts continued to attract inflows even as the central bank pared returns on one-week funds by more than 2.5 percentage points between May 2011 and April 2013 (and even more than that for two- and four-week funds). That was a period when easy monetary policy in the U.S. and other developed economies was pushing capital toward emerging markets like the Philippines. Last July, the central bank began restricting access to SDAs, hoping to force money into the financial system and stimulate the economy. Since that move, money supply has been growing every month by more than 30% over its year-earlier levels. That’s extremely fast, and at two recent meetings the central bank raised the proportion of funds banks must keep on reserve by one percentage point each time, to the current 20%. That helped limit money supply growth to 32.1% in April — down from 37.3% in January, but still double the pace the BSP believes is sustainable. Central bank Gov. Amando Tetangco Jr. said Thursday’s quarter-percentage-point increase in SDA rates was a prudent move “to counter risks to price and financial stability that could emanate from ample liquidity.” He said the central bank can still tinker with the accounts to make sure liquidity doesn’t grow by more than 17% on-year every month.

Asia’s Sputtering Growth Engine - For most of the 2000s, we had a strong front engine pulling us along – domestic demand in the U.S. and in some other countries with external deficits. On the other side, Emerging Asia’s current-account surplus ballooned from 1.7% of aggregate GDP in 2001 to 6.7% in 2007. China’s current account surplus was 0.7% of total global GDP in 2008. Elsewhere, Malaysia and Thailand saw their combined current-account surplus double to 10.3% of their GDP in 2007 from 5.2% in 2001. But that export engine blew up in 2008 with the global financial crisis. Emerging Asia’s exports, excluding intra-regional trade, rose 40% between 2007 and 2013 – not bad, but they had grown 178% from 2001-2007. The region’s aggregate trade surplus was $161 billion in the year to February 2014, down from $275 billion in 2007. Excluding China, the region ran a trade deficit of $65 billion in the year to February 2014, compared with a $13 billion surplus in 2007. Still, Fitch expects the region to grow about 6.75% in 2014. Even excluding China, growth of 5.2% is the strongest expected for any global region (though sub-Saharan Africa is close). Clearly, another engine has helped pick up the strain. To a large extent, the rear engine that’s now pushing Emerging Asia along is debt. The standout is China. Fitch estimates aggregate financing in China rose to about 217% of GDP by end-2013, after hovering around 125% from 2004-2008. China’s credit-fueled investment surge drove a commodities supercycle that flattered incomes and growth in commodities exporters like Australia and Indonesia. Elsewhere, household debt in Malaysia and Thailand had risen to 87% and 82% of their GDPs, respectively, by end-2013, up from 66% and 55% at end-2007.

India Seeks Names of Swiss Bank Account Holders, Jaitley Says - India will ask Swiss authorities to provide details on bank accounts held by its citizens, Finance Minister Arun Jaitley said as he attempts to recover billions of dollars stashed overseas to avoid taxes. Switzerland is preparing a list of Indians suspected to have deposited so-called black money through legal entities based in countries other than India, the Press Trust of India reported yesterday, citing an unnamed Swiss government official. India defines black money as assets that haven’t been reported to authorities at the time of their generation or disclosed at any point during their possession. “The ministry of finance has officially not received any communication as yet,” Jaitley told reporters in New Delhi, referring to the report. “We are today writing ourselves to the Swiss authorities with whom the ministry has been in touch so that details with regard to whatever information the authorities have can be expedited.” Modi’s Bharatiya Janata Party said in a 2011 report that Indians had $250 billion, or 13 percent of gross domestic product, hiding in Switzerland. India’s tax-to-GDP ratio was 10.7 percent in 2012, compared with Brazil’s 15.4 percent and Russia’s 15 percent, World Bank data show.

India to raise import duty on sugar, promote exports: India will raise its import duty on sugar to 40 percent from 15 percent, as the government tries to revive business at mills that owe farmers around $1.84 billion, the food minister said on Monday. The climb in import duty will make overseas purchases nearly unviable for refiners in the world's biggest consumer of the sweetener, hitting shipments from suppliers such as Brazil, Thailand and Pakistan. "We have reached a consensus to raise the import duty to 40 percent," Ram Vilas Paswan said after meeting senior government officials. Local sugar prices, which had been stifled by rising stockpiles, jumped 1.5 percent following the announcement and are likely to rise further if monsoon rains stay subdued as expected in the next few weeks, dealers said. Paswan also told reporters the subsidy on raw sugar exports would be extended until September. India increased the subsidy for raw sugar earlier this month to boost output and exports. But large-scale exports are unlikely in the short term, as most of this year's raw sugar output has already been shipped. India is likely to export more than 2 million tonnes of sugar in 2014/15 as the top consumer is set to produce a surplus of the sweetener for the fifth straight year despite chances of reduced rainfall, a commodities executive said earlier this month. The government has also decided to raise the mandatory level for blending ethanol in gasoline to 10 percent from 5 percent, Paswan said.

In India, Prices Set to Rise as New Prime Minister Lifts Railway Fees - Indian Prime Minister Narendra Modi’s decision to go ahead with long-delayed plans to increase railway fares and freight rates could push up the prices of everything from carrots to cement. Just under a month in office, Mr. Modi’s government Wednesday started applying the steepest increase in years in railway freight rates and passenger fares.The new leaders in New Delhi want to make the world’s biggest railway network healthy again and follow through on campaign promises to take the tough measures needed to revive the once-shining, south-Asian economy. The Indian railway network, which crisscrosses the country and employs 1.4 million people, plays a crucial role in keeping India’s people and products moving.Prices of commodities such as coal, which are generally transported by railways, could go up with the new fees. That in turn could push up costs for key infrastructure industries such as power, steel and cement, which use coal as an input. Those costs are then passed on to consumers in the form of higher prices for electricity and different goods. Even food grains such as rice and wheat could get costlier as they too are transported on the railways.

El Nino may cause weak monsoon & high prices; poses serious challenge to Modi government -- The first big challenge to Narendra Modi's prime ministerial skills is now possibly in plain sight — and it's developing not in India but thousands of miles away off the coast of Peru, South America. The now-notorious El Nino weather phenomenon is not yet fully developed — it will reach its full fruition around September and October, but already it is being linked to a weak monsoon, soaring prices of vegetables and the possibility of poor agricultural output.The BJP fought this election around the inability of the previous government to rein in inflation and the rising prices of essential commodities. Now it is faced with the very real possibility that inflation could well head higher in the coming months. The signs are hardly positive.The monsoon shortfall is currently around 42% and with land temperatures high and little sign of rain in a number of regions, crop planting is delayed. During the 2009 drought, one of the worst India faced in many decades, rainfall deficit in June was running at similar levels. Delayed planting of key crops such as onion has already forced prices upward. What is El Nino and how will it affect the monsoon? The big problem here is one of uncertainty — about the future path of the monsoon, about the extent of any weakness in rainfall and even the extent of the El Nino phenomenon

Why inflationary pressures are building across the globe - Inflation is not just heating up in the U.S. Price pressures are growing globally, according to a research note from J.P. Morgan. The brokerage powerhouse says its global inflation index jumped to 2.6% in May from 2.1% in February on a year-over-year basis. That’s where J.P. Morgan expected the pace of inflation to end up by year end. And the firm’s core inflation index, which strips out food and energy, has climbed to 2.1% from 1.8% a few months ago. What’s surprising, J.P. Morgan economists say, is that the increase in inflation is not mainly due to higher food and energy prices. They say the sudden uptick in inflation suggests that companies are “regaining some pricing power.” In other words, companies around the world are able to pass the higher costs of doing business onto their customers by charging more. J.P. Morgan says prices are likely to remain higher than the firm expected, though inflationary pressure could cool off a bit since employee costs remain stagnant. Higher wages are typically the main generator of rising inflation over the long term.

IMF Frets About Giant Sucking Sound Of Hot Money, Wants To Take Over Global Monetary Policy - The IMF was lulled into its comfort zone by worldwide central-bank money-printing to bail out and enrich bondholders, bank investors, counterparties, and other investors via the masterful creation of magnificent asset bubbles. Now it’s waking up to the reality that the Fed, which instigated all this, is thinking out loud about pulling back. And that sent IMF heads fretting about “spillovers” to the rest of the world.  Bailing out holders of government debt is the IMF’s purpose. These bondholders are usually big banks; and when things curdle, hedge funds. The entire body of reports and other work and the bureaucracy that produces them are just decoration. In return for extending emergency loans to bail out certain bondholders, the IMF pressures the debt-sinner country to impose “adjustments” on its people – usually cuts in wages, benefits, pensions, healthcare, and what not, joined by tax hikes that hit everyone but the elite. These adjustments are also known as “structural reforms” and have been lovingly dubbed "austerity." There are other options, such as letting the market do its job. Bondholders, who’ve benefited from the income stream, would lose their shirts in return for buying these crappy high-risk bonds in the first place. Countries would bear the consequences of their governments’ reckless spending and borrowing policies. Governments would either resort to prudent budgets or print and devalue the currency until the infuriated people throw the scoundrels out. If the market were allowed to take over, much of the debt would be wiped out. The elite holding it would still be the elite, but less wealthy. A few banks might crater. But instead, the IMF intercedes, pushes out market forces, inserts international taxpayers, and voilà.

Slowdown in Emerging Markets: Not Just a Hiccup - IMFdirect - Emerging market economies have been experiencing strong growth, with annual growth for the period 2000-12 averaging 4¾ percent per year—a full percentage point higher than in the previous two decades. In the last two to three years, however, growth in most emerging markets has been cooling off, in some cases quite rapidly. Is the recent slowdown just a hiccup or a sign of a more chronic condition? To answer this question, we first looked at the factors behind this strong growth performance. Our new study finds that increases in employment and the accumulation of capital, such as buildings and machinery, continue to be the main drivers of growth in emerging markets. Together they explain 3 percentage points of annual GDP growth in 2000–12, while improvements in the efficiency of the inputs of production—which economists call “total factor productivity”—explain 1 ¾ percentage points (Figure 1). We also found that the pickup in economic activity in the 2000s compared to the 1990s is solely explained by higher total factor productivity. After exhibiting declines in Latin America and the Middle East and North Africa in previous decades, total factor productivity is now on the rise in emerging market economies in all regions (see our previous blog for a targeted discussion on Latin America)

Argentine debt battle could pressure world food prices higher (Reuters) - Argentine farmers say they will stockpile soybeans in the second half of the year if the government is unable to cut a deal with debt investors to stave off a new sovereign default, and the increased hoarding will likely push world food prices higher. Many producers are already holding soy back from the market as a hedge against high inflation and say they will be even more cautious as negotiations between the government and "holdout" bond investors go down to the wire. The holdouts want full repayment on bonds that Argentina defaulted on in 2002 and they have won a string of victories in U.S. courts that put the country on the brink of a new default. true "Considering what's going on with Argentina's debt, we are holding onto what we've harvested this year, to see what happens," said Carlos Novecourt, who runs a small farm in the town of Carlos Casares, in Buenos Aires province. The resulting cut in Argentine oilseed supply would put upward pressure on world soybean and soymeal prices at a time of rising demand, particularly from China.

Argentina debt ruling upends restructuring norms (IFR) - Holdout creditors' legal victory over Argentina looks set in the short term to complicate future sovereign debt restructurings but it may also prompt quicker implementation of long-proposed reforms to ease such stand-offs. true The US Supreme Court last week declined to hear Argentina's last-ditch effort to overturn a ruling that - as a result of the bonds' pari passu or equal ranking clause - the country must pay litigant holdouts in full when it next pays those who accepted 2005 and 2010 exchanges. At the same time, the IMF had just completed a meeting outlining proposals to overhaul how it deals with sovereign debt problems, giving preliminary backing to a plan that in exceptional circumstances it might try to extend bond maturities of distressed sovereigns seeking its help. "Given that the pari passu interpretation stands, creditors will have one more significant weapon in their arsenal against sovereigns who default. That is big, given creditors generally have very few weapons," said Mitu Gulati, a law professor at Duke University. One sovereign restructuring adviser agreed that the ruling will change the mindset of bondholders dealing with a sovereign default. "In the past, long-term bondholders may have been happy to accept an offer if they saw the writing on the wall. Now they may be wary of looking stupid if they accept an exchange and holdouts get paid. This will make everyone pause,"

Argentina Default Could Hurt JPMorgan and Citigroup --  If International Swaps and Derivatives Association (ISDA) rules that credit-default swap payments (CDS) on Argentina’s debt have been triggered after government officials said the nation won’t make bond interest payments, then Citigroup Inc. and JPMorgan may be at risk to repay a substantial portion of the CDS losses on up to $906 million in defaulted bonds.  Greece defaulted in 2012 on its bonds and created a $3.2 billion potential loss to banks and other financial institutions that sold credit-default swaps on the nation’s sovereign debt. At the time it was revealed by ISDA that a stunning $15.7 trillion or about a fifth of the world’s GDP was outstanding in sovereign debt credit-default swaps. JPMorgan Chase & Co. and Goldman Sachs Group Inc. had topped a list of the biggest credit-default swaps dealers since 2009 according to the annual Fitch Ratings survey. Barclays Plc, the U.K.’s second-largest lender, ranked third. Deutsche Bank AG and Morgan Stanley had been either first or second in the CDS exposure from 2004 through 2006, but they dropped to fourth and fifth after the 2008 collapse of Bear Stearns and Lehman Brothers.  Fitch states that ten banks make up approximately 67% of the global trading in the credit-swaps market. This limited number of “counterparties” represents a concentration of risk that is much narrower than before the Great Recession that started with the Lehman Brothers' filing for bankruptcy protection in September 2008.

Argentina deposits $832m to pay bonds - Argentina has deposited $832m to meet interest payments on restructured debt by a Monday deadline in its latest attempt to avoid a second default in less than 15 years. Economy minister Axel Kicillof said on Thursday the government had proceeded with the payment, of which $539m was deposited with the Bank of New York Mellon, the trustee for the disputed Argentine bonds, and the remainder with other financial intermediaries. But the move placed the country at odds with a New York federal court order that prohibits Argentina from making payments on its restructured debt without also doing so on its defaulted debt to so-called holdout investors – who did not participate in the country’s previous debt restructurings. “This is a brazen step in violation of this court’s orders and it warrants a swift and decisive response,” said NML Capital, the hedge fund leading the holdout creditors, in a letter to the court. Mr Kicillof said that by making the deposits Argentina was showing its willingness to comply with the terms of its bond contracts. “Complying with a ruling doesn’t exempt us from honouring our obligations,” the minister said at a press conference in Buenos Aires. “Argentina will meet its obligations, will pay its debt, will honour its promises.” Any attempt to block the payment would violate the rights of investors who accepted the terms of Argentina’s two previous debt restructurings, Mr Kicillof said.

Marxist Rebels Sabotage Bondholders in Colombia Selloff -  Colombia’s bondholders have become Latin America’s biggest losers as rebel attacks on oil sites imperil production and the government plans more debt sales. The nation’s peso-denominated notes have fallen six times the emerging-market average since June 16, when sabotage by Marxist guerrillas, community protests and environmental delays prompted Colombia to reduce the oil-output estimates in this year’s financing plan. The 1.4 percent bond loss coincides with the Finance Ministry’s decision to raise its budget deficit projection and boost local debt auctions by 1 trillion pesos ($531 million). While the price of Colombia’s biggest export is surging to a nine-month high, investors are growing more pessimistic over the nation’s creditworthiness as oil production decreases. Finance Minister Mauricio Cardenas said last week that crude output is his “biggest worry.” The revised financing plan called for a 2014 budget deficit of 2.4 percent of the economy, wider than previously forecast.

The Baltic Dry Index Is Down 60% Year-To-Date; Worst On Record - The Baltic Dry Index - so admired when it is soaring and supportive of all things great and good about credit creation and rehypothecation - has collapsed over 60% year-to-date. At $867, the index is at one-year lows and hovering near post-crisis lows as the hope-strewn surge of last year now lies torn asunder by the reality of China commodity ponzi probes and a 'real' slowing global economy. Of course, we will hear the echo chamber of 'over-supply' of ships rather than any 'under-demand' of actual aggregate product argument but the circularity of this argument is entirely lost on status quo huggers who viewed rising dry bulk commodity prices as indicative of growth (and built more ships) as opposed to the ponzi-financing scheme it really was... mal-investment writ large once again in a manipulated (and mismanaged) world.

Kiev Doubles The Price Of Cold Water, Shuts Off Hot Water -- No one ever thinks about the water.. until they have to. Hours ago, the local gas company in Kiev (Kyivenergo) announced that they would be shutting off the hot water supply to most of the city. While the official reason for the hot water shutoff is that Kyivenergo (the energy supplier to Kiev) owes a debt to the Ukrainian state gas company (Naftogaz) of over $100 million; it’s just a quirky little coincidence that this debt suddenly became materially important only one week after Russia shut off natural gas supplies to Ukraine. Funny thing is that Ukrainian politicians for years had been telling people not to worry about this. Clearly this turned out to be a big fat lie.

French Private Sector Contracts Second Month; Eurozone Composite Growth Weakest in 6-Months -- The Markit Flash Eurozone PMI shows Eurozone growth slows to six-month low despite strengthening periphery. Key Points

  • Flash Eurozone PMI Composite Output Index at 52.8 (53.5 in May). 6-month low.
  • Flash Eurozone Services PMI Activity Index at 52.8 (53.2 in May). 3-month low.
  • Flash Eurozone Manufacturing PMI at 51.9 (52.2 in May). 7-month low.
  • Flash Eurozone Manufacturing PMI Output Index at 52.8 (54.3 in May). 9-month low.

Eurozone economic growth slowed for a second month running in June, easing to the weakest since December, according to the flash reading of the Markit Eurozone PMI. Growth remained robust in Germany despite weakening slightly, and France‟s downturn deepened. Elsewhere across the region, however, growth was the strongest since August 2007. The headline index covering output of both manufacturing and services fell from 53.5 in May to 52.8, dropping further from April‟s 35-month high. Despite the slowdown, the average PMI reading for the second quarter as a whole was the highest since the second quarter of 2011. Output has also now risen for 12 consecutive months. Output rose at identical rates in manufacturing and services, but the rates of growth slowed in both cases to nine- and three-month lows respectively. In a sign that activity may reaccelerate, the survey's measure of new orders rose to its highest since May 2011, driven by the service sector. A slowing in growth of manufacturing new orders to the weakest since October pointed to ongoing sluggish production growth in coming months, while service sector companies report ed the largest inflow of new business for three years. The service sector also saw business expectations about the year ahead improve to the second-est seen over the past three years.

Polish Foreign Minister: We Gave The US A "Blowjob," Got Nothing - Polish Foreign Minister Radek Sikorski, generally viewed as a leading ally of the United States in Europe, said in a mysteriously-leaked recording Sunday that the alliance between the two countries is “not worth anything.” “The Polish-American alliance is not worth anything. It’s even damaging, because it creates a false sense of security in Poland,” Sikorski says on an excerpt of a longer conversation set to be published Monday morning in the magazine Wprost, which is reportedly between Sikorski and former finance minister Jacek Rostowski. It’s unclear who recorded the conversation said to be from this spring, and why, though speculation has focused on Russian intelligence, which is believed to have leaked a similarly embarrassing conversation between American officials.  After his interlocutor asks why he’s skeptical of the alliance, Sikorski continues that it is “bullshit.”  “We are gonna conflict with both Russians and Germans, and we’re going to think that everything is great, because we gave the Americans a blowjob. Suckers. Total suckers,” Sikorski says, according to a translation of the account for BuzzFeed.

France faces prolonged stagnation - France remains the Eurozone's Achilles heel, as its economy stagnates. Estimates continue to show that the euro area ex-France is doing significantly better. Today's flash Markit PMI report for June showed French manufacturing and service sectors contracting faster than expected. Manufacturing orders were particularly poor. PMI below 50 indicates contraction.  Markit: - There remained little sign of any turnaround in the performance of France’s economy at the end of Q2, with output falling for a second successive month and at a faster rate. The data are consistent with another disappointing GDP outturn for Q2 following stagnation in the first quarter... On these trends, the economic underperformance of France seems set to persist well into H2 2014. A number of factors contributed to this weakness, including elevated political uncertainty in France. Here are some other problems that continue to plague the nation:

  • 1. The unemployed in France now number 3.4 million, over 10% of the workforce. And the long-term unemployment rate is still rising.
  • 2. French residential construction is mired in red tape, which discourages homebuilding. As a result, the nation's home affordability is worse than in the UK, a nation that is struggling with expensive real estate
  • 3. Finally, the nation's public finances are a mess. Hollande's big tax increases did not produce the results expected. In fact, it's hard to understand how budget estimates could be this far off.

German economics minister “austerity policies have failed”  - Bill Mitchell – There was a report in the papers this morning about a horrific beating in one of the poorest migrant areas north of Paris. The article – Roma teen attacked: the images that will shock France was really a repeat of a story in the UK Telegraph. I don’t want to go into the details because I don’t know them. But what is apparent in modern day Europe is the increasing breakdown of social stability and an emerging law of the jungle driven by unemployment, poverty and the inevitable social exclusion. France has been hit particularly hard by fiscal austerity. The difficult times that it has created have then led to the inevitable divisions appearing within the population and the call for scapegoats. Typically migrants become the easy targets for the wrath felt by an increasingly unemployed population. The European elections in May clearly demonstrated the success of Marine le Pen’s Front National was concentrated in areas of France with very high unemployment. The right-wing political parties exploit the hardship in the same way that the Nazis did in Depression-ridden Germany in the early 1930s.  The Minister for Economics, Sigmar Gabriel and has meetings earlier this week with his French counterpart and said afterwards that: Countries that are embarking on reforms must have more time to cut their deficits, but it has to be binding – a binding chance to reform in return for more time  Gabriel is the “leader of the Social Democratic Party, the junior coalition party of Angela Merkel.” He now plans to put a joint proposal with the French to lesson the emphasis on austerity. Sigmar Gabriel was reported as saying the “austerity policies have failed”. He was quoted as saying: Anyone who doubts that austerity has failed should look at the election result of the right-wing parties.

The EU Center-Right and Ultra-Right’s Continuing War on the People of the EU -- William K. Black - The New York Times has provided us with an invaluable column about the interactions of the EU’s rightist and ultra-rightest parties. It is invaluable because it is (unintentionally) so revealing about the EU’s right and ultra-right parties and the NYT’s inability to understand either the EU economic or political crises. The NYT article illustrates its points by presenting a tale entitled “A German Voice, Hans-Olaf Henkel, Calls for Euro’s Abolition.'  Mr. Henkel wants to abolish the euro.His country, he contends, would be better off returning to the deutsche mark, rather than letting hard-working, disciplined Germans continue spending their taxes propping up laggards in Greece, Italy and other euro zone countries that he says have squandered the common currency’s birthright. And last month he won a seat in the European Parliament that will give him a platform to try to unwind the currency union.” I will return to the euro controversy at the end of my article, but for now we will follow how the NYT and the EU view Henkel.

France, Italy join forces against 'high priests of austerity' (AFP) - The left-wing leaders of France and Italy launched an offensive Tuesday against strict EU budget policies, warning two days ahead of a key summit that austerity was holding back economic growth. Top austerity promoter Berlin however showed no sign of backing down, as European Union leaders prepare to gather in Brussels from Thursday to name the 28-nation bloc's top officials. France's Socialist President Francois Hollande and Italy's popular new Prime Minister Matteo Renzi have been leading a charge against the rigid application of a rule requiring that budget deficits not exceed three percent of annual gross domestic product. Both have denied seeking to change the rule but have called for more leeway in how it is applied, especially in the setting of deadlines to reach the three percent goal. In a letter to European Council President Herman Van Rompuy on Tuesday, Hollande said a "deeper discussion" was needed to come up with "a balanced budget policy" for the eurozone. "France proposes that budgetary rules be applied in a manner favourable to investment and employment," Hollande wrote in the letter, a copy of which was obtained by AFP.

French unemployment rose to record high of 3.39 million in May - France‘s unemployment figures continued to worsen in May, with the number of jobless growing by 24,800 to hit a new high of 3.39 million, government statistics released on Thursday showed. Unemployment in the eurozone‘s second-largest economy has been on the rise since April 2011. August and October 2013 were the only two months that marked slight improvements. President Francois Hollande‘s has failed to deliver on his promise to generate jobs - one of the main reasons that he has lost credibility in the eyes of voters. His Socialist government admitted that the latest figures were disappointing. "These figures are not good. They reflect weaker-than-expected growth in the first quarter which led to net job losses in the retail sector," the labour ministry said, adding it expected an improvement in the second half of the year. The unemployment rate for all of France, including overseas territories, stood at 10.1 per cent in the first quarter, according to national statistics agency INSEE

French GDP growth stalls in first quarter: Insee - The French economy failed to grow in the first three months of the year, data from statistics bureau Insee confirmed Friday. Growth in the euro zone's second largest economy was weighed down by a fall in consumer spending and investment by non-financial companies. France only avoided an overall economic contraction in the first quarter of the year due to government spending and companies rebuilding their stocks. Insee's publication Friday was the second reading of gross domestic product. Since the first reading, the statistics bureau has forecast the French economy will grow only 0.7% in 2014, below the government's forecast of a 1% expansion. Growth at 0.7% will be insufficient to bring down unemployment, ministers have said.

Italian Debt Swells to Rival Germany as Bond Yields Slide - As Italy’s borrowing costs fall to new lows, its debt is rising to the most ever. The country owed 5 percent more in April compared with a year earlier, with debt reaching 2.15 trillion euros ($2.9 trillion), Bank of Italy figures show. That matches the outstanding borrowing of Germany, the largest economy in Europe and the most of any country on the continent, at the end of last year, according statistics office Eurostat. While Germany is scheduled to grow 2 percent this year, Italy will expand 0.3 percent in 2014, according to a Bloomberg survey. To ensure its debt is sustainable, Prime Minister Matteo Renzi is under pressure to push through spending cuts and foster growth in an economy burdened by the threat of deflation and the highest jobless rate on record. “In our forecasts Italian debt will overtake Germany by the end of the year,” said an economist at Bank of America Merrill Lynch in London. “It is particularly important that the government moves ahead with the promised reforms to firm the sovereign credit rating and strengthen further investors’ appetite for Italian assets.”

Euro-zone mood worsens despite ECB action - The European Central Bank's new measures to boost growth and the inflation rate across the euro zone seem to have inspired little fresh optimism among businesses and households about the single-currency area's economic prospects. A European Commission survey released Friday recorded a decline in confidence during June. The ECB announced a package of measures June 5 designed to stave off the threat of dangerously low inflation in Europe, including cutting a key interest rate below zero for the first time to get banks to lend more to credit-starved customers. It is too early for those measures to affect growth and inflation. ECB President Mario Draghi said it may take between nine and 12 months for their full impact to be felt. But the Commission's survey indicates that neither consumers nor businesses view the measures as having the potential to improve the outlook for the economy and their own prospects. The European Commission Friday said its headline Economic Sentiment Indicator-which measures confidence in a number of business sectors and among consumers fell to 102.0 from 102.6 in May. That was a surprise, with the consensus forecast of 17 economists surveyed by The Wall Street Journal last week having been for a rise to 103.0. The decline in confidence was visible in each of the euro zone's three largest member economies, with the national ESIs falling in Germany, France, and Italy. However, the ESI for Greece--the currency area's most troubled member over recent years--surged to stand above its long-term average for the first time since August 2008. The ESIs for Spain and the Netherlands also rose.

BOE Questions Fall In Euro-Zone Bond Yields - - While the Bank of England Thursday focused its attention on the threats to financial stability posed by the U.K.’s booming housing market, its twice-yearly Financial Stability Report highlighted some other concerns. Developments in the euro zone are never far from the BOE’s thoughts: not only is the currency area a major export market for the U.K., but London is at the heart of the 18-nation bloc’s financial system, despite the U.K. having chosen to hold on to its own currency and central bank. The BOE appeared unconvinced that the rapid fall in spreads on bonds issued by governments in what is known as the euro zone’s ‘periphery’–which includes a large number of its members–is warranted and sustainable. It noted that Greece, Italy, Ireland, Portugal and Spain “remain highly indebted,” while their growth prospects are weak. “The fall in euro-area periphery bond spreads appears to have outpaced improvements in the macroeconomic outlook,” the BOE said, a polite way of saying investors should be demanding higher interest rates to lend to those countries. The BOE also noted that with inflation in the euro zone at very low levels–0.5% in May–it will be more difficult for governments, households and businesses to lower those high levels of debt. It also said that low inflation makes it more difficult for the euro zone to rebalance, or make economies in the south more competitive relative to those in the north.

Poverty In The UK Doubles Over the Past 30 Years, Despite Robust “Economic Growth” -- One of our favorite lines about the current oligarch theft continuing to occur throughout the world is courtesy of the “Artist Taxi Driver,” who likes to state: “This is not a recession its a robbery.” Truer words were never said, but this theft goes back a lot further than the latest economic catastrophe. As we all know by now, real median wages haven’t increased in the U.S. for the past 45 years, while at the same time, so-called economic growth according to traditional metrics has exploded higher. As yesterday’s article from the Guardian below demonstrates, this is not just an American problem. It is pervasive throughout the Western world. So what happened?

Super-rich worry that their wealth is killing drive and ambition in their children - With millions of pounds in the bank, you might have thought the world's super-rich wouldn't have a care in the world. But a new survey has revealed the top fears of the world's wealthiest people, and one of the most common is that their money is their children's ambition and drive to do well. For the most successful - defined as those with fortunes of $10million (£5.9million) and above - worries about children's motivation came second only to worries about their own health According to the study, by law firm Withersworldwide, fears over children's ambition come above worries about investments failing, inability to provide for the family, and even divorce.Among those with a fortune of less than $10million the fear still ranked highly, but came in fourth place, behind health troubles and worries over income.The study found that, wealthy families have the most to fear from third generation family members when it comes to losing the family millions. Sara Cormack, a partner at Wither's, said: 'If the first generation are wealth creators then the second generation tend to be wealth preservers, but it is the third generation that families are most worried about.

Calculating the Contribution of Heroin to GDP -- Proving once again that we're willing to tackle really strange questions, we thought we'd take a stab at it, following the same approach that nations like Italy, Ireland and specifically the United Kingdom have taken in seeking to inflate the reported values of their countries' Gross Domestic Product. Because when politicians are desperate to claim more economic growth to try make themselves look good, it's time to look the other way when it comes to accounting for the economic impact of things that the politicians have outlawed to try to make themselves look good.  Of course, the problem with the things that politicians have outlawed, such as heroin, is that it can be very difficult to get accurate business statements from the people who are engaged in the outlawed trade, such as heroin dealers. For some strange reason, many of those who are engaged in such trades aren't willing to fully detail the figures related to their illicit businesses on their income tax returns or in their quarterly financial statements.  So economists in nations seeking to record a positive benefit for illegal activities have to estimate how much those illegal activities add to their GDPs. In the U.K., that meant going back to the findings of a study of heroin use in the nation in 2003, then adjusting for changes in the quality and price of heroin over time, as well as the number of heroin users.