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

Saturday, June 14, 2014

week ending June 14

Fed Prepares to Maintain Record Balance Sheet for Years - Federal Reserve officials, concerned that selling bonds from their $4.3 trillion portfolio could crush the U.S. recovery, are preparing to keep their balance sheet close to record levels for years. Central bankers are stepping back from a three-year-old strategy for an exit from the unprecedented easing they deployed to battle the worst recession since the Great Depression. Minutes of their last meeting in April made no mention of asset sales. Officials worry that such sales would spark an abrupt increase in long-term interest rates, making it more expensive for consumers to buy goods on credit and companies to invest, according to James Bullard, president of the Federal Reserve Bank of St. Louis. That “is a widespread view in parts of the Fed, I think, and in financial markets,” Bullard said in an interview last week. While he disagrees with that perspective, it “won the day.” The Fed is testing new tools that would allow it to keep a large balance sheet even after it raises short-term interest rates, a step policy makers anticipate taking next year. They would use these tools to drain excess reserves temporarily from the banking system.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 12, 2014: Federal Reserve statistical release -  Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Fed’s James Bullard: Fed Is ‘Much Closer’ to Its Policy Goals - While he stopped short of calling for a change in policy, Federal Reserve Bank of St. Louis President James Bullard said Monday the time is fast approaching when the central bank may need to begin raising interest rates. “The macroeconomy is much closer to normal than it has been during the past five years,” and the Fed “is much closer to its goals” as a result, Mr. Bullard said. But at the same time, the stance of central bank monetary policy “is not close to pre-crisis levels” and remains at settings putting in place to deal with a flailing economy, the official said. Mr. Bullard did not say when he believes the central bank should commence ending the ultra-easy money policy stance that prevailed over recent years. But he noted central bankers face “a classic challenge” and added “the debate on this topic is likely to garner significant attention as the economy continues to improve during 2014.” Mr. Bullard’s comments came from a presentation prepared for a gathering held by Tennessee Bankers Association in Palm Beach, Fla. He spoke as U.S. monetary policymakers increasingly face big questions about the future. After a weak, weather-related start to the year, recent economic data have been pointing to continued growth and job gains. Inflation remains well under the central bank’s 2% target, but it has been rising back toward the level Fed officials want to see. The Fed is currently in the process of winding down its bond-buying stimulus program and officials have widely signaled that effort will be completed by the end of the year. The next issue Fed officials will likely have to deal with is what to do with the near zero percent short-term rate policy that’s been in place since the end of 2008.  Most Fed officials reckon the first increase in interest rates will come some time in 2015. San Francisco Fed president John Williams, a close ally of Fed chairwoman Janet Yellen, said last month he doesn’t see rates rising until the second half of next year. New York Fed President William Dudley observed in late May rate increases lie well off in the distance, but added “no one knows” when the Fed will act. Meanwhile, Kansas City Fed leader Esther George, a persistent critic of the central bank’s easy money policies, wants to see rate increases follow shortly after the end of the bond-buying program.

Fed’s Rosengren: May Extend Taper Process To Reinvestment Buying - Federal Reserve Bank of Boston President Eric Rosengren said Monday the U.S. central bank might need to implement a second tapering of its bond-buying efforts. The central bank is steadily winding this process down and has signaled that as long as the economy plays out as officials expect, purchases that expand the size of the central bank balance sheet will be done by year’s end. Mr. Rosengren’s taper talk zeroed in on what happens after that. He speculated how the Fed could deal with its ongoing effort that takes the money from maturing Fed-owned bonds and buys new securities. The Fed does this to maintain the size of its balance sheet. The fate of the reinvestment regime becomes very important after the end of balance-sheet expanding bond buys, because its end would represent the first step in the process of raising short-term interest rates. “As the economy moved closer to the Federal Reserve’s 2% inflation target and full employment, there could be a gradual reduction in the reinvestment policy–which would allow for a predictable reduction in the size of the balance sheet,” Mr. Rosengren said in the text of a speech prepared for delivery before a gathering in Guatemala City. “A reduction in the balance sheet, when that becomes appropriate, could be implemented as a basically seamless continuation of the tapering program used for reductions in the purchase program,” he said. The Fed “could decide to reinvest all but a given percentage of securities on the balance sheet as they reach maturity, and increase that percentage at each subsequent meeting, assuming conditions allow.”

Fed’s Bullard Says Central Bank May Raise Rates Sooner Than Many Now Think - Federal Reserve Bank of St. Louis President James Bullard said Monday if the economy performs as he expects over the remainder of the year, it is likely the central bank will increase short-term rates earlier than most officials now expect. “If you get 3% growth for the rest of this year, if you get unemployment coming down below 6%, if you continue to have jobs growth at 200,000, if you continue to see inflation moving back up toward target, I think if we get to the fall of the year and all of those things are transpiring as I’m suggesting they will, that will change the conversation about monetary policy, and there will be more sentiment toward an earlier rate hike,” Mr. Bullard told reporters after a speech. The official noted that his present projection is the Fed will first increase what are near-zero percent interest rates sometime near the end of the first quarter of next year. But, he said that view is now somewhat in flux. Mr. Bullard spoke to reporters after delivering a speech on the economy to a gathering held by the Tennessee Bankers Association in Palm Beach, Fla. He weighed in as U.S. monetary policymakers increasingly face big questions about the future. After a weak, weather-related start to the year, recent economic data have been pointing to continued growth and job gains. Inflation remains well under the central bank’s 2% target, but it has been rising back toward the level Fed officials want to see.

Fed’s Tarullo Signals Short-Term Funding Market Requirement May Be Coming - —Federal Reserve Gov. Daniel Tarullo offered his strongest signal yet that a new requirement for the short-term funding markets widely used on Wall Street may soon be coming. Mr. Tarullo, who plays a central role in setting the Fed’s regulatory agenda, said, after reading accounts of the role short-term markets played in the financial crisis, a “broadly applicable” minimum margin requirement makes sense. “It’s a little hard, I think, to make a compelling case against doing something like that,” he said Monday in response to a question from the audience after a speech before the Association of American Law Schools. Mr. Tarullo has previously said the Fed is considering a margin rule. He made no explicit promises Monday that the Fed would take action, but made it clear he believes the Fed would be justified in doing so. Fed Chairwoman Janet Yellen has also said that rules targeting short-term funding could help mitigate risks to the financial system. Banks and many other financial firms, including non-banks that operate in the so-called shadow banking sector, use short-term funding transactions. Lenders holding large amounts of cash or low-risk securities use the markets to boost returns on those assets, while borrowers use those securities or cash to fund their operations, hedge or execute short sales. The transactions include repurchase agreements and securities-lending transactions and are valued in the trillions of dollars every day. Mr. Tarullo signaled he doesn’t believe such a requirement should be controversial. When banks borrow from the Fed, “we require haircuts on all the collateral presented to us,” Mr. Tarullo said. “It’s just good counterparty practice.” “Haircut” is another word for margin.

What If the Fed Has Created a Bubble? - Mohamed A. El-Erian - Macro-prudential regulation has been significantly enhanced in the aftermath of the global financial crisis. Authorities around the world have imposed higher and more intelligent capital requirements, required financial institutions to value their assets more conservatively and to hold more easy-to-sell assets, placed constraints on allowable risk-taking, insisted on more stable funding, and demanded greater provisions against bad loans. The more confident central bankers are in their macro-prudential approach, the greater their willingness to persist with stimulus policies today that could involve a bigger risk of financial instability down the road -- a trade-off that has been noted recently by Minneapolis Fed President Narayana Kocherlakota, Boston Fed President Eric Rosengren and former Fed Governor Jeremy Stein. Essentially, the Fed has been pushing stock and bond prices up to "bubblish" levels, in the expectation that they will inspire the kind of consumer spending, physical investments and hiring required to subsequently justify them. The hope is that the convergence will occur in the context of full employment and inflation near the Federal Reserve’s target of 2 percent. So far, though, the wedge between asset prices and economic reality remains large, as last week's juxtaposition of new stock-market highs and still-anemic wage-inflation data demonstrated. The danger is that the economic recovery will ultimately fail to validate artificially high asset prices, leading to significant financial instability and adverse “spillback” for the economy. The more comfortable the authorities are in their ability to counter -- and, if necessary, contain -- such potential instability, the greater their appetite for maintaining the stimulus that markets so love.

Fed’s Bullard Calls Out Ignoring Bubbles Developing “Under Our Noses,” So What About Now? - Yves Smith - It’s been astonishing to see members of the Fed in denial about their own handiwork, so when St. Louis Fed President James Bullard berates his fellow central bankers for their abject refusal to notice pre-crisis bubbles, it’s an all too rare departure from their usual insularity and willful blindness.  Moreover, there’s one issue that Bullard mentions only obliquely that deserves more notice. Bullard specifically criticizes the way that the Fed decided to increase interest rates in the face of extreme spread compression in all credit markets in a measured, deliberate way. That well-signalled, cautious process in fact was part of a pattern of insulating investors as much as possible from losses, which of course simply encourages more recklessness. Many writers, including your humble blogger, have written at length about the Greenspan, and later Bernanke and presumed Yellen puts, that if financial markets got too upset, the Fed would ride in to their rescue.  But that was not the only way the monetary authority over the years has shielded investors more and more from risk. An important article this past Sunday by John Coates in the New York Times explained how various Fed policies meant to increase the safety of the financial system were having the reverse effect. Key extracts: If we understand how a person’s body influences risk taking, we can learn how to better manage risk takers. We can also recognize that mistakes governments have made have contributed to excessive risk taking…. the Fed has pioneered a new technique of influencing Wall Street. Where before the Fed shrouded its activities in secrecy, it now informs the street in as clear terms as possible of what it intends to do with short-term interest rates, and when. Janet L. Yellen, the chairwoman of the Fed, declared this new transparency, called forward guidance, a revolution; Ben S. Bernanke, her predecessor, claimed it reduced uncertainty and calmed the markets. But does it really calm the markets? Or has eliminating uncertainty in policy spread complacency among the financial community and actually helped inflate market bubbles?…

Policy Rules When Money Still Matters -  John Taylor - In an interesting recent paper and blog post “Money Still Matters,” Michael Belongia and Peter Ireland report new empirical results with relevance to monetary policy.  They show that the Divisia index of the money supply (not M1 or M2) has effects on the economy over and above the effects of the short term interest rate. The results suggest that central bankers—as they look into alternative strategies for monetary policy—should consider some kind of money growth rate rule, at least as a supplement to the interest rate rules which have been the focus of research and practice for many years. I agree with this view, and have for a long time pushed back against the trend of central banks—including the Fed—to ignore money growth.  In situations where the interest rate hits the lower bound or more generally in situations of deflation or hyperinflation, I have argued that central banks need to focus on a policy rule which keeps the growth rate of the money supply steady. In a 1996 paper, for example, I recommended that “Interest rate rules need to be supplemented by money supply rules in cases of either extended deflation or hyperinflation.”

Fed Fails To Stimulate Jobs, Declares Victory and Pulls Out - The seasonally finagled headline number for nonfarm payrolls for May increased 217,000. The consensus expectation of Wall Street conomists was for a gain of 220,000. This report was not too hot, not too cold but j-u-u-u-st right! The market loved it. The seasonally adjusted monthly gain equated to an annualized gain of roughly 2.6 million or 1.9%. Actual, not seasonally adjusted (NSA), nonfarm payrolls rose by 920,000 in May to a total of 139.2 million. The actual annual growth rate was +1.75%. The seasonally adjusted number slightly overstated the gain. However, the actual number was better than the 10 year average and slightly better than May 2013. On the surface it looked like a good number. However, I find the consistency of the growth pattern to be “strange”. The annual rate of change has been between 1.55% and 1.85% for more than 2 years. Excluding a brief bump in early 2012, that string has persisted since September 2011. Meanwhile, the Fed has grown its balance sheet by 38% over the past year, and stock prices have risen not quite 20%. Ben Bernanke’s theory was that stock price gains resulting from QE would stimulate jobs. After 5 years of massive Fed balance sheet expansion, it’s apparent that he was dead wrong. There’s not much trickling to the labor market, either in terms of jobs or labor income.

David Brat to Bernanke: Don’t Underestimate the Value of Protestants -- Ben Bernanke got it wrong because he forgot to account for God, or at least for the Protestant way of worshiping him. That’s the basic argument of David Brat, the Virginia Republican who toppled House Majority Leader Eric Cantor (R., Va.) Tuesday. In a 2005 paper, which he presented at an economics conference in Myrtle Beach, S.C., he took on Mr. Bernanke, the former Fed chairman, Fed governor, and former chairman of the White House Council of Economic Advisers.In the paper, titled “Is Growth Exogenous? Taking Bernanke Seriously (But How Can a Fed Guy Forget the Institutions)”, Mr. Brat waded into a debate among economists over the determinants of long-term growth with this conclusion: Mr. Bernanke’s work on economic growth overlooked the role that religious institutions–particularly Protestant ones–play in driving a country’s growth rates. In his argument against Mr. Bernanke, Mr. Brat draws on previous research titled “Economic Growth and Institutions: The Rise and Fall of the Protestant Ethic?” a 2004 paper in which he wrote that Protestantism “provides an efficient set of property rights and encourages a modern set of economic incentives” so “one might anticipate positive economic performance.” “Give me a country in 1600 that had a Protestant led contest for religious and political power and I will show you a country that is rich today,” he wrote.

Price Inflation and Wage Inflation - The figure below plots a pretty long time series of annual changes in the core PCE price index and the Employment Cost Index, a measure of nominal average compensation costs–wages plus benefits–faced by employers (and adjusted for employment shifts across industries). The core PCE has wiggled around between one and two percent for over ten years!  (This has led some unenlightened souls to suggest to me that we must have been at full employment all those years…you know who you are!)  But the comp measure is stuck at an all time low of around 2%, year-over-year.  BTW, that’s about where overall (as opposed to core) inflation is running, implying flat real compensation growth–and this is the average.  The forces of inequality tend to pull up the average relative to the median. This is not just an idle observation.  There are those among us who have suggested that the Federal Reserve might be wise to factor nominal wage inflation, of lack thereof, into its thinking about wind-downs and liftoffs.  Chair Yellen herself has said in the recent past: “the low rate of wage growth is, to me, another sign that the Fed’s job is not yet done” and ”low nominal wage inflation was also viewed as consistent with slack in labor markets.” The unemployment rate is biased down due to labor force exiters.  Price growth is low and apparently “well-anchored.”  We’re still a ways from full employment.  All good reasons to considering adding wage trends (and I think the ECI is a strong candidate) to the mix of indicators guiding the Fed’s next move–or lack thereof!

There Is No Tradeoff Between Inflation And Unemployment - Anyone reading the regular Federal Open Market Committee press releases can easily envision Chairman Yellen and the Federal Reserve team at the economic controls, carefully adjusting the economy’s price level and employment numbers. The dashboard of macroeconomic data is vigilantly monitored while the monetary switches, accelerators, and other devices are constantly tweaked, all in order to “foster maximum employment and price stability." The Federal Reserve believes increasing the money supply spurs economic growth, and that such growth, if too strong, will in turn cause price inflation. But if the monetary expansion slows, economic growth may stall and unemployment will rise. So the dilemma can only be solved with a constant iterative process: monetary growth is continuously adjusted until a delicate balance exists between price inflation and unemployment. This faulty reasoning finds its empirical justification in the Phillips curve. Like many Keynesian artifacts, its legacy governs policy long after it has been rendered defunct.

Great Moderation 2.0 Seen Lasting by JPMorgan Until Fed Shifts -   The calm that has descended on financial markets has longer to run if history is any guide. Having coined the phrase Great Moderation 2.0 to describe the lull back in April, JPMorgan Chase & Co.’s John Normand is comparing this moment to periods of tranquility over the past three decades. His findings suggest the quiescence is here to stay for a while, meaning investors may be lulled into taking ever-greater risks. The bank’s head of foreign-exchange and international-rates strategy in London characterizes low volatility in the currency market as when swings in the Group of 10 major currencies slip and stay below 7 percent on a trailing three-month basis. While that happened for 45 business days as of the end of last week, the average timeframe of similar episodes since the 1980s is 150 days. They ranged in length from three months when the Federal Reserve paused its easing of monetary policy in 2002 to almost two years during the so-called Goldilocks era of the late 1990s when the U.S. economy was neither too hot nor too cold.

Easy money: Even without the Fed, we are awash in cash - The question is why. Part of the answer is that the Fed is only one aspect of a world awash in capital. We are in the midst of a cycle with no end in sight, one characterized by a supply of money that might not be endless and is surely not infinite but which is showing no signs of waning. The result has been and likely will continue to be a world where capital thrives (pace Piketty) without any countervailing force. In this Golden Age of Capital, financial assets are in a prime position to thrive and have constant new sources of fuel. And there is nothing evident on the horizon—no backlash beyond rhetoric, no movement powerful enough to curtail or channel the flow of capital to labor—that will halt this movement. Just as the Fed has slowly begun a shift from very easy money to just easy money, other spigots around the world have opened. At the end of last week, the European Central Bank, led by its president Mario Draghi, announced its own version of quantitative easing, focusing less on the Fed’s approach of asset purchases and more on incentives to get banks to lend more. The central bank of China then unveiled a program designed to boost lending to small businesses. While the exact dollar amount of these measures is unclear, they represent a new injection of liquidity into a global system that has hardly lacked for it.

Amid Upbeat Economic News, Many Reasons for Pause - WSJ - In the teeter totter between good and bad economic news, developments in the U.S. are clearly titling up. The U.S. hit a new all-time jobs peak last month. The Dow is setting new records. On Tuesday, a measure of small-business confidence sounded its most optimistic note in seven years. There’s a notable surge in job openings.But economists are of a mind that it’s a bit early to celebrate. The champagne goblet is, at best, half full. Yes, the U.S. labor market has finally nosed above where it was before the recession and the financial crisis threw millions out of work. But the country since then has grown, and the proportion of Americans in the workforce has shrunk by nearly two percentage points. By another measure, the labor force participation rate, which measures those working or actively seeking work, is near its lowest level since the late 1970s. The makeup of the job market is also far different from what it was during the relative boom years before the housing bust. The fastest growing jobs, including a surge in temp and part-time jobs, are also among the lowest paying. At the same time, jobs in manufacturing, construction and government—all among the better paying of sectors— are off by 3.6 million from their levels at the start of 2009. The Labor Department reported Tuesday that the number of job openings in April had jumped to its highest level since 2007. In all, employers reported 4.45 million job postings for the month. But for some economists, those numbers highlight a bigger challenge. With so many job openings, how can the unemployment rate remain at 6.3%? One likely culprit: A lingering shortage of workers with the right skills to fill the needed jobs. Put another way, too few of those out of work, or newly entering the workforce, have the mix of skills employers want most.

The Economic Damage of Recession News - -  Real gross domestic product (G.D.P.) in the United States shrank by 1 percent in the first quarter of the year. What made this announcement seem so significant? We already knew that the economy did not perform well in the first part of the year — the Commerce Department’s Bureau of Economic Analysis initially estimated G.D.P. growth at 0.1 percent — and that early economic estimates are often revised substantially as more data become available. The key difference is the direction of change. A shrinking economy is far more scary — and newsworthy — than a slow-growing one. In this case, the G.D.P. revision prompted a wave of coverage focusing on the fact that growth was negative. Distinctions like these matter. Consumers often overweight the importance of arbitrary thresholds like zero growth. That’s why used cars with just over 100,000 miles sell for significantly less than those with just under 100,000 miles.  In the case of the economy, the arbitrary distinction between slightly negative and slightly positive growth can be especially consequential because a widely used rule of thumb defines a recession as two consecutive quarters of negative growth. The political scientists Andrew Eggers and Alexander Fouirnaies examined this effect in developed economies and found that consumer confidence and private consumption declined substantially in countries that narrowly experienced two consecutive quarters of negative growth relative to countries that just missed meeting the definition. These effects appear to be driven by media reporting portraying the country as being in recession, which causes consumers to downgrade their estimates of the state of the economy and adjust their spending accordingly.

U.S. Economy’s First-Quarter Contraction Could Be Even Worse Than You Thought -- The U.S. economy may have contracted more than previously thought during the first three months of 2014, private economists said Wednesday based on new health care-sector data from the government. Some analysts said economic output may have contracted at a 2% pace in the first quarter. That would be its worst performance since the recession.  The Commerce Department’s latest estimate of gross domestic product, the broadest measure of output across the economy, said GDP shrank at a seasonally adjusted annual rate of 1% in the first quarter. A revised estimate will be released June 25, and it could show an even larger contraction. That’s based on the Commerce Department’s Quarterly Estimates for Selected Service Industries report for the first quarter, released Wednesday. It showed that revenue in the U.S. health-care and social-assistance sector fell 2% in the first quarter from the fourth quarter of 2013, not adjusted for seasonal variations or price changes. Hospital revenue fell a seasonally adjusted 1.3% from the prior quarter. The Commerce Department’s last GDP report, though, said inflation-adjusted spending on health-care services surged to a seasonally adjusted annual level of $1.848 trillion in the first quarter from $1.808 trillion in the fourth quarter of 2013. That estimate for spending on health care boosted overall GDP growth by 1.01 percentage point, keeping the 1% contraction from being even worse.

It Was A Reeeeeally Bad Winter: JPM Cuts Q1 GDP From -1.1% To -1.6% -- Remember when we reported that if it wasn't for Obamacare, the US economy would have contracted not by 1% as per the revised GDP estimate but by 2%. Guess what: according to the latest spending data, the BEA massively overestimated spending on medical care services, which it had pegged at a whopping +9.7% SAAR, while according to the latest Quarterly Services Survey, the increase was actually a decrease of 5.8% SAAR! End result: one after another bank today has sprung to revise their GDP data downward, by about half a percentage point, and here is JPM, cutting its Q1 GDP from -1.1% to -1.6%, which if realized will be the worst collapse in US economic growth since the recession.

Treasury Secretary Lew Warns of Lower Potential Economic Growth - WSJ: Congressional Budget Office Projects Average Growth Rate of Just 2.1% Going Forward. The U.S. could face a permanent downturn in economic growth without increased business investment, better job training and a push to rebuild the country's aging infrastructure, Treasury Secretary Jacob Lew warned Wednesday.In a speech to the Economic Club of New York, Mr. Lew said the U.S. growth rate is now projected to run a little above 2% a year, down from a 3.4% average from the end of World War II until 2007. If America can't maintain stronger growth, the country could face deepening challenges from sluggish labor market and widening inequality, he said. "The choices we make over the years to come can alter this projection," he said. Mr. Lew called on businesses to accelerate capital investment, noting the rate of spending on items such as buildings, equipment and software during the economic recovery has been considerably slower than the pace recorded in the 50 years before the recession began in 2007. "American businesses are sitting on historically high levels of cash," he said. "What we need now is for businesses—including many of you in this room—to come off the sidelines and make investments in our future."

SF Fed declares the ‘end of exceptional growth’ for America -- An unsettling forecast from America’s technology hub: “Productivity and Potential Output Before, During, and After the Great Recession” by John Fernald of the Federal Reserve Bank of San Francisco… Alan Greenspan in 2000 suggested that the economy was in the midst of a “once-in-a-century acceleration of innovation.” That hope has fallen short. For three of the past four decades, productivity growth has proceeded relatively slowly, suggesting this slower pace is the benchmark. … For now, the IT revolution is a level effect on measured productivity that showed up for a time as exceptional growth. Going forward, productivity growth similar to its 1973-95 pace is a reasonable expectation. The end of exceptional growth implies slower growth in potential output. But this fact does not mean that all the economy’s problems in recent years are structural or supply-related. After all, output gaps by any measure have closed very slowly despite substantial monetary accommodation. In other words, growth in aggregate demand has also been weak.Slower productivity and population growth also point towards a lower neutral real interest rate, which increases the challenges of providing sufficient monetary stimulus to close gaps. Uncertainty about any such forecast is inherently high. Jones (2002) argues that 20th century U.S. growth depended on rising education and research intensity. That is, maintaining growth required us to pedal ever harder and harder. That isn’t sustainable in steady state, so his model implies slower long-run growth.

U.S. Economic Recovery Looks Distant as Growth Lingers - Recessions are always painful, but the Great Recession that ran from late 2007 to the middle of 2009 may have inflicted a new kind of pain: an era of slower growth.It has been five years since the official end of that severe economic downturn. The nation’s total annual output has moved substantially above the prerecession peak, but economic growth has averaged only about 2 percent a year, well below its historical average. Household incomes continue to stagnate, and millions of Americans still can’t find jobs. And a growing number of experts see evidence that the economy will never rebound completely. For more than a century, the pace of growth was reliably resilient, bouncing back after recessions like a car returning to its cruising speed after a roadblock. Even after the prolonged Great Depression of the 1930s, growth eventually returned to an average pace of more than 3 percent a year. But Treasury Secretary Jacob J. Lew, citing the Congressional Budget Office, said on Wednesday that the government now expected annual growth to average just 2.1 percent, about two-thirds of the previous pace. “There are questions about whether America can maintain strong rates of growth and doubts about whether the benefits of technology, innovation and prosperity will be shared broadly.” The most recent recession and the slow recovery have “left lasting scars on the economy,” the Labor Department concluded late last year in a report that declared slower growth “the new normal” for the American economy. The Federal Reserve, persistently optimistic in its previous forecasts, said in March that it no longer expected a full recovery in the foreseeable future.

Still extrapolating the bubble -  Economists and pundits continue to draw a line through the US GDP chart to show how the current growth is so far below trend (blue line below). Look, we are operating so much below capacity because of ... whatever it is that they want to complain about. Nonsense. The real trend is the red line. Extrapolating the “bubble era” trend is suggesting that the credit/housing bubble was the norm.

Last Time this happened, The Financial Crisis Broke Out - The Fed has a measure for it: the Financial Stress Index, issued by the St. Louis Fed. And according to the index, all this craziness, created by the Fed’s policies, is simply a sign of low “financial stress.” The data series goes back to 1993. The index is intended to be at zero, on average. Higher financial stress would show up with a positive number, lower financial stress with a negative number. And in the latest reporting week, ended May 30, the index fell to -1.281, the lowest in its history. The previous record low occurred in February 2007 at -1.268. A very unpropitious moment. The housing bubble was already imploding, but at the time, “the froth” was just coming off; it was “plateauing” before the next surge. Stocks were still going up on a relentless escalator. Merger Mondays were thrilling CNBC talking heads. Mega-LBOs were greeted with media hoopla even as leverage in the system skyrocketed. And malodorous fumes were already emanating from cracks that had appeared in the foundations of banks and other financial institutions. Bit by bit, these inconvenient issues were worming their way into the Financial Stress Index, and by August 2007, the index rose into positive territory, and even then it edged up only gradually, and it made it past the Bear Stearns collapse in early 2008 without much of a squiggle, but by August 2008, it was at +1.17 and by September 5, it was at +1.47, and then the Lehman moment happened, and suddenly, after having essentially ignored all the issues along the way, the index spiked every week until it peaked on October 17, at a phenomenal 6.27:

The Lack of Major Wars May Be Hurting Economic Growth  -  Tyler Cowen -- The continuing slowness of economic growth in high-income economies has prompted soul-searching among economists. They have looked to weak demand, rising inequality, Chinese competition, over-regulation, inadequate infrastructure and an exhaustion of new technological ideas as possible culprits.An additional explanation of slow growth is now receiving attention, however. It is the persistence and expectation of peace. The world just hasn’t had that much warfare lately, at least not by historical standards. ... Counterintuitive though it may sound, the greater peacefulness of the world may make the attainment of higher rates of economic growth less urgent and thus less likely. This view does not claim that fighting wars improves economies, as of course the actual conflict brings death and destruction. The claim is also distinct from the Keynesian argument that preparing for war lifts government spending and puts people to work. Rather, the very possibility of war focuses the attention of governments on getting some basic decisions right — whether investing in science or simply liberalizing the economy. Such focus ends up improving a nation’s longer-run prospects. ...

Is the lack of war hurting economic growth? - I have a new piece for The Upshot on that topic, here is one excerpt: Counterintuitive though it may sound, the greater peacefulness of the world may make the attainment of higher rates of economic growth less urgent and thus less likely. This view does not claim that fighting wars improves economies, as of course the actual conflict brings death and destruction. The claim is also distinct from the Keynesian argument that preparing for war lifts government spending and puts people to work. Rather, the very possibility of war focuses the attention of governments on getting some basic decisions right — whether investing in science or simply liberalizing the economy. Such focus ends up improving a nation’s longer-run prospects. It may seem repugnant to find a positive side to war in this regard, but a look at American history suggests we cannot dismiss the idea so easily. Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today’s entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth.

War is the Health of the GDP - The headline of Tyler Cowen's Upshot piece, "The Lack of Major Wars May Be Hurting Economic Growth" is calculated to provoke controversy. Cowen's point, though, isn't that we need a war to boost the economy. As he concludes: "Living in a largely peaceful world with 2 percent G.D.P. growth has some big advantages that you don't get with 4 percent growth and many more war deaths."  But there is an underlying logic to Cowen's reductio ad absurdum that I'm not sure he grasps completely. The national income accounts were designed with the idea of paying for war in mind. That actually might make sense during a time of war when you're trying to figure out how to pay for it. But it embeds a social accounting protocol that is incompatible with the absence of war. The predictable results are policies such as the Cold War rearmament based on the premise that arms spending will pay for itself by siphoning off revenues from the additional growth that the spending will stimulate. The Latin term for it is inflatio. Time to recycle a piece from three years ago:

Treasury: Budget Deficit declined in May 2014 compared to May 2013 -- The Treasury released the May Monthly Treasury Statement today. The Treasury reported a $130 billion deficit in May 2014, down from $138 billion in May 2013. For fiscal year 2014 through May, the deficit was $436 billion compared to $626 billion for the same period in fiscal 2013. In April, the Congressional Budget Office (CBO) released their new Updated Budget Projections: 2014 to 2024. The projected budget deficits were reduced for each of the next ten years, and the projected deficit for 2014 was revised down from 3.0% to 2.8%.  Based on the Treasury release today, I expect the deficit for fiscal 2014 to be lower than the current CBO projection. This graph shows the actual (purple) budget deficit each year as a percent of GDP, and an estimate for the next ten years based on estimates from the CBO.The deficit should decline further next year. The decline in the deficit, as a percent of GDP, from almost 10% to under 3% in 2014 is the fastest decline in the deficit since the demobilization following WWII (not shown on graph).

Will Congress "Pay the Bills" in 2015? -- I wrote several posts about the "debt ceiling" debate in 2011 and again in 2013. Unfortunately "debt ceiling" sounds virtuous, but it isn't - it is actually a question of "paying the bills".   And I've always argued that Congress would "pay the bills". So even though the debate in 2011 clearly scared many Americans and impacted the economy, I was confident that Congress would eventually do its job. These political stunts always happen in off election years with the hope that most voters will forget about the nonsense by the next election.  So there is a risk in 2015 - and right now I'm a little more concerned than in previous years.  Most of the commentary concerning the upset of Congressman Eric Cantor has focused on immigration reform, but his opponent has also argued that the government should not pay the bills (default on payments to the American companies and people).    This is an economic risk for next year (and a political risk for the GOP).  As Republican Senator Mitch McConnell noted in 2011, if the debt ceiling isn't raised the "Republican brand" would become toxic and synonymous with fiscal irresponsibility.

What Eric Cantor’s Exit Means for Economic Policy - The surprising defeat of House Majority Leader Eric Cantor (R., Va.) this week in a primary election will have myriad political consequences in the coming weeks, but what will it mean for Congress’s approach to the economy? Mr. Cantor was often caught in the middle of the battle for the soul of the House GOP, leading conservatives in some fights and falling in line with leadership on others. These are some issues where his vacancy will be felt:

  • 1.) The debt ceiling. Mr. Cantor was one of fewer than 30 House Republicans who voted in February to suspend the debt ceiling until 2015. The suspension was a calculated move by House Speaker John Boehner (R., Ohio) not to risk another fiscal standoff with the White House, following the government shutdown last year. The measure passed largely because of the support from Democrats, and it opened Mr. Cantor (and others in the GOP) up to criticism that they didn’t hold the line and demand budget changes to restrain the growth of the deficit.
  • 2.) Reform Conservatism. A Mr. Cantor is essentially the GOP leadership’s spokesman when it comes to “reform conservatism,” which is an effort to frame conservative principles in a way that hits home with middle class voters. A number of Republicans, both centrists and conservatives, believe the party needs to do a better job reaching out to mainstream voters, and Mr. Cantor was trying to help shape the party’s image.
  • 3.) Wall Street. China almost always emerges as a bipartisan punching bag during presidential elections, but Wall Street’s strawman reputation is growing. When House Ways and Means Committee Chairman Dave Camp (R., Mich.) proposed a new way of taxing financial companies a few months ago, the banking industry went bananas, enlisting many friendly Republicans to ensure the proposal never saw the light of day (it didn’t). But how much longer will they hold such sway? The professor who defeated Mr. Cantor in Tuesday’s primary, David Brat, seems to hold Wall Street banks in the same regard as Sen. Elizabeth Warren, the Massachusetts Democrat who dreamt up the idea of a consumer financial regulator. Will Mr. Brat’s disdain for Wall Street become contagious?

Companies Keeping Billions in Tax Havens - Apple: $36.4 billion; Microsoft: $24.4 billion; Citigroup: $11.7 billion. That's how much each company would owe in corporate taxes if they repatriated the more than $230 billion of profits they hold offshore, according to a report released Thursday from the Citizens for Tax Justice and U.S. PIRG. The report finds that 72 percent of Fortune 500 companies have subsidiaries in tax haven jurisdictions. The majority of those companies—307 out of 362—do not disclose the average tax rate they pay on offshore profits. But for the 55 that do, they pay an average rate of just 6.7 percent and would owe nearly $150 billion in corporate taxes if they repatriated the profits.That’s a massive amount of money and speaks to both the complexity of the U.S. corporate tax code and the extreme lengths companies will go to lower their tax bill. Apple, for instance, uses a subsidiary known as Apple Operations International (AOI) to hold most of its offshore profits, as a report from the Senate Permanent Subcommittee on Investigations explained last year. AOI is incorporated in Ireland, where the corporate tax rate is just 2 percent. Because of that, AOI avoids paying the U.S. corporate tax rate of 35 percent. But the Irish corporate tax code only applies to companies whose management and control reside in Ireland. It has nothing to do with where the entity is incorporated. Therefore, AOI’s management and control is not located in Ireland, so it avoids the Irish corporate tax as well.The Citizens for Tax Justice report shows that Ireland is the seventh most popular tax haven for Fortune 500 companies. You’ll see some other familiar names on the list: the Netherlands, the Cayman Islands, Bermuda and Switzerland.

The Fantasy that Tax Repatriation Can Pay for Highways (or anything else…) Like a bad penny, this tax repatriation idea just keeps coming back. You know, the one where you offer a bribe to multinational corporations in the form of a big tax cut to “repatriate” their foreign earnings.  In this case, members on both sides of the aisle are conspiring to use this gimmick to replenish the nearly exhausted highway trust fund.My CBPP colleagues have pointed out many times over why this doesn’t work, but simply put: repatriation can’t pay for anything because it’s a big, fat revenue loser.  The figure below shows the score of such a plan by the bi-partisan Joint Tax Committee.  The first two bars show something like $20 billion initially flowing into the Treasury as foreign earnings are brought home at an 85% discount on the 35% corporate tax rate (that’s a tax rate around 5%: (1-.85)*.35). But after that, the temporary tax cut starts losing revenue, and for an interesting reason: multinationals ramp up their deferrals of  foreign earnings (holding them overseas) in advance of the next tax holiday.  The “holiday” terminology is interesting, btw, because a bunch of these alleged revenues have already been on holiday, sunning themselves in Caribbean tax havens.

New NBER Paper Analyzes Sales Tax on Services: A Wonkish Review --A recent National Bureau of Economic Research working paper assessing optimal sales tax policies has found that exempting some services (like health and education) from a hypothetical national sales tax would amount to only a 3 percent revenue loss. They also find that charging different rates on different categories of goods rather than a flat sales tax rate can improve society-wide “utility” (how well off people feel) by 30 percent for any given level of revenues.These findings are provocative. Sales tax base expansion to services is widely regarded as being a major revenue boost for states, and charging different rates on different goods is also widely regarded as ill-advised policy except in perhaps a few special circumstances. However, a look at the paper itself reveals that its claims, while totally reasonable within the paper’s context, need some bracketing.

OECD Urges Broad Tax Reform In U.S. - The U.S. should reform its tax code with “a degree of urgency” to overcome challenges to long-term economic growth, including an aging population and rising household inequality, the Organization for Economic Cooperation and Development said in a report Friday. The OECD said the U.S. recovery is solidly on track, if historically sluggish, and that the short-term outlook is favorable with a resurgent manufacturing sector and new energy development. But the country is facing long-term challenges—due largely to the retirement of baby boomers—that require sweeping policy reforms, according to the Paris-based think tank, which is backed by the 30 leading industrialized countries. Among a series of recommendations, the OECD said the U.S. should lower its corporate tax rate, eliminate tax loopholes that benefit businesses, and make the tax code more redistributive. The U.S. corporate tax rate of 39.1% is the highest of OECD countries, far above the average 25.5%. But loopholes in the code mean that the actual taxes businesses pay vary widely and enable some firms to avoid paying an share necessary for a stronger economy.

The Strange Fruit of the House’s Bonus Depreciation Bill - When the Ways & Means Committee sent the House a measure to make permanent extra-generous tax subsidies for firms that purchase capital equipment, I noted in passing that the bill included a provision extending “bonus depreciation” rules to fruit and nut trees. If I had read the bill more carefully, I would have noticed that while it applied to fruit that grows on trees and vines, it inexplicably excluded fruit that grows on bushes. As a blueberry lover, I am shocked and outraged. This job-killing exclusion also extends to raspberries—both black and red. Cranberries are more complicated. They usually grow on a bush, but sometimes a vine. So eligibility for the special tax break may depend on the variety of cranberry we are talking about. I suspect the bill has tax lawyers scrambling to find the broadest possible definition of tree. After all, there must be some bright-eyed legal associate out there who can make the case that a bush is nothing more than a short tree. Or a fat vine. Kudos to Bloomberg BNA’s Marc Heller for describing this foolishness. Marc reports that the fruit and nut amendment was added by Rep. Devin Nunes (R-CA), whose district includes growers of apricots, grapes, and almonds. But not, apparently, blueberries. Marc also noted that Michigan, the home state of Ways & Means chair Dave Camp, is a major producer of those blown-off blueberries. This may prove that Camp, whose tax reform plan would scrap bonus depreciation entirely in return for lower tax rates, is no hypocrite. Alternatively, after announcing his retirement, he may simply have lost interest in adding home-state goodies to the tax law.

Full Show: How Tax Reform Can Save the Middle Class | Moyers & Company - A  report out this week finds that over 70 percent of Fortune 500 companies use offshore tax havens to avoid paying US taxes. In the second part of his interview with Bill, the Nobel Prize-winning economist Joseph E. Stiglitz says that such lucrative loopholes are contributing to America’s inequality problem and persistent unemployment rate. In fact, corporate greed, combined with a tax code too biased toward the very rich, is hurting our economy and reducing public investment at a time when we really need it. Stiglitz says it doesn’t have to be this way. He has a new plan for overhauling America’s current tax system, which he believes contributes to making America the most unequal society of the advanced countries. “We can have a tax system that can help create a fairer society,” Stiglitz tells Bill in the second part of their conversation. “Only ask the people at the top to pay their fair share. It’s not asking a lot. It’s just saying the top 1% shouldn’t be paying a lower tax rate than somebody much further down the scale – [they] shouldn’t have the opportunity to move money offshore and keep it in an unlimited IRA account.” Stiglitz believes that taxes should incentivize corporations to act in ways that benefit our country. “If your taxes say we want to encourage real investments in America, then you get real investment in America… But I also believe that you have to shape incentives and that markets on their own don’t necessarily shape them the right way.”

Rich got 14.6% richer in 2013 -   Global private financial wealth grew by 14.6 per cent in 2013 to reach a total of $152 trillion, with the spike in stock prices helping to power the expansion, according to a  study from Boston Consulting Group. Wealth is growing most quickly in the Asia-Pacific area, excluding Japan, where it expanded by 30.5 per cent in the year. The Asia-Pacific region is expected to overtake Western Europe in 2014 to become the second-wealthiest region and to beat out North America to become the wealthiest part of the world by 2018, the report said. The Boston Consulting Group has done an annual study of private wealth for the past 14 years, estimating the cumulative amount of cash and deposits, money market funds, and listed securities around the world. The study is meant to help pinpoint trends for the wealth management industry, including the increasing amount of wealth (28 per cent) invested in stock markets and the fact that the growth of private wealth was driven primarily by returns on existing assets.

The rich have advantages that money cannot buy - Larry Summers - With the popularity of Thomas Piketty’s book, Capital in the 21st Century, inequality has become central to the public debate over economic policy. Piketty, and much of this discussion, focuses on the sharp increases in the share of income and wealth going to the top 1 per cent, 0.1 per cent and 0.01 per cent of the population. This is indeed a critical issue. Whatever the resolution of arguments over particular numbers, it is almost certain that the share of personal income going to the top 1 per cent of the population has risen by 10 percentage points over the past generation, and that the share of the bottom 90 per cent has fallen by a comparable amount.  The only groups that have seen faster income growth than the top 1 per cent are the top 0.1 per cent and top 0.01 per cent. This discussion helps push policy in constructive directions. There is every reason to believe that taxes can be reformed to eliminate loopholes for the wealthy and become more progressive, while also promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. There is a compelling case for policy measures to reduce profits from such rent-seeking activities as a number of economists, notably Dean Baker and the late Mancur Olsen, have emphasised. At the same time, unless one regards envy as a virtue, the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much. So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor. On any reasonable reading of the evidence starting where the US is today, more could be done to increase tax progressivity without doing any noticeable damage to the prospects for economic growth.

CEO Pay Continues to Rise - Economic Policy Institute  - The 1980s, 1990s, and 2000s were prosperous times for top U.S. executives, especially relative to other wage earners and even relative to other very high wage earners (those earning more than 99.9 percent of all wage earners). Executives constitute a larger group of workers than is commonly recognized, and the extraordinary pay increases received by chief executive officers of large firms had spillover effects in pulling up the pay of other executives and managers.1 Consequently, the growth of CEO and executive compensation overall was a major factor driving the doubling of the income shares of the top 1.0 percent and top 0.1 percent of U.S. households from 1979 to 2007 (Bivens and Mishel 2013). Income growth since 2007 has also been very unbalanced as profits have reached record highs and, correspondingly, the stock market has boomed while the wages of most workers (and their families’ incomes) have declined over the recovery (Mishel et al. 2012; Mishel 2013). It is useful to track CEO compensation to assess how well this group is doing in the recovery, especially since this is an early indication of how well other top earners and high-income households are faring through 2013. This paper presents CEO compensation trends through 2013 and finds:

  • Average CEO compensation was $15.2 million in 2013, using a comprehensive measure of CEO pay that covers CEOs of the top 350 U.S. firms and includes the value of stock options exercised in a given year, up 2.8 percent since 2012 and 21.7 percent since 2010.
  • From 1978 to 2013, CEO compensation, inflation-adjusted, increased 937 percent, a rise more than double stock market growth and substantially greater than the painfully slow 10.2 percent growth in a typical worker’s compensation over the same period.
  • The CEO-to-worker compensation ratio was 20-to-1 in 1965 and 29.9-to-1 in 1978, grew to 122.6-to-1 in 1995, peaked at 383.4-to-1 in 2000, and was 295.9-to-1 in 2013, far higher than it was in the 1960s, 1970s, 1980s, or 1990s.

Who Does Wall Street Own In Washington? - Last night we saw one of Wall Street's favorite politicians of the decade, Eric Cantor, destroyed by a random teabagger who railed against him endlessly for pushing through Bush's TARP bailout of the big banks. Just this cycle, the financial sector had contributed $1,396,450 to Cantor's mammoth campaign coffers. But grotesque bribery from Wall Street isn't just about Republicans. This is a list of the dozen most corrupted designated point persons for Wall Street in the House (since 1990):

John Boehner (R-OH)- $9,797,914
Eric Cantor (R-VA)- $8,492,465
Spencer Bachus (R-AL)- $6,257,494
Jeb Hensarling (R-TX)- $5,540,181
Charlie Rangel (D-NY)- $5,376,743
Ed Royce (R-CA)- $5,006,718
Pat Tiberi (R-OH)- $4,702,881
Steny Hoyer (D-MD)- $4,612,825
Carolyn Maloney (D-NY)- $4,574,624
Joe Crowley (D-NY)- $4,526,330
Pete Sessions (R-TX)- $4,505,220
Paul Ryan (R-WI)- $4,056,918

How ordinary Americans can influence policy – Recently, Benjamin Page and Gilens disturbed many Americans with their finding that “average citizens’ preferences have little or no independent impact on policy.” Their data suggest that the wealthy have 15 times the influence of the middle class. As remarkable as this conclusion is, many of the reporters discussing the study failed to read it carefully and missed other important findings. For example, Page and Gilens found that the preferences of elites actually correlate fairly well to the preferences of the average citizen (with a coefficient of 0.78, with 1.0 indicating exact alignment and –1.0 reflecting inverse correlation), whereas business groups have preferences that are far more divergent (–0.10). Public interest groups, such as unions and the American Association of Retired Persons, correlate slightly better with the interests of the average voter (0.12). However, pro-business groups, whose interests  largely conflict with the average voter’s, have about nine times the influence as typical voters.  In an e-mail, Page noted that the U.S. might get some “democracy by coincidence” — meaning that the preferences of the affluent for the most part align with those of the middle class — but such luck rarely occurs with the preferences of business groups. He also said that while his work with Gilens focuses on the top 10 percent of income earners, the top 1 percent and the top 0.1 percent may have even more influence and more divergent preferences as well.  To fix these oligopolistic trends, we must turn to the states for ideas. Patrick Flavin may have some answers on this score. He has been using methods similar (although not entirely comparable) to those used by Gilens, Bartels and Page to test which states are most responsive to the interests of citizens. What he finds should give reformers hope: There are policies to strengthen the voice of middle class voters.

Why the Worst Get on Top – in Economics and as CEOsWilliam K. Black Libertarians are profoundly anti-democratic. The folks at Cato that I debate make no bones about their disdain for and fear of democracy. Friedrich von Hayek is so popular among libertarians because of his denial of the legitimacy of democratic government and his claims that it is inherently monstrous and murderous to its own citizens. Here’s an example from a libertarian professor based in Maryland.“[W]hen government uses its legal monopoly on coercion to confiscate one person’s property and give it to another, it is engaging in what would normally be called theft. Calling this immoral act “democracy,” “majority rule” or “progressive taxation” does not make it moral. Under democracy, rulers confiscate the income of productive members of society and redistribute it to various supporters in order to keep themselves in power. In order to finance a campaign, a politician must promise to steal (i.e., tax) money from those who earned it and give it to others who have no legal or moral right to it. There are (very) few exceptions, but politicians must also make promises that they know they can never keep (i.e., lie). This is why so few moral people are elected to political office. The most successful politicians are those who are the least hindered by strong moral principles. They have the least qualms about confiscating other peoples’ property in order to maintain their own power, perks, and income.

SEC commissioner calls on US regulators to end turf wars - US regulators must end their turf wars, SEC commissioner Kara Stein said on Thursday, in a sweeping speech that criticised colleagues for falling behind on financial reforms. At the same time the Securities and Exchange Commission had to broaden its role in addressing systemic risks in the financial system, she said. In particular, Ms Stein said, regulators needed to rein in the financial industry’s reliance on short-term funding through securities lending and repurchase agreements, a sentiment that has been echoed by Federal Reserve governor Dan Tarullo, the Fed’s top policy maker on regulation. In the speech at the Peterson Institute for International Economics, Ms Stein also expressed her disappointment at the lack of progress in implementing parts of Dodd-Frank, as she continued to push regulators to be tougher on Wall Street when it comes to financial reform regulation. She has extra influence at the SEC as the most left-leaning member of the agency, counting Democrats on the Senate banking committee as her allies. Congress sets the SEC’s budget and can hold hearings on the agency. Ms Stein joined the SEC last year and was in Congress when the Dodd-Frank bill was passed in 2010. Since joining the commission, she has at times been critical of the agency now headed by former federal prosecutor Mary Jo White, including on whether banks admitting wrongdoing should be given access to capital markets without regulatory scrutiny. “Far too many of the substantive reforms mandated by the Dodd-Frank Act are not yet implemented,” Ms Stein said. “Many of the most important systemic risk reforms of Dodd-Frank just aren’t done.”

SEC Commissioner Kara Stein Declares War on SEC Chair Mary Jo White -- Yves Smith - A relatively new SEC Commissioner, Kara Stein, has decided to depart from the usual polite behavior regulatory overseers and is making noise about SEC decisions and policies that she finds to be dubious. The word most commonly used in the media about her remarks is “blistering”.  But the press, while giving Stein’s unusually forthright speeches the attention they warrant, has either failed to notice or is pretending to miss what is really going on: Stein is taking on SEC chairman Mary Jo White on her finance-firm-friendly regulatory stance in a remarkably frontal manner.The reason that Stein’s outspokenness is so unusual is that it is almost unheard of for a regulatory supervisor to cross swords openly with an agency head who hails from the same party.And don’t think that Stein is merely making noise. Even though she’s only been in her post for roughly a year, she’s already having an impact. The final Volcker rule came out much tougher than the financial services industry expected, and insiders report that Stein played a significant role in those eleventh-hour improvements. Similarly, having a strong pro-regulation, pro-enforcement voice on the commission emboldens staffers in the SEC to be more vigorous in pursuing violations (contrary to popular opinion, many career staff members are keen to stamp out bad conduct. Too often, they are curbed by the more craven politicized division heads. One has to wonder, for instance, if the SEC’s Drew Bowden would have been as direct and specific as he was in calling out widespread abuses in the private equity industry in early May if Stein hadn’t paved the way for more blunt SEC public remarks.

The South Rises Up to Take on Wall Street and High Frequency Trading - Southern states are mad as hell and aren’t going to take it any more. After more than five years of watching their cities and towns suffer foreclosure and mortgage abuse from the biggest firms on Wall Street, rigged Libor swaps impoverishing local governments, and massive stock losses to municipal workers’ pensions, the South is rising up and suing Wall Street over its latest fleecing scheme – high frequency trading.  And before anyone starts to chuckle about the chances of Southern lawyers outfoxing the mega Wall Street law firms in their own stomping ground in the U.S. District Court for the Southern District of New York, you should know this one salient detail: one of the key Southern lawyers involved is Michael Lewis. That’s not bestselling author Michael Lewis; that’s Big Tobacco Cartel suing and winning lawyer Michael Lewis who mightily assisted in bringing the tobacco cartel out of the shadows and changed the health of a Nation forever.  Even more problematic for Wall Street and its hideously shrewd lawyers is that one of the smartest programming brains in U.S. markets, Eric Hunsader, is cooperating with the Southern lawyers. (Wall Street On Parade has previously written about Hunsader here and here.)

US Chamber of Commerce voices concern over potential BNP fine - The US Chamber of Commerce, the powerful American business lobby, has voiced concern about the potential scale of a fine on French bank BNP Paribas by US regulators, echoing anxious demands by the French government for moderation. Speaking in Paris, Myron Brilliant, head of international affairs for the USCC, said the Chamber might “weigh in” on the issue if BNP was hit by “excessive” penalties for breaking US sanctions on doing business with Iran, Sudan and Cuba. “We worry about actions by government and other entities that could undermine the business environment and create uncertainty,” Mr Brilliant told the Financial Times. “We do not want to see a chilling impact on investment into the US.” His comments reflect the USCC’s longstanding concerns about the effects of regulation and litigation on business. Yet they also hint at concern that the BNP case could damage the prospects of a new transatlantic trade deal for which the USCC has been one of the most devoted advocates. BNP is currently negotiating the terms of a settlement in the case, with US regulators reported to be considering a fine of up to $10bn against France’s biggest bank by market capitalisation, along with a possible temporary bar on dollar clearing. President François Hollande raised the issue with Barack Obama at a meeting in Paris last week. But his appeal was brushed aside in public by the US president, who said he could not intervene in judicial cases.

Exclusive - U.S. using JPMorgan penalty to speed cases against other banks (Reuters) - The U.S. Justice Department is spending some of the $13 billion (7.74 billion pounds) JPMorgan Chase & Co agreed to pay to settle claims stemming from mortgage misdeeds to speed up similar punishments against other lenders, possibly including Bank of America Corp and Citigroup, according to people familiar with the matter. U.S. Attorney's offices that have been among the most active in probing banks over the toxic loans they bundled into mortgage securities and sold to investors have received funds to hire new civil prosecutors, the people said. U.S. Attorneys in New Jersey, Colorado and the Eastern District of California, based in Sacramento, are among those most experienced in pursuing the probes, the people said. The increased activity is a sign that President Barack Obama is trying to follow through on his 2012 pledge to hold more banks accountable for their role in the housing crisis, after prosecutors faced criticism for little high-profile action. Attorney General Eric Holder has also expressed a desire to wrap up more of mortgage securities-related cases this year. "There is a widespread recognition that the banks have not yet been held fully accountable for their origination practices and the harm that did to borrowers, investors and the American economy in general," said Don Hawthorne, a partner with Axinn, Veltrop & Harkrider in New York who has represented clients in mortgage-backed securities litigation.

Citigroup Said to Face $10 Billion Request in U.S. Talks - The U.S. Justice Department has asked Citigroup Inc. (C) for more than $10 billion to settle a probe into the lender’s sale of mortgage-backed bonds before the 2008 financial crisis, a person familiar with the negotiations said. Prosecutors broke off talks with Citigroup on June 9 and are preparing to sue the New York-based bank after it offered less than $4 billion to resolve the matter, said the person, who asked not to be named because the discussions are confidential. The Justice Department could file a lawsuit as early as next week, according to the person, who also said the bank’s offer included about $1 billion in cash and the rest in consumer relief.

Bank of America Shocker: New Commercial Loan Plunge Is Largest Since Lehman - A shocker from Bank of America: "The number of new commercial loans made by BAC has declined notably over the first half of the year. Measured as an indexed level to cycle peak (which was December 2005), the data show that the recent drop was the largest since the recovery began." Oops. If this is accurate then not only is the Fed fabricating loan data outright, it is massively misrepresenting the general direction of loan creation altogether. In fact, if loans are contracting, when one adds the decline in reserve "asset" creation, then banks are set for a world of pain come October when QE is set to end!

Why fix banks? - Do we need banks? Frances raises this question. She says: Lack of spending in an economy (shortage of aggregate demand) is caused by distributional scarcity of money, not by lack of loans. It is not necessary to restore lending in order to encourage spending. It is necessary to replace the money that is not being created by banks.  She's right. The famous "helicopter drop" - more realistically, a money-financed fiscal expansion - might well* do more to boost aggregate demand than measures to boost credit supply such as the Funding for Lending Scheme or "targeted" LTROs.  But this poses the question. If governments can bypass banks by simply printing money, why bother to fix the banking system at all? Why not just let it be a dysfunctional casino? The question gains force from the likelihood that, in practice, measures to improve bank lending are in effect subsidies to bankers. I suspect that the reason bank shares did so well after the ECB's announcement last week isn't so much that investors are looking forward to a brighter economic future, but simply that LTROs are yet more hand-outs. There is, though, an answer here. It's not that helicopter money would be inflationary; in the euro area, higher inflation is something to be desired. Nor is it much of a problem that such a policy would create a merely "artificial" boom; I've always been irritated by Austrians' tendency to dismiss some economic actions as less genuine than others in violation of Hayek's justified warnings about the boundedness of individual knowledge.

Economist: U.S. Banks Preparing to Charge Customers For Deposits -- In the week that the European Central Bank cut its deposit rate for banks from zero to -0.1%, economist Martin Armstrong warns that negative interest rates are coming to the United States, meaning that Americans will be forced to pay just to keep their money in the bank.Armstrong, who is noted for calling the 1987 economic crash to the very day, warns that U.S. banks are preparing a raft of new account fees that will serve as a de facto negative interest rate. “In the USA, we are more-likely-than-not going to get the negative rates directly passed to consumers by the banks who will claim it is the Fed who will do so at the requests of the banks. Larry Summers has set the stage. This is just how it works. He flew the balloon to get everyone ready. This is likely to be bullish for the stock market,” writes Armstrong, noting that, “The talk behind the curtain is to impose negative interest rates on the consumer.”

Bank Failure, Relationship Lending, and Local Performance - Whether bank failures have adverse effects on local economies is an important question for which there is conflicting and relatively scarce evidence. In this study, I use county-level data to examine the effect of bank failures and resolutions on local economies. Using quasi-experimental techniques as well as cross-sectional variation in bank failures, I show that recent bank failures lead to lower income and compensation growth, higher poverty rates, and lower employment. Additionally, I find that the structure of bank resolution appears to be important. Resolutions that include loss-sharing agreements tend to be less deleterious to local economies, supporting the notion that the importance of bank failure to local economies stems from banking and credit relationships. Finally, I show that markets with more inter-bank competition are more strongly affected by bank failure.

Unofficial Problem Bank list declines to 495 Institutions -  This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for June 6, 2014.   It was a very quiet week for the Unofficial Problem Bank List with only one removal. The list holds 495 institutions with assets of $153.9 billion. A year ago, the list had 923 institutions with assets of $355.7 billion. The OCC terminated the action against Independence National Bank, Greenville, SC ($97 million Ticker: IEBS). Next week, we anticipate for the OCC to provide an update on its enforcement action activity through mid-May 2014. 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 495.

The Biggest Policy Mistake of the Great Recession - The popular conception of the Great Recession explains that it stemmed from a financial shock. Housing prices stopped going up, and then Lehman Brothers fell, triggering paralysis in the credit markets. This spilled onto Main Street, and the effects still linger in terms of elevated unemployment and sluggish economic growth. But this history of the recession can’t be right, say two economics professors who have studied the data. In their new book House of Debt, Amir Sufi of the University of Chicago and Atif Mian of Princeton point out that consumer purchases dropped sharply well before the September 2008 Lehman bankruptcy, and most deeply in places where home prices fell the most. They found that steeper declines in net worth — many homeowners were completely wiped out by falling home prices — led to far sharper reductions in consumer spending, and bigger job losses. But even those with no debt suffer when fire-sale foreclosures drop home prices, and lower overall demand spreads out across the country.  By reviewing other economic downturns, Mian and Sufi discover two recurring features: a buildup of household debt before the crash, and an extreme decline in consumer spending afterward, as households cut back, hoarding money to pay off those scaled-up debts. The normal channels of fiscal and monetary policy have difficulty dealing with highly leveraged household balance sheets. House of Debt correlates these features of recessions, and really targets debt as the core problem, arguing that it needs to be restructured during crises and prevented during better times.

Larry Summers' Attempt to Rewrite Cramdown History - Larry Summers has a very interesting book review of Atif Mian and Amir Sufi's book House of Debt in the Financial Times. What's particularly interesting about the book review is not so much what Summers has to say about Mian and Sufi, as his attempt to rewrite history. Summers is trying to cast himself as having been on the right (but losing) side of the cramdown debate. His prooftext is a February 2008 op-ed he wrote in the Financial Times in his role as a private citizen.  The FT op-ed was, admittedly, supportive of cramdown. But that's not the whole story. If anything, the FT op-ed was the outlier, because whatever Larry Summers was writing in the FT, it wasn't what he was doing in DC once he was in the Obama Administration. Let's make no bones about it.  Larry Summers was not a proponent of cramdown.  At best, he was not an active opponent, but cramdown was not something Summers pushed for.  Maybe we can say that "Larry Summers was for cramdown before he was against it."  Here's a telling paragraph from a National Journal article by Stacy Kaper called, The 'Cramdown' Fix Was Out, from Mar. 22, 2012. (in Lexis):    William Longbrake, a former vice chairman with Washington Mutual who joined the Obama transition team in early 2009, recalls an administration divided over cramdown. "My sense is that Larry Summers probably ultimately brokered the solution," said Longbrake, now an executive in residence at the University of Maryland. "It was decided, but never publicly announced, sort of like, ‘Well, we are not going to oppose it, but we are just not going to support it.' … and then, ultimately, it died."

Larry Summers’ Contradictory and Dishonest Defense of Administration’s Bank-Focused Crisis Response - Yves Smith -- If you are going to succeed in rewriting history, a necessary condition is that the public doesn’t remember it very well. Unfortunately, that requirement is not in place for the architects of the Administration’s blatantly bank-friendly crisis responses.  Timothy Geithner’s book Stress Test, in which he tries selling the idea that rescuing the banks was unsavory but necessary, is not only doing poorly in terms of sales, but is producing pushback on multiple fronts. A less high-profile effort at revisionist history, this one by Larry Summers in the Financial Times, is landing with a similar gratifying thud. Summers’ effort at Team Obama brand-burnishing came in the form of a review of an important new book, House of Debt, that analyzes the drivers of the financial crisis and its aftermath.  The book’s authors, economists Amir Sufi at the University of Chicago and Atif Mian at Princeton, performed extensive empirical work and found that over-indebted consumers, particularly the lower-income ones targeted by aggressive and often predatory lenders, had markedly cut back on spending before the fourth and final acute phase of the crisis, triggered by the Lehman collapse. Sufi and Mian performed zip-code level analysis and found that the areas where home prices fell the most and consumers therefore had the biggest hits to their net worth were also the ones that suffered the biggest job losses. Sufi and Mian also stressed that there’s no precedent for this response to a financial panic.  Dave Dayen described last week how schizophrenic Summers’ reaction was to House of Debt, first lavishing it with praise, then disagreeing vehemently with the authors’ well-documented views:  Adam Levitin, Georgetown law professor and special counsel to the Congressional Oversight Panel, has a more detailed takedown of the Summers article. Levitin, a bankruptcy expert, objects strenuously to Summers claiming that he supported “cramdown”. In all other types of collateralized consumer lending, when a borrower is in bankruptcy, the loan is written down to the value of the collateral and the rest is treated as unsecured and written down based on how much the borrower has left to pay off all unsecured loans. Cramdown was seen by supporters as the best way to cut the Gordian knot of considerable complications and bad incentives impeding the restructuring of mortgages.

Larry Summers Should Keep His Mouth Shut -- Larry Summers is well on his way to rehabilitating his public image as a brilliant intellectual, moving on from his checkered record as president of Harvard University and as President Obama’s chief economic adviser during the first years of the administration. Unfortunately, he can’t resist taking on his critics—and he can’t do it without letting his debating instincts take over. I was reading his review of House of Debt by Mian and Sufi. Everything seemed reasonable until I got to this passage justifying the steps taken to bail out the financial system: “The government got back substantially more money than it invested. All of the senior executives who created these big messes were out of their jobs within a year. And stockholders lost 90 per cent or more of their investments in all the institutions that required special treatment by the government.” I have no doubt that every word in this passage is true in some meaninglessly narrow sense or other. But on the whole it is simply false. Yes, the government got back more money than it invested, if you are looking solely at TARP disbursements. But if Larry Summers evaluates his own investments that way, then he should find someone else to manage his money. The government systematically bought preferred stock in banks for more than it was worth, and it sold assets guarantees to banks for less than they were worth. The fact that it got lucky doesn’t mean those weren’t bad investments.

Official: Recapitalizing Fannie Mae, Freddie Mac Would Take 20 Years - It would take at least 20 years to adequately recapitalize Fannie Mae and Freddie Mac, a top Treasury official said Friday, the latest effort by the Obama administration to push back against arguments that the government-controlled mortgage-finance giants could be restored as private companies without legislation.Mary Miller, the Treasury’s undersecretary for domestic finance, said in a speech in Washington on Friday that even if Fannie and Freddie were preserved and allowed to build up capital, that transition would take too long, maintaining a market that leaves taxpayers too exposed to losses and that isn’t serving the broad middle class.The Treasury Department has been heavily involved in pushing forward a bill to replace the companies, which cleared the Senate Banking Committee on a 13-9 vote last month but which probably doesn’t have enough support from Democrats to advance through the Senate this year.Ms. Miller used the speech to argue that legislation was still the only viable way to overhaul Fannie and Freddie, rebutting arguments made by supporters of the companies, including shareholders such as Bruce Berkowitz’s Fairholme Capital Management, that the firms could be restored without legislation.While few in Washington expect the Senate to pass legislation this year, the administration has “not in any measure given up on housing-finance reform,” she said.

Court probes Wells’ foreclosure steps again - How exactly do the note endorsement processes described in Wells Fargo’s controversial Home Mortgage Foreclosure Attorney Procedure Manual work? On March 12, The Post broke the news of this manual and allegations in court papers by attorney Linda Tirelli that the document provides detailed procedures to fabricate foreclosure papers on demand. Wells Fargo denied the allegations. Now a federal judge wants the nation’s largest mortgage servicer to shed further light on the procedures described in the manual, and how it may have been used in the case of Westchester resident Cynthia Carssow-Franklin. In an extraordinary move, Judge Robert Drain reopened discovery in the case, which had already gone to trial. At a May 21 hearing in White Plains, Judge Drain ordered Wells Fargo to produce the version of the manual in effect in 2010 when it filed a proof of claim. Carssow-Franklin filed for bankruptcy to halt foreclosure on her home. Tirelli has challenged the assignment of mortgage and endorsement of the note, documents that transfer ownership when a loan is sold.

What the foreclosure crisis looks like in urban neighborhoods with few single-family homes - -  So often when we talk about the foreclosure crisis, we're talking about places like this, or homes like this. We picture zombie subdivisions that were hastily built at the peak of the housing bubble, or single-family homes where the front lawn has long grown over with weeds. But this is not necessarily what the foreclosure crisis has looked like in cities.Take Chicago, a city of spacious but small-scale brick apartment buildings that date to the 1920s and earlier. There, the foreclosure crisis was particularly hard on two-to-four unit buildings that dominate many older neighborhoods ringing the downtown. Such buildings account for 26 percent of the total housing stock in the city, and about half of its multi-family rental units, according to an analysis by the Institute for Housing Studies at DePaul University. In some neighborhoods the two-to-four unit apartment makes up around 70 percent of housing units. To grasp how the foreclosure crisis filtered through the city's unique housing stock -- the three-flat is to Chicago as the tripple-decker is to Boston or the Victorian to San Francisco -- the institute mapped every property in the city using county assessor data: In the legend, two-to-four unit and larger multi-family properties not identified as condos are all rental properties (the single-family homes are a mix of the two). As we can see in a neighborhood southwest of the Loop like South Lawndale, the housing is overwhelmingly two-to-four-unit rentals (in light blue, composing 71 percent of housing units). Single-family homes make up just 15 percent of the housing there:

Get Ready For the Subprime Mortgage Crack-Up 2.0: Earlier this month the following headline appeared in the Wall Street Journal: "U.S. Backs Off Tight Mortgage Rules: In Reversal, Administration [HUD/FHA] and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery." Clearly memories as to the causes of the recent housing market collapse are short. Indeed, political pressures are once again increasing on the private sector to degrade sound lending practices. The headline refers to two policy statements made May 13, one by Mel Watt, director of the Federal Housing Finance Agency (FHFA), and the other by Shaun Donovan, secretary of HUD. The FHFA is the regulator of Fannie Mae and Freddie Mac, which along with the Federal Housing Administration (FHA) are responsible for guaranteeing about 75 percent of all mortgage credit in the United States. Watt announced a course reversal from his predecessor Edward DeMarco. One of his most significant moves was the alignment of FHFA's policies -- with respect to discouraging private sector discretion in adhering to strong underwriting standards -- with those of the FHA. Watt warned lenders and private mortgage insurers that "credit overlays result in the rejection of many loans that would otherwise meet [Fannie Mae and Freddie Mac] credit standards." This echoes FHA Commissioner Carol Galante's 2013 statement: "[L]ender overlays are damaging the recovery by limiting access to creditworthy borrowers."

How House Democrats Are Caving On Key Mortgage Rules -- House Republican leaders Eric Cantor and John Boehner are about to secure the passage of a bill that chips away at consumer mortgage protections created by President Barack Obama's 2010 Wall Street reform bill. And they have Democrats to thank for it. The bill would allow mortgage companies to charge consumers higher fees for title insurance and other processing costs associated with a loan, while still qualifying for special perks the government gives to high-quality loans. But the while the bill has broad backing in the House, it has drawn heated criticism from consumer groups, labor unions and the NAACP, which have fought the bill for months.  "The approach taken in this bill leaves the door open for abuses that were typical in the recent subprime crisis," NAACP Washington Bureau Director Eric Shelton wrote, noting that excessive and deceptive fees have been disproportionately "targeted at specific demographics including African Americans and other racial and ethnic minority homebuyers."Yet Republicans in both chambers of Congress have successfully cultivated Democratic support for the bill, including some traditionally stalwart liberals. When it was introduced by Rep. Bill Huizenga (R-Mich.) in October, six of its 10 co-sponsors were Democrats, including Reps. David Scott (D-Ga.), Greg Meeks (D-N.Y.), Betty McCollum (D-Minn.), Gary Peters (D-Mich.), Patrick Murphy (D-Fla.) and Michael Doyle (D-Pa.).Among those lobbying in support of the bill are mortgage brokers, banks and realtors. Realtors, who have been particularly outspoken, wield significant influence in the House because the industry operates in every congressional district.

Lawler: Preliminary Table of Distressed Sales and Cash buyers for Selected Cities in May - Economist Tom Lawler sent me the preliminary table below of short sales, foreclosures and cash buyers for several selected cities in May. Total "distressed" share is down in all of these markets, mostly because of a sharp decline in short sales. Short sales are down in all of these areas.Foreclosures are down in most of these areas too, although foreclosures are up a little in a couple of areas. The All Cash Share (last two columns) is mostly declining year-over-year. As investors pull back, the share of all cash buyers will probably continue to decline.

Spring-Summer Buying and Selling Season Sputters Despite Drop in Mortgage Rates  -  Americans’ concerns about the direction of the economy and their household income appear to be weighing on housing growth, according to results from Fannie Mae’s May 2014 National Housing Survey. The share of respondents who believe the economy is headed in the wrong direction remained at 57 percent last month, and those who said their household income is significantly higher than it was at the same time last year decreased four percentage points to 21 percent. Although respondents’ attitudes toward housing have been generally positive during the past few months, their reluctance to enter the home buying or selling market has restrained activity below typical seasonal trends.  "Consumers’ lukewarm income expectations and reticence about the economy seem to be holding back housing demand," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "This year’s spring and summer home buying season has gotten off to a slow start, even as mortgage rates have trended lower over the past two months. Our National Housing Survey data show that economic conditions continue to be the top concern among consumers who think it’s a bad time to buy or sell a home. While recent housing activity suggests that the worst of the housing slump may be behind us, this caution among consumers supports our expectation that the rebound in home sales will likely be too modest to pull sales for all of 2014 ahead of last year."

Mortgage refinancing and the danger of a 2H 2015 recession: Yesterday the Mortgage Bankers Association reported that applications for refinancing had increased by 11% in the past week. Sounds like great news, right? Except that mortgage refinancing is so low right now that even that kind of percentage increase barely makes a dent in the absolute decline in refinancing since rates rose a year ago. Here's Bill McBride a/k/a Calculated Risk's graph of refinancing applications since the MBA started keeping records almost 25 years ago: Direct your attention to two other periods where refinancing fell off a cliff: 1998-2000 and 2005-07. Both of those two year periods immediately preceded recessions. And that is no coincidence. I have long argued that, in the absence of real wage increases, then American households either have to cash in rising assets (stocks in the 1980s-90s, housing via equity withdrawal in 2002-2005), or else have to refinance existing debt at a lower percentage range, or else the economy will tip into recession about 3 years after the refinancing stops (this is what happened in 1990, 2001, and 2008). Note contrarily that refinancing fell off a cliff -- but only for one year -- in 1994. No recession ensued. Mortgage made their lows almost two years ago. Bill McBride's graph shows that refinancing fell off a cliff one year ago. His graph confirms my calculations - if wages don't make new highs, and if there is no asset for American households to cash in - then we enter the danger zone in the second half of next year.

MBA:"Strong Growth in Mortgage Application Volume Following Memorial Day Holiday" - From the MBA: Strong Growth in Mortgage Application Volume Following Memorial Day Holiday Mortgage applications increased 10.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 6, 2014. The previous week’s results included an adjustment for the Memorial Day holiday. ...The Refinance Index increased 11 percent from the previous week. The seasonally adjusted Purchase Index increased 9 percent from one week earlier. ... ... The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.34 percent from 4.26 percent, with points increasing to 0.16 from 0.13 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. The refinance index is down 71% from the levels in May 2013. As expected, refinance activity is very low this year.  The second graph shows the MBA mortgage purchase index.   According to the MBA, the unadjusted purchase index is down about 13% from a year ago.

Weekly Update: Housing Tracker Existing Home Inventory up 10.9% year-over-year on June 9th  - Here is another weekly update on housing inventory ... There is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then usually peaking in mid-to-late summer. The Realtor (NAR) data is monthly and released with a lag (the most recent data was for April).  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years.

FNC: Residential Property Values increased 8.4% year-over-year in April - FNC released their April index data today.  FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.6% from March to April (Composite 100 index, not seasonally adjusted). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased between 0.6% and 0.7% in April. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales). The year-over-year change slowed in April, with the 100-MSA composite up 8.4% compared to April 2013.  The index is still down 21.7% from the peak in 2006. This graph shows the year-over-year change based on the FNC index (four composites) through April 2014. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. This might be the beginning of a slowdown in prices increases in the FNC index.

Economic Concerns Temper Home Buyer Enthusiasm - A combination of rising home prices, higher mortgage rates and general economic concerns seem to be restraining Americans from taking part in the spring and summer home-buying season. In May, 68% of Americans thought it was a good time to buy a home, while 43% thought it was a good time to sell, according to survey results released by mortgage giant Fannie Mae. That net 25% advantage in favor of home buying was the lowest it’s been since at least June 2010, the earliest month for which Fannie has data. The buyer pessimism probably reflects a confluence of factors tilting the housing market against them. The clearest: Home prices have increased significantly in the last 12 months, especially in certain hot housing markets. Between April 2013 and April 2014, the median national price for an existing single-family home rose 4.7% to $201,100, according to the National Association of Realtors. In the same period, rates on 30-year fixed-rate mortgages have risen about 0.7 percentage point to 4.14%, according to Freddie Mac. And that’s only if you qualify. Although mortgage lending has loosened since the depths of the financial crisis, lenders are nowhere near as forgiving as they were during the housing boom. In the meantime, potential buyers’ income expectations are stagnant. About 57% said they think the economy is headed in the wrong direction and about 21% said their household income has increased significantly in the last year, four percentage points less than in April.

The US Housing Market's Darkening Data - When looking at residential real estate, we often tend to focus almost solely on recent price movements in assessing the health of the housing market at any point in time. But as both homeowners and income-earners in the larger economy, of which the housing market is an important component, to really understand what's going on, we need clarity into the larger cycle driving those price movements. The more we look at today's data, the more it looks like that we are in a new type of pricing cycle -- one that homeowners and housing investors have no prior experience with. And the more we learn about the fundamentals underlying the current cycle, the harder it becomes to justify today's home prices on any sustained level. Meaning a downward reversion in home values is very probable in the coming years.

WSJ Survey: Economists Pare Down Their Housing Addition - Economists are lowering their expectations for the housing sector, again. Their diminishing optimism is among the most noticeable trends in The Wall Street Journal’s monthly surveys of economic forecasters in the first half of 2014. In January, the consensus view of economists participating in the survey was that housing starts would jump 20% this year, rising to 1.11 million units from 924,900 in 2013. Then the harsh winter froze homebuilding in January and February. Plus, higher mortgage rates, which spiked up last summer, along with rising home values priced many home buyers out of the new-home market. These drags have caused forecasters to lower their expectations for housing this year. The June survey’s consensus view calls for 1.05 million homes to be started this year. That’s still a healthy 13% increase from 2013’s total. But housing likely won’t provide the big growth boost economists expected in January.

Realtors, Builders Differ on Need for New Homes - The top U.S. association for Realtors and that for home builders agree more home construction is needed to keep pace with job growth. What they don’t agree on is how much. The National Association of Realtors released a study Tuesday finding that 32 states and the District of Columbia saw a disproportionate amount of job growth in relation to home construction in the past three years. That, the Realtors group says, will lead to housing shortages and rising home prices in those markets. In its study, the Realtor group noted how builders since 1960 constructed a ratio of one single-family home for every 1.5 jobs created on a national basis. Yet, in the past three years, several states, led by Michigan, Florida, Utah, California, Montana and Indiana, produced jobs in excess of that ratio, the study found.  But David Crowe, the builder association’s chief economist, noted a few issues with the Realtor data. First, the Realtor study doesn’t factor in apartments and condominiums, a popular destination in recent years for young workers. Construction starts for multifamily homes registered 293,700 last year, the highest since 2005. The pace is quickening this year: In April, construction starts were at a seasonally adjusted annual pace of 413,000.Second, the builders group finds a more reasonable ratio of home construction to job growth would be one new home built – single-family or multifamily – for every two to three jobs created. By that measure, more states likely are within the ideal range.Finally, it is possible that a number of jobs created over the past three years went to unemployed

Experts: Builders’ Shift to More Home Construction Might Take 1-2 Years - Home-building experts predict it might take a year, perhaps two, before the industry fully shifts to constructing a greater volume of homes at lower prices from its current focus of padding profit margins by selling fewer, more expensive homes.That shift, often described in the industry as pace versus price, is critical to U.S. home construction getting back to its annual average rate of construction starts since 2000 and providing more of a boost to gross domestic product. So far this year, builders are starting homes at a rate of about 60% to 65% of the industry’s annual average of 1 million. In recent years, builders have focused mostly on building expensive homes to cater to better-heeled buyers. Meanwhile, many first-time and entry-level buyers have remained sidelined by stringent mortgage qualification standards such as requirements for hefty down payments and high credit scores. John Johnson, chief executive of Houston-based David Weekley Homes, a closely held builder that operates in 10 states, predicts that the industry will shift to pace over price “within the next 12 to 18 months.” He added that the supply side of the equation is constrained, too, since builders still face a shortage of labor and lots. Meanwhile, demand will return despite lofty prices for new homes.

Condo Towers Rise From Boston to L.A. in U.S. Rebound - For the first time since the U.S. housing crash, new condominium towers are sprouting in downtown Boston, Seattle and Los Angeles as developers bet on the return of the riskiest type of residential real estate. Buyers are signing deals to reserve units in two new high-end projects in Boston. A 41-story tower rising in Seattle is the first phase of the largest condo development ever in the city. In Los Angeles, a 22-floor building is slated for construction later this year, the first ground-up high-rise condo project downtown since 2005. Construction cranes also spike the skylines of Washington, Houston, Miami, New York and San Francisco as financing gradually returns to a real estate class that lenders shunned for years. Condos are regaining favor after a surge in rental demand pushed the U.S. apartment-vacancy rate to the lowest level in a decade, sending urban rents soaring, while the inventory of for-sale housing remains historically low. “We’re in the very early stages of a long recovery in condos,”

Why Renters Are Ending Up in the Suburbs -- Something doesn't quite square up between U.S. housing data and what we know about the changing demographics of U.S. metro areas. As Census Bureau data show, growth in cities is tilting ever so slightly back toward the suburbs. Yet multifamily housing, mostly situated in urban centers, is still driving the American housing market. Are developers out of step with demand? Between 2010 and 2013, several U.S. cities saw more growth than they did over the entire course of the decade between 2000 and 2010. As the Brookings Institution's William H. Frey has reported, cities with populations greater than 250,000 are showing growth rates of slightly more than 1 percent, much higher than the average growth rate for the previous decade.  In McKinney and other fast-growing suburbs and exurbs, rentals are the major force driving growth—just not multifamily rentals. Yet the Census data also show that this growth rate is falling—albeit marginally. San Marcos, Cedar Park, and Georgetown, all three of them Austin suburbs of about 50,000, are the fastest growing cities in the country. While urban growth still outpaces suburban growth, Frey acknowledges that "the new numbers for 2012–13... suggest a closing of the city-suburb growth gap with the small downtick in city growth and an even tinier suburban growth uptick." Even though suburban growth is catching up, the multifamily housing boom that has characterized explosive growth in center cities for the last several years is still driving the economy. With winter finally behind us, permits for new housing grew 8 percent in April; construction on new housing jumped a full 13 percent. Most of these new homes come in the form of apartment units. In April, there were 2,000 new permits for single-family homes versus 81,000 new permits for multifamily units. Housings starts showed the same wide divide: 5,000 new single-family homes versus 124,000 new multifamily units.

Many Seek New Homes Near Cities but are Priced Out - The average price of a newly built home nationwide has reached $320,100 — a 20.5 percent jump since 2012 began. That puts a typical new home out of reach for two-thirds of Americans, according to government data. Yet many builders have made a calculated bet: Better to sell fewer new homes at higher prices than build more and charge less. Their calculation is partly a consequence of the growing wealth gap in the United States. Average inflation-adjusted income has declined 9 percent for the bottom 40 percent of households since 2007, while incomes for the top 5 percent exceed where they were when the recession began that year, according to the Census Bureau.Buyers have historically paid about 15 percent more for a new home than for an existing one, a premium that's reached 40 percent today, according to the real estate data firm Zillow. An average new home costs about six times the median U.S. household income. Historically, Americans have bought homes worth about three times their income.Construction has yet to rebound with vigor. Just 433,000 new homes were sold on an annualized basis in April. Over the previous half-century — when the United States had a smaller population — annual sales had averaged 660,000.

Another Housing Red Light: Furniture Spending Negative For The First Time Since 2012 - As we showed a week ago, it is not just the coincident housing signals confirming that the latest artificial bounce has faded, but both upstream and downstream indicators. Specifically, we showed that lumber prices - that one component so critical in the building of new homes and a traditional leading indicator - have cratered. That's the upstream indicator. As for the downstream, we go to Bank of America which finds that not only has home improvement store spending declined substantially since the dead housing bounce peak last summer, but that furniture spending according to BofA estimates, is now once again negative: the first such drop since early 2012.

Retail Sales increased 0.3% in May -- On a monthly basis, retail sales increased 0.3% from April to May (seasonally adjusted), and sales were up 4.3% from May 2013. Sales in April were revised up sharply from a 0.1% increase to a 0.5% increase. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $437.6 billion, an increase of 0.3 percent from the previous month, and 4.3 percent above May 2013. ... The March 2014 to April 2014 percent change was revised from +0.1 percent to +0.5 percent. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales ex-autos were up 0.1%. The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 4.6% on a YoY basis (4.3% for all retail sales).

May Advance Retail Sales: Weaker Than Forecast -  The Advance Retail Sales Report released this morning shows that sales in May rose 0.3% month-over-month, down from 0.5% in April, which was an upward revision from 0.1%. Core Retail Sales (ex Autos) was up 0.1% in May, down from 0.4% in April, which was an upward revision from 0.0%. Today's headline and core numbers were below the forecasts, which were 0.6% for Headline and 0.4% for Core.  The first chart below is a log-scale snapshot of retail sales since the early 1990s. I've included an inset to show the trend in this indicator over the past several months.  Here is the Core version, which excludes autos.  Here is a year-over-year snapshot of overall series.  Here is the year-over-year performance of at Core Retail Sales.

May Retail Sales Miss, Core Retail Sales Unchanged, Control Group Declines -- Another swing and a miss for the so-called Q2 GDP surge.  After April data was revised higher, with headline retail sales pushed from 0.1% to 0.5%, and core retail sales ex-autos and gas boosted from -0.1% to 0.3%, May showed a big drop in whatever momentum may have resulted from the March spending spree. As a result May headline retail sales missed expectations of a 0.6% increase, printing at 0.3%, with the entire positive print due to auto and gas sales. Indeed, when looking at core retail sales excluding autos and gas, these were unchanged from April, printing at 0.0%, far below the 0.4% expected.  As the table below shows, segments that saw a decline in May were Electronics stores (again), as well as food and beverage stores, health and personal care, clothing stores, sporting goods stores, restaurants, as well as general merchandise stores. In other words a decline across the board.

U.S. retail sales miss expectations, jobless claims rise  (Reuters) - U.S. retail sales rose less than expected in May and first-time applications for jobless benefits increased last week, but the data did little to alter views the economy is regaining steam. The Commerce Department said on Thursday that retail sales gained 0.3 percent. While that was below the 0.6 percent rise expected on Wall Street, April sales were revised higher to show a 0.5 percent increase, helping to keep growth forecasts intact. "The continued gains during the first two months of the second quarter suggests that consumers are continuing to hold their side of the bargain, building on the strong momentum at the end of the last quarter," said Millan Mulraine, deputy chief economist at TD Securities in New York. In a separate report, the Labor Department said initial claims for state unemployment benefits climbed 4,000 to a seasonally adjusted 317,000 for the week ended June 7. Despite the rise, claims are not too far from their pre-recession lows and job growth continues at a steady clip.

Census Bureau Revisions to Retail Sales: Earlier this week I posted my monthly update on Retail Sales. Those of us who routinely track this series know that the Advance Estimate will be followed by a second estimate next month and a third estimate the month after. How big are those revisions? Are they big enough to warrant skepticism about the Advance Estimate? Here is a visualization of the cumulative change from the first to third estimates from January 2007 through March 2014, the most recent month for which we have three data points. As we see, revisions abound, and they move in either direction, although mostly downward during the last recession. For a better sense of the magnitude of the revisions, the next chart shows the percent change from the first (advance estimate) to third (second revision). During this timeframe there were 39 upward revisions and 48 downward revisions. The absolute mean (average) revision was 0.38%, which breaks down as 0.28% for the upward adjustments and -0.42% for the downward adjustments. Now, let's recall the latest 0.3% month-over-month improvement in Advance Monthly Sales for Retail Trade and Food Services. The CB adds a parenthetical (±0.5%)* for that MoM advance estimate. The asterisk is expanded as follows: * The 90 percent confidence interval includes zero. The Census Bureau does not have sufficient statistical evidence to conclude that the actual change is different than zero. [PDF source] The message is clear: Don't take the advance estimate of retail sales data too seriously.

Spending Worries? - Census retail sales for May came out today, and they missed the consensus forecast slightly on the downside. But there is another pattern that may be more concerning. Let’s take a closer look at what has been going on with household spending. First, new auto purchases have been an important driver of household spending for the past two years. The chart below plots year over year spending (in nominal terms) from January to April for 2013 and 2014. The blue bar shows total spending, and the red bar shows spending excluding new auto purchases. Over the past two years, nominal spending growth has been about 3% on a year-over-year basis. But if we exclude auto sales, the numbers are much worse, especially for 2014. Spending excluding autos in the first four months of 2014 has been less then 1.5% nominal, which implies a decline in real terms. This includes March and April, so it is hard to argue that weather alone explains this weakness. So purchases of new vehicles have been an important boost to household spending and the overall economy. But what is driving this great performance of auto sales? A clue comes from looking across zip codes that differ in credit scores. In the chart below, we plot the year-over-year growth in new auto purchases for the lowest and highest credit score zip codes. These are the bottom and top quartile of the overall credit score distribution, where the quartiles are population weighted to ensure we are looking at the same number of people.The growth in new auto purchases has been much stronger in low credit score zip codes over the past two years. In 2014, the growth was more than twice as strong in low credit score zips relative to high credit score zips. So total spending is being driven in large part by auto purchases, and auto purchases are being driven in large part by purchases by low credit score individuals. What explains this pattern?

Preliminary June Consumer Sentiment decreases to 81.2 - The preliminary Reuters / University of Michigan consumer sentiment index for June was at 81.2, down from 81.9 in May. (see graph) This was below the consensus forecast of 83.0. Sentiment has generally been improving following the recession - with plenty of ups and downs - and a big spike down when Congress threatened to "not pay the bills" in 2011, and another smaller spike down last October and November due to the government shutdown.

Preliminary June 2014 Michigan Consumer Sentiment Now At 3 Month Low - The preliminary University of Michigan Consumer Sentiment for April came in at 81.2, a decline from the May final of 81.9. Today's number came in below the forecast of 83.0.  See the chart below for a long-term perspective on this widely watched indicator. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is now 5 percent below the average reading (arithmetic mean) and 3 percent below the geometric mean. The current index level is at the 36th percentile of the 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 11.9 points above the average recession mindset and 6.2 points below the non-recession average. Note that this indicator is somewhat volatile with a 3.1 point absolute average monthly change. The latest 0.7 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.

Americans warming up to credit cards again - A few days back we posted this chart on Twitter that clearly indicates an increase in US consumer spending. One of the questions discussed was "how was this increased spending financed?". A fair question, given the painfully slow wage growth in the US. On Friday we got our answer. US consumer credit outstanding spiked way above expectations. But unlike in previous Fed reports, in which consumer credit growth was driven by student loans and to a lesser extent auto finance, we saw something new. The increase was caused by a jump in revolving credit. Americans are warming up to using plastic again. This is certainly a positive signal because it shows that household confidence is improving sufficiently to send consumers shopping. Unfortunately a great deal of what Americans bought came from abroad, causing US trade deficit to jump unexpectedly (see post). The effect on GDP growth from this jump in consumer spending will therefore be muted.

America’s credit card addicts just relapsed - America’s addiction to credit cards is flaring up again. This is either really good news or really bad news. As we’ve told you before, one of most unappreciated shifts in the American financial landscape since the financial crisis hit has been the downturn in credit card usage.  Why the shift? A big reason has to do with sound public policy designed to prevent predatory lending. The passage of the US Credit Card Accountability, Responsibility and Disclosure Act—the CARD Act—in 2009, and its 2010 implementation, completely reshaped the American credit card industry. Here’s some of what the CARD Act did:

  • Blocked credit card companies from extending credit without assessing the customer’s ability to pay
  • Implemented rules on marketing to people under the age of 21 to crack down on abuses at college campuses
  • Limited a credit card company’s ability to levy penalty fees
  • Restricted the circumstances in which the company could jack up interest rates

So is an increase consumer credit use good news or bad news? Well, if you’re simply rooting for GDP growth, without regard for how it occurs, you can argue that this is a great sign. Roughly 70% of US economic activity is driven by consumption. And a rise in credit card use suggests that consumers are ramping up their buying. (Other data, such as the worsening US trade balance on higher imports of consumer goods (paywall), would seem consistent with that view.)But if you care about the long-term sustainability of US economic growth and the financial health of American households, it’s not particularly heartening to see signs of backsliding into a widespread reliance on credit cards.

US bank-held consumer credit on the rise - Bank-held consumer credit in the US continues to rise. It's impossible to tell from this weekly data what portion is credit cards debt vs. auto and other. This of course does not include any new student loans, which are all held by the federal government. With wage growth remaining tepid, the consumer is starting to put on some leverage.

4 in 10 millennials overwhelmed by debt: Study: Four in 10 millennials are overwhelmed by debt, with almost half spending at least 50 percent of their monthly paycheck paying off debt, a new study by Wells Fargo found. More than half—56 percent—reported living paycheck to paycheck. Credit cards are the biggest drain on millennials' wallets, followed by mortgages and student loans. However, millennials are optimistic—72 percent said they are confident they'll be able to save enough to have the lifestyle they want in the future. "They're overconfident, they're extremely optimistic if you compare them to other generations," " "Honestly, it's not there for them. A third don't think they're going to have the same standard of living as their parents did and that's a huge problem."

Subprime Lending Drives Spending - A concern that we highlighted in yesterday’s post is that the only way the U.S. economy can generate significant consumer spending is through aggressive lending to borrowers with low credit scores. Here is more evidence supporting that view. In the chart below, we plot retail spending on appliances, furniture, and home improvement, or “home-related spending” (blue line) and spending on new autos (red line) from 1998 through 2014. We have highlighted the two major subprime lending booms we’ve seen in that period — the subprime mortgage lending boom from 2003 to 2006, and the subprime auto loan boom from 2010 to 2014. In order to be able to include 2014, we focus only on the first four months of each year. For auto spending, growth was positive prior to the Great Recession, but unspectacular. But as soon as subprime auto lending heated up in 2011 and afterward, so did purchases of new auto vehicles. The growth in new auto sales from 2011 to 2014 has been really impressive. So once again, spending in a particular market is strongest when subprime lending in that market is strongest. It appears that the key to boosting spending in the U.S. economy is subprime lending. The financial system was lending against homes before the Great Recession, and now it has moved to lending against cars. But the basic message is the same.

The Subprime Auto-Lending Credit Bubble Is Bursting - We have commented a few times on the slightly diffuse character of the echo bubble, which has infected a great many nooks and crannies of the economy. One of the areas which has experienced an enormous boom was the sub-prime auto loan sector. It seems however that the party in this sub-sector of the bubble economy is in the process of ending. According to Bloomberg: “A three-year lending boom to car buyers with spotty credit that helped push auto sales to a six-year high is starting to show signs of overheating. The percentage of loans packaged into securities that are more than 30 days late rose 1.43 percentage points to 7.59 percent in the 12 months ended September 30, according to Standard & Poor’s. That’s the highest in at least three years, the data released last week by the New York-based ratings company show.

Tesla Motors turns all its patents over to the open source movement: Electric carmaker Tesla announced Thursday it was giving up its patents to “the open source movement” to help spur electric vehicle technology. The unusual move comes with Tesla enjoying huge success, but against a backdrop of multiplying legal squabbles among technology firms over patents. “All our patents belong to you,” Tesla chief executive Elon Musk said in a blog post. “Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters. That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology.” Musk, an entrepreneur who made a fortune with the PayPal online payment service and also heads the space travel firm Space X, said he does not want patents to halt growth of an important environmental technology. “We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform,” he wrote.

The fault in our starry-eyed 'recovery': 2014 looks like we're going bust again - There are millions of Americans who hoped 2014 would be the year their financial lives would improve. After the struggle of a stagnant country since 2009, economic forecasts predicted that a real recovery was coming - that this this would be the year for a well-paying new job, a house, the year those Americans would pay off student loans or reduce their credit-card debt. But nothing can really improve for us individually until everything improves for all of us economically. And, increasingly, that utopia looks distant. According to the numbers – and to an increasingly frustrated group of experts – the first few months of 2014 are turning out to be a bust, and there’s no reason to believe the rest of the year will be any better, for the haves or the have-nots. First, there are the basics. This year has started with bad news for consumers: a weaker housing market, anemic employment with 10m people out of work and millions of others not even looking any more, plus economic growth that’s lower than it’s been in three years. “2014, what was supposed to be the ‘break-out’ year according to many optimistic forecasts, would be starting off with the weakest performance of any quarter since 2011.” There are other, wonkier measures that fill out the picture: productivity, a measure of the robustness of the American workforce, dropped to 3.2% in April - the sharpest tumble since 2008. Personal spending is falling, into negative territory, because healthcare and high gas bills were the main things Americans were buying this winter, and they aren’t now. To millions of Americans, this downward trend is no surprise, even if the numbers are new. To millions of Americans, this downward trend is no surprise, even if the numbers are new. The relentless cheerleading about the improving economy never really made sense for a large swath of Americans: those who were forced to take lower-paying jobs, had their houses foreclosed by banks, or were drummed out of the workforce into long-term unemployment.

Blogs Review: The Sharing Economy Hype - What’s at stake: As sharing economy companies become valued in the billions, grand claims are being made for the future of these new providers. But the question remains open as to whether the success of these companies, which often relies on lower standard of regulatory oversight and taxes, are a net plus for the economy as a whole. Dean Baker writes that the “sharing economy” – typified by companies like Airbnb or Uber, both of which now have market capitalizations in the billions – is the latest fashion craze among business writers. Although these companies facilitate the use of underutilized resources, the reality is that this new business model is largely based on evading regulations and breaking the law.  Dean Baker writes that insofar as Airbnb is allowing people to evade taxes and regulations, the company is not a net plus to the economy and society – it is simply facilitating a bunch of rip-offs. Others in the economy will lose by bearing an additional tax burden. If these services are still viable when operating on a level playing field they will be providing real value to the economy. As it stands, they are hugely rewarding a small number of people for finding a creative way to cheat the system.

Hotels: Occupancy Rate up 3.1%, RevPAR up 7.4% in Latest Survey -- From SSTR: US hotel results for week ending 7 June In year-over-year measurements, the industry’s occupancy increased 3.1 percent to 69.1 percent. Average daily rate increased 4.2 percent to finish the week at US$114.00. Revenue per available room for the week was up 7.4 percent to finish at US$78.81. Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room. The 4-week average of the occupancy rate is solidly above the median for 2000-2007, and is at the highest level since 2000.   The following graph shows the seasonal pattern for the hotel occupancy rate for the last 15 years using the four week average.

Gasoline Price Update: Down 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 two cents cheaper per gallon. Prices have been hovering in a narrow range for the past six weeks. Regular is up 48 cents and Premium 46 cents from their interim lows during the second week of last November. According to, California, Hawaii and Alaska have Regular above $4.00 per gallon, up from two the previous week, and two states (Michigan and Illinois) are averaging above $3.90, up down from four states last week. Arkansas has the cheapest Regular at $3.37.How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's a visual answer.

US electricity markets are anti-consumer - Accusations of market manipulation dog the electricity markets from coast to coast, raising questions about the integrity of these secretive entities and whether they can ensure sufficient generating capacity at all times. Opportunities to drive electricity prices up through misconduct are rampant and sure to grow unless the current rules are reformed and veils of secrecy are pulled back. The electricity markets, originally designed by Enron, are supposed to benefit consumers by attracting the necessary investment in power plants to meet the demand for juice at all times, especially during peak periods such as hot summer evenings. Proponents say the current market solution is superior to vertically integrated utilities that generate, transmit and distribute power at prices set by government regulators. It is a remarkable claim, since in areas with electricity markets the reserves — capacity that sits unused or underused but can be called on during high demand — has shriveled. The price signals that were supposed to spur investment in new capacity have failed to do so, prompting the creation of an added layer of markets called capacity auctions. In these auctions suppliers bid to collect payments just to have power plants standing by in case they are needed. But even the capacity markets have not produced the expected investment, as some of their strongest supporters subtly acknowledge. In the end, the deregulated electricity markets have repeatedly enabled price gouging and other inefficiencies at the expense of the consumer. Many electricity market rules seem to be based more on hopes and wishes than on evidence of success and realistic appraisals of market dysfunctions.

U.S. Producer Prices Unexpectedly Fall - U.S. producer prices fell in May after two month of solid gains, but the decline was not enough to change perceptions that inflation pressures are steadily creeping up. The Labor Department said on Friday its producer price index for final demand slipped 0.2 percent after advancing in April by 0.6 percent, which was the largest gain in 1-1/2 years. Economists, who had expected producer prices to edge up, saw the decline as a correction after gains in March and April, and said it did not change their view that prices were firming. The government revamped the PPI series at the start of the year to include services and construction. Big swings in prices received for trade services have injected volatility into the series, making it hard to get a good read on inflation. The overall inflation backdrop remains generally tame, with the main gauge watched by the Federal Reserve continuing to run below the U.S. central bank's 2 percent target. Still, key consumer inflation measures pushed up in April and are expected to continue edging higher as the labor market tightens and the economy regains momentum. That should position the Fed to raise interest rates in the second half of 2015.

Producer Price Index for May Comes in Below Expectations -  Today's release of the May Producer Price Index (PPI) for Final Demand fell 0.2% month-over-month seasonally adjusted. Core Final Demand declined 0.1% from last month. Both indicators were below the expectation of parallel 0.1% increases.  The unadjusted year-over-year change in Final Demand is up 2.0%, little changed from last month's YoY of 2.1%. Here is the essence of the news release on Finished Goods: The Producer Price Index for final demand fell 0.2 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This decline followed increases of 0.6 percent in April and 0.5 percent in March. On an unadjusted basis, the index for final demand advanced 2.0 percent for the 12 months ended in May....  In May, the 0.2-percent decrease in final demand prices can be traced to the indexes for final demand services and final demand goods, both of which also declined 0.2 percent. More…  The BLS shifted its focus to its new "Final Demand" series earlier this year. Since my focus is on longer term trends, I continue to track the legacy Producer Price Index for Finished Goods, which the BLS also includes in their monthly updates. The May Headline Finished Goods declined 0.05% MoM and is up 2.45% YoY, down slightly from last month's 3.08%, which was the largest YoY jump in 26 months. Core Finished Goods rose 0.05% MoM and is up 1.78% YoY. Now let's visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, the YoY trend in Core PPI (the blue line) declined significantly during 2009 and stabilized in 2010, increased in 2011 and then eased during 2012 and most of 2013. Despite the winter surge in the core indicator, it remains below the common 2% benchmark.

Producer Prices Miss, Plunge To Negative After April Surge -- After the surge in prices in April, May's Producer Prices fall 0.2% MoM (compoared to a +0.1% expectation). Year-over-year inflation rose 2.0% (down from last month's 2.1% and missing expectations of 2.4% significantly). This is the first MoM drop since Febuary for the headline and core numbers as it appears vehicle rental appeared to see prices implode. PPI Ex Food and Energy (core), saw prices rise at 2.0% - the fastest since May 2012. The breakdown of the drop, first in services: Most of the decline in May is attributable to the index for final demand trade services, which fell 0.5 percent. And then by products:  The indexes for securities brokerage, dealing, investment advice, and related services; apparel, footwear, and accessories retailing; health, beauty care, and optical goods retailing; food wholesaling; and consumer loans (partial) also moved lower. It appears that any hopes of "benign" inflation finally taking hold have to be postponed once more...

NFIB: Small Business Optimism Index increases in May, Highest since 2007 --From the National Federation of Independent Business (NFIB): Small Business Sentiment: Improves a Bit But Is No Sign Of A Surge NFIB Optimism Index rose 1.4 points in May to 96.6, the highest reading since September 2007. ...Labor Markets. NFIB owners increased employment by an average of 0.11 workers per firm in May (seasonally adjusted), the eighth positive month in a row and the best string of gains since 2006.  In another good sign, the percent of firms reporting "poor sales" as the single most important problem has fallen to 12, down from 16 last year - and "taxes" are the top problem at 25 (taxes are usually reported as the top problem during good times). This graph shows the small business optimism index since 1986.

Small Business Sentiment: Third Month of Improvement - The latest issue of the NFIB Small Business Economic Trends is out today. The June update for May came in at 96.6, up 1.4 points from the previous month's 95.2. Today's headline number marks the third month of improvement. The index is now at the 30.4 percentile in this series and the highest level since September 2007, three months before the Great Recession.The forecast was for 96.1.  Here is the opening summary of the news release, which takes a typically cautious view of the survey findings. NFIB Optimism Index rose 1.4 points in May to 96.6, the highest reading since September 2007. However, while May is the third up month in a row, the Index is still far below readings that have normally accompanied an expansion and there have been similar gains in the past that haven’t panned out in this recovery period. Five Index components improved, one was unchanged and four fell, although not by much. (Link to news release). The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past four years. The NBER declared June 2009 as the official end of the last recession.

NFIB: May Small-Business Optimism Index Hits 96.6, Highest Since 2007 - Small-business owners have recovered all of the optimism lost during the Great Recession, according to a report released Tuesday. The higher level of confidence is feeding into price increases. The National Federation of Independent Business’s small-business optimism index increased again to 96.6. last month, from 95.2 in April. The May reading is the highest since September, 2007, before the last recession. Economists surveyed by the Wall Street Journal expected the index to edge up but only to 95.8. The index has increased for three consecutive months, but the NFIB has played down the gains. “The improvement, while welcome, is far below readings that normally accompany an expansion,” the report said. Even so, the confidence seems to be feeding into pricing decisions. “Price hikes are more widespread than at any time since 2008 (with the exception of a brief period in 2011) and profit trends are improving a bit,” the report said. Seasonally adjusted, the net percentage of owners that have raised their selling prices held at 12%. In addition, a net 21% plan price hikes in the next few months. “If successful, the economy will see a bit more ‘inflation’ as the price indices seem to be suggesting,” the report said.

Weekly Initial Unemployment Claims increase to 317,000  - The DOL reports: In the week ending June 7, the advance figure for seasonally adjusted initial claims was 317,000, an increase of 4,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 312,000 to 313,000. The 4-week moving average was 315,250, an increase of 4,750 from the previous week's revised average. The previous week's average was revised up by 250 from 310,250 to 310,500. There were no special factors impacting this week's initial claims. 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: A Bit Above Expectations - Here is the opening statement from the Department of Labor:In the week ending June 7, the advance figure for seasonally adjusted initial claims was 317,000, an increase of 4,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 312,000 to 313,000. The 4-week moving average was 315,250, an increase of 4,750 from the previous week's revised average. The previous week's average was revised up by 250 from 310,250 to 310,500. There were no special factors impacting this week's initial claims. [See full report]Today's seasonally adjusted number at 317K was above the forecast of 310K. The less volatile four-week moving average is now 4,750 above its nearly seven-year interim low set last week. 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.

U.S. Job Openings Climb to Highest Level in Seven Years - The number of job openings in the U.S. economy climbed to the highest level in seven years, becoming the latest gauge in the labor market to recover the ground its lost during the recession. Job openings climbed to 4.5 million in April, according to the Labor Department‘s report on job openings and labor turnover, or JOLTS. The rate of job openings climbed to 3.1% in April from 2.9% in March, also near a seven-year high. In this month’s report the hiring and layoff rates were little changed. During the 18-month recession, which ran from December 2007 to June 2009, the rate of hiring and job openings collapsed while the rate of layoffs surged. The rate of layoffs declined during 2009 and 2010 as the economy regained its footing and has recovered to its pre-recession levels. Though layoffs have slowed, the rate of hiring in the economy has yet to recover. In April, 4.7 million workers were hired on to new jobs, the same number as in March. Prior to the recession, the level of hiring was often over 5 million a month. The U.S. economy is characterized by its churn, with millions of Americans switching jobs every month. In a healthy economy the level of job openings, job hiring and voluntary job separation all rise. The labor turnover survey is closely watched by officials at the Federal Reserve for signs that the labor market is nearing complete recovery. Federal Reserve Chairwoman Janet Yellen has pointed to the rate of voluntary quitting in the report as a sign that workers are gaining enough confidence in the economy to take the risk on a new employer. The quit rate was little changed in today’s report. with 2.5 million Americans voluntary leaving their job in April, the same rate as in March.

BLS: Jobs Openings increase sharply to 4.5 million in April - From the BLS: Job Openings and Labor Turnover Summary There were 4.5 million job openings on the last business day of April, up from 4.2 million in March, the U.S. Bureau of Labor Statistics reported today. ... ...Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ... The number of quits (not seasonally adjusted) increased over the 12 months ending in April for total nonfarm and total private and was little changed for government. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  This series started in December 2000.Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. Note that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. This is a measure of labor market turnover. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings increased in April to 4.455 million from 4.166 million in March. The number of job openings (yellow) are up 17% year-over-year compared to April 2013. Quits are up 11% year-over-year. These are voluntary separations. (see light blue columns at bottom of graph for trend for "quits"). It is a good sign that job openings are over 4 million for the third consecutive month, and that quits are increasing.

April 2014 JOLTS  --JOLTS were reported Tuesday, and Job Openings jumped in April, putting the Beveridge Curve in territory that would have signaled full employment 10 years ago. This is great news. I think it signals that the employment strength we have been seeing in the last couple of months is not a statistical aberration, and it gives me more confidence that we will see more employment gains over the next couple of months. One caveat, though, is that the 2000's vintage Beveridge Curve was not typical. The JOLTS data doesn't go back any farther than that, so it's hard to find versions of the relationship tying into older data.  Here is one that I've found from the Federal Reserve Bank of San Francisco. The relationship in the 1970's and 1980's would target us at 8% unemployment or more with April's Job Openings level. We all like to push our own policy preferences onto these statistical canvasses, and I'd like to do that as much as the next guy. But, the 70's and 80's had their own, minor, baby boomer generation that was hitting retirement, and I wonder if the rightward shift has to do with behavioral tendencies of an older work force that tends to be unemployed less, but for longer durations, than younger workers. Maybe a 3.1% Job Openings rate corresponds to a 6.3% unemployment rate in the current demographic context. On the other hand, the difference between where the Beveridge Curve is now and where it was 10 years ago is roughly equal to the unusual number of very long duration unemployed, which is probably a combined product of demographics, EUI, and the recession. The shape of the distribution of unemployment durations would suggest that the Beveridge Curve has more room to shift back to the left. We are, after all, still to the right of all historical Beveridge Curve locations outside of that 15 year period in the 1970's & 1980's.

An Updated Look at the Beveridge Curve - WSJ -- The number of job openings climbed in April to the highest level since before the recession began, according to a Labor Department report this morning. That’s good news for the economy overall, as more job openings ought to mean more opportunities for the unemployed to find work or for people to find better jobs. But it’s bad news for the Beveridge Curve.  Real Time Economics has been tracking the progression of the Beveridge Curve that tracks the relationship between the job openings rate and the unemployment rate. Before the recession hit in December 2007, the relationship between job openings and unemployment held steady. If job openings climbed, the unemployment rate tended to fall, as one would expect (the blue line in the accompanying chart). During the recession, the unemployment rate soared toward 10%, and the availability of job openings plummeted (the red line). Then, in the recovery, something strange happened. The openings rate began to climb, yet unemployment remained stubbornly high. The new job listings were not being filled by the vast number of unemployed workers (the green line). With so many jobs available, more people ought to be finding their way to work. An openings rate above 3% has historically meant that the unemployment rate was below 5%, more than a full percentage point away from where it sits today. Why are job openings not doing more to reduce unemployment? One reason may be that large recessions often disrupt the traditional relationship between openings and unemployment, and that with time this will heal. After all, the relationship appears significantly closer to normal today than it did at the end of the recession in 2009. But another school of thought says that some unemployed workers may lack the skills to assume the openings or, put another way, that employers are unwilling to train applicants so that they can fill the available roles. This suggests the economy may have suffered at least some structural damage that will take longer than normal to heal.

Atrophied Social Network vs. Skill Mismatch Theories of the Unfortunate Shift in the Beveridge Curve - DeLong - Erik Brynjolfsson: Twitter / @erikbryn: “The Beveridge curve has shifted. Part (but not all) of our economic problem is a mismatch between skills vs. needs“ I think that’s what Erik says is: “true, but…”. The “true” part is that as technology advances the needs of the economy shift, and very bad things happen if the skills of the labor force do not keep up. The not so true part is Erik’s assumption that “skill-need mismatch” will show itself in a shift in the Beveridge Curve rather than in sharp shifts in relative wages, As businesses respond by boosting what they will pay to those with skills in short supply and by reconfiguring jobs to make more use of low-wage “unskilled” labor. The way I look at it, an upward shift in the beverage curve is much, much more likely to reflect either the atrophy of the past social networks that had gotten the currently not employed their previous jobs or the nonexistence of the needed social networks on the part of young workers entering the labor market and looking for their first jobs. There is no reason to think that our educational system was performing much poorer in the 1970s and 1980s that it had in the 1950s and 1960s or that the pace of technological progress and speed it up. Yet the Beveridge Curve shifted out sharply in those years. There is no reason to think that June 2009 was a magic moment after which “skill–needs mismatch” took a sudden upward leap.

U.S. Government Struggles to Hire Smart Young People - WSJ: The federal workforce needs fresh blood. The percentage of its employees under the age of 30 hit an eight-year low of 7% in 2013, government statistics show, compared with about 25% for the private-sector workforce. Back in 1975, more than 20% of the federal workforce was under 30. Without a pipeline of young talent, the government risks falling behind in an increasingly digital world, current and former government officials say. Meanwhile, critics say that government hiring is confusing, opaque and lengthy, deterring even those who want to devote their lives to public service. The process is "deeply broken," says Max Stier, chief executive of the nonpartisan Partnership for Public Service, which aims to motivate a new generation of government workers. Government officials acknowledge the current generational mix is a concern. About 45% of the federal workforce was more than 50 years old in 2013, and by September 2016, nearly a quarter of all federal employees will be eligible to retire, according to the Office of Personnel Management, the government's human-resources department. Overall employment at the federal, state and local level has fallen, shedding 928,000 employees between 2009 and 2013, according to the Bureau of Labor Statistics.

Looking Beyond the Job-Finding Rate: The Difficulty of Finding Full-Time Work - Atlanta Fed's macroblog - Despite Friday´s report of a further solid increase in payroll employment, the utilization picture for the official labor force remains mixed. The rate of short-term and long-term unemployment as well as the share of the labor force working part time who want to work full time (a cohort also referred to as working part time for economic reasons, or PTER) rose during the recession.  The short-term unemployment rate has since returned to levels experienced before the recession. In contrast, longer-term unemployment and involuntary part-time work have declined, but both remain well above prerecession levels (see the chart). Some of the postrecession decline in the short-term unemployment rate has not resulted from the short-term unemployed finding a job, but rather the opposite—they failed to get a job and became longer-term unemployed. Before the recession, the number of unemployed workers who said they had been looking for a job for more than half a year accounted for about 18 percent of unemployed workers. Currently, that share is close to 36 percent. Moreover, job finding by unemployed workers might not completely reflect a decline in the amount of slack labor resources if some want full-time work but only find part-time work (that is, are working PTER). In this post, we investigate the ability of the unemployed to become fully employed relative to their experience before the Great Recession.  The job-finding rate of unemployed workers (the share of unemployed who are employed the following month) generally decreases toward zero with the length of the unemployment spell. Job-finding rates fell for all durations of unemployment in the recession.

Fed Warns The Plunge In "Routine" Jobs Won't Slow Down Anytime Soon - Employment in the United States is becoming increasingly polarized, growing ever more concentrated in the highest- and lowest-paying occupations and creating growing income inequality. As the Dallas Fed explains, market changes involving middle-skill jobs in the U.S. are hastening labor market polarization. So-called "Routine" jobs have declined from 58% of employment in 1981 to 44% in 2011, while both types of non-routine jobs have expanded. Since 1990, none of the routine jobs lost in these downturns came back in the following expansions. This is a problem since middle-skill, routine jobs still account for almost half of all existing jobs; and as the Dallas Fed concludes, the pace of labor market polarization is unlikely to slow down anytime soon.

US Job Market Recovers Losses yet Appears Weaker - Employers added 217,000 workers in May, more than enough to surpass the 138.4 million jobs that existed when the recession began in December 2007. But even as the unemployment rate has slipped to 6.3 percent from 10 percent at the depth of the recession, the economy still lacks its former firepower. To many economists, the job figures are both proof of the sustained recovery and evidence of a painful transformation in how Americans earn a living. There are still 1.49 million construction jobs missing. Factories have 1.65 million fewer workers. Many of these jobs have been permanently replaced by new technologies: robots, software and advanced equipment that speeds productivity and requires less manpower, said Patrick O'Keefe, director of economic research for the advisory and consulting firm CohnReznick. "When heavy things need to be moved, we now have machines to do it," O'Keefe said. "It is unlikely in the manufacturing sector that we recover much of the losses." Government payrolls have shrunk, taking middle class pay with them. Local school districts have 255,400 fewer employees. The U.S. Postal Service has shed 194,700 employees. And during the economic recovery, more people have left the job market than entered it. Just 58.9 percent of working-age Americans have jobs, down from 62.7 percent at the start of the recession.

May 2014 Employment Review -- I had wondered if this month would confirm a strong employment trend, which would have corresponded to a range of 5.9%-6.3%.  Or, this month could suggest that trends are continuing along the long term pace and last month was a statistical aberration, which would have corresponded to a range of 6.1%-6.5%.  The month came in at 6.3%, and it looks like a combination of the two.  There was some statistical reversion compared to last month, but with some hopeful signals.The first graphs here are from flows data. These are pretty noisy numbers, so it is tough to see much change from month to month. All of these flows reverted back from last month's strong movements, which was expected. The trends are all moving in the right direction, but last month's improved unemployment numbers were partly from unusual movements. The next graph is the comparison of insured unemployment and total unemployment. There was some snap-back this month. This will bounce around from month to month, as all of these indicators do, but last month's drop in unemployment was much closer to the trend in this relationship than this month's pause. This points to more potential for falling unemployment in the coming months. The remaining graphs are related to unemployment by duration of unemployment. This data shows strong confirmation of less persistent unemployment coinciding with the end of EUI. First, regarding this month's unemployment, the total number of unemployed workers remained about the same as last month. But, note that this comes from an increase in very short term unemployment and a decrease in long term unemployment.

The REAL "real unemployment rate" for May 2014 -- This month the usual suspects did not run any "real unemployment rate" articles, which assume there is no such thing as Boomers retiring in droves. Only the EPI updated its "missing workers" number based on estimates from a research paper published 7 years ago. In fact, let me make a general announcement that will save you a lot of time reading useless or misleading analysis:  any time you see an article citing the employment to population ratio, or the civilian labor force participation rate, for the entire population, ignore it.  It's useless BS garbage. Retired Boomers are skewing both numbers drastically,  Both numbers are going to trend down for years, as Boomers move out of the labor force and into senior citizenship.  With that caution, let me update the "REAL real unemployment rate." In order to be counted among the unemployed for purposes of the monthly jobs survey, a person must have actively looked for a job during the reference period.  But what about people who are so discouraged that they have completely stopped looking for work and have simply dropped out of the labor force? The monthly household jobs survey measures exactly this in a statistic called "not in labor force, want a job now."  Here's what that metric shows for the last 10 years: In order to find out what the "real" unemployment rate is, including such discouraged workers, we simply add the number of people shown above to both the numerator (unemployed) and denominator (civilian labor force, which excludes those adults not interested in jobs, like retirees) of the statistics used for the unemployment rate.  Here's what that shows for the last 10 years:

781,000 Jobs to Go Until Full Recovery - Perhaps the biggest reaction from the May 2014 employment situation report is that the number of non-farm payroll jobs recorded as part of the establishment survey portion of the report has finally recovered to pre-recession levels.  But what about the household survey portion of the employment situation report? Well, as it happens, about 781,000 jobs have to be filled before it recovers to its pre-recession peak.  Meanwhile, if we dig deeper into the household survey portion of the report, we find that compared to the peak in total employment that was recorded in November 2007, we find that the news is especially dire for one particular demographic group of the potential U.S. labor force:  Since October 2009, three months after the last federal minimum wage increase, there has been virtually no jobs recovery for American teens. For May 2014, the official count puts the number of teens with jobs at a level that's 1,377,000 lower than the 5,927,000 teens who were counted as being employed in November 2007.  Inspired by Bill McBride, who has long predicted that the number of non-farm jobs reported in the establishment survey portion of the U.S. employment situation report would exceed its pre-recession level this year, we'll offer this prediction: the number of teens counted as being employed in the household survey portion of the employment situation report will begin falling after July 2014.

The Downward Ramp - With the bursting of the tech bubble at the start of the 21st century, two decades of growth at the high end of the job market — once the province of college graduates with strong cognitive abilities — came to an abrupt halt, according to detailed studies of employment and investment patterns by three Canadian economists. We are still feeling the ramifications.New evidence produced by Paul Beaudry and David A. Green of the University of British Columbia, and Ben Sand of York University, demonstrates that thecollapse, between 1980 and 2000, of mid-level, mid-pay jobs — gutted by automation or foreign competition (and often both) — has now spread to the high-skill labor market. The U-shaped pattern of job growth characteristic of recent decades – strong at the top and bottom, but weak throughout the middle — has now become “a bit more like a downwardramp,” according to David Autor, an economist at M.I.T. who documented the decline in mid-level jobs in the 1980s and 1990s. Preliminary findings suggest that this trend is alarming in almost every respect. Just one example: the drying up of cognitively demanding jobs is having a cascade effect. College graduates are forced to take jobs beneath their level of educational training, moving into clerical and service positions instead of into finance and high tech. This cascade eliminates opportunities for those without college degrees who would otherwise fill those service and clerical jobs. These displaced workers are then forced to take even less demanding, less well-paying jobs, in a process that pushes everyone down. At the bottom, the unskilled are pushed out of the job market altogether.

What Size is Your ‘Nairu’ Jacket? -  Debating the natural rate of unemployment is a parlor game that only economists want to play. But the implications of the rate touches every paycheck-gatherer. The non-accelerating inflation rate of unemployment, Nairu, is the rate that indicates the economy is at full employment. Labor markets are in balance and wage growth does not contribute to price pressures. When the jobless rate falls below Nairu, labor-market tightness can lead to wages being bid up to attract needed workers. Businesses then raise their prices to cover the higher costs. In a March 31 speech, Federal Reserve chairwoman Janet Yellen said, “Most of my colleagues on the Federal Open Market Committee and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2% and 5.6%, well below the 6.7% rate in February.” Of course, that speech was made before the jobless rate took a surprising tumble to 6.3% in April and remained there in May. Economists now are debating whether the Fed has set its Nairu sights too low. And they point to two reports out Tuesday as proof. The first report was the small business survey done by the National Federation of Independent Business. 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. To attract needed workers (and keep the ones they have), 15% of business owners are planning to raise worker compensation. That share is also the highest in this recovery.

Can the Great Recession ever be repaired? - The US employment report on Friday was notable because it showed that the number of jobs in the American economy now exceeds the high point reached in January 2008 for the first time since the Great Recession. Another important signal that the economy is returning to normal, it might be claimed. But a period of more than six years with zero growth in jobs in the American economy is anything but normal. According to the Economic Policy Institute in Washington, the US would need to create an extra 6.9 million jobs before the labour market could really be said to be back to normal, in the sense that all those who want employment would be fully satisfied. The same point can be made about the path for real GDP in almost every developed economy since 2007. While several economies have now returned to their previous peak levels of output, very few have approached the previous long term trendlines which had been established for decades before that. For the developed economies as a whole, output remains about 12 per cent below these trendlines. The case for believing that the trendlines can indeed be re-attained is that this has always happened after recessions in the past, at least in the US, though it has sometimes taken many years, especially in the wake of financial crashes. A more pessimistic view is that the Great Recession has resulted in a permanent (or at least very long lasting) loss of economic capacity, in which case it would be inflationary to attempt to re-attain previous trendlines. On this view, the global economy has now locked on to a different path, with its effective capacity being much lower than previous trends might imply. The latest estimates of capacity published by the IMF and OECD, who should be able to do this sort of work better than most, clearly imply this (see graph above).

The two key numbers that shadow the jobs numbers -- The monthly jobs report is comprised of two numbers, calculated using two different methods. In May, the economy added an estimated 217,000 jobs and the unemployment rate stayed at 6.3 percent.  But you can't look at those job gains without looking at another number: population. Below is a graph of the number of people employed in the economy relative to January 2008 ("JOBS") with another set of data, the noninstitutional population of the country relative to the same month ("POPULATION"). That's the shadow. And it shows that job additions since 2010 have essentially kept pace with the growth of the number of people in that same time period. Likewise, you can't just look at the unemployment rate by itself. The unemployment rate is a simple fraction: the number of people employed divided by the number of people in the workforce. If a million people are in the workforce and 800,000 are employed, 80 percent of them are employed and the unemployment rate is 20 percent. Simple enough. But the size of the workforce fluctuates. People retire, people graduate from college, people go on disability, people just give up on finding work. (The Bureau of Labor Statistics goes into more detail.) So if the workforce suddenly drops to 900,000 in our previous example, eight out of nine people are working, instead of eight out of 10. The unemployment rate goes from 20 percent to 11 percent in a snap, with no one getting a job.

US Workers In The Prime 25-54 Age Group Are Still 2.6 Million Short Of Recovering Post-Crisis Job Losses -- Pundits may be trying to spin this Friday's jobs report as indicative of an ongoing recovery, emphasizing that as of May, all the jobs that were lost since December 2007 have now been recovered, or this chart... However the same pundits fail to mention is that while it took the Fed some $2.7 trillion in incremental liquidity to regain all the lost jobs (and concurrently push the S&P to absolutely ridiculous record numbers), at the same time the US population, which grew by 14.8 million since December 2007, has lost a record 12.8 million people form the labor force, which remains at an all time high 92 million! Further digging into the data, here are two other things you won't hear from the permabulls: while the May job gain of 217K was respectable, breaking down the jobs by age group as shown by the household survey, shows that not only did the majority of the jobs go to the lowest paying wages for yet another month, but for Americans in their prime working years, those aged 25-54, May was a month in which some 110K workers either lost their jobs, or were moved into the oldest, 55-69 age group. Furthermore, while the total number of jobs may have recovered its post December 2007 losses, for Americans aged 25-54, there is still a long, long time to go, with the prime US age group still over 2.6 million jobs short of recovering all of its post December-2007 losses.

41-Year-Olds and the Labor Force Participation Rate -  On Friday, Dean Baker wrote: The Question on People Leaving the Labor Force is 41-Year-Olds, Not 61-Year-Olds Actually, the story of people leaving the labor force is not primarily one of older workers who are near retirement age, it is primarily a story of prime age workers. ...  It is difficult to envision any obvious reason why people in their prime working years would suddenly decide that they did not want to work other than the weakness of the labor market. Most of these workers will presumably come back into the labor market if they see opportunities for employment.This brings up a few key points:
1) Analyzing and forecasting the labor force participation requires looking at a number of factors. Everyone is aware that there is a large cohort has moved into the 50 to 70 age group, and that that has pushing down the overall participation rate. Another large cohort has been moving into the 16 to 24 year old age group - and many in this cohort are staying in school.
2) But there are other long term trends. One of these trends is for a decline in the participation rate for prime working age men (25 to 54 years old).
3) Although Dr. Baker argues that the decline in prime working age workers is due to "weakness of the labor market", this decline was happening long before the Great Recession.
Lets take a look at Dean Bakers "41-Year-Olds". I used the BLS data on 40 to 44 year old men (only available Not Seasonally Adjusted since 1976). I choose men only to simplify. This graph shows the 40 to 44 year old men participation rate since 1976 (note the scale doesn't start at zero to better show the change).There is a clear downward trend, and a researcher looking at this trend in the year 2000 might have predicted the 40 to 44 year old men participation rate would about the level as today (see trend line).

Update: 41-Year-Olds and the Labor Force Participation Rate -  To make a few simple points on the Labor Force Participation Rate, yesterday I posted 41-Year-Olds and the Labor Force Participation Rate . In the previous post I only used men for each age group to simplify.  By request here is a look at the participation rate of women in the prime working age groups over time. Click on graph for larger image. The first graph shows the trends for each prime working age women 5-year age group. Note: This is a rolling 12 month average to remove noise (data is NSA), and the scale doesn't start at zero to show the change. For women, the participation rate increased significantly until the late 90s, and then started declining slowly. This is a more complicated story than for men, and that is why I used prime working age men only yesterday to show the gradual downward decline in participation that has been happening for decades (and is not just recent economic weakness). The second graph shows the same data for women but with the full scale (0% to 100%). The upward participation until the late 80s is very clear, and the decline since then has been gradual. The third graph is a repeat of the full scale graph for prime working age men. The participation rate has been trending down for decades. To repeat: The bottom line is that the participation rate was declining for prime working age workers before the recession, there are several reasons for this decline (not just recent "economic weakness") and many estimates of "missing workers" are probably way too high.

Most Missing Workers Are Nowhere Near Retirement Age -  In today’s weak labor market, there are around 6.0 million “missing workers”—potential workers who, because of weak job opportunities in the aftermath of the Great Recession, are neither employed nor actively seeking work. Some have suggested that many of these missing workers may be at or near retirement age and, in the face of weak job opportunities, have simply decided to retire earlier than they otherwise would have. While this would clearly indicate a huge waste of human potential and a serious indictment of macroeconomic policymakers that allowed economic weakness to linger on so long, it would also indicate that these workers are very unlikely to rejoin the labor force in coming years no matter how dramatically economic conditions improve. This would in turn mean that their absence is not in fact an indicator of current slack in the labor market. The figure below provides an age breakdown of the missing workforce. It shows that nearly three-quarters of missing workers are age 54 or younger, which means they are unlikely to be early retirees. Even if all of the missing workers age 55 and over will never reenter the labor force no matter how strong job opportunities get, that still leaves 4.4 million missing workers age 54 or younger who would be likely to re-enter the labor force when job opportunities strengthen. In other words, weak labor force participation rate remains a key component of total slack in the labor market.

Labor Force Participation for "Prime Age Workers"  -- Bill McBride has a great piece on labor force participation for "prime age workers".  This is referring to workers 25-54 years old.  There is some tradition in using this indicator.  But, the fact of the matter is that LFP rates for 25-29 and 45-54 year old workers is lower than it is for 30-44 year old workers.  All the lowest participation age groups within this set are unusually populated right now.  The decline in prime age worker LFP is still capturing a lot of demographic factors.  Breaking LFP out in 5 year baskets, all of these age groups generally follow long term trends, except for the 25-29 year old male category, which has an unusual decline of about 2% over the past decade.  So, we can debate what is happening with 20-somethings, but this just isn't a story about 41 year olds.  The thing is, the data to clarify this error is readily available.  There is no excuse for making this mistake. I think generally what is going on here is that the "prime age workers" category is a source of data that is seemingly credible but is currently providing a false signal for LFP pessimism.  Frankly, I think an article using "prime working age" to make pessimistic points about LFP mostly just informs the reader of two things.  (1) The author has a preconception that LFP has been especially bad and that the unemployment rate understates problems in the labor economy, and (2) the author hasn't taken some very basic disciplined steps to check their preconception.  I don't mean to be too harsh.  This is an example of how difficult analysis of the economy is.  We are all engaged in a battle against our own self-dealing misconceptions and lack of understanding.  If we're lucky, we might occasionally find a window into the chaos that gives us a slightly less misinformed viewpoint.

Labor force participation and the skills gap in America - Debate among economists around the drivers of declining labor force participation in the US has intensified. How much of the decline since the Great Recession is from the demographic effects of aging population and how much is due to disillusioned workers giving up on job searches and "dropping out" of the workforce? The answer is not obvious, since the participation rate has peaked around the year 2000 and had started declining years before the Great Recession. The answer to this question has significant implications for the Fed's monetary policy trajectory because it is a major determinant of the amount of slack in US labor markets. The decision on the timing of rate hikes will depend to a great extent on whether the labor market has become sufficiently tight to warrant wage pressures. And if companies can draw on a large pool of workers who had left the labor force, it will be a while before wage growth begins to accelerate. The best way to answer this question of demographic contribution to the decline in participation rate is to find a "control" country.Scotiabank's Derek Holt argues that Canada is indeed such a country. Canada's so-called population pyramid is very similar to the US. It turns out that the economic factors impacting participation in the US vary materially across population groups. Here is an illustration. The chart below shows labor force participation for workers with a bachelor's degree or higher that are 25 and older. The downward trend over the past 20 years exhibits only a minor impact of the Great Recession. This is mostly demographics - baby-boomers with a college degree retiring.

One In Six Americans With A Disability Held A Job Last Year -- Almost 12% of Americans over 16 years old have a disability. But the group accounts for only 3% of those who have a job, according to a new Labor Department report. In 2013, just over one in six — or 17.6% — of people who were disabled had a job, down slightly from the prior year. The report tracks workforce characteristics of people with a disability, which includes hearing, sight, cognition, mobility or other impairments. The number of Americans with a disability and over 16 years old increased slightly to 28.6 million. The unemployment rate for people with disabilities fell two-tenths of a percentage point to 13.2%, a figure that measures people who did not have a job and were looking for one. By comparison, 64% of Americans who did not have a disability had a job last year, up slightly from a year earlier, while the jobless rate was 7.1%. As of May, the unemployment rate had fallen to 6.3%, the Labor Department said last week. Workers with a disability were more likely to be self-employed or hold jobs in production and transportation than their counterparts. But they were less likely to work in management or professional occupations.

Why Do Coal Mining Jobs Matter So Much More Than Jobs Lost to Trade? - When President Obama announced plans to curtail the use of coal over the next fifteen years major news outlets like National Public Radio and The New York Times rushed to do pieces on the prospective loss of jobs in coal mining areas. There are a bit less than 80,000 workers directly employed in the coal industry. A large percentage of these jobs will be lost in the next fifteen years due to these regulations. While it is good to see the media paying attention to this job loss and its implications for families and communities, this concern is a striking departure from normal practice. This was demonstrated clearly last week when the Commerce Department reported a large jump in the trade deficit for April. The report, and the implied job loss, received almost no attention from the media. To remind folks who never suffered through an intro economics course or forgot their suffering, a trade deficit means that demand generated in the United States is going overseas. Money spent by businesses or consumers is going for goods and services produced in Europe, Mexico, and China rather than in United States. If the economy were near full employment this would not necessarily be a problem, but with millions of people still unemployed or underemployed, this lost demand is a big issue. A larger trade deficit has the same implication for the economy as a sudden cutback in consumer spending or business investment. It means less demand and fewer jobs.

An Employment Safety Net for Youth -- Pavlina Tcherneva participated in a conference on youth unemployment at Middlebury College and shared her ideas for a youth employment safety net (beginning at 38:45):

The Mental-Health Consequences of Unemployment -- “Your whole life your job defines who you are,” Yundra Thomas told The New York Times  “All of the sudden that’s gone, and you don’t know what to take pride in anymore.” Unemployment is commonly understood as an economic problem, and inquiries into its nature tend to come from that perspective. Why do people struggle to find work even when jobs are available? What are the job prospects for those who have been unemployed for a long time? What policies, if anything, can Washington enact to help? But, as Thomas is saying, unemployment often exacts a toll that goes beyond economic concerns to psychological ones. Humans, after all, are not robots, and the loss of a job is not merely the loss of a paycheck but the loss of a routine, security, and connection to other people.  A new poll from Gallup attempts to gauge the consequences of those losses and finds that "unemployed Americans are more than twice as likely as those with full-time jobs to say they currently have or are being treated for depression—12.4 percent vs. 5.6 percent, respectively." Moreover, for those who have been unemployed for 27 weeks or more (the "long-term unemployed," currently numbering 3.4 million people), the depression rate is 18 percent, nearly one in five.

Real Earnings of Private Employees Declined Again in May: The government has been tracking the data for Production and Nonsupervisory Employees for decades. But coverage of Total Private Employees only dates from March 2006. Let's examine the broader series, which goes back far enough to show the trend since before the Great Recession. I want to look closely at a five-snapshot sequence. First, here is a chart of the Average Hourly Earnings. I've included a linear regression through the data to highlight the trend. Hourly earnings increased at a faster pace through 2008, but the pace slowed from early 2009 onward.But the hourly earnings above are nominal (not adjusted for inflation). Let's look at the same data adjusted for inflation using the Consumer Price Index. Since the government series above is seasonally adjusted, I've used the seasonally adjusted CPI, and I've chained the series to the dollar value of the latest month of hourly wages so that the numbers reflect the purchasing power in today's dollars. As we see, the difference is amazing. The decline in real wages at the onset of the recession accords with our expectations. But why the rise in the middle of the recession when the Financial Crisis began unfolding in earnest? Let's add another data series to the mix: Average Hours per Week. About eight months into the recession, hours per week began to fall. The number bottomed a few months before the recession ended and then began increasing a few months after it ended.

"Luddite" Larry and the Downward Ramp of Opportunity  "...unless one regards envy as a virtue," writes Lawrence H. Summers in a column at the Financial Times, "the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much.". Summers argues that the policy impacts which matter most have more to do with health and opportunity for children than with income or wealth inequality. The subheading of his column is "The differences between the rich and everyone else are about health and opportunity." Along the way, though, he quietly substitutes educational achievement for opportunity and concludes: It would be a tragedy if this new focus on inequality and on great fortunes diverted attention from the most fundamental tasks of any democratic society – supporting the health and education of all its citizens.Who could be against health or education? Than depends. Is educational achievement really the same as opportunity for children? Not according to research highlighted by Thomas Edsall in an Op-Ed, The Downward Ramp, at the NYT: ..evidence demonstrates that the collapse, between 1980 and 2000, of mid-level, mid-pay jobs — gutted by automation or foreign competition (and often both) — has now spread to the high-skill labor market.   The U-shaped pattern of job growth characteristic of recent decades – strong at the top and bottom, but weak throughout the middle — has now become “a bit more like a downward ramp,” according to David Autor, an economist at M.I.T. who documented the decline in mid-level jobs in the 1980s and 1990s.

CEO pay up by 937% since 1978. That of the typical worker? 10.2%  -- CEO compensation has increased by 937 percent over the last three decades, according to a new study. The rise compares with a dismal 10.2 percent hike for the average U.S. worker over the same time frame, putting into stark contrast the relative fortunes of the superrich and everyday employees in an increasingly economically divided America. The report, released by the Economic Policy Institute on Thursday, found that average CEO compensation, which includes stock bonuses, was $15.2 million in 2013, up 2.8 percent from 2012 and 21.7 percent since 2010. That increase follows a trend since 1978 of CEO pay outpacing other economic growth factors. EPI says the 937 percent rise in pay is more than double the rate that the stock market grew in the same years. The mismatched pace between CEOs and the typical worker means that CEOs earned on average $295 for every dollar their employees earned in 2013. The report is based on an analysis of a database of CEO pay for the largest 350 public companies in the U.S. from 1978 to 2013.

The Supposed Decade of Flat Wages Was Worse Than We Thought - It’s well known that the wages of US workers have become disconnected from productivity growth, with real wages growing much more slowly than advances in productivity over the last several decades. This is a key part of the story of widening income inequality.But these observed trends actually understate the degree to which working people have been left behind. New research reveals that the US economy is doing a worse job passing on productivity gains to workers than the wage growth (or even stagnation) numbers suggest.The Levy Institute’s Fernando Rios-Avila and the Atlanta Fed’s Julie Hotchkiss looked back to 1994 and tried to see what proportion of real wage growth since then can be accounted for by key changes in the demographic profile of the labor force: principally, the fact that the average worker has become older (i.e., more experienced) and more educated. What they found is that over 90 percent of real wage growth between 1994 and 2013 was due to demographic shifts. And the 2002–13 period, commonly referred to as the decade of flat wages, is more accurately described as “a decade of declining real wages within age/education worker profiles.” If we control for demographics, wages are back to where they were in 1998. That’s what you’re seeing in the red line below:

Goldman Sachs CEO: "Income Inequality Is A Very Destabilizing Thing In The Country" -- The CEO of Goldman Sachs thinks the economy isn’t doing enough to benefit those at the lowest end of the income spectrum. Lloyd Blankfein, in an interview with CBS, said that income inequality is “destabilizing” and “responsible for the divisions in the country.” Calling it a “very big issue … that has to be dealt with,” Blankfein said that whether or not the economy grows faster, “too much of the GDP over the last generation has gone to too few of the people.” Blankfein himself is firmly a beneficiary of one of the drivers of the yawning gap between the richest and everyone else: high executive compensation. Blankfein earned $23 million for his service as Goldman’s CEO and chairman in 2013, making him the highest paid chief executive at any U.S. megabank. In a securities filing, the compensation committee of Goldman’s board said that Blankfein “continued to demonstrate impressive leadership,” and “successfully navigated the competitive landscape this past year, driving our commercial performance.”

How Demographic Changes Could Boost Americans’ Wages - A big demographic shift could finally deliver income growth that U.S. workers have been waiting for. The U.S. labor pool, defined as residents between ages 20 and 64, is growing at a slower pace this year, and will soon increase just 25% as fast as it has historically,  The upshot is that, as the pool shrinks, employers are “finally going to have to compete for talent, and that will ultimately result in household incomes that are finally going to rise,” he says. For the last 30 years, the U.S. has added around 1.8 million eligible workers to the labor pool each year, with around 4.3 million new entrants from those turning 20 years old and around 2.5 million exiting as they turn 65. But in 2012, the labor pool grew by just 900,000, as the number of retirees jumped and unemployment began to fall. And over the next decade, that growth will slow further, to a paltry 200,000 by 2022, estimates Mr. Porter. So far, the decline in unemployment has done little for wage growth when compared to past recoveries. Since the recession, wage growth is running a little higher than 2% a year, which is low by historical measures. What ultimately happens to the millions of Americans who want full-time work but gave up looking or are in part-time jobs is the subject of intense debate. Some bullish forecasters have argued that the unemployment rate, which stood at 6.3% in May, overstates the supply of available workers because many of these are long-term unemployed who aren’t competing at the same level as the short-term unemployed. A more bearish view says these long-term unemployed workers would come back to the market if labor-market conditions are tighter, putting downward pressure on wages

Minimum Wage: Who Makes It? - Minimum-wage increases could appear on the ballot in as many as 34 states this year. President Obama has also proposed increasing the federal minimum wage to $10.10, from $7.25. Who makes the minimum wage, and who would be affected by any of the proposed increases? All the statistics here apply to those who would be affected by the proposed increase to raise the federal minimum wage from $7.25 to $10.10. The analysis also includes a number of workers making slightly above $10.10, who, history suggests, would receive a raise if the minimum wage were increased. Their average age is 35, and 88 percent are at least 20 years old. Half are older than 30, and about a third are at least 40. These patterns are somewhat new. In 1979, 27 percent of low-wage workers (those making $10.10 per hour or less in today’s dollars) were teenagers, compared with 12 percent in 2013. Most — 54 percent — work full-time schedules (at least 35 hours per week), and another 32 percent work at least half time (20-34 hours per week). Many have kids. About one-quarter (27 percent) of these low-wage workers are parents, compared with 34 percent of all workers. In all, 19 percent of children in the United States have a parent who would benefit from the increase. One in eight lives in a high-income household. About 12 percent of those who would gain from an increase to $10.10 live in households with incomes above $100,000. This group highlights the fact that the minimum wage is not nearly as well targeted toward poverty reduction as the earned-income tax credit, a wage subsidy whose receipt, unlike the minimum wage, is predicated on family income. Still, a minimum-wage increase does much more to help low- and moderate-income households than any other groups. Households that make less than $20,000 receive 5 percent of the nation’s total earnings, for instance — but would receive 26 percent of the benefit from the proposed minimum-wage increase.

Who Benefits From Increasing the Minimum Wage? - Jared Bernstein - Over at the NYT’s Upshot section, with a cool graphic showing the progressivity of the policy.  The figure, which I haven’t seen elsewhere in this debate–and it’s a debate that’s been going on forever, so coming up with a new graphic that says something ain’t easy–shows economy-wide wage shares plotted against the shares of who benefits from the proposed increase to $10.10 (in three annual steps, and then indexed to inflation).EG, summing the first two bars, households with incomes below $40K claim 18% of total earnings, but 55% of the benefits from the proposed increase.  As noted in the piece, no question that some of the benefits of the increase reach high-income households–11% goes to those with incomes>$100K.  That’s because, unlike safety net programs, receipt of the the minimum wage is not conditioned on income.  And that, in turn, as Heidi Shierholz and I argue in a forthcoming piece, is because it is a labor standard, deemed to be an important and necessary part of the landscape of labor markets in advanced economies across the globe. Labor markets, like the broader economies in which they exist, are social and political constructs.  They operate as much by laws, rules, and standards as by supply and demand.  Laws against child labor, discrimination, overtime without extra pay, wage theft, and more are examples of hard fought standards that most Americans today recognize as integral to the functioning of labor markets.

Vermont Pushes Minimum Wage to New Highs - Vermont became the first state to approve a minimum wage above President Barack Obama’s $10.10 an hour goal, potentially creating a series of oneupmanship that could elevate wage floors in pockets of the country. Gov. Peter Shumlin, a Democrat, on Monday signed a law that would lift the minimum wage in the Green Mountain State to $10.50 an hour by 2018 from $8.73 an hour. That tops Connecticut, Hawaii and Maryland, which earlier this year passed eventual increases to $10.10 an hour. The federal level is $7.25 an hour.  Vermont and Connecticut could be emblematic of an emerging trend: states with already strong minimum wage laws lifting the pay floor even higher. Connecticut’s minimum wage was $8.25 an hour before lawmakers voted for an increase. The New York state assembly passed a gradual minimum wage increase to $9 an hour just last year, but earlier this month Gov. Andrew Cuomo threw his support behind an effort to raise the state’s rate to $10.10 and allow New York City to set an even higher wage. California is in the middle of phasing in a minimum wage increase to $10 an hour. But already Golden State legislators are pushing a $13 an hour wage. San Francisco and San Jose mandate pay above $10.10 an hour.  Washington has the highest current state minimum wage in the country at $9.32 an hour, and since it’s indexed to inflation the level will likely top $10 by 2018. Still, the state’s largest city, Seattle, just approved an eventual increase to $15 an hour.

Cities are passing higher minimum wages – and leaving the suburbs further behind - Last week, Seattle's city council voted to raise the local minimum wage to an unprecedented $15 an hour, more than twice the federal wage threshold and well above the next most generous cities in America. That rate, which will be phased in over seven years for the smallest businesses, currently tops $10.74 in San Francisco, $10.66 in Santa Fe, N.M., and $10.15 in San Jose. It's significantly higher than the $11.50 wage planned for the District, and the $13.09 hoped for in San Diego. In the rush to measure these cities against each other, though, a more relevant comparison often gets left behind: Nearly all of these cities has hiked or plans to hike the minimum wage well above the suburbs right next door. "Seattle is a particularly interesting example in that the city is moving pretty quickly to pay what is going to be a significantly – significantly -- higher minimum wage to its workers than will be the case in surrounding King County," says Alan Berube, a senior fellow with the Brookings Institution Metropolitan Policy Program. "It’s opened up about a 60 percent difference between itself and the state of Washington minimum wage." And Washington has the highest state minimum wage in the country. By Berube's calculation with colleague Sid Kulkarni, there are actually more low-wage jobs currently paying less than $15 in King County suburbs outside of Seattle than inside of the city itself. And many of the workers who will benefit from the new wage in Seattle -- 40 percent of them according to a University of Washington analysis -- actually live outside of the city.

33 U.S. Cities Have Restricted Feeding The Homeless In Past Year Alone: Report - When the National Coalition for the Homeless (NCH) began publishing which American cities have restricted publicly feeding homeless people, it believed the reports would be a source of humiliation for those communities and their leaders. But that hasn't been the case. "We published the report in the hope that it would embarrass the cities," Michael Stoops, director of community organizing at NCH, told Vice News. "But they just keep doing it." Not only are those cities unashamed, they seem to be setting something of a national precedent.  Vice News obtained NCH's third and latest report, which is set to be published later this month. The outlet reports that, incredibly, at least 33 municipal bans on publicly handing out free food have been enacted across the U.S. between January 2013 and April 2014, reflecting a sharp increase in communities with such restrictions.  That troubling number is likely less surprising to anyone whose been following the issue of food sharing at a national level. Many cities have been actively stepping up their fights -- not against homelessness, but against homeless people. This past February, Columbia, S.C., began requiring groups of 25 people or more to purchase permits allowing them to utilize the city's parks, making it considerably more difficult for a local chapter of Food Not Bombs to pass out meals to the hungry. Last month, a retired Florida couple was fined $700 and threatened with jail time for feeding hot meals to the homeless in Daytona Beach. After the news gained national attention and outrage, police dropped all charges.

The Three Biggest Right-Wing Lies About Poverty - Robert Reich -They’re peddling three big lies about poverty. To wit:

  • Lie #1: Economic growth reduces poverty. Wrong. Since the late 1970s, the economy has grown 147 percent per capita but almost nothing has trickled down. The typical American worker is earning just about what he or she earned three decades ago, adjusted for inflation. Meanwhile, the share of Americans in poverty remains around 15 percent. That’s even higher than it was in the early 1970s.
  • Lie #2: Jobs reduce poverty. Surely it’s better to be poor and working than to be poor and unemployed. Evidence suggests jobs are crucial not only to economic well-being but also to self-esteem. Long-term unemployment can even shorten life expectancy. But simply having a job is no bulwark against poverty. In fact, across America the ranks of the working poor have been growing. Around one-fourth of all American workers are now in jobs paying below what a full-time, full-year worker needs in order to live above the federally defined poverty line for a family of four.
  • Lie #3: Ambition cures poverty. Most Republicans, unlike Democrats and independents, believe people are poor mainly because of a lack of effort, according to a Pew Research Center/USA Today survey.   But there’s no evidence that people who are poor are less ambitious than anyone else. In fact, many work long hours at backbreaking jobs. What they really lack is opportunity. It begins with lousy schools. America is one of only three advanced countries that spends less on the education of poorer children than richer ones, according to a study by the Organization for Economic Cooperation and Development.

For poverty solutions, looking beyond Congress = Just a few blocks from the capital, academics, activists and policymakers will gather for Inequality Begins at Birth: Child Poverty in America, where they will discuss the causes and conditions of poverty and highlight tried solutions for sustainably reducing the U.S. poverty rate. Today, 46.5 million people in the United States live in poverty, more than a third of them children. The U.S. child poverty rate, at 22 percent, is the highest of any rich country. The seemingly incurable inertia with which Congress regards poverty makes it seem like a creeping and intractable problem to which there is no solution. Participants at the Inequality Begins at Birth conference — co-hosted by the Roosevelt Institute, the Century Foundation and the Academic Pediatric Association (APA) — will discuss the complex drivers and outcomes of poverty: the impact of toxic stress on young children; the challenges facing single and working mothers; the need for paid sick and family leave policies; and the importance of safety net programs for poor children. A number of panelists will speak about their own experiences with poverty — a perspective the Ryan hearings have woefully neglected.

Personal Income Tax Revenues Show Significant Softening in Q4 2013, Decline in Q1 2014  - For two consecutive quarters, state income tax revenues have disappointed. And in the first quarter of 2014, state income tax revenue actually declined. The Nelson A. Rockefeller Institute reports Personal Income Tax Revenues Show Significant Softening in the Fourth Quarter of 2013Total state tax collections have grown in each quarter of the last four years. However, growth softened significantly in the third and fourth quarters of 2013. Early figures for the first quarter of 2014 indicate even further softening in state tax collections, and possible declines in personal income tax collections.  Officials in many states have been facing extraordinary challenges in forecasting income taxes due to uncertainties related to capital gains, which can have a large impact on estimated taxes paid in December and January, and on payments with tax returns filed in April. The uncertainty has been heightened this year due to the strong performance of the stock market in 2013 and the un- intended consequences of the fiscal cliff. Calendar year 2013 ended up being a remarkable year for the stock market, gaining 19 percent as measured by the S&P 500 Index, creating a favorable environment for capital gains. On the other hand, for reasons discussed within, many taxpayers appear to have accelerated income from calendar year 2013 to calendar year 2012 to avoid higher federal tax rates, likely creating a “trough” in capital gains in 2013. This creates great uncertainty for states: Was the stock market strong enough to more than offset the “trough” effect related to the fiscal cliff, so that capital gains would be strong in 2013, or would the latter effect dominate, resulting in a large decline in capital gains?

That Was Then, This is Now -  Kunstler - I was in Buffalo, New York, over the weekend at the annual conclave of New Urbanists — a movement started in the 1990s to rescue American towns and cities. The scale of desolation of that city is not as spectacular or vast as Detroit’s, but the visible symptoms of the illness are the same. One of the events was a bicycle tour of Buffalo’s neglected East Side, where maybe 80 percent of the houses are gone and the few that remain stand amid spring wildflower meadows and the human density per acre appears too low even for successful drug-selling. There were zero signs of commerce there block after block, not even a place to buy potato chips. So, as it works out, the few remaining denizens of this place must spend half their waking hours journeying to a food store. How they make that journey is hard to tell. There were almost no cars anywhere nor buses to be seen. At one edge of the East Side neighborhood stood the hulking, gigantic remnants of the Larkin soap company, a haunted brick behemoth plangent with silence, ailanthus trees sprouting from the parapets and birds nesting in the gigantic, rusted ventilation fans. . At its height of success a hundred years ago, the Larkin Company provided a stupendous bounty of social support services for its 4,500 employees: a dental office at nominal prices, dedicated rooms at local hospitals, an on-premises branch of the city library, subsidized night school classes, gyms, lounges, sports clubs, a credit union, insurance plans, and more. A hundred years ago, Buffalo was widely regarded as the city of the future. The boon of electrification made it the Silicon Valley of its day. It was among the top ten US cities in population and wealth. It’s steel industry was second to Pittsburgh and for a while it was second to Detroit in cars. Now, nobody seems to know what Buffalo might become, if anything. It will be especially interesting when the suburban matrix around it enters its own inevitable cycle of abandonment.

Infrastructure Sticker Shock: Financing Costs More than Construction -- A general rule for government bonds is that they double the cost of projects, once interest has been paid. The San Francisco Bay Bridge earthquake retrofit was originally slated to cost $6.3 billion, but that was just for salaries and physical materials. With interest and fees, the cost to taxpayers and toll-payers will be over $12 billion.  The bullet train from San Francisco to Los Angeles, another pet project of Jerry Brown and his administration, involves a bond issue approved in 2008 for $10 billion. But when interest and fees are added, $19.5 billion will have to be paid back on this bond, doubling the cost. And those heavy charges pale in comparison to the financing of “capital appreciation bonds.” As with the “no interest” loans that became notorious in the subprime mortgage crisis, the borrower pays only the principal for the first few years. But interest continues to compound; and after several decades, it can amount to ten times principal or more.San Diego County taxpayers will pay $1 billion after 40 years for $105 million raised for the Poway Unified School District.

California Turns to Private Prison to Address Overcrowding and Medical Care: To address overcrowding and inadequate medical care, California is once again turning to private prisons. This time, however, the California Department of Corrections and Rehabilitation (CDCR) is planning to send women to a privately run prison. In April, California contracted with GEO Group to open a 260-bed women's prison in Bakersfield. The prison is scheduled to open in fall 2014, with the contract effective through June 30, 2018. The contract includes an opportunity for GEO Group to expand its prison by another 260 beds, which would increase the overall four-year revenue for the prison from $38,132,640 to $66,394,276. Unlike contracts for other privately-run prisons, this agreement does not include a lock-up quota.. Instead, CDCR will pay for actual occupancy - $94.50 per person per day for each of the first 260 women sent to GEO Group's McFarland Female Community Reentry facility. If the prison takes in more than 260 women, CDCR will pay $86.95 per day for each woman, i.e. the contract does provide CDRC with incentive to turn more women over to the prison. " Women who are classified as minimum or medium custody and have 60 months or less of their sentence to serve will be eligible for transfer to the new prison once it opens. Those who have active or potential ICE holds, have convictions for violent felonies or who have served SHU (solitary confinement) terms within the last six months are ineligible.

Mother Of Seven Dies in Jail While Serving Sentence For The Truancy Of Her Children -We have previously discussed the move in some states to jail parents of truant children. It is part of the criminalization of America where pet peeves of politicians are ramped up to criminal offenses to make a point. Now, Eileen DiNino, 55, of Reading, Pennsylvania has died while serving one of these ridiculous sentences. The mother of seven died in jail after serving half of her 48-hour sentence. The 48-hour sentence was in lieu of a $2,000 — a choice that many impoverished parents have to make.   District Judge Dean R. Patton is quoted as asking “Did something happen? Was she scared to death?” He described DiNino as “a lost soul.”  Perhaps not quite as lost as when she was sent to jail for her kids not attending school regularly. The law is another example of how politicians are criminalizing every type of social ill to demonstrate their commitment to an area like education. Little thought is given to how such sentences only worsen the situation in families that already have serious problems. Jail increasingly seems the answer to every social failure for politicians. It not only magnifies the problems in these families but gives these parents criminal records.

NJ dad says state is threatening to take away son after pencil twirling incident – A 13-year-old boy was the most famous kid in school for a few weeks. A simple pencil-twirling incident landed Ethan Chaplin in hot water with his school, which threatened to suspend him after a classmate claimed he was spinning the writing utensil like a gun. After media attention from PIX11 and around the world, school officials backed off — but child protection agencies did not. Letters to Ethan’s father, Michael, show the school found his son did nothing wrong at all, and that there would be no disciplinary action. The superintendent was even confident the issue would be behind all of them. And that’s exactly what happened, until Ethan’s father received startling communication from New Jersey’s Department of Child Protection and Permanency and Department of Children and Families. “I received a letter from them saying they had found an incident of abuse or neglect regarding Ethan because I refused to take him for psychological evaluation,” Michael said. In an effort to play along and clear his name, Michael agreed to take his son for an evaluation. Ethan was seen by a social worker, and had his blood drawn and urine taken.  In the end, no behavioral problem was found. The state, it seems, is ignoring that set of testing, demanding further evaluation and threatening that if Michael doesn’t comply, they are will terminate his parental rights and free Ethan up for adoption.

Teachers and Tutors Can't Fix All of Low-Income Students' Problems -- I faced a stark contrast to my own experience when I worked with Achieve, a program that offers tuition-free educational enrichment to impoverished students in Boston. I taught critical math skills and literacy comprehension for eight weeks during the summer, and volunteered on Saturdays during the school year. Over the three years I spent with Achieve, I developed intimate and meaningful relationships with my students; but I felt that my impact, even the impact of the entire program, was severely limited. These students did not have the same tools I did to succeed in the classroom. As a teacher, it was excruciatingly painful to hear a student who is already falling behind explain he could not do his homework because his mom could not pay the bills and the electric company shut off the power. It kills me to tell a student to take notes in class only to find out later that her parents can't afford the prescription glasses she needs to see the board and take those notes. I was expecting these kids to read when some of them could not even see. Our government claims each citizen maintains the right to an education, but fails to substantiate this right with everything needed for an education. The social safety net did not subsidize electricity for low-income families, and Medicaid doesn't cover prescription eyewear. How could these students possibly reach their full potential under such circumstances? I could see the changes needed to better these students’ lives, but I could not enact them. Our political system remains apathetic or even complicit to the systemic inequality I faced everyday in the classroom. I cared about these students and their success, and it deeply disturbed me to see them seemingly destined for failure because of conditions out of their control.

The damage of poverty is visible as early as kindergarten - A big part of the American Dream is being able to climb the ladder and land higher than your parents. But that climb starts when people are just small children, according to new research, and getting off on the wrong foot has lifelong consequences. In a new article in the spring issue of the Princeton University journal The Future of Children (and highlighted by the Brookings social mobility blog), researchers show that poverty is directly correlated to kindergarten performance. Children who live in poverty have far lower performance than their richer peers across a variety of measures, and those who live in near poverty in turn have dramatically worse performance than middle-class peers. The poorest kids, for example, are less than one-third as likely as middle-class kids to recognize letters.

'Cool' kids at school are more likely to be criminals in later life -- Kids who are considered "cool" at a young age are more likely to have issues with alcohol and substance abuse, and difficulty maintaining intimate relationships in later life. Kids who showed a focus on "physical appearance when choosing friends", engaged in minor delinquent behaviour and were romantically involved at a young age, were also more likely to engage in criminal behaviour later in life. That's according to a new study into the long-term impact of so-called "pseudomature behaviour", or imitating seemingly adult behaviour, in young adolescents. Instead of being part of the rough and tumble of childhood, the study's authors argue "pseudomature behaviour may not simply predict future problems, but may also predict the development of more serious adjustment problems over long periods of time".

School officials meet again with Council members on funds - With time ticking away to solve the School District of Philadelphia's latest budget crisis, district officials went to a skeptical City Council Wednesday with a new last-minute plea for funding. "We are asking for every dollar we can possibly get." Specifically, the district asked the city to borrow $55 million for the schools and allow the district to keep the proceeds from the sale of 27 shuttered school buildings. The district needs some of that money for the current fiscal year, which ends June 30, and wants to carry over the rest to apply toward next year's projected $216 million shortfall. Borrowing money has been on the table since last year, when Council balked at the idea and came up with its own plan: Give the district $50 million in exchange for empty buildings, which could be sold to pay back the city. Mayor Nutter signed a bill authorizing that approach, but the administration and the district shrugged off the plan. Bryan said the district was now asking to borrow money as well as keep the proceeds of the building sales because of a "desperate fiscal situation" that could lead to 800 teacher layoffs and 40 students per class.

U.S. Food Policy: Schools really can serve healthy meals: For a child, eating a piece of fruit is not some big challenge like climbing Mount Everest. It is realistic for us to expect school meals programs to meet the modest sensible new standards. All over the world, children are capable of eating the basic amounts of fruits and vegetables that are served under the new standards. Throughout longer-term U.S. history, I imagine children have eaten meals with these amounts. It is the recent history of fast food meals in school that are the aberration. In a transitional year, it is not surprising to see some reports of increased plate waste. Everybody recognizes that plate waste may go up for new menu items, and then come down again as children become accustomed to them. In this week's Congressional struggle over child nutrition programs, some folks describe the new rules in terms of a food police state run amok. This is not fair. In contrast with government restrictions on, say, advertising practices targeting adults, what we serve in schools has nothing to do with police power. Taxpayers and parents are entrusting schools with several billion dollars each year, in return for feeding our children. Surely the adults who receive these funds for this task can serve reasonably healthy meals.

An Opportunity to Survive: Someone Has Made A Bulletproof Blanket For Your Kids Because This Is What We've Come To - An Oklahoma podiatrist has designed the Bodyguard Blanket, a bulletproof pad offering "an extra layer of protection" against "90% of all weapons that have been used in school shootings in the United States." In their soft-focus, schmaltzy-music-festooned video, kids romp on "just an ordinary day" until - dark music for "when seconds count" - they dutifully strap on their blankets and hunch on the floor under some capitalist's wet dream of a money-making scheme because that's all the kids will have thanks to gutless politicians who've failed to do anything else to protect them against our national lunacy, and alas no this is not The Onion. Update: Hey, look, another school shooting, this time in Oregon. Money to be made. Update 2: According to Everytown For Gun Safety, today's was the 74th school shooting since Sandy Hook. We can't think of any jokes to make about this.

How Bill Gates pulled off the swift Common Core revolution - The Bill and Melinda Gates Foundation didn’t just bankroll the development of what became known as the Common Core State Standards. With more than $200 million, the foundation also built political support across the country, persuading state governments to make systemic and costly changes. Bill Gates was de facto organizer, providing the money and structure for states to work together on common standards in a way that avoided the usual collision between states’ rights and national interests that had undercut every previous effort, dating from the Eisenhower administration. The Gates Foundation spread money across the political spectrum, to entities including the big teachers unions, the American Federation of Teachers and the National Education Association, and business organizations such as the U.S. Chamber of Commerce — groups that have clashed in the past but became vocal backers of the standards. Money flowed to policy groups on the right and left, funding research by scholars of varying political persuasions who promoted the idea of common standards. Liberals at the Center for American Progress and conservatives affiliated with the American Legislative Exchange Council who routinely disagree on nearly every issue accepted Gates money and found common ground on the Common Core.

Judge Rejects Teacher Tenure for California - A California judge ruled Tuesday that teacher tenure laws deprived students of their right to an education under the State Constitution and violated their civil rights. The decision hands teachers’ unions a major defeat in a landmark case, one that could radically alter how California teachers are hired and fired and prompt challenges to tenure laws in other states. “Substantial evidence presented makes it clear to this court that the challenged statutes disproportionately affect poor and/or minority students,” Judge Rolf M. Treu of Los Angeles Superior Court wrote in the ruling. “The evidence is compelling. Indeed, it shocks the conscience.” The decision, which was enthusiastically endorsed by Education Secretary Arne Duncan, brings a close to the first chapter of the case, Vergara v. California, in which a group of student plaintiffs backed by a Silicon Valley millionaire argued that state tenure laws had deprived them of a decent education by leaving bad teachers in place. Both sides expect the case to generate more like it in cities and states around the country. David Welch, a Silicon Valley technology magnate, spent several million dollars to create the organization that brought the Vergara case to court — Students Matter — and paid for a team of high-profile lawyers, including Theodore J. Boutrous Jr., who helped win a Supreme Court decision striking down California’s same-sex marriage ban. While the next move is still unclear, the group is considering filing lawsuits in New York, Connecticut, Maryland, Oregon, New Mexico, Idaho and Kansas as well as other states with powerful unions where legislatures have defeated attempts to change teacher tenure laws. The teachers’ unions said Tuesday that they planned to appeal. A spokesman for the state’s attorney general, Kamala D. Harris, said she was reviewing the ruling with Gov. Jerry Brown and state education officials before making a decision on any plans for an appeal.

Trafficked Teachers: Neoliberalism’s Latest Labor Source - Between 2007 and 2009, 350 Filipino teachers arrived in Louisiana, excited for the opportunity to teach math and science in public schools throughout the state. They’d been recruited through a company called Universal Placement International Inc., which professes on its website to “successfully place teachers in different schools thru out [sic] the United States.” As a lawsuit later revealed, however, their journey through the American public school system was fraught with abuse.  According to court documents, Lourdes Navarro, chief recruiter and head of Universal Placement, made applicants pay a whopping $12,550 in interview and “processing fees” before they’d even left the Philippines. But the exploitation didn’t stop there. After the teachers landed in LAX, they were required to sign contracts paying back 10 percent of their first and second years’’ salaries; those who refused were threatened with instant deportation. “We were herded into a path, a slowly constricting path,” said Ingrid Cruz, one of the teachers, during the trial, “where the moment you feel the suspicion that something is not right, you're already way past the point of no return."  Similar horror stories have abounded across the country for years. Starting in 2001, the private contractor Omni Consortium promised 273 Filipino teachers jobs within the Houston, Texas school district—in reality, there were only 100 spots open. Once they arrived, the teachers were crammed into groups of 10 to 15 in unfinished housing properties. Omni Consortium kept all their documents, did not allow them their own transportation, and threatened them with deportation if they complained about their unemployment status or looked for another job.

Texas teachers to see increase in health care costs - Health care costs for nearly 270,000 Texas teachers and other public school employees will go up this fall, a critical development that will result in a de facto pay cut, educator groups say. On Friday, the Teacher Retirement System of Texas agreed to increase the monthly health care premium costs for all members. Depending on what level of care members are enrolled in, most will see increases between 4 and 8 percent. For example, school employees enrolled in the most popular tier, called TRS-ActiveCare2, that covers themselves and their spouse will see a 7 percent increase in their monthly contribution, from $1,203 to $1,287. “These increases amount to pay cuts,” said Clay Robison of the Texas State Teachers Association, who said a $1200 a month health care bill for a teacher could amount to one-quarter of his or her salary. “It really has become a burden for some of these teachers.”

How Medicaid lowers high school dropout rates and leads to more college grads --We often talk about the first-order benefits of health care, the wounds treated or diseases caught when families and children have the luxury of visiting a doctor. Many of the second- and third-order benefits are harder to see, whether they take the form of money not spent treating illness, or lifestyles that are possible when people aren't sick. Give people access to health care, in short, and a lot of other things become possible, too. For instance: Children are better able to learn. Education policymakers and teachers regularly argue this. But researchers at Cornell and Harvard have found particularly convincing evidence that it's true.  In a National Bureau of Economic Research working paper, they found that the expansion of public health care to many more children in the 1980s and 1990s produced long-term educational benefits. Evidence across states that rolled out more generous programs at different times suggests that expanded access to public health care led to lower high school dropout rates, increased college attendance and more bachelor's degrees. The effects were large and consistent across the country. And they bolster both the underlying idea that health is an important input to education, and the policy argument that investments in public health care yield cascading benefits. Specifically, the researchers found that a 10 percentage point increase in Medicaid eligibility among children in a state translated into a 5.2 percent decline in high school dropouts (among all students), a 1.1 percent increase in college attendance, and a 3.2 percent increase in students completing bachelor's degrees.

The Case for Banning Laptops in the Classroom -  A colleague of mine in the department of computer science at Dartmouth recently sent an e-mail to all of us on the faculty. The subject line read: “Ban computers in the classroom?” The note that followed was one sentence long: “I finally saw the light today and propose we ban the use of laptops in class.” While the sentiment in my colleague’s e-mail was familiar, the source was surprising: it came from someone teaching a programming class, where computers are absolutely integral to learning and teaching. Surprise turned to something approaching shock when, in successive e-mails, I saw that his opinion was shared by many others in the department. Over time, a wealth of studies on students’ use of computers in the classroom has accumulated to support this intuition. Among the most famous is a landmark Cornell University study from 2003 called “The Laptop and the Lecture,” wherein half of a class was allowed unfettered access to their computers during a lecture while the other half was asked to keep their laptops closed.The experiment showed that, regardless of the kind or duration of the computer use, the disconnected students performed better on a post-lecture quiz. The message of the study aligns pretty well with the evidence that multitasking degrades task performance across the board.

University Presidents Are Laughing All the Way to the Bank While the People Who Work for Them Are on Food Stamps - A report just issued by the Institute for Policy Studies―The One Percent at State U― finds that the 25 highest-paid presidents increased their income by a third between fiscal 2009 and fiscal 2012, bringing their average total compensation to nearly a million dollars each. Also, the number of these chief executives earning over a million dollars in 2012 more than doubled over the previous year. In 2013, the best-paid among them was E. Gordon Gee of Ohio State University, who raked in $6,057,615 from this employment.  The lucrative nature of these positions appears to have had little to do with the intellectual distinction of the universities. For example, in 2013 the second most lavishly-rewarded public university president (paid $1,636,274) headed up Texas A&M University at College Station and the eighth (paid $1,072,121) headed up the University of South Alabama, two institutions that are not usually considered the acme of intellectual achievement. By contrast, the presidents of some of the nation’s most respected public universities―the University of Wisconsin-Madison, the University of California-Berkeley, UCLA, and the University of Massachusetts-Amherst―received total annual compensation that ranged from $400,664 and $467,699.

Privatizing America’s Public Universities as “Shock Doctrine” (or not) - You mean charters aren’t the whole story of privatizing education? What fresh hell is this? I’ve got to say my jaw dropped when I read this in Bloomberg; I hadn’t thought that privatization rot had gone so far: From Pennsylvania to Oregon, the number of top public universities bidding to shake off government control keeps growing.  How exactly does “public university” “shake off government control”? By letting the administrators cut their own checks?  The universities want more control over tuition and academic programs as they become less dependent on public subsidies. Some state systems have resisted because, without their flagships, they lose premier faculty and students as well as clout in legislatures that set funding.  Pennsylvania’s West Chester University, the fastest-growing of 14 state-owned campuses and the one with the highest SAT scores, could break away under legislation filed this year. Its departure would deepen a divide between independent ‘haves’ and tightly controlled ‘have nots’ plagued by dwindling funding and enrollment. Pennsylvania State University and three other public institutions already operate autonomously.  “Plagued by”? Note the lack of agency. Who’s doing the “plaguing,” and why? And what does “autonomously” mean? The independence drive is analogous to the rise in K-12 education of charter schools… Like charters, breakaway universities want less red tape and more freedom to experiment with academic programs. Whatever “less red tape” and “more freedom” means, other than open season for executive looting. Like charters, they fuel fears about the future of public systems and whether some institutions will be left behind to wither as competition intensifies.  And so they should fear. (We might also remember, although Bloomberg oddly, or not, does not mention it, the stench of corruption that hangs round the charter movement.)

State report shows rise in tuition, fees at state’s public colleges: Tuition and fees for full-time resident undergraduate students at Kentucky’s public colleges and universities have increased 110 percent over a recent 13-year period, according to a report approved by a state legislative committee Thursday. The inflation-adjusted tuition and fee data, which tracks annual tuition and mandatory fees for full-time resident undergrads at each of the state’s public institutions for academic year 2001 through academic year 2013, is found in the Legislative Research Commission staff report titled “Cost and Funding of Higher Education in Kentucky,” approved by the Program Review and Investigations Committee. The University of Kentucky and the University of Louisville having the highest cost tuition and fees, according to the report. The lowest cost tuition and fees are found at schools that are part of the Kentucky Community and Technical College System, or KCTCS, according to the report. In the 2013 academic year, the cost of inflation-adjusted tuition and fees at the highest priced comprehensive public universities in Kentucky was $1,678 more than tuition and fees at the state’s lowest priced comprehensive public universities, the report said. During the 2001 academic year, the difference between the highest and lowest priced comprehensive public universities in the state in terms of inflation-adjusted tuition and fee cost was only $258.

Half of college grads still rely on parents for money - Students who graduated college in the throes of the recession are still struggling to make it on their own. Two years out of college, half of graduates are relying on their parents or other family members for some sort of financial help, according to research from the University of Arizona. The study tracked more than 1,000 of its students over the course of five years -- from when they entered college in 2007 to 2013. "These people started college during the boom period, then the market fell apart and they came out of college into a very different environment," said Ted Beck, president of the National Endowment for Financial Education, which helped sponsor the research.  Whether they rely on their parents for every single expense or just need a little help here and there, many graduates say their financial situations have caused them to postpone certain life goals -- like getting married, having children or buying a home.  About 28% of respondents said marriage is not an important goal for them, while 27% said the same about having children. Another 19% said owning a home isn't important to them, and 16% cited living on their own as unimportant.

Here We Go Again: Is College Worth it? - The debate over whether college is worth the money may have taken a decisive turn. Unquestionably, it is—even if you must go into debt to get the degree—new data suggests. Still, there is no convincing folks at the Thiel Foundation, which just blessed a fourth class of dropouts with money to start their own business. First, the new data: Americans with four-year college degrees made 98% more an hour, on average, in 2013 than people without a degree. That’s up from 89% five years earlier, 85% a decade earlier and 64% in the early 1980s. These figures are based on an analysis of Labor Department statistics by the Economic Policy Institute and first  reported in The New York Times.Researchers conclude that over the long run not going to college will cost you about $500,000. That’s double the penalty for not getting a degree three decades ago. “The decision not to attend college for fear that it’s a bad deal is among the most economically irrational decisions anybody could make in 2014,” says The Times.But the Thiel Foundation isn’t drinking that Kool-Aid and, in fact, hopes to eventually refute the assertion with data it collects through its “20 under 20” fellowship. The foundation just selected its fellows for the coming year and Mike Gibson, vice president for grants, says both the number and quality of applicants has risen each year. “High school students are now anticipating this is something they want to do,” Gibson says. “They start working on a business long before they apply for the grant.”

Remember the Problems With Mortgage Defaults? They’re Coming Back With Student Loans -- Student loans, along with mortgages and car loans, have become one of the three largest sources of credit, exceeding credit-card debt. This growth in student debt appears to have caught regulators unprepared. Compared with mortgages, auto loans and credit cards, student loans are loosely regulated, and that regulatory weakness is particularly threatening to consumers because they can’t discharge their debts through bankruptcy and escape lenders who are causing them harm.Borrowers — and the economy at large — are suffering as a result. Every borrower in default has a damaged credit record, which increases the cost of buying a home or car and can result in lost job opportunities. Many landlords won’t rent to someone with a bad credit record.The parallels with the mortgage crisis are striking. In both cases, the companies managing the loans have been slow to devise loan forgiveness plans for borrowers who run into trouble, hurting both the borrowers and the broader economy. In both cases, it often isn’t clear who even owns the underlying loans, further slowing efforts to restructure them.  Lenders are dragging their feet, and the number of borrowers in more forgiving repayment plans is much lower than the number of borrowers in distress and default. The Consumer Finance Protection Bureau has documented that in many cases loan servicers are unresponsive to borrowers who want to restructure their payments. Paperwork is lost, resulting in missed deadlines and missed opportunities for relief. Again, we see that it is risky to rely on lenders to carry out a task that would clearly benefit borrowers.In another echo of the mortgage crisis, “robo-signing” is making a comeback, this time in student loans.  Student loans, like mortgages, are traded in a secondary credit market. Robo-signing is cropping up in these trades, with staff members signing off on the transfer of ownership of a huge number of student loans in a single trade. The National Consumer Law Center has documented that this has created difficulty for borrowers in distress trying to restructure their loans.

President Obama to Offer a Subsidy for Past Humanities Majors - Debt forgiveness is often an attractive policy for borrowers.   While such new "rules of the game" create bad dynamic incentives, we can understand why they are popular with a subset of people. Today we are told that many young adults have unacceptable levels of college debt. How did they become saddled with this debt?  Did they not understand the terms of the deal?  Did they naively assume that attending college would raise their earnings prospects by 50% regardless of what they studied?  The NY Times reports that President Obama will now offer students some debt relief. The following quote caught my attention; "Mr. Obama’s main action will be to expand on a 2010 law that capped borrowers’ repayments at 10 percent of their monthly income. The intent is to extend such relief to an estimated five million people with older loans who are currently ineligible — those who got loans before October 2007 or stopped borrowing by October 2011." So, which Universities and which majors will be affected by this new law?  Suppose you major in Computer Science at MIT, I don't think law will affect you.  This group's monthly income will be high enough such that they would prefer to pay their current student debt rather than hand over 10% of their monthly income. Now consider universities with low value added and majors whose graduates do not earn a high salary, the average graduate from these programs will be more likely to embrace President Obama's new deal.  For an unemployed college graduate, how will this new deal affect what they pay?  If you reflect on this law for a moment it creates a moral hazard effect.   In its extreme form, President Obama is allowing people who borrowed money and went to college and partied and didn't study or didn't gain employable skills to now not pay their loans and instead let taxpayers pick up the bill.

Obama Unveils Student Loan Debt Bubble Bailout - "The challenges of managing student loan debt can lead some borrowers to fall behind on their loan payments and in some cases even default on their debt obligation," notes the always astute White House... and so it's time to do something about that... by bailing the bad debtors out with US taxpayers money. As we have been vociferously warning, not only has the student loan debt bubble expanded massively (as the easiest credit substitute for real-world working and unemployment) but delinquencies on the 'easily available' credit is soaring with "consequences such as a damaged credit rating, losing their tax refund, or garnished wages." Consequences, as we have been taught now, are not acceptable for this administration and so President Barack Obama will issue an executive action on Monday aimed at making it easier for young people to avoid trouble repaying student loans.

Obama's Executive Order: Bad for Taxpayers, Worse for Students --President Obama announced today an executive order that will make the student loan program a worse deal for taxpayers. Though the federal government already allows some students to cap their loan repayments at 10 percent of their monthly incomes, the President hopes to expand the program. Students who borrowed before October 2007 or who haven't borrowed since October 2011 will now be allowed to do so. In other words, more students will be able to repay less of their taxpayer-subsidized loans.  The President has chosen to ease student debt by shifting the costs to the taxpayers who fund it. Though this order might strike him as a good political move--especially in advance of the upcoming midterm elections--it won't help students in the long run. It will encourage students to assume more debt, as it signals that the federal government is willing to bail out indebted students. The more the federal government cushions student borrowers while maintaining its generous loan program, the higher student debt loads will grow. The risk of delinquency and default will increase accordingly. A real solution to growing student debt requires substantive fixes to the student loan program, not expensive gimmicks. It's a sorry fact that Congress, and now the President, have chosen the latter.

Obama's Student-Debt Plan Won't Fix America's College Crisis - Student debt is a $1.2 trillion shadow cast over the lives of tens of millions of Americans, and it's getting longer each year. President Obama has a plan to make it easier for borrowers to pay it all off.  Today, he announces an executive order to cap student-debt repayments at just 10 percent of income. This expanded pay-as-you-earn plan (which already exists for recent borrowers) should be welcome news for young people struggling to find steady work. Gainfully employed grads would pay just $0.10 for every $1. Unemployed grads might pay nothing. After 20 years of following these rules, remaining debt would be wiped clean.  The president will also throw his support behind Sen. Elizabeth Warren's plan to refinance student loans at lower rates. But since the president's public support is of extremely dubious value in the GOP-controlled House, this idea is probably going nowhere.  Student loans have an overrated effect on the overall economy, but there is little doubt that fresh debt warps the choices of young college grads, pushing some away from homes and cars. Even worse, the high cost of college warps the choices of wannabe students, pushing some to drop out of college, or skip it altogether, a highly questionable choice for most young people considering that college graduates earn more, work more, and are happier with their lives.

Student Loans and the “I’ve-Got-Your-Back” Agenda  -The wonk brigade, of which I’m a card-carrying member, has extensively weighed in on the President’s executive order (EO) to expand income-based repayments (IBR) for student loans as well as his endorsement of Sen. Warren’s idea to help borrowers refinance outstanding loans at lower interest rates. The consensus is pretty mixed, with many arguing that these ideas nibble at the edges of the problem of the mismatch between college affordability and middle-class incomes (I’ve also seen the argument that the Warren idea is distributionally skewed toward the wealthy—maybe, but I’d like to see a distribution table). I don’t disagree with any of that, though if the expanded IBR actually reaches another five million borrowers, as advertised, that will be a pretty sweeping outcome for a mere EO and another win for the President’s “pen and phone” campaign to get around Congressional gridlock.  But what I’d like to focus on here is something else: a piece of the framing and rhetoric in the speech the President just gave announcing the EO, which I happened to hear part of on the radio.  I don’t follow every speech, of course, and there’s a lot of usual pot-boiler in here, but something caught my ear that struck me as important, something that I hope grows as a theme in today’s politics. It’s an idea that I tried to get at recently when I ask why has capital become so much stronger than labor, but politicians don’t frame it that way.  Instead, I heard the President talking about ways in which middle-income people need the government to “get their back.”

Do Taxpayers Care if Student Loans Are Paid Off Too Quickly? (On Fair Value Accounting) - |With President Obama’s student loan announcement in the news this week, an argument over whether or not taxpayers make a profit from student loans is no doubt close behind. We do make a profit using the government’s accounting tools, but there’s an argument that we should instead use “fair value accounting,” or the rate at which the private market adjusts for risk (here’s Jared Bernstein with a recent piece). By that standard, we see a much smaller profit. Most people reference the CBO on this, though its numbers are entirely opaque. For instance, it says that it “relied mainly on data about the interest rates charged to borrowers in the private student loan market,” but there are gigantic adverse selection problems right out of the gate. The private student loan market is where the worst credit risks go, so of course they have higher rates. Is the CBO able to control for this? Nobody knows. But beyond that, there’s a simple finance logic reason for why I don’t buy the argument for fair value accounting. I don’t believe that taxpayers face prepayment risk, and to whatever extent they do, it’s a matter of politics, not economics, that determines this.

U.S. student loan refinancing bill fails Senate hurdle (Reuters) - Legislation to allow student loan borrowers to refinance at lower interest rates failed to clear a procedural hurdle in the U.S. Senate on Wednesday, dooming a measure that was a Democratic priority ahead of November congressional elections. Democrats had said the bill would let holders of both federal and private undergraduate loans - some with rates of 9 percent or higher - to refinance at 3.86 percent. Republicans thought the legislation was too expensive. The bill, championed by Massachusetts Senator Elizabeth Warren, was part of Democrats' plan this year to rally their base supporters ahead of an election that could tip control of the Senate into Republican hands. The Senate voted 56-38 on Wednesday in favor of a motion that would have ended debate on the measure and paved the way for a final vote. That fell short of the 60 votes that would have been needed to move it forward.  "Senate Democrats don’t actually want a solution for students. They want an issue to campaign on – to save their own hides in November," said Senate Republican leader Mitch McConnell.

Elizabeth Warren student loan bill stalls - The Senate on Wednesday voted not to move forward on a bill from Sen. Elizabeth Warren that would have allowed an estimated 25 million people with older student loans to refinance that debt at current, lower interest rates. Democrats are vowing to keep the issue alive and bring it back for another airing this year. Warren’s bill sparked a fierce debate in the Senate, where Republicans said Democrats are cynically capitalizing on student loan debt for election-year gains. “I’ve been calling on the majority leader to press pause on his party’s non-stop campaign,” Senate Minority Leader Mitch McConnell (R-Ky.) said Wednesday morning. President Barack Obama and second lady Jill Biden had thrown their support behind the bill in recent days, and Obama on Monday rolled out new executive actions to help address student loan debt alongside the action in the Senate. Senate Democrats “want an issue to campaign on to save their own hides this November,” McConnell said. “Americans are not going to fall for this spin.” Warren’s bill sparked a fierce debate in the Senate, where Republicans said Democrats are cynically capitalizing on student loan debt for election-year gains.“I’ve been calling on the majority leader to press pause on his party’s non-stop campaign,” Senate Minority Leader Mitch McConnell (R-Ky.) said Wednesday morning.  President Barack Obama and second lady Jill Biden had thrown their support behind the bill in recent days, and Obama on Monday rolled out new executive actions to help address student loan debt alongside the action in the Senate. 

Republicans say they killed the bill to lower interest on existing student loans because it does nothing to cure cancer … er, it does nothing to lower college costs and therefore reduce borrowing. Or cure cancer.Beverly Mann Republicans said the bill wouldn’t have done anything to lower education costs or reduce borrowing, and they accused Democrats of playing politics by highlighting an issue that was bound to fail.– Senate Republicans block student loan bill, AP, todayThe bill, proposed and sponsored by Elizabeth Warren, would allowed borrowers, including those with “years-old debt and interest rates topping 7 percent or more, refinance at today’s lower rates,” the AP article specifies, and “would have been paid for with the so-called Buffett Rule, which sets minimum tax rates for people making over $1 million.”  the vote was 56-38. Should the Republicans actually be interested in doing something to lower higher-education costs and consequently reduce borrowing, they might consider reinstating substantial federal financial assistance to states in order to help the states once again fund their state universities and colleges at, say, the pre-Bush-tax-cuts-era levels, so that these universities and colleges weren’t being funded mostly by tuition.  And should Republicans actually acknowledge that current high levels of student debt–debt already incurred, which was the subject of that bill–won’t recede even if college and university attendance suddenly were made free of charge, and concede the high level of current debt is itself a problem, they will stop claiming that you shouldn’t try to help students and former students who are deeply in debt unless you also fix an unrelated problem, or even also fix a problem that is related but not in a way that matters to the proposed fix.

U.S. Public Pension Shortfalls Exceed $1 Trillion - U.S. state and local government pensions have at least $1.1 trillion less than they need for promised retirement benefits, even after stock-market gains and increased contributions boosted the funds, a study found. The pensions had about 72 percent of the money needed to meet retirement obligations in 2013, unchanged from the year before, the Center for Retirement Research at Boston College said in the study released today. Governments paid more into the funds, 83 percent of their required annual contributions, up from 81 percent a year before. The figures illustrate the strain facing states and cities that have failed to set aside enough money to cover retirement costs. Those gaps are putting pressure on governments around the country, including Illinois and California, to pare benefits or force governments and employees to pay more into the funds. The study, based on 150 public pension plans in the 2013 fiscal year, found the funds have been slow to recognize stock market gains because of accounting techniques that smooth increases and losses across several years.

CalPERS Demonstrates Its Commitment to Operating in Bad Faith With Public Records Act Requests; Is It Keen to Hide Bad Records? - Yves Smith - As readers may know, we’ve been in a protracted struggle to obtain private equity performance records from the giant public pension fund CalPERS, the largest investor in private equity in the US. Perversely, CalPERS has maintained, even in its public filings, that it agrees we should have all the records that we are seeking, and even stated in a court filing that “it stands ready to produce additional data about private equity funds that it has not included in its productions to date.” Yet we informed CalPERS on March 18, both on our blog and attempted to do so through our attorney to CalPERS’s attorney, who did not allow our attorney to tell him precisely what was missing. We’ve gotten no records since that date. . CalPERS’ justification has been that our request has been “confusing” and have tried to depict us as somehow taking advantage of CalPERS’ and asking for more data. In fact, we made a request and provided CalPERS with text from and a link to the original academics’ study that led us to ask for the data they’d received. CalPERS per its own repeated admissions to us only looked at past Public Records Act requests; it did not make inquiries with staffers nor did it search e-mails. Based on this inadequate search, they rejected our request. After our attorney wrote a nastygram, they didn’t reverse their claim that they had never heard of the academics (effectively accusing them of misrepresentation or misappropriation of information) but if we told them what we wanted, they’d provide the data. Our revised submission was based on the reading of the academics’ paper and made repeated references to it. The only part that we though was an addition was to ask for an update, which we made clear was above and beyond the scope of the paper. Ironically, the request for the update was the only information CalPERS provided.

Retiree health-care tab: $220,000, says Fidelity --It’s that time of year again: time for Fidelity’s annual reminder of just how much it costs to grow old. Okay, maybe they don’t phrase it quite that way. But that’s the subtext of the Fidelity Retiree Health Care Cost Estimate. iStockRetirement healthcare tally: $220,000This year’s projection is that couples retiring at age 65 are expected to incur $220,000 in health care costs on average during their retirement years. This figure is unchanged from last year, although that’s hardly a cause for celebration for your average pre-retiree. Most people haven’t saved $220,000 period, much less earmarked that amount for health-care costs alone. Fidelity’s tally doesn’t include nursing home or other long-term care costs. Medicare does not cover these expenses, and they can be devastating for families. The median annual cost of a private nursing home room is $87,600, according to Genworth’s Cost of Care Survey 2014. The study assumes that the hypothetical retiring couple has traditional Medicare. The $220,000 total includes monthly premium payments for Parts B and D, plus Medicare cost-sharing requirements–beneficiaries have to pay 20% of most of their doctor bills, along with co-payments and deductibles.

Employers shifting health-care costs to employees -- Health-insurance costs rose for both employers and their employees in 2014, according to a new analysis, but costs rose faster for employees as employers shifted more of the burden in an attempt to combat ever-increasing premiums. A new study called the Milliman Medical Index, produced by Seattle-based health-care analytics company Milliman Inc., shows that employees’ health insurance costs rose by 6 percent in 2014, while employers’ costs rose by 5.4 percent. At the same time, it costs more than twice as much to insure a family in 2014 as it did in 2004, according to the study. Then, it cost an average of $11,192 to insure one employee and his or her dependents, compared with $23,215 in 2014. The employer pays $13,250 of that cost, and the employee, through payroll deductions, co-pays and deductibles, pays $9,695, an increase of $1,185 from 2013. “Even if we are bending the cost curve, there are few other household expenses that increase at four figures a year,” said Chris Girod, co-author of the index. This marks the ninth year in a row in which insurance costs for the average American family have increased by more than $1,100, according to the study.

More Than 1.7 Million Consumers Still Wait For Medicaid Decisions - While an unprecedented 6 million people have gained Medicaid coverage since September, mostly as a result of the Affordable Care Act, more than 1.7 million more are still waiting for their applications to be processed—with some stuck in limbo for as long as eight months, according to officials in 15 large states. The scope of the problem varies widely. California, the most populous state to implement the health law’s expansion of Medicaid, accounts for a lion’s share of the backlog with 900,000 applications still pending as of early June. The next biggest pileup is in Illinois, with 283,000 cases, while New York has no backlog at all. Yet even some big states that chose not to expand the federal-state program for the poor, are seeing backlogs, including North Carolina with 170,000 applications pending, Georgia, with 100,000 and South Carolina with 62,000. Florida and Texas, which also did not expand the program, each report fewer than 11,000 in queues. Federal regulations typically require states to process applications within 45 days and many state applications are still within that period. “It’s a serious problem that people are waiting a long time and the process of getting covered is more cumbersome than it should be,” said Stan Dorn, senior fellow with the nonpartisan Urban Institute.

Medicare growth is really low -There’s been a lot of talk recently about how healthcare spending in 2014 has been increasing really fast. That’s due, in part, to the fact that we just massively expanded coverage for millions of people. But Medicare spending, on the other hand, has been going up much more slowly. It turns out that actual Medicare growth for the first eight months of the fiscal year has been 0.3%. That’s amazing. But, of course, there are some temporary policies in place that have been restraining spending. These include things like the seqester, some ACA stuff, and frozen means-tested Medicare premium income thresholds.* Without these policies in place, growth would have been 2.5%.

Time to bring back the public option — Medicare in all exchanges -- Now that Republicans have all but given up the ghost of repealing the Affordable Care Act, we can begin to focus on improving the law, which is what the American people overwhelmingly want. Here's a way to quickly bring more competition into all the exchanges and guarantee people a choice of doctor and hospital: Bring back the public option by having Medicare offer coverage in all of the exchanges. A study released last month found that competition in healthcare exchanges does lead to lower premiums. If every exchange had a major health insurer, rates would be 11 percent lower. It is true that more insurers plan to enter exchanges in 2015, which will be helpful in controlling premiums. But that still does not guarantee the major competitor needed in every health market in the country. Many of the existing and new plans in the exchanges are charging lower premiums by offering "skinny" networks. That's a metaphor for a limited choice of doctors and hospitals. Requiring people to find another doctor is not popular, and Republicans are quick to make an issue of it. Limiting choices can be more than an inconvenience for some people with serious health issues. The available medical specialists and hospitals in a network may not have the expertise to treat complicated or less common health conditions, or they may not be as practiced at treating the condition, which increases the chances of complications and death. Access to the right teaching hospital can be key for treatment of many serious conditions.

Meanwhile, On the Health Front - Paul Krugman - You still encounter people claiming that Obamacare has been a disaster, that more people have lost insurance than gained it, etc., etc. But the reality is that it has already made a big dent in the number of uninsured; and the quality of insurance has gone up, too, because canceled policies were canceled because they offered little real protection.Of course, the coming of the law in January 2014 has been a big job-killer .. or maybe not:This is what success looks like.

New VA secretary plans to allow veterans to seek ‘purchased care’ at other hospitals (Reuters) – The acting secretary of the Department of Veterans Affairs said on Friday the agency is putting out bids for “purchased care” that would allow veterans to be treated at other hospitals at the VA’s expense while cutting backlogs at its facilities. “In far too many instances, in far too many locations, we have let our veterans down,” Sloan Gibson told reporters after a tour of the sprawling Audie Murphy VA Medical Center in San Antonio. VA hospitals and clinics will be open during non-traditional hours to expand coverage, said Gibson, who was appointed acting secretary of the department on May 30. U.S. lawmakers engaged in bipartisan talks this week to address delays in the delivery of health care for military veterans. The talks came after former VA Secretary Eric Shinseki resigned in late May amid a scandal over widespread schemes to mask care delays and protect staff bonus awards and salary increases.

US House of Representatives approves VA bill - United and eager to respond to a national uproar, the House overwhelmingly approved legislation Tuesday to make it easier for patients enduring long waits for care at Veterans Affairs facilities to get VA-paid treatment from local doctors. The 421-0 vote was Congress' strongest response yet to the outcry over backlogs and falsified data at the beleaguered agency. Senate leaders plan debate soon on a similar, broader package that has also drawn bipartisan support, underscoring how politically toxic it could be for lawmakers to be seen as ignoring the problem. The VA, which serves almost 9 million veterans, has been reeling from mounting evidence that workers fabricated statistics on patients' waits for medical appointments in an effort to mask frequent, long delays. A VA audit this week showed that more than 57,000 new applicants for care have had to wait at least three months for initial appointments.

How Big Pharma (and others) began lobbying on the Trans-Pacific Partnership before you ever heard of it - In 2009, four years before the Trans-Pacific Partnership (TPP) was a widely-debated trade deal, few would have noticed a new issue popping up in a handful of lobbying reports. That year, 28 organizations filed 59 lobbying reports mentioning the then far-off trade agreement. Almost half of those organizations were pharmaceutical companies or associations. It was an early clue as to which industry would take the most active role in trying to shape the trade agreement while it was still secret from the public. From 2009 until mid-2013 (the time during which the language of the agreement was still reasonably fluid), drug companies and associations mentioned the trade agreement in 251 separate lobbying reports – two and a half times more than the next most active industry (at least measured by lobbying reports). It is an investment that appears to have paid off. The TPP is quite friendly to drug manufacturers, strengthening patent exclusivity and providing protections against bulk government purchasing (should it hurt profits). At the behest of the pharmaceutical industry, the U.S. is also pushing to limit the ability of national regulatory agencies to support generic drug development. All of this suggests that the active lobbying has paid off.But the pharmaceutical industry is not alone in lobbying to shape the trade agreement (see Figure 1 below). Next on the list are auto manufacturers (101 reports), followed by clothing & accessories (89 reports), milk and dairy products (82 reports), and textiles and fabrics (82 reports). Figure 1 visualizes the top 20 most active industries, measured by lobbying reports that mention the Trans-Pacific Partnership or TPP by name.

29.1 Million Americans Now Suffer From Diabetes -- About 29.1 million Americans—nearly 10% of the U.S. population—now has type 2 diabetes, according to a new report.Of those Americans with the illness, 27.8% of them are undiagnosed, according to the U.S. Centers of Disease Control and Prevention’s 2014 National Diabetes Statistics Report released Tuesday. The report uses data collected between 2009-2012, as well as national surveys.The CDC estimates that the direct and indirect costs of the disease have reached $245 billion, with direct medical costs making up 72% of that amount. People with type 2 diabetes incur medical costs on average 2.3 times higher than people without the disease, the CDC found.Type 2 diabetes is caused by various factors that result in a heightened amount of blood sugar in the body. The disease is divided into two types; type 1 diabetics do not produce enough insulin, a hormone integral to metabolizing blood sugars, while in type 2, the body cannot use the insulin it makes. Diabetes can in the most severe cases result in serious complications including heart and kidney disease

Scientists condemn 'crazy, dangerous' creation of deadly airborne flu virus --- Scientists have created a life-threatening virus that closely resembles the 1918 Spanish flu strain that killed an estimated 50m people in an experiment labelled as "crazy" by opponents. US researchers said the experiments were crucial for understanding the public health risk posed by viruses currently circulating in wild birds, but critics condemned the studies as dangerous and called on funders to stop the work. Scientists at the University of Wisconsin-Madison used a technique called reverse genetics to build the virus from fragments of wild bird flu strains. They then mutated the virus to make it airborne to spread more easily from one animal to another. "The work they are doing is absolutely crazy. The whole thing is exceedingly dangerous," said Lord May, the former president of the Royal Society and one time chief science adviser to the UK government. "Yes, there is a danger, but it's not arising form the viruses out there in the animals, it's arising from the labs of grossly ambitious people." Influenza viruses circulate freely in wild bird populations. Most remain in chickens, ducks and other birds, but occasionally strains mutate into a form that can infect humans. The H5N1 bird flu strain has killed at least 386 people since 2003, according to WHO figures. The Spanish 1918 flu is thought to have come from birds too.

A superbug resistant to “last-resort” antibiotics has made its way into the food supply  - A dangerous “superbug” has made its way into the North American food supply for the first time, Canadian researchers announced Wednesday. Routine testing of raw squid, imported from South Korea, revealed a strain of bacteria resistant to carbapenems, a class of antibiotics used to treat life-threatening infections. This is concerning because carbapenems are a “last resort” antibiotic, one doctors turn to when common antibiotics fail. Health officials have been watching them closely; in April, the World Health Organization warned that antibiotic resistance had become a serious, global threat to public health, listing the spread of carbapanem resistance as a main reason for that. Carbapanem-resistant bacteria have been detected in the environment and in animals used for food, but this is the first time they’ve been found in food itself. That raises the stakes considerably, Joseph Rubin, assistant professor of veterinary microbiology at the University of Saskatchewan and head of the research team, explained, because it means “the risk of exposure in the public goes beyond people with travel histories and beyond people who have been previously hospitalized” — a select group — to the general public.Maryn McKenna, who first broke the news, has more on why this is such a big deal:

FDA Backs Down In Fight Over Aged Cheese - The FDA is backing away (at least temporarily) from a policy statement that declared cheese makers would no longer be able to age their cheese on wooden boards.  The statement caused outrage in the artisan cheese community and consumers quickly came to the aid of the industry signing onto a petition and expressing their outrage through social media.  The American Cheese Society released a position statement, and it was clear that the industry was prepared to fight back if the FDA did not change its position.  Today, the FDA claimed that it in fact had not issued a new policy, they stated: “The FDA does not have a new policy banning the use of wooden shelves in cheese-making, nor is there any FSMA requirement in effect that addresses this issue. Moreover, the FDA has not taken any enforcement action based solely on the use of wooden shelves.In the interest of public health, the FDA’s current regulations state that utensils and other surfaces that contact food must be “adequately cleanable” and properly maintained. Historically, the FDA has expressed concern about whether wood meets this requirement and has noted these concerns in inspectional findings. FDA is always open to evidence that shows that wood can be safely used for specific purposes, such as aging cheese. The FDA will engage with the artisanal cheese-making community to determine whether certain types of cheeses can safely be made by aging them on wooden shelving.”

Revealed: Asian slave labour producing prawns for supermarkets in US, UK - Slaves forced to work for no pay for years at a time under threat of extreme violence are being used in Asia in the production of seafood sold by major US, British and other European retailers, the Guardian can reveal. A six-month investigation has established that large numbers of men bought and sold like animals and held against their will on fishing boats off Thailand are integral to the production of prawns (commonly called shrimp in the US) sold in leading supermarkets around the world, including the top four global retailers: Walmart, Carrefour, Costco and Tesco. The investigation found that the world's largest prawn farmer, the Thailand-based Charoen Pokphand (CP) Foods, buys fishmeal, which it feeds to its farmed prawns, from some suppliers that own, operate or buy from fishing boats manned with slaves. Men who have managed to escape from boats supplying CP Foods and other companies like it told the Guardian of horrific conditions, including 20-hour shifts, regular beatings, torture and execution-style killings. Some were at sea for years; some were regularly offered methamphetamines to keep them going. Some had seen fellow slaves murdered in front of them.Fifteen migrant workers from Burma and Cambodia also told how they had been enslaved. They said they had paid brokers to help them find work in Thailand in factories or on building sites. But they had been sold instead to boat captains, sometimes for as little as £250.

Radiation in Tuna Triples After Fukushima, New Study Says -- You’re right to be concerned about the effects of radiation from the Fukushima nuclear disaster of 2011 and beyond. The power station in Japan failed miserably following an earthquake, sending radioactive waste into the ocean at amounts still not fully understood. Recently, a study from researchers with Oregon State University has affirmed the spills have affected sea life and Albacore tuna in particular.  Published in the journal Environmental Science and Technology, the research, led by Delvan Neville of the Department of Nuclear Engineering and Radiation Health Physics of the University, says there are notable effects of the Fukushima disaster being felt by tuna caught off the coast of Oregon.“You can’t say there is absolutely zero risk because any radiation is assumed to carry at least some small risk,” said Neville. But, he says, the amounts aren’t enough to pose a risk to consumers.Neville and his team of researchers examined tuna caught off the Oregon coast between 2008 and 2012. In other words, they had tuna before Fukushima occurred and up to the year following. At the most extreme level, the radioactive isotopes tripled from the pre- to post-Fukushima samples. Neville says this isn’t enough to be harmful.

The continued power of the milk-industrial complex - You all know how I feel about this. But friend of the blog Brad Flansbaum sent me this report. Here’s the introduction, which should sound familiar: The United States is in the midst of a public health epidemic due to poor diet. While much of the focus has been on obvious culprits such as sugary soft drinks and fast food, dairy foods often get a pass. The dairy industry, propped up by government, has convinced us of the health benefits of milk and other dairy products. But the context of how people consume dairy matters. This report shines a light on the shifting patterns of consumption away from plain milk toward dairy products laden with sugar, fat, and salt. Did you know that about half of all milk is consumed either as flavored milk, with cereal, or in a drink? Did you know that 70% of milk consumed in schools is flavored?  Did you know that 11% of all sugar goes into the production of dairy products? Mind blowing. The report also talks about all the ways in which the government supports the dairy industry, and how that in turn supports fast food companies. The executive summary is like two pages long. Go read. And watch this again:

Bee Killers Sponsor National Pollinator Week (And 3 Ways They Are Killing Bees) - Interested in celebrating National Pollinator Week? It’s happening next week, June 16-22. And it’s brought to you, in part, by none other than Monsanto and Bayer. In 2007, the U.S. Senate designated a week in June as National Pollinator Week. Every year, the Secretary of Agriculture signs a National Pollinator Week proclamation. As the public has grown increasingly concerned about the link between toxic chemicals and the die-off of bees and monarch butterflies, National Pollinator Week has evolved into the Pollinator Partnership. The Pollinator Partnership is a nonprofit that describes itself as “the largest organization in the world dedicated exclusively to the protection and promotion of pollinators and their ecosystems.” Who supports (i.e. funds) the Pollinator Partnership? Among others, Bayer and Monsanto—the very companies that are killing pollinators with insecticides and genetically engineered crops. It’s all part of a well-documented, well-funded (and shameless) public relations campaign by the pesticide industry to give the appearance of “caring” about the die-off of bees and butterflies, while diverting attention from the cause of those die-offs—highly profitable products made by Monsanto and Bayer.

Treating Food as an Investment - In the United States, despite years of rising food prices, people spend a lower percentage of their income on food than most people throughout the world. The percent of a person’s income spent on food hovered around 25 percent in the 1930s, and has since fallen into the range of 8 to 10 percent. This shift has many underlying reasons, but chief among them is the fact that Americans, bless us all, are buying the lower quality food that our industrial food system produces at rock bottom prices. Think about it: at a typical fast food outlet a patron can spend $1.50 on an industrially produced hamburger and get 400 kilocalories of low quality food energy, paying a third of a penny per kilocalorie. That same $1.50 would buy a bit under a pound of conventionally grown broccoli, but those broccoli kilocalories would cost three times more than the fast food kilocalories. This comparison between fast food and fresh vegetables ties to the realization that our cheaper, industrially produced diets have unseen costs associated with them, particularly with respect to our heath. While declines of food expenditures through the 1960s yielded savings overall when healthcare expenditures were added in, after 1970 this trend reversed so that rising healthcare expenditures gradually ate up the savings gained from spending less on food. Since 2008 the sum of food and healthcare expenditures, as percentage of personal income, are higher than at any time in the last 100 years. Yes we spend less on food, but we pay for these savings with more frequent trips to the doctor and hospital.

How El Niño will change the world's weather in 2014 - The  global El Niño weather phenomenon, whose impacts cause global famines, floods – and even wars – now has a 90% chance of striking this year, according to the latest forecast released to the Guardian. El Niño begins as a giant pool of warm water swelling in the eastern tropical Pacific Ocean, that sets off a chain reaction of weather events around the world – some devastating and some beneficial. India is expected to be the first to suffer, with weaker monsoon rains undermining the nation’s fragile food supply, followed by further scorching droughts in Australia and collapsing fisheries off South America. But some regions could benefit, in particular the US, where El Niño is seen as the “great wet hope” whose rains could break the searing drought in the west. The latest El Niño prediction comes from the European Centre for Medium-range Weather Forecasts (ECMWF), which is considered one the most reliable of the 15 or so prediction centres around the world. “It is very much odds-on for an event,” said Tim Stockdale, principal scientist at ECMWF, who said 90% of their scenarios now deliver an El Niño. "The amount of warm water in the Pacific is now significant, perhaps the biggest since the 1997-98 event.” That El Niño was the biggest in a century, producing the hottest year on record at the time and major global impacts, including a mass die-off of corals. The movement of hot, rain-bringing water to the eastern Pacific ramps up the risk of downpours in the nations flanking that side of the great ocean, while the normally damp western flank dries out. Governments, commodity traders, insurers and aid groups like the Red Cross and World Food Programme all monitor developments closely and water conservation and food stockpiling is already underway in some countries.

Record-Breaking Heat Grips India, Causing Blackouts And Riots - The usually chaotic streets of Delhi have been nearly deserted for days and the city’s markets have been eerily quiet. While the city is no stranger to warm weather, temperatures hovering around 115°F have kept even the heartiest sheltering indoors. On Sunday, a 63-year-old heat record melted away in a 118°F blaze.  The sweltering heat has led to a dramatic surge in demand for electricity in the city of over 22 million causing widespread blackouts. While most people in Delhi are accustomed to sudden power cuts, the current heatwave makes such cuts not just annoying, but dangerous.   The government is now cutting power to shopping malls and switching off street lights in an attempt to reduce the strain on the grid. Government officials will also get their AC cut over the next few days.  While the heat on its own can be deadly, it also bakes the polluted air in the city, leading to dangerous spikes in ground level ozone. Analysis of real-time air quality data from the Delhi Pollution Control Committee (DPCC) monitoring stations from January to early June have recorded the rapid build-up of ozone as summer heat has intensified. In the week before the current heat wave set in, the average ozone level across the stations was 73 micrograms per cubic meter on June 1. That figure doubled by June 5, soaring past levels considered safe. There are around 8 million vehicles in Delhi that contribute to the toxic soup of chemicals that can cook into ozone.

Intense heat bakes India as monsoon approaches: Intense heat continues to scorch India this week, straining an already fragile power grid as more than a billion people await the cooling monsoon rains. One part of New Delhi hit 118 degrees today, the seventh straight day of temperatures above 110 degrees. One spot, Satna, hit 119 degrees, the Indian Meteorological Department reported. These temperatures are about 9 degrees above average. Protests broke out because of blackouts earlier this week in New Delhi, Al Jazeera reported, as frustration mounted over power cuts. Riots were also reported last weekend in Uttar Pradesh. "There has been a rise in the number of deaths among Delhi's homeless in this heatwave,"  Today in Calcutta, closer to the more humid coast, the city hit 100 degrees with a dew point of 82 degrees, giving a heat index of 126 degrees. Dew points are the best measurement of how humid it feels. Anything over 70 is considered uncomfortable. The double-edged sword of the summer monsoon is slowly approaching and should reach central and northern India next week, the Indian Meteorological Department predicts. While rains from the monsoon reduce temperatures, they can also lead to deadly and devastating flooding. Last year, hundreds died in monsoon floods.

Is Your Air Conditioning Unit Heating Up Your City? - After a series of scorching days last week, Phoenix, AZ is forecast to see temperatures climbing as high as 110°F by Tuesday — nearly 10 degrees above the average for this time of year. Those sweltering temperatures will mean that air conditioners in homes and businesses throughout the area will be on full blast. That’s bad news not only for energy consumption, and the capacity of the grid to keep up, but also for Phoenix residents trying to keep cool. A new study in the Phoenix area reveals that all those AC units are measurably raising the temperature of the air outside as they blast hot air out, only increasing the need to cool inside areas even more. That effect helps to set up a vicious, self-perpetuating cycle where the hotter it gets, the more people use their air conditioning, which in turn, makes it even hotter.According to research conducted at Arizona State University and published in the Journal of Geophysical Research Atmospheres, air conditioners that emit waste heat are raising nighttime temperatures in Phoenix by around 2 °F — a small, but significant amount.  Cities are already global hot spots thanks to the urban heat island effect. According to the EPA, the annual mean air temperature of a city with 1 million people or more can be 1.8–5.4°F warmer than surrounding areas. That’s because dark, paved areas soak up heat, and buildings have displaced vegetation and wetlands — Earth’s natural temperature regulators.

Kenya’s Climate Change Legislation Takes Shape To Save Struggling Farmers - Daniel Njau, a small-scale farmer from Nyeri County, central Kenya, is torn. He just may have to give up his six-hectare tea plantation in favour of farming climate-resilient food crops.“Tea is very sensitive to climate change. Any drastic weather changes spell doom for the cash crop. In recent years, I have made more losses than gains,” he told IPS. But statistics from the Ministry of Agriculture show that Njau is only one of an estimated 500,000 small-scale tea farmers facing uncertainty when it comes to their livelihoods.  United Nations scientists have also warned that as maize-growing areas become warmer, production of maize — the country’s main staple crop — will reduce by a fifth. Yields of other staple foods, including beans, will shrink by 68 percent. At least 300,000 maize farmers are affected, says the Ministry of Agriculture. For sometime now, experts have blamed the low adaptive capacity on the lack of a national policy and law on climate change in this East African nation.  But Kenya’s National Assembly deputy speaker Joyce Laboso told IPS that while the 2012 bill was rejected because of a lack of public involvement in its discussion, “the new Climate Change Bill 2014 has garnered significant political goodwill.”The 2014 bill is expected to provide a legal and institutional framework for climate change mitigation and adaption efforts.

Africa's climate policies burned by firewood dependence: The women folk of Eye-Nkorin, a farming community of 500 people in Nigeria’s Kwara State, make a living from cooking up mashed cassava - and for this they need a huge amount of energy, supplied by firewood from nearby forests. Piles of logs are stacked on the edge of frying pits, and women feed the wood into the fire to keep their pans searing hot. The dry, granular food they produce, known as garri, is a popular meal across Nigeria, and most of it is processed on wood-fired pits, contributing to deforestation.  Nigeria is a leading producer of Liquefied Petroleum Gas (LPG), and has the world’s seventh largest reserves of natural gas. Yet the West African country is also among the biggest users of solid fuel for cooking. According to the International Energy Agency, over 120 million Nigerians rely on firewood and charcoal for their cooking needs.Wood, a form of biomass, remains the sole source of energy for hundreds of millions of Africans, who lack access to modern sources of power. Illegal logging also remains a lucrative business that has contributed to the rapid shrinking of Africa’s rainforests and woodlands. African governments are struggling to combat the problem - made worse by widespread corruption – at a time when some are taking steps to receive funding under the U.N.-backed Reducing Emissions from Deforestation and Forest Degradation (REDD+) scheme.

A Dusty Greenland Is Speeding Up Glacial Melt -Greenland provides one of the best real-time visuals of climate change — cleaving glaciers the size of buildings cascading into the ocean as one long, slow river of ice returning to the sea. A new study shows that a layer of dust covering much of Greenland’s ice sheet could be speeding up this process.  A paper published in the journal Nature Geoscience suggests that dust particles embedded in Greenland’s massive ice sheet are gathering more heat than the otherwise white, reflective surface would and causing melting to accelerate. The scientists write that “recent warming in the Arctic has induced an earlier disappearance of the seasonal snow cover, uncovering large areas of bare soil and thus enhancing dust erosion.”  Dust absorbs the sunlight and re-radiates it as heat. This causes earlier snowmelt that in turn exposes ice beneath the snow sooner than otherwise would have been expected — creating a feedback loop. This reduction in reflectivity is generating a lower albedo, a term used to indicate how well a surface reflects solar energy, across the landmass. More than three-quarters of Greenland is covered by an ice sheet that can reach up to two miles in thickness. If all 684,000 cubic miles of ice melted it could raise sea levels by up to 24 feet. “Greenland’s melt already accounts for about 30 percent of current sea level rise, which has been 8 inches since the 1880s, though the rate has been increasing in recent decades,” reports Climate Central.

Researchers find major West Antarctic glacier melting from geothermal sources: Thwaites Glacier, the large, rapidly changing outlet of the West Antarctic Ice Sheet, is not only being eroded by the ocean, it's being melted from below by geothermal heat, researchers at the Institute for Geophysics at The University of Texas at Austin (UTIG) report in the current edition of the Proceedings of the National Academy of Sciences. The findings significantly change the understanding of conditions beneath the West Antarctic Ice Sheet where accurate information has previously been unobtainable. The Thwaites Glacier has been the focus of considerable attention in recent weeks as other groups of researchers found the glacier is on the way to collapse, but more data and computer modeling are needed to determine when the collapse will begin in earnest and at what rate the sea level will increase as it proceeds. The new observations by UTIG will greatly inform these ice sheet modeling efforts. Using radar techniques to map how water flows under ice sheets, UTIG researchers were able to estimate ice melting rates and thus identify significant sources of geothermal heat under Thwaites Glacier. They found these sources are distributed over a wider area and are much hotter than previously assumed. The geothermal heat contributed significantly to melting of the underside of the glacier, and it might be a key factor in allowing the ice sheet to slide, affecting the ice sheet's stability and its contribution to future sea level rise.

How long can the global economy keep on growing if the 6th Great Extinction Event is upon us? -  The Real News Network interviewed 2 scientists about a new study on current extinction rates. The scientists interviewed are Dr. Terry Root & Dr. Stuart L. Pimm. They study shows that extinctions are occurring much faster than previously thought and that within 100 years, one third to one half of all species could be extinct. What is the cause of the extinction? … Humans and their economic activity. What are we doing about it? … Further monetary easing by all advanced countries who watch output and unemployment rates. We simply cannot slow down, can we? What is the real solution? … Economies must be more locally oriented, where production and consumption occur where the species are going extinct. The local people will have more awareness of what they are doing to their life own support systems. Think about what we buy. How much of it is produced in far away places? Almost all of it. It comes to us looking pretty and nice. We get an image that the world is fine. Yet the world is not fine.

Study Dismisses Geoengineering Quick Fix For Global Warming - Politicians should not look to science and engineering for a relatively quick fix to effectively deal with climate change caused by rising greenhouse gas emissions, a new academic study has determined. The only solution to global warming is a massive rejection of toxic fossil fuels, vastly improved energy efficiency and substantially altered human behavior, found the recently released study — An interdisciplinary assessment of climate engineering strategies. “In light of their limitations and risks, climate engineering approaches would best serve as a complement to — rather than replacement for — abatement, and the latter should remain a focus of climate-change policy for the foreseeable future,”  Their study has been published in the June edition of Frontiers in Ecology and the Environment. Simon Fraser University issued a media release about the study earlier this week explaining that the new study is the first scholarly attempt to rank a wide range of approaches to minimizing climate change in terms of their feasibility, cost-effectiveness, risk, public acceptance, governability and ethics. The new research found that some geo-engineering technologies — such as improved forest and soil management — can work to help reduce carbon dioxide in the atmosphere and that carbon capture and storage, also known as CCS, shows some promise too. But other technologies, such as fertilizing the ocean with iron to absorb CO2 and employing solar radiation management by injecting particles directly into the atmosphere to block sunshine, are likely doomed to failure.  

Why it's still not "game over" for global warming - If you haven't read it yet, I'd recommend my colleague Ezra Klein's piece on "7 reasons America will fail at global warming." It's an insightful look at all the ways the US political system is poorly suited to dealing with a massive, long-range problem like climate change.  But the underlying premise of the article is a little ill-defined. Climate change isn't an issue with a single point of "success" or a single point of "failure." What we're facing are (literally) degrees of change. The world will get hotter as we load more greenhouse gases into the atmosphere. And the higher the temperatures, the greater the risks for human civilization. A 2°C rise in global average temperatures would be disruptive. A 4°C rise would be much more disruptive. And 6°C rise would be far, far more drastic still. At no point here does it make sense to say that we've "failed" once and for all, or that it's (to use Ezra's phrase) "game over." Things can always get worse. And it's still very unclear where we'll end up on that spectrum. Ezra's jumping-off point was a long piece I wrote about the world's likely failure to stay below the agreed-on 2°C temperature limit. Even if we met the 2°C goal, many people would consider that a "failure" That's a goal that the international community has set for itself: We shouldn't let global average temperatures rise more than 2°C (or 3.6°F) above pre-industrial levels. Go past that, and we step outside the conditions under which human civilization developed.

Fighting climate change with taxpayer dollars isn't a fight against freedom – it's a fight against the end of the planet | Dean Baker - Conservatives like to project themselves as lovers of the free market. They believe that everyone should go out and fend for themselves, that the government shouldn't be getting in the way of those with talent and ambition – and that it shouldn't be wasting "their" tax dollars on people who are too lazy to get off their rears and earn their keep. That story has a certain simplistic appeal and apparent logical consistency. Unfortunately it also has almost nothing to do with the reality of where conservatives actually stand on major political issues.The right's reaction to President Obama's new plan to curb carbon emissions from power plants follows a similar storyline of entitlement. Obama proposed a 30% reduction in emissions over the next 15 years, which will substantially reduce the use of coal and likely to lead to a modest increase in electricity prices. (The Environmental Protection Agency estimates the additional cost per household will be less than $50 a year.)  Emissions of carbon dioxide and other greenhouse gases are having a measurable impact on the global climate, and this is causing damage to people's property and in many cases jeopardizing their lives. But Republicans quickly raced to be first in line to condemn this massive government intervention in the economy.

In Some States, Emissions Cuts Defy Skeptics - The cries of protest have been fierce, warning that President Obama’s plan to cut greenhouse gases from power plants will bring soaring electricity bills and even plunge the nation into blackouts. By the time the administration is finished, one prominent critic said, “millions of Americans will be freezing in the dark.”Yet cuts on the scale Mr. Obama is calling for — a 30 percent reduction in emissions from the nation’s electricity industry by 2030 — have already been accomplished in parts of the country.At least 10 states cut their emissions by that amount or more between 2005 and 2012, and several other states were well on their way, almost two decades before Mr. Obama’s clock for the nation runs out.  That does not mean these states are off the hook under the Obama plan unveiled this week — they will probably be expected to cut more to help achieve the overall national goal — but their strides so far have not brought economic ruin. In New England, a region that has made some of the biggest cuts in emissions, residential electricity bills fell 7 percent from 2005 to 2012, adjusted for inflation. And economic growth in the region ran slightly ahead of the national average.

Interests, Ideology And Climate, by Paul Krugman - There are three things we know about man-made global warming. First, the consequences will be terrible if we don’t take quick action to limit carbon emissions. Second, in pure economic terms the required action shouldn’t be hard to take: emission controls, done right, would probably slow economic growth, but not by much. Third, the politics of action are nonetheless very difficult. ut why is it so hard to act? Is it the power of vested interests? ’ve been looking into that issue and have come to the somewhat surprising conclusion that it’s not mainly about the vested interests. ... What makes rational action on climate so hard is something else — a toxic mix of ideology and anti-intellectualism. ’ve noted in earlier columns that every even halfway serious study of the economic impact of carbon reductions ... finds at most modest costs. ... But wouldn’t protecting the environment nonetheless impose costs on some sectors and regions? Yes, it would — but not as much as you think. ... So why is the opposition to climate policy so intense? Well, think about global warming from the point of view of someone who grew up taking Ayn Rand seriously, believing that the untrammeled pursuit of self-interest is always good and that government is always the problem, never the solution. Along come some scientists declaring that unrestricted pursuit of self-interest will destroy the world, and that government intervention is the only answer..., this is a direct challenge to the libertarian worldview. So the real obstacle, as we try to confront global warming, is economic ideology reinforced by hostility to science. In some ways this makes the task easier: we do not, in fact, have to force people to accept large monetary losses. But we do have to overcome pride and willful ignorance, which is hard indeed.

EPA leaves out the most vital number in their fact sheet - Last week, the Obama Administration’s U.S. Environmental Protection Agency (EPA) unveiled a new set of proposed regulations aimed at reducing carbon dioxide emissions from existing U. S. power plants. The motivation for the EPA’s plan comes from the President’s desire to address and mitigate anthropogenic climate change. We hate to be the party poopers, but the new regulations will do no such thing. The EPA highlighted what the plan would achieve in their “By the Numbers” Fact Sheet that accompanied their big announcement. For some reason, they left off their Fact Sheet how much climate change would be averted by the plan. Seems like a strange omission since, after all, without the threat of climate change, there would be no one thinking about the forced abridgement of our primary source of power production in the first place, and the Administration’s new emissions restriction scheme wouldn’t even be a gleam in this or any other president’s eye. But no worries.  What the EPA left out, we’ll fill in. Using a simple, publically-available, climate model emulator called MAGICC that was in part developed through support of the EPA, we ran the numbers as to how much future temperature rise would be averted by a complete adoption and adherence to the EPA’s new carbon dioxide restrictions*. The answer? Less than two one-hundredths of a degree Celsius by the year 2100.  0.018°C to be exact.

Chinese hints, US emissions cuts fall far short of climate cure: China's hints that it will cap its soaring greenhouse gas emissions and a US plan to cut emissions in the power sector, while representing a shift, do not add up to a strong cure for global warming by the world's top two emitters. Other nations have hailed Washington and Beijing for a newfound commitment to tackle climate change. Governments are working on a deal, due in Paris in late 2015, to slow rising temperatures to avert more heatwaves, floods and rising seas. Yet after a rush of enthusiasm, there are uncertainties - especially about China. On June 2, Washington said it planned to cut emissions from existing power plants by 30 per cent below 2005 levels by 2030 as the centrepiece of climate action by President Barack Obama. Chinese officials followed up by saying Beijing is considering a cap, for the first time, on the nation's emissions. Advertisement European Climate Commissioner Connie Hedegaard cautioned against celebrating about China, whose carbon dioxide emissions have almost quadrupled since 1990 amid stellar economic growth. "I am sure that China is sincere in wanting to deliver cuts and cap but the key thing is, when is that going to happen?," she said on the sidelines of June 5-14 talks in Bonn among climate negotiators from about 170 nations. "We have a saying in Danish that 'you have to see the man before you take off your hat',"

Incentives and Technology - Paul Krugman - The invaluable Mark Thoma leads me to this post attacking what I thought was a totally obvious takedown of Roger Pielke Jr.. So, we are told that Krugman seems to believe that by sprinkling the fairy dust of incentives over society the emission busting new technologies will emerge. Um, no. There has been a lot of theorizing about induced innovation, but it’s not solidly grounded in empirical evidence and was not at all what I was talking about. I was talking about the fact that at any given time we have a choice of already existing technologies. You can drive a conventional SUV, but you could also drive a hybrid, or for that matter a smaller vehicle that, say, emits half as much carbon as the SUV while providing services that are a lot more than half of what the SUV would provide. You can generate electricity using a coal-fired plant, but you can also use a gas-fired plant, a wind turbine, or solar panels.  None of these are technologies that need developing; they’re already here and in fairly widespread use. And do you really want to deny that which technology people choose is affected by incentives?  Mea culpa: I thought this was totally obvious, and didn’t imagine that anyone could be confused about this, or seriously argue with the proposition that energy use involves choices.

Ohio Gov. John Kasich Signs Nation’s First Renewable Energy Freeze -  It took two weeks, but now it’s official—Ohio is the nation’s first state to roll back renewable energy standards. After the state House of Representatives passed Senate Bill 310 in May, Gov. John Kasich signature was all that was missing to ensure Ohio’s clean-energy fall from grace. The standards—first passed in 2008 and reauthorized two years ago—previously required the state’s utilities to sell more solar and wind energy each year and charged them with finding efficiency solutions for their customers. Kasich’s signing means the standards are put on hold until 2017, when a committee formed by the bill’s passage could agree to permanently freeze them. Kasich signed the bill Friday without any comment to the media, The Plain Dealer reported.

Ohio Becomes The First State To Freeze Its Renewable Energy Standard -- Ohio Gov. John Kasich signed legislation Friday afternoon that will freeze his state’s renewable energy and energy efficiency standards at their current levels for two years, legislation that makes his state the first in the nation to roll back its renewable energy standard. Kasich signed Senate Bill 310 after months of heated debate over the bill, which was backed by some of Ohio’s manufacturers but opposed by others, including Honda and Whirlpool. The measure will freeze the state’s renewable energy standard and energy efficiency program at 2014 levels for two years, during which time a committee will study how the standard impacts the state and whether or not further changes should be made. Currently, Ohio’s RES stipulates that the state’s utilities must get 12.5 percent of their energy from renewable sources by 2025.Former Ohio Governor Ted Strickland, now President of the Center for American Progress Action Fund, signed Ohio’s RES into law after it passed the House and Senate almost unanimously in 2008. He told ThinkProgress in May that he doesn’t agree with the push to freeze the RES. “Let me be clear, this vote does not represent a compromise, it represents a giveaway to utility companies and the end of Ohio’s leadership in the renewable energy industries,” Strickland said. “When I signed SB 221 into law it put consumers on a level playing field with the utility companies. It was legislation developed over months of bipartisan discussions about how to create jobs in an emerging industry and position Ohio as a national leader in the production of renewable energy. It has been working — jobs are being created, investments are being made, and rate-payers are saving money.”

Chile Rejects $8 Billion Dam Project in Patagonia - ABC News: Chile's government rejected an $8 billion proposal to dam Patagonian rivers to meet the country's growing energy demands, handing a victory to environmentalists who praised Tuesday's ruling as a landmark moment. A ministerial commission rejected the HidroAysen plan, which would have tamed two of the world's wildest rivers and built more than 1,000 miles (1,600 kilometers) of power lines to supply energy to central Chile. After a three-hour meeting, Chile's ministers of agriculture, energy, mining, economy and health voted unanimously to reject the project. The committee "decided to side with complaints presented by the community," Environment Minister Pablo Badenier told reporters. "As of now, the hydroelectric project has been rejected." The project would have built five dams on the Baker and Pascua rivers in Aysen, a mostly roadless region of southern Patagonia where rainfall is nearly constant and rivers plunge from Andean glaciers to the Pacific Ocean through green valleys and fjords.

Oilprice Intelligence Report: Beating the Dead Horse That is Coal -- Since the Environmental Protection Agency (EPA) announced its new plans for curbing carbon emissions from power plants earlier this week, there has been a flurry of speculation over who the winners and losers will be and the significance of this for energy markets.In what is being cast essentially as a redrawing of the US energy map, the EPA has proposed to cut power plant emissions by 30% from 2005 levels by 2030. The losers, on the face of it, will be coal-dependent companies, while natural gas, renewables and nuclear energy generators would conceivably gain by default. Coal-fired plants are currently the largest source of electricity in the US, and the largest polluters. According to FRB Capital Markets, the EPA’s new Clean Power Plan will cut coal consumption in the power sector by 267 to 285 million tons until 2030. The Environmental Defense Fund is rejoicing. From its perspective, the EPA’s new rules finally open the door to investment in renewable energy. The new plan “will give entrepreneurs, corporations, and venture capitalists the market signal they need to go full steam ahead with low-carbon innovations. It may be one of the largest market opportunities in history to drive the development and implementation of clean energy on a national level.” But determining the effect on markets is not as easy as pointing to the obvious winners and losers because each state will roll out its own regulations, which gives us a multitude of smaller pictures that have yet to coalesce into the bigger picture.

The War on Coal Already Happened - Paul Krugman - I’m trying to pull together some thoughts about interests and ideology in the fight over climate policies, and found myself wondering what exactly is at stake in the supposed “war on coal”. And the answer is, surprisingly little — at least as far as jobs are concerned. Here’s total employment in coal mining (the earlier numbers are from Historical Statistics of the United States, Millennial Edition; the later from the FRED database): There used to be a lot of coal miners, but not any more — strip mines and machinery in general have allowed us to produce more coal with very few miners. Basically, it’s a job that was destroyed by technology long ago, with only a relative handful of workers — 0.06 percent of the US work force — still engaged in mining. So what is this fight about? There’s capital invested in coal and coal-related stuff, hiding behind the pretense of caring about the workers. And there’s also ideology, of which more soon. But the war on coal already happened, it had nothing to do with liberals and environmentalists, and coal lost.

US firm hired to save Fukushima from 400k tons of radioactive water -- TEPCO, the company in charge of the damaged Fukushima nuclear power plant, cannot filter a dangerous radioactive isotope out of about 400,000 metric tons of water before returning it to the sea, and has contracted with a US company for a second system. In April, Tokyo Electric Power Company (TEPCO) launched a contaminated water management system at the crippled Fukushima nuclear plant, which was designed to pump groundwater into tanks before it passes through the premises of the plant. After checking the water’s quality it would be dumped into the ocean.  But “Japan’s crippled nuclear plant is bleeding hazardous radioactive water at a mind-staggering rate,” KPLU reported. “Officials at Fukushima Daiichi are filling 27-foot-tall tanks nearly every other day.”  The filtration at Fukushima is used to remove Strontium-90 (Sr-90), a by-product of the fission of uranium and plutonium in nuclear reactors, from the plant’s water before it is dumped in the ocean. Sr-90 is found in waste from nuclear reactors, and is considered one of the more hazardous constituents of nuclear wastes, the US Environmental Protection Agency said. It can also contaminate reactor parts and fluids. The radioactive isotope is referred to as a "bone seeker." Internal exposure to Sr-90 is linked to bone cancer, cancer of the soft tissue near the bone and leukemia.  The new TEPCO contract with US-based Kurion Inc. provides for a mobile water-filtration system mounted on trucks to be used alongside the ALPS processors, which are designed to decontaminate 62 of the 63 radioisotopes present in tank water to prepare it for release into the environment, Kurion said. The truck-based filters will focus solely on strontium reduction.

Fukushima’s Children are Dying - Some 39 months after the multiple explosions at Fukushima, thyroid cancer rates among nearby children have skyrocketed to more than forty times (40x) normal. More than 48 percent of some 375,000 young people—nearly 200,000 kids—tested by the Fukushima Medical University near the smoldering reactors now suffer from pre-cancerous thyroid abnormalities, primarily nodules and cysts. The rate is accelerating. More than 120 childhood cancers have been indicated where just three would be expected, says Joseph Mangano, executive director of the Radiation and Public Health Project. The nuclear industry and its apologists continue to deny this public health tragedy. Some have actually asserted that “not one person” has been affected by Fukushima’s massive radiation releases, which for some isotopes exceed Hiroshima by a factor of nearly 30.

Alternative Energy No Substitute For Clean Nuclear - Wind and solar production won’t make much of a difference in reducing CO2 emissions, and meaningful levels of production have, at best, a negligible positive impact. By contrast, nuclear power — which is not eligible for mandatory use under the renewable power standards — supplies nearly 20% of the nation’s electricity. The clean little secret of recent years is that nuclear power has performed very well. Nuclear power is our zero-emission energy workhorse, providing 64% of the nation’s zero-carbon energy. Over the last decade, the U.S. fleet of around 100 nuclear plants has generated electricity about 90% of the time. Thus, a 1,000-megawatt nuclear plant produces three times more electricity than 1,000 megawatts of wind turbines and four times more electricity than solar panels. Policymakers and politicians have routinely ignored the impact that the mandate for renewable power has had in more than half the country where electricity markets have been deregulated. And the result has been a catastrophe for nuclear power, with safe and efficient reactors either being shut down prematurely or at risk of being shuttered for no good reason. The Energy Information Administration forecasts a 28% increase in U.S. power demand through 2040. Those who claim that solar and wind can meet all of our electricity needs by then are engaged in fantasy. Renewables cannot get us even halfway there. In fact, the renewable sources added in recent years have made the electric system more fragile, because of their intermittency problems.

Who Wrote EPA’s Power Plant Emissions Proposal? - I’m going to guess ICF International via Natural Resources Defense Council (NRDC) at least planted the seed that germinated into the idea of replacing coal with fracked gas. NRDC published the following report it published in March 2013: Closing the Power Plant Carbon Pollution Loophole: Smart Ways the Clean Air Act Can Clean Up America’s Biggest Climate PollutersNRDC acknowledges those assisting in writing the report: ICF International, Inc., Synapse Energy Economics, Inc., Environmental Defense Fund, and David Schoengold. EPA’s June 2014 Clean Power Plan Proposed Rule is titled: Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units The premise of the EPA proposal seems similar to NRDC’s report. Then there’s the Regulatory Impact Analysis: Regulatory Impact Analysis for the Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed Power Plan And again, ICF International was acknowledged:So who is ICF International? It use to be ICF Kaiser. That company was a merger between ICF and Kaiser Engineers. ICF was a federal government contractor in Washington DC. And positioned nicely to help out the EPA upon the start of Superfund. Kaiser Engineers built the Hoover dam and other huge infrastructure projects throughout the twentieth century. Kaiser was dropped from the name, I believe due to financial troubles, and became ICF Consultants. Later on becoming ICF International.Here is more on the company and what the do from the website. I believe ICF International dropped all its steel, coal, hazardous waste, and construction work over to International Technologies (IT). IT, a hazardous waste incinerator and Superfund site cleanup contractor, went bankrupt and was later purchased by The Shaw Group. Who was later purchased by CBI. The old Chicago Bridge & Iron and now huge engineering and construction company. ICF International seems like a high end consulting firm today.

Will EPA's Climate Plan Lead To A Counterproductive Fracking Boom? - There’s little doubt the Obama administration’s big push to cut carbon pollution, announced this week, will lead to much less coal-fired power in the United States. That’s a good thing.  But what if states instead turn to natural gas-powered electricity instead? That’s certainly what the administration would like them to do—it’s explicitly laid out as an alternative in the Environmental Protection Agency’s proposed rule, and Obama echoed that suggestion when he spoke on a conference call the day the rule was unveiled. For years, his administration has pushed natural gas as a fundamental part of America’s long-term energy strategy. If that happens, it could be a disaster for the environment, according to some leading climate experts. Federal regulations on the extraction and transport of natural gas range from insufficient to nonexistent, and the resultant methane emissions from a bigger natural gas boom could neutralize the gains made by the EPA’s rule, and possibly even accelerate climate change in the short-term. In its 645-page proposed rule, the EPA examines the “carbon intensity” of power production in forty-nine states—that is, the percentage of carbon pollution in each state’s power generation output. (Vermont and the District of Columbia are exempt because they have no fossil fuel power plants.) States have many options to reduce carbon intensity. The EPA rule lays out four suggestions: making coal plants more efficient, boosting energy efficiency in the state, increasing wind, solar and nuclear power—and expanding natural gas power production. States can do some, all or none of those things. They are also free to come up with their own plans, like introducing a carbon tax or a cap-and-trade scheme.

Did the “Clean Natural Gas” (Methane) Lobby Help Write the EPA “Clean Power Plan”? - Gaius Publius - People are still analyzing Obama’s (typically complicated) plan to reduce CO2 emissions from power plants, and both criticism and praise is pouring in. But there’s something almost no one is saying. Obama’s “Clean Power Plan” is a huge gift to the methane (“Clean Energy”) industry — we’ll show you how in a minute. And guess who’s big in methane? Big oil, of course (see below).  Let’s start here, with an analysis by Dr. Robert W. Howarth, David R. Atkinson Professor of Ecology & Environmental Biology at Cornell University. Howarth writes (my emphasis and some reparagraphing everywhere): I have carefully read the 645-page Draft Plan. There is much to commend in the Plan’s goals to reduce carbon dioxide emissions and to promote more production of electricity by renewable sources and more efficient end use of electricity. However, the Plan has a fundamental flaw: it addresses only carbon dioxide emissions, and not emissions of methane, another critically important greenhouse gas. This failure to consider methane causes the Plan to promote a very poor policy – replacing coal-burning power plants with plants run on natural gas (see pages 33-34) – as one of the major four building blocks of the Plan. Let’s consider methane briefly, since the EPA apparently has not.  In case anyone has forgotten, methane is CH4, a burnable carbon-based molecule. When it escapes into the atmosphere as methane, it’s at least 100 times as powerful a greenhouse gas (GHG) as CO2 over its short (9–15 year) lifetime. Over a 20-year span, methane is considered by the IPCC to be up to 86 times as powerful a greenhouse gas as CO2 — up from the IPCC’s previous estimate of 72 times (see Table 2). And when methane is burned (combined with oxygen), it creates our friend, airborne CO2. So methane still creates carbon emissions, whether leaked or burned. Howarth again: The Plan should be revised to reflect the importance of methane and the extent of methane emissions from using natural gas. While phasing out coal is a desirable goal, replacing coal with natural gas [methane] trades one problem for another, reducing carbon dioxide emissions but increasing methane emissions to such an extent as to cause even greater global warming.

Gas Lobby Wrote Obama’s Power Plant Proposal -- Methane, the most potent power plant greenhouse gas, is conspicuously absent from Obama’s power plant proposal. Because that’s the way the gas lobbyists wrote it.  In the proposals 645 pages, methane, ie. natural gas, is mentioned 5 times. Making this proposal one big Fracking Ad, and a prescription for cooking the planet with “clean burning natural gas” via Robert W. Howarth, Ph.D., Cornell: I have carefully read the 645-page Draft Plan. There is much to commend in the Plan’s goals to reduce carbon dioxide emissions and to promote more production of electricity by renewable sources and more efficient end use of electricity. However, the Plan has a fundamental flaw: it addresses only carbon dioxide emissions, and not emissions of methane, another critically important greenhouse gas. This failure to consider methane causes the Plan to promote a very poor policy – replacing coal-burning power plants with plants run on natural gas (see pages 33-34) – as one of the major four building blocks of the Plan. Recent research indicates that the greenhouse gas footprint of generating electricity from natural gas can exceed that of coal-fired plants (Alvarez et al. 2012; Howarth et al. 2014 and references therein). The Plan should be revised to reflect the importance of methane and the extent of methane emissions from using natural gas. While phasing out coal is a desirable goal, replacing coal with natural gas trades one problem for another, reducing carbon dioxide emissions but increasing methane emissions to such an extent as to cause even greater global warming. “Methane” is mentioned only five times in the 645 pages. The first time is on page 59, where it is stated that EPA could not monetize the consequences of nitrous oxide and methane emissions, and that the Plan therefore focuses only on carbon dioxide emissions. The second time is footnote #13 on page 59, where it is stated that “although CO2is the predominant greenhouse gas released by the power sector, electricity generating units also emit small amounts of nitrous oxide and methane….”

Is natural gas the next ethanol?Ceres has published a recent report on growing corn for ethanol costs-relating to water use, where corn is grown, and why. The report includes the impact on global food prices. David Zetland at Aguanomics points us to a growing concern about the increasing use of natural gas (and fracking). Corn ethanol was a “win-win” alternative fuel that would allow Americans to drive as before, using less carbon, while supporting American farmers.It turned into (and still is) an ecological disaster* that mostly helped agribusiness (e.g., ADM and Cargill) more than Farmer John down the road. Many people see the natural revolution (or the “shale gale”) as a win-win that will allow Americans to use energy as before, emitting less carbon, while supporting American energy companies (not nasty terrorists). I worry that this optimism is misplaced for the following reasons:

  • An increase in supply of cheap natural gas means an reduction in the price of energy — and thus an increase in its consumption, which will displace conservation and alternative energy sources.
  • Sloppy production and movement of natural gas means more leaks of methane, which is 20-35x worse for global warming than CO2. Natural gas produces abouthalf the CO2 output as coal, per MWh of electricity produced, which means that a 4 percent rate of leakage in the supply chain (25×4% = 100%) would double the carbon impact from natural gas. EDF comissioned a 16-partner study to look into methane emissions and estimates a 2.6-5.6 percent leakage rate. That’s bad enough, but don’t forget that methane is routinely vented (released) and flared (burnt, reducing emissions) at oil producing sites.
  • Finally, there’s the strong possibility that drillers and investors, eager to flip fracking leases into cash will (1) produce too fast (releasing extra methane) or overstate their reserves (leading to a financial crunch for suckers who buy late).

Renewables Cheaper Than Fracking !  -- Even in Texas. New study of the cost of adding renewable power, show that in some states with abundant sunshine and wind, renewable power costs less than fossil fuels. And that is without any of the “intangible” costs of the health impacts, pollution, road damage and global warming caused by frackers. . . . . States can boost renewable energy capacity at bargain-basement prices, a new study finds.  Federal researchers examined the 29 states where renewable portfolio standards (RPS’s) have been in place for more than five years. They concluded that these standards, which require utilities to generate a certain percentage of power from clean sources, led to the development of 46,000 megawatts of renewable capacity up until 2012 — and that they raised electricity rates by an average of less than 2 percent.The researchers, scientists at the National Renewable Energy Laboratory and Lawrence Berkeley National Laboratory, also examined other studies that have attempted to quantify the economic impacts of RPS policies: “A number of the studies examined economic development benefits annually or over the lifespan of the renewable energy projects, with benefits on the order of $1-$6 billion, or $22-30/MWh of renewable generation.” RPS’s can also help make electricity prices more stable, the researchers note.

Why U.S. LNG Exports to Asia Would Be Worse Than Building a New Coal Plant in China -- While researchers have already exposed how the presence of methane debunks the notion that natural gas is a clean energy option, a new study shows that things don’t get any better when the gas is liquified and exported.   Ironically, that study comes from the U.S. Department of Energy—the same agency that has been approving liquefied natural gas (LNG) export terminals in places like Oregon and Maryland. Despite its intention of presenting LNG in a positive light when compared to coal, the DOE study, “Life Cycle Greenhouse Gas Perspective on Exporting Liquefied Natural Gas from the United States,” actually ends up showing that LNG exports to China would impact the climate in a worse fashion than if China constructed its a new coal-fired plant. Yet again, methane is the reason why. LNG exports offer a climate advantage over coal in a 100-year scenario or “lifecycle,” the DOE concludes. However, over the next 20 years—when the U.S. and others want to reduce carbon and greenhouse gas emissions—the impact is worse, analysts at the Chesapeake Climate Action Network (CCAN) realized after looking at the DOE report.

Scientists: Fracking Linked to Groundwater Contamination  - Last week a Texas TV station broke the news that new independent scientific analysis refutes the claim by the oil and gas industry that “there’s never been a confirmed case of fracking polluting drinking water.” WFAA, the ABC affiliate in Dallas, reported that two independent scientists using data from Texas regulators confirmed fracking in Parker County, TX by Range Resources polluted resident Steve Lipsky’s drinking water with dangerous levels of methane from the Barnett Shale. According to Earthworks, the Parker County case is not the first example of fracking polluting drinking water:

Fracking Drives Farmers From Land in Illinois: Can We Live on Fossil Fuel Instead of Food? - An essential resource needed in the fracking extraction process is a relatively rare sand - and Illinois has one of the largest supplies in the United States. As a result, once again the fossil fuel industry is forcing destructive changes in nature that threaten, in this case, farming in the United States heartland: the nation's breadbasket. This is because the sand exists in deposits under rich Illinois agricutural land. In a June 8 article, the Chicago Tribune spelled out the financial stakes at play: Dallas-based Eagle Materials Inc., poised to start operating in LaSalle County, estimates it would sell at least 900,000 tons of sand a year from a single mine on 564 acres. At $110 a ton, the company estimates the mine will generate $99 million a year over the next 45 years, according to a state permit application. Analysts who follow Eagle Materials say about $40 of the $110-per-ton price is pure profit. "Mining frac sand is a lot like mining regular sand except it's wildly profitable, and that's why everyone wants to do it,"

Fracking Companies Used 45 Million Pounds Of Toxic Chemicals In Los Angeles Last Year - The oil and gas industry in the Los Angeles area used about 22,500 tons of chemicals that, if released into the air, can be toxic and even carcinogenic last year, according to a new report. The report, published by the Center for Biological Diversity and three other health and environmental groups, looked at oil and gas industry-reported chemical data for 477 fracking, acidizing, and gravel packing operations in Los Angeles and Orange counties in California. It found that companies have used 44 different air toxics over the last year, pollutants that include formaldehyde, a chemical that’s a known carcinogen, as well as crystalline silica, another carcinogen, and hydrofluoric acid, which can be deadly.  According to the report, more than half of these fracking, acidizing, and gravel packing events occurred within 1,500 feet of a school, home or medical facility, with some occurring as close as 12 feet away from these buildings. The report highlights acidizing done by one oil and gas company that occurred 85 feet from houses, 145 feet from a church, and 770 feet from an elementary school.

Oxymoronic “Safe Setbacks” for Fracking  When someone asked me what I thought the safe setback should be in New York, I answered, “The state line.” Setbacks do not address even half of the fracking problems –  greenhouse gases. frack truck convoys, toxic radioactive frackwaste, water pollution, etc. Here is an article about the proposed setbacks in Maryland. One comment – the setbacks in Texas are set by local zoning, with 1,500′ being the norm. But the hydrology in most of Texas is vastly different than the hydrology in Maryland, so the setbacks would need to be greater in Md. Though 82,000 natural gas fracking wells have been drilled since 2005, there has been little to no scientific research studying fracking’s impacts on people, air, water and climate. Yet, there’s one indisputable, scientifically-supported fact concerning fracking in the Marcellus shale region, which includes Maryland’s western counties. The closer a water well is to a fracking well, the higher the chance of methane (natural gas) contamination. See photo #1. As Maryland develops fracking regulations, determining safe buffers, known as setback distances, between gas wells and water wells is critical, and not just for methane migration, but also for potential chemical spills above land and human exposure to fracking air pollution. Duke University scientists published peer-reviewed and independent research that found that when a private drinking water well is within 1 kilometer (3,280 feet or 9 football fields) from a fracking well in the Marcellus shale region, there is a high likelihood (600 percent more likely) that deep shale methane gas will migrate into private drinking water wells and contaminate the water wells. (See photo #1) Maryland’s current setback distance is 1,000 feet, about 3 football fields

The War On Fracking Is Over -- And The Greens Lost -- Hydraulic fracturing, or fracking, a technique to remove natural gas and oil from shale formations, has been under withering assault from environmental groups for much of the last decade. Fracking has been blamed for contamination of drinking water, air pollution, earthquakes, water shortages, global warming, radiation discharge, and even cancer. But it appears that environmentalists have lost the battle against fracking. Environmental groups have been almost unanimously opposed to hydraulic fracturing. Greenpeace and the Sierra Club favor outright bans, and other organizations call for tight controls on the process. According to the Sierra Club website, “‘Fracking,’ a violent process that dislodges gas deposits from shale rock formations, is known to contaminate drinking water, pollute the air, and cause earthquakes. If drillers can’t extract natural gas without destroying landscapes and endangering the health of families, then we should not drill for natural gas.” But the case against hydraulic fracturing is weak. Shale is typically fractured at depths greater than 5,000 feet, with thousands of feet of rock between the fractured area and the water table, which is located near the surface. When properly designed, fracking wells are lined with multiple layers of steel and cement casing to prevent leakage of water and natural gas into the local water supply. Approximately one million wells have been hydraulically fractured over the last six decades without cases of water contamination. During Congressional testimony in 2011, Environmental Protection Agency administrator Lisa Jackson stated, “I am not aware of any proven case where the fracking process itself has affected water, although there are investigations ongoing.”

Possible Fracking-Earthquake Link Could Challenge Oil And Gas Industry -- Recent scientific research about hydraulic fracking's link to earthquakes could lead to massive new lawsuits against oil and gas producers. The tentative research could also affect the producers of oil and gas development in the U.S. and the value of energy stocks. A growing number of scientists believe that there could be a link between fracking operations and earthquakes, recent news stories indicate. The evidence is far from conclusive, but it is compelling. There's good and bad news for oil and gas investors in the fracking earthquake debate. The good news is that only a small percentage of fracked wells produced earthquakes, Ellsworth found. The bad news is that even a suspected connection between earthquakes and fracking could greatly increase liabilities and legal costs for oil and gas producers. Courts are already handing down anti-fracking verdicts based on questionable science.A Texas jury awarded a couple that claimed fumes from a drilling site made them sick $3 million in April. The evidence presented in that case was far from conclusive. The evidence for the fracking earthquake connection actually seems a little more conclusive. It is not hard to imagine juries siding with property owners that claim their homes or businesses were damaged by earthquakes caused by fracking. Juries are, after all, swayed by emotion and rhetoric, not science. The average juror is much more likely to side with Joe the homeowner than the big bad oil company.

Is fracking causing earthquakes? States with drilling are investigating -- Ohio is leading a group of drilling states working with seismology experts from energy companies, government agencies and universities across the U.S. on how best to detect and regulate human-induced earthquakes. The initiative follows Ohio's discovery in April of a probable link between the drilling practice called hydraulic fracturing and five small tremors in eastern Ohio, a first in the Northeast. In 2012, Gov. John Kasich halted disposal of fracking wastewater surrounding a well site in the same region after a series of earthquakes later tied to a deep-injection well. The company that ran the well has disputed the link. Ohio Oil & Gas Chief Rick Simmers said in an Associated Press interview that state regulators are seeking up-to-date information so they can develop appropriate detection procedures and regulatory practices. "I think we're being proactive in some ways," he said. "We're not waiting until something bad happens. We're trying to figure out how to, in a regulatory sense, address this rather than waiting." Simmers said a dozen states, including Ohio, Texas and Oklahoma, showed up at the first meeting of the State Induced Seismicity Work Group Members last month. Also in attendance were representatives of the Groundwater Protection Council, the state-led Interstate Oil and Gas Compact Commission and research institutions such as Stanford University, the University of Southern California and the University of Texas.

Will Fracking Cause Our Next Nuclear Disaster?: The idea of storing radioactive nuclear waste inside a hollowed-out salt cavern might look good on paper. The concept is to carve out the insides of the caverns, deep underground, then carefully move in the waste. Over time, the logic goes, the salt will move in and insulate the containers for thousands of generations. "The whole game is to engineer something that can contain those contaminants on the order of tens of thousands of years,"   Salt-cavern storage was the plan for the Waste Isolation Pilot Project (WIPP), the world's third-deepest geological repository, constructed and licensed to permanently dispose of radioactive waste for 10,000 years. The repository sits approximately 26 miles east of the town of Carlsbad in southeastern New Mexico. Since shipments began in 1999, more than 80,000 cubic meters and 11,000 shipments of waste have been transferred to WIPP. But at the moment, there are several ongoing critical problems at the site, which has been closed and unable to accept shipments of radioactive waste ever since a fire and radiation release in February. Dozens of barrels of radioactive waste from Los Alamos National Lab, like the one that caused the radiation leak, now pose an "imminent" or "substantial" threat to public health and the environment. Yet, these problems could pale in comparison to what might happen at the site if an earthquake were to strike, or if the protective salt layer were compromised by nearby drilling for oil and gas, and in particular, hydraulic fracturing, commonly known as fracking. Fracking is a technique used in obtaining gas and petroleum, in which water is mixed with sand and toxic chemicals, and the mixture is injected at extremely high pressure into a wellbore to create small fractures. Thus, one would logically deduce that fracking should never be done anywhere near WIPP. However, it is being done there, and experts expect it to increase.

ND Ethics Law Potentially Broken on Petraeus Fracking Trip for Private Equity Kingpin KKR - Yves Smith - Yves here. Steve Horn of DeSmogBlog has done important original reporting and uncovered what could be impermissible dealings between North Dakota officials and David Petraeus, in his role as emissary for one of private equity’s best-known players, KKR. Readers may recall that KKR is already mired in controversy over allegations that it shortchanged limited partners in its funds in its dealing with its captive consulting firm, KKR Capstone.  Horn focuses on the ethics issues, which are troubling in and of themselves. But as worrisome is what KKR is attempting to pull off. KKR has particular expertise in being early to find and dazzling large and not terribly sophisticated investors. KKR was the first to target public pension funds, and succeeded in wooing Oregon and Washington’s state funds in the early 1980s. Admittedly, then private equity funds really were earning outsized returns, and the two Western states, seen as more innovative than their peers, also helped KKR woo other public pension funds. But private pension funds are subject to a raft of regulation, the most important being ERISA. Public pension funds generally comply with those rules even though they are not obligated to do so. By contrast, the pot of money apparently being targeted is North Dakota’s oil and gas legacy fund, which may grow to be as large as $5 billion by 2017. It is almost certain that this fund is subject to much less in the way of gatekeeping than public pension funds are. That would make it even easier for private equity funds, which have been showing mediocre performance since the crisis, to get their feeders into a new money source that hasn’t gotten the memo that savvy, longstanding private equity players like Harvard and CalPERS are getting cold feet about the strategy. Horn’s article mentions that the legacy fund’s advisory board recommended a 50% allocation to private equity fund managers.* If that is the case, that an insanely high allocation that no reputable finance professional would consider.

Fracking: Could Mexico's Water Scarcity Render It's Energy Sector Reforms Self-Defeating? - In many countries, including the U.S., France, Germany, Ireland, The Netherlands and Australia, fracking has been partially banned or delayed on environmental concerns. Also known as hydraulic fracturing, fracking is a controversial oil and gas producing method that relies on injecting massive amounts of water, chemicals and sand into the earth to break up rocks to free up oil and gas reserves buried deep underground. Cities in California, New York, Ohio, Pennsylvania, Texas, Colorado, Hawaii and New Mexico, have temporarily or permanently banned fracking. Yet the government of Mexico, which has largely suppressed national debate on a highly unpopular energy reform that will end the state’s 75-year old control of the oil industry, has fully embraced fracking as an alternative to its declining energy production. Mexico, the third-largest exporter of crude oil to the U.S, has seen its oil output fall around 25% over the past decade. According to the 2013 U.S. Energy Information Administration survey, with 545 trillion cubic feet of shale gas, Mexico has the world’s sixth largest reserves. The Eagle Ford shale formation in Texas is believed to stretch hundreds of miles into Mexico, where it is known as the Burgos Basin.  Yet in the limited energy debate taking place in Mexico and the U.S there is a relevant area that has not received enough consideration:  the externalities and geographic limitations of fracking in Mexico where the cost could be especially high. Fracking on a large scale requires several million gallons of water per well which could create conflicts with agriculture and basic fresh water needs in a country were 55% of the population receives water only intermittently, according to Mexico’s 2000 national census.

Company That Caused Historic Chemical Spill Leaks More Waste Into West Virginia Waters - The company responsible for letting 10,000 gallons of a mysterious chemical seep into West Virginia’s water this past January experienced another spill at its site on Thursday, this time from an overflowing trench of potentially contaminated stormwater, according to state officials. Inspectors from the state Department of Environmental Protection noticed water overflowing into the Elk River from a containment trench at Freedom Industries’ site in Kanawha County on Thursday night at 5 p.m — the same site that leaked into the river in January, poisoning the drinking water supply for approximately 300,000 people. A sump pump that was supposed to send overflow to a storage tank had stopped working, inspectors said. As of early Friday, the overflow had stopped, and a spokesperson for West Virginia American Water assured that initial tests showed no detection of crude MCHM, the mysterious coal-cleaning chemical that spilled at the site on Jan. 9. The chemical has a distinct licorice smell, but state DEP inspectors said there were no odors reported coming from the site. WOWK reporter Jessie Shafer, who visited the site in the hours after the spill, said otherwise.“No odors reported at site today by public, but we were there. We smelled it clearly,” she tweeted.

RFK, Jr. Attacks Our Oil Train Craze on Ring of Fire Radio -- Robert F. Kennedy, Jr. can envision it now—rail cars leaving a shiny, expanded oil terminal near his neck of the woods in Albany, NY, heading south toward the Big Apple. All is well until the cars derail spilling thousands of Bakken crude oil gallons into the nearby Hudson River. Kennedy and the rest of the nation saw such a derailment in Lynchburg, VA in late April when 50,000 gallons spilled into the James River. Virginia health officials said the James River was safe less than two weeks later, but Kennedy doesn’t think Albany would so lucky because “World’s End,” the 200-foot-deep portion of the Hudson near rail tracks that would prevent any chance of a true cleanup in the event of a spill. “All that oil, which is very, very toxic, that stays at the bottom,” he said last week on his Ring of Fire radio program. “That’s very, very difficult to clean up [and] would affect the entire Hudson River ecosystem, as well as the health of communities that use the river for drinking water and recreation activity.”

Hundreds more fatalities if Keystone XL isn’t built? Not exactly -- On Friday, the State Department revised its January report on the environmental impacts of building or not building the controversial Keystone XL oil pipeline, including the number of potential injuries and fatalities if Canadian oil would move by rail instead.The New York Times reported that the revisions projected “hundreds more fatalities and thousands more injuries than expected over the course of a decade.”  Frightening numbers that supporters and opponents of the pipeline used to boost their case _ except that the newspaper tied the wrong set of numbers to the no-build scenario.“The initial study noted that without the pipeline, companies would simply move the oil by rail, and an addendum concluded that the alternative could contribute to 700 injuries and 92 deaths over 10 years,” wrote Times reporter Coral Davenport. “Friday’s updated report raised those numbers more than fourfold, concluding that rail transport could lead to 2,947 injuries and 434 deaths over a decade.”  The January Final Supplemental Environmental Impact Statement projected that the increase in rail traffic could lead to 49 additional injuries and six fatalities annually, or 490 injuries and 60 fatalities over 10 years. On Friday, the department said that projection was incomplete based on “an error in search parameters” applied to a decade of Federal Railroad Administration accident data.“  Using these updated statistics, the estimated numbers of incidents correlated to the increased rail traffic that was assumed in the rail scenario would increase from 49 to 189 injuries, and from 6 fatalities to 28,” the department wrote.  So where did those higher numbers come from? They represent the total injuries and fatalities from all rail-related accidents the government counted from 2002 to 2012. The department then used those numbers to project an annual increase in injuries and fatalities.

Judge Rules Exxon Must Face Negligence Lawsuit Over 210,000-Gallon Oil Spill - An Arkansas federal judge on Monday refused to let ExxonMobil off the hook from a lawsuit claiming the company violated federal and state clean water laws when its Pegasus Pipeline ruptured in March 2013, spilling approximately 210,000 gallons of Canadian tar sands crude oil into the small community of Mayflower.  U.S. District Judge Kristine Baker denied the company’s motion to dismiss, saying the lawsuit offered sufficient proof that ExxonMobil may have committed two violations of the Clean Water Act, two violations of Arkansas’ air and water regulations, and one hazardous materials violation. The lawsuit, brought by both the federal and Arkansas governments, says ExxonMobil should pay up to $4,300 per barrel of oil released — a maximum of $21.5 million — and up to $45,000 per day in civil penalties for violations since the spill.  Residents of Mayflower have struggled to cope with the impacts of the now-infamous spill, which saw thick, gooey tar sands oil running onto a residential street, forcing the evacuation of 22 homes. Many residents have reported suffering from dizziness, headaches, nausea and vomiting — classic symptoms of short-term exposure to the chemicals found in crude oil — up to five months after it occurred. The lingering stench was apparently so bad that Exxon offered to buy out 62 homes in the area. The company even had to tear down a few houses and bought 20 more from affected residents. On the one year anniversary, residents said they were still attempting to regain a sense of normalcy.

Who Are You Kidding? -  Daniel Yergin, longtime foe of the Peak Oil crowd, made news on Friday claiming removing the oil export ban would reduce gasoline prices by 8 cents in the USA. Yergin claims ending the ban on exports would allow the U.S. to sell its highly rates light sweet crude on the open market and that would drive down the price of heavy sour crude we buy from other countries. The first point that should make his report suspect is that it was paid for by Exxon, Chevron and Halliburton. Any report that big oil funds has got to be suspect. They would not be paying for a report that said ending exports would reduce oil prices. They have a vested interest in seeing oil prices move continually higher. Secondly, the U.S. imports roughly 7 million barrels of crude per day from places like Venezuela, Brazil, Angola, etc. Why should we continue to fund the government of Venezuela by importing one million barrels every day from that country? Maduro hates us and blames the squalid conditions in Venezuela on the USA. The U.S. House just voted last week to place sanctions on Venezuela because of his treatment of his citizens yet we send them $3 billion per month for their imported oil. Yergin claims gasoline prices will go down 8 cents between 2016 and 2030 as a result of allowing exports. I believe if we allow exports of our currently "cheap" crude the price of gasoline will go up. I am positive the oil companies all want to export because they believe the price of oil will go higher not because they expect it to go lower. He also says it is stupid for the U.S. to allow gasoline and diesel exports but not allow oil exports. Personally I think it makes all the sense in the world. When we refine our own crude and export it as refined products we produce jobs for thousands of workers and our export dollars are higher because we are exporting finished products instead of raw crude.

How easy will it be to turn around Pemex? -- Not that easy.  Here is one excerpt from a generally interesting article: The failure of Pemex and its government overseers to invest in the latest drilling and exploration technology is partly to blame for the decline. A critical issue for the future of Pemex is manpower. The company is overstaffed with unskilled workers whose jobs are guaranteed for life and understaffed with engineers and skilled laborers, says Marcelo Mereles, a former Pemex director and now a partner at EnergeA, a consultancy. “Pemex continues to have a very big cultural handicap,” Mereles says. “The government has converted Pemex into a very bureaucratic company that operates like a government office and not like an international oil company.” Pemex’s ability to compete with foreign companies will also be hampered by deficiencies in Mexico’s educational system. “We’ve all heard the excellent news about Mexico’s great potential in the energy sector, but the question is, who’s going to do it?” said Rangel, of the hydrocarbons commission. “We have few universities committed to oil production, petrochemicals, chemical engineering or physics. And we produce few engineers.”Until now, petroleum engineers’ main potential employer in Mexico was Pemex, and they could earn more money abroad.

World Needs Record Saudi Oil Supply as OPEC Convenes - OPEC ministers say they will almost certainly leave their oil-production ceiling unchanged when the group meets this week. What really matters for markets is whether Saudi Arabia will respond to global supply shortfalls by pumping a record amount of crude. Just six months ago, energy analysts predicted output from the Organization of Petroleum Exporting Countries would climb too high and Saudi Arabia needed to cut to make room for other suppliers. They changed their minds after production from Libya, Iran and Iraq failed to rebound as anticipated, and industrialized nations’ stockpiles fell to the lowest for the time of year since 2008. Saudi Arabia may need to pump a record 11 million barrels a day by December to cover the other member nations. “Now it’s not whether the Saudis will make room, but whether they’ll keep it going and maintain enough spare capacity,” “OPEC is increasingly having a hard time just doing its job of bringing all the barrels needed.” Even as the North American shale revolution propels U.S. production to a three-decade peak, supply in other parts of the world is faltering. A battle for political control in Libya, pipeline attacks in Iraq and prolonged sanctions against Iran are preventing those nations from reviving output. While U.S. crude inventories rose to a record in April, restrictions on exports are keeping those supplies in the country, tempering forecasts that global oil prices will decline this year.

Stupidity Is Not A Valid Defense For Us - The Automatic Earth: When I see a headline like this one at Bloomberg today, World Needs Record Saudi Oil Supply as OPEC Convenes,,-- When I see a headline like this one at Bloomberg today, World Needs Record Saudi Oil Supply as OPEC Convenes, there’s just one thought that pops into my head: what the world needs is for us to stop doing this thing we’re doing. Even apart from peak oil concerns, it’s obvious we’re going to run out at some point or another, and it doesn’t matter whether that’s tomorrow or at some other point in the future, though we do know it’s not going to take another 100 years, or even 50. And nothing will ever take the place of oil; once those unique carbons are gone, that’s it, we’ll have to find a completely different way of running our societies, and if we’re not smart enough to prepare for that beforehand, we’ll be cats fighting in a sack and use the last scraps to kill off each other. Our main legacy will be bloodshed, we will have gone the exact same path that any non-thinking or even primitive organism would have taken, who don’t have opera or philosophy or poetry to their name. The reason a reporter chooses to say the world ‘needs’ all that oil may tell us a lot about ourselves, about where we are and where we’re going. The word ‘need’ is a choice we make, but that does not mean it reflects reality. ‘Want’ sounds far more applicable. We may ‘need’ the oil to continue on our chosen path, but that doesn’t mean the path is well-chosen. And we have the ability to think about different paths, and what each might mean for us, our children and our species going forward. The path we’re on is an obvious dead end, even if there are many amongst us who think they, and we, are so smart we can find our way out of any dead end predicament, including the loss of the carbons that have shaped our world for a 150 year long, even for mankind, fleeting moment in time.

IEA Investment Report – What is Right; What is Wrong  - Recently, the IEA published  a “Special Report” called World Energy Investment Outlook. Lets’s start with things I agree with:

1. World needs $48 trillion in investment to meet its energy needs to 2035. This is certainly true, if we assume, as the IEA assumes, that world economic growth will actually improve a bit, from 3.3% per year in the 1990 to 2011 period to 3.6% per year in the 2011 to 2035 period. It is likely that the growth in investment needs will be even higher than the IEA indicates.  In my view, this is a CYA report. The IEA sees trouble ahead. There is no way that investment of the needed amount (which is likely far more than $48 trillion) can be met. With the publication of this report, the IEA can say, “We told you so. You didn’t invest enough. That is why energy supply ran into huge problems.”

2. Without reform to power markets, the reliability of Europe’s electricity supply is under threat. The current pricing model, in which wind and solar PV get feed in tariffs and electricity prices for other fuels is set using merit order pricing, produces huge market distortions.  In my view, the problem is even worse than the writers of the report understand. The value of wind and solar PV are inherently difficult to determine, because they produce intermittent supply, and this is not comparable to other types of electricity. Furthermore, a big chunk of costs relate to transmission and distribution–42% of electricity investment costs in the New Policies Scenario. Many well-meaning researchers looked at wind and solar PV and thought they were a solution, but they tended to look at the situation too narrowly.

OPEC Meets As World Oil Demand Rises, Production Sputters -- Last December, as OPEC prepared to meet in Vienna, Bloomberg News reported that analysts it polled had predicted that the oil cartel would leave its production quota unchanged in the face of a growing supply glut. Despite its plans, “falling oil demand and prospects for increased supply from some member states mean the group’s leader, Saudi Arabia, will have to cut production anyway,” Bloomberg predicted. The age of abundance appeared to be upon us.  Six months later, OPEC may have the opposite problem on its hands. Despite December predictions that Saudi Arabia would need to trim its output by 1 to 2 million barrels per day (bpd) to prevent a price collapse, the oil kingdom kept its output level in the intervening months, and even slightly increased output to 9.66 million bpd in April from 9.56 million bpd in March. The group will meet on June 11 in Vienna amid sputtering output among many of its member states and better than expected economic growth in China and the U.S., the world’s largest oil consumers.  Taken together, global oil markets may be undersupplied for the second half of this year, with analysts now predicting Saudi Arabia may need to lift production substantially to meet demand. Saudi Arabia may need to boost output to somewhere between 10.2 and 11 million bpd to prevent prices from spiking, but the Bloomberg survey suggested analysts question whether or not the world’s largest oil producer can fill the void.

Burden is on Saudi as Opec leaves oil output unchanged: Organisation of Petroleum Exporting Countries (Opec), which supplies about 40 per cent of the world's crude, kept its production target unchanged at 30 million barrels a day, a decision that was widely anticipated. The Opec reaffirmed the ceiling for a fifth consecutive meeting, Diezani Alison-Madueke, Nigeria's petroleum minister said after the event. The group forecasts demand for its crude of 30.4 million barrels a day in the coming six months, while its 12 members produced 29.6 million barrels a day in April, the organisation's data show. Opec nations representing 94 per cent of the group's output said before the meeting that they were at ease with supply and demand in global oil markets. While the formal limit remains unchanged, the burden will fall to Saudi Arabia to increase output to meet higher demand in the second half as political turmoil constrains Libyan output and sanctions curb Iranian exports, according to Barclays, Societe Generale and Energy Aspects.The International Energy Agency (IEA), the Paris-based adviser to 29 nations, recommended on May 15 a "significant rise in Opec production" to meet its forecast of demand for the group's crude of 30.7 million barrels a day in the second half of the year. Oil inventories in advanced nations were at 2.62 billion barrels in April, the lowest for that month since 2008, the year Brent reached a record $147.50 a barrel, IEA data show.

The World’s Five Most Important Oil Fields -- Much has been made about the role that hydraulic fracturing – or fracking -- has played in revolutionizing the energy landscape, unlocking vast new reserves of oil trapped in shale rock. This “tight oil” is pouring into the global pool of oil supplies at a crucial time, preventing oil prices from spiking in an age of high demand and geopolitical turmoil. But the world still relies overwhelmingly on conventional oil production from existing fields, many of which are in decline. The Middle East has dominated the world of oil for half a century and as the list below shows, it remains king. Here are the top five most important oil fields in the world.

Quiet So Far, Oil Prices Could Rise as Insurgents Gain in Iraq - Military advances by Islamic insurgents in northern Iraq have had a negligible impact on global oil futures so far – but that’s likely to change if Baghdad doesn’t re-establish its authority soon. Iraq may evolve as a “significant wild card,” oil-trading advisory company Ritterbusch & Associates commented overnight, following the loss of a second major city to insurgents. Prices are likely to climb if tensions continue to rise, the firm said. Oil traders in New York were mostly taking things in stride late Wednesday after gunmen from the Islamic State of Iraq and al-Sham, an al Qaeda offshoot known as ISIS, took over the streets of Mosul and Kirkuk. July futures for benchmark WTI settled up just five cents, while ICE futures on Brent crude oil rose 43 cents, and strengthened only slightly in Asian trade Thursday. Since the start of the year, WTI and Brent futures prices are up 12% and 4%, respectively, adding to inflationary pressures in energy-importing countries. That rise is due mostly to existing political risks in places like Ukraine and Libya, as well as strong demand from China. It isn’t due to a shortage of oil, and events in Iraq won’t tighten supplies unless Baghdad loses control over the country’s southern oilfields, which supply all of Iraq’s roughly 2.5 million barrels a day of crude exports.

Oil Prices Will Hike After Mosul Falls - Oil prices are set to hike in the next few days with the growing fear that fighting in the northern city of Mosul will spread southwards in Iraq. The country is clearly in line for a greater split between the north and the south, but this time there will be little or no intervention from outside of the country, leading to the belief that oil prices in the world will be affected. The US has stated today that it will support a strong and coordinated response to aggression, however. After 4 days of intense fighting Iraq’s northern city of Mosul has fallen to the Islamic State and the Levant (ISIS), a break-away group of Al-Qaeda. A state of emergency has been requested by the Prime Minister of Iraq, Nouri al-Maliki at the Iraqi Parliament, with almost half a million people fleeing the city. All of this means that there are worries that there will be another rise in oil prices on the books, in particular if fighting starts spreading towards the south of the country. Sunni militants have already been reported to have been in the oil-refinery town of Baiji, which is some 200 kilometers from Baghdad. Baiji is the largest oil refinery in the country. 1.5 thousand troops have deserted their posts. Of course they have added to the strife by leaving behind weapons and equipment that will be snapped up by the splinter group.

Mosul Falls to Insurgents, Threatening Iraqi Oil Sector - OPEC’s second largest oil producer is in severe disarray just as the world has come to rely upon Iraq for greater energy supplies. Iraq is facing its biggest security threat in years following a surprise attack by Sunni militants on Mosul. In the June 10 attack on Iraq’s second largest city, members of the Islamic State of Iraq and Syria (ISIS) surprised Iraq’s security forces, driving them out and storming military bases, police stations and the provincial governor’s headquarters.  Government security forces shed their uniforms to avoid capture and abandoned their posts as Prime Minister Nouri Al-Maliki declared a state of emergency in the entire country. Eyewitness reports said civilians were streaming out of Mosul, fleeing the violence. The attack by the militant Sunni group is not the first. In January, ISIS attacked Ramadi and Fallujah in Anbar province, briefly taking control of the cities entirely. The turmoil in Mosul threatens to upend some of Iraq’s oil production. Most of Iraq’s oil is located in the south near Basra, but there are significant oil fields near Mosul, as well as in nearby Kurdistan. Perhaps more importantly, the fighting in Mosul has brought to a standstill the repairs to Iraq’s main oil pipeline to Turkey. Moreover, the violence could threaten future investment in the country, which has plans to triple its oil production by the end of the decade. The phenomenal level of investment required to achieve such a feat will not happen in a country suffering from severe violence. “Taking over Mosul will likely halt investment in oil and gas in that area,” Paul Sullivan, a Middle East expert at Georgetown University, told Bloomberg News. “Who wants to drop hundreds of millions or billions in a place where ISIL could attack at any moment?”

The Islamic State of Iraq and al-Sham Captures Mosul and Advances toward Baghdad -- Iraq’s territorial integrity is in question. The Iraqi Security Forces have fractured in the northern provinces. The Islamic State of Iraq and al-Sham (ISIS) is putting military pressure on Kirkuk and the Kurdish region and may be trying to drive a permanent wedge between Kurdish and Arab Iraq. There is now an Islamic State controlled by an al-Qaeda splinter in the heart of the Middle East…. Iraq’s security forces will not be able to retake all of the ground they have lost. They may not even be able to hold what they still have. The best-case scenario is a stalemate in which Iraqis manage to contain the ISIS state and army for now. The more likely case is the creation of another Syrian-style conflict pitting ISIS with increasing international support against desperate and increasingly brutal Iraqi Shi’a militias and ISF elements. The two civil wars, which have now completely merged, will continue to expand, destabilizing an already unstable Middle East and inviting further intervention by the Sunni Arab states and Iran. In the very worst case, the fall of Mosul could be a step down the path to outright regional war. It is likely to result in the meaningful creation of an al-Qaeda state straddling the Iraq-Syria border (and erasing that border), giving al-Qaeda a secure base of operations such as it has not had since the fall of the Taliban.

Iraq Slides Further Into Turmoil as Kurds Take Oil City Kirkuk - Iraq’s Shia-dominated government launched air strikes on Sunni insurgent positions in and around the city of Mosul on Thursday as Islamist forces hurtled toward the capital and Kurdish troops seized control of the key oil city of Kirkuk.  State television aired images of what it described as air strikes on insurgent positions in Mosul, seized on Tuesday after a days-long assault by the Islamic State of Iraq and the Levant (known as Isis) and its allies, as Iraqi forces abandoned their posts and fled. Turkish media also reported the Turkish military was flying surveillance drones over Mosul in a co-ordinated move with Baghdad.  Iraqi media reported clashes between Islamist insurgents and Iraqi security forces in Abu Ghraib, just west of Baghdad, as Isis warned it would take its battle to the cities of Najaf and Karbala, shrine and seminary cities holy to the Shia faith.  “Go to Caliphate Baghdad. We have a score to settle,” Isis spokesman Abu Mohamed al-Adnani urged in an audio recording posted online. “We will settle our differences not in Samarra or Baghdad but in Karbala, the filth-ridden city, and in Najaf, the city of polytheism.”

Kurdish forces step into security void in disputed Kirkuk - Beaming Kurdish fighters were dropped by the busload on the outskirts of Kirkuk on Thursday, eager to defend a city they say is on its way to becoming part of their autonomous region after the Iraqi army left. “The Iraqi army didn’t argue, they didn’t fight. They left behind their weapons. They didn’t even take their uniforms,” said Tayeb Younis, a young member of the peshmerga, the autonomous Kurdish region’s forces. “We are thrilled – this is a first step to [the city] becoming part of the Kurdish Regional Government.”  The sudden withdrawal of the central government’s army from Kirkuk is another sign of how quickly Iraq could break up into separate sectarian territories of Shia, Sunni Arabs and Kurds. Since militants of the Islamic State of Iraq and the Levant (known as Isis) seized Mosul on Tuesday, they have advanced to take control of an area that amounts to more than 10 per cent of the country.

Oil tops $106 for highest close in almost 9 months -  — Crude-oil futures top $106 a barrel on Thursday, with the U.S. benchmark marking its highest close in almost nine months as unrest in Iraq intensified, raising concerns about potential disruptions to the nation’s oil supplies. Militants reportedly took full control of the northern oil city of Kirkuk and vowed to march to Baghdad. The biggest threat to the oil market would be if militants took Baghdad and moved south to the oil patch, said James Williams, energy economist at WTRG Economics. “All together, there is Iraqi production of 3.5 million barrels a day at stake,” he said. “If all is temporarily interrupted, we could see a $20 spike” in oil prices.  July crude oil, the U.S. benchmark, tacked on $2.13, or 2%, to settle at $106.53 a barrel on the New York Mercantile Exchange. Tracking the most-active contracts, futures prices haven’t settled at a level this high since Sept. 18, 2013.

Oil Industry in Iraq Faces Setback to Revival - After a long history of wars and sanctions, Iraq re-emerged as a critical source of oil in recent years. Mounting Iraqi production helped to ease world oil prices despite the tightening restrictions on Iran and tanking exports from Libya. And Western and Chinese oil companies rushed back, revitalizing long-neglected oil fields in the north and south.Now suddenly all that progress has been put in jeopardy with the intense military offensive by extremist insurgents. The stakes for the oil markets are high as the Iraqi government tries to gain control over the situation. An eventual decline in Iraqi exports would put pressure on China and India to increase their imports of Iranian oil again, weakening the United States government’s position in negotiations with Tehran over nuclear policies. Russian oil exports would become more crucial for global markets, potentially strengthening the Kremlin’s hand in Ukraine. And a major spike in global oil prices could help unfriendly regimes like Venezuela.“The collapse of Iraq would bring an international oil crisis,” said Dragan Vuckovic, president of Mediterranean International, an oil service company that supplies state oil companies in Iraq. “It would mean crude oil would go up to $150 a barrel. It could spread unrest to Saudi Arabia and Kuwait.”

Iraq oil shock could kill world economic recovery, experts warn As violence threatens Iraq’s oil industry, experts fear crude at $130 per barrel would damage the global economy. Open warfare between the government and rebels in Iraq would pose a threat to the global economic recovery should oil production from the war-torn Middle East state suffer a serious disruption, analysts have warned….“The worst case scenario is that we see production from Iraq slip down to levels in the last Gulf war, then oil could spike $20 a barrel very quickly,” Ole Hansen, vice-president and head of commodity strategy at Saxo Bank told The Telegraph. “In that scenario, the entire economic recovery, which is still fragile, could stall and we could even slip back into recession in some regions.” 

US energy markets are not insulated from the unrest in Iraq  - The situation in Iraq continues to unravel. The nation's government and some in the media are calling this a "terrorist insurgency". In reality what we have is a large armed Sunni group, supported by militant factions from Syria, quickly gaining ground against the Shiite-controlled government forces. It's a civil war. Many Shia families are leaving Baghdad as the Sunni militants advance. And now Iran is getting militarily involved in an attempt to defend Shiite interests in Iraq. The risk of further escalation is threatening to cut Iraq's oil output and even destabilize the region.  NY Times: - traders are worried that the action could spread, threatening supplies. Iraq is the second largest oil producer in OPEC, representing the largest source of growth among the 12 member countries. Of perhaps greater concern is that the growing instability in Iraq and the unrest in other big petroleum-producing countries could alter the geopolitical dynamics that have kept oil prices remarkably stable although relatively high for the last three years. The Russian annexation in Crimea and the chaos in Libya “point to a systemic and seismic shift geopolitically,” Edward L. Morse, head of commodities research at Citigroup, wrote in a note to clients on Friday.  Oil prices have been on the rise as a result, with US crude prices following Brent higher.

Khamenei rep blames Saudi Arabia, Qatar for Iraq insurgents - The representative of Iran’s supreme leader to the Revolutionary Guard Corps blamed Saudi Arabia and Qatar's failed policies in Syria as the reason behind the surge of the Islamic State of Iraq and al-Sham (ISIS) in Iraq. Ali Saeedi said, “Saudi Arabia tried very hard to ruin the situation in Syria, and Qatar also invested a lot in this situation.” He continued, “Today they feel that all of their conspiracies have failed in Syria. They have started a new front in Iraq.” Saeedi also blamed the policies of the United States and “other countries” for increasing terrorism in the region. While it is not uncommon for conservative Iranian media outlets to assign blame to Arab countries in the Persian Gulf, it is rare for an Iranian official, especially one as high profile as Supreme Leader Ayatollah Ali Khamenei’s representative to the Revolutionary Guard, to accuse Saudi Arabia or Qatar by name. Often officials will refer only to “countries in the region.” However, as the situation in Iraq worsens, the rhetoric has increased. Ayatollah Seyed Yousef Tabatabei-nejad, Friday prayer leader for Esfahan, also pointed at Saudi Arabia as the source of funding for terrorist groups.

Exclusive: Alarmed by Iraq, Iran open to shared role with U.S. - Iran official  (Reuters) - Shi'te Muslim Iran is so alarmed by Sunni insurgent gains in Iraq that it may be willing to cooperate with Washington in helping Baghdad fight back, a senior Iranian official told Reuters. The idea is being discussed internally among the Islamic Republic's leadership, the senior Iranian official told Reuters, speaking on condition of anonymity. The official had no word on whether the idea had been raised with any other party. Officials say Iran will send its neighbor advisers and weaponry, although probably not troops, to help its ally Prime Minister Nuri al-Maliki check what Tehran sees as a profound threat to regional stability, officials and analysts say. true Islamist militants have captured swathes of territory including the country's second biggest city Mosul. Tehran is open to the possibility of working with the United States to support Baghdad, the senior official said.

IEA Says the Party’s Over -- The International Energy Agency has just released a new special report called “World Energy Investment Outlook” that should send policy makers screaming and running for the exits—if they are willing to read between the lines and view the report in the context of current financial and geopolitical trends. This is how the press agency UPI begins its summary:  It will require $48 trillion in investments through 2035 to meet the world’s growing energy needs, the International Energy Agency said Tuesday from Paris. IEA Executive Director Maria van der Hoeven said in a statement the reliability and sustainability of future energy supplies depends on a high level of investment. “But this won’t materialize unless there are credible policy frameworks in place as well as stable access to long-term sources of finance,” she said. “Neither of these conditions should be taken for granted.”Here’s a bit of context missing from the IEA report: the oil industry is actually cutting back on upstream investment. Why? Global oil prices—which, at the current $90 to $110 per barrel range, are at historically high levels—are nevertheless too low to justify tackling ever-more challenging geology. The industry needs an oil price of at least $120 per barrel to fund exploration in the Arctic and in some ultra-deepwater plays. And let us not forget: current interest rates are ultra-low (thanks to the Federal Reserve’s quantitative easing), so marshalling investment capital should be about as easy now as it is ever likely to get. If QE ends and if interest rates rise, the ability of industry and governments to dramatically increase investment in future energy production capacity will wane.

For Western Oil Companies, Expanding in Russia Is a Dance Around Sanctions - — Like many chief executives of American companies, Rex W. Tillerson of Exxon Mobil didn’t attend the major business forum in Russia last month, at the urging of White House officials. But the company’s exploration chief, Neil W. Duffin, did.In a ceremony at the event, Mr. Duffin signed an agreement with Igor I. Sechin, the head of the state-owned Rosneft, to expand its joint ventures to drill offshore in the Arctic Ocean, to explore for shale oil in Siberia and to cooperate on a liquefied natural gas plant in Vladivostok.The deal came just weeks after the United States government imposed sanctions on the personal dealings — though not the corporate activities — of Mr. Sechin, a former military intelligence agent and longtime aide to President Vladimir V. Putin.  Despite the push by Western governments to isolate Moscow for its aggression in Ukraine, energy giants are deepening their relationships with companies here by striking deals and plowing more money into the country.

Russia-Ukraine Gas Talks to Resume Despite Overrunning Russia's Deadline - Russia and Ukraine planned to resume efforts to resolve a gas pricing dispute late on Tuesday after a Russian deadline for Kiev to pay some of its debts passed without Moscow cutting off supplies. The gas dispute is at the heart of a crisis between Russia and Ukraine, and failing to resolve it would set back peace moves that are gaining momentum after weeks of violence in east Ukraine. Russia gave Ukraine until 10 a.m. Moscow time on Tuesday to pay some of the billions of dollars it owes, but pulled back from the deadline after officials said talks brokered by the European Commission would continue in Brussels. Russian Energy Ministry spokeswoman Olga Golant confirmed the Russian delegation was flying back to Brussels for evening talks after consultations with President Vladimir Putin in Moscow. The Russian leader will have the final say on any deal. The European Commission confirmed negotiations would resume Tuesday evening after eight hours of talks, which ended early Tuesday morning, failed to get a deal.

90% Of Gazprom Clients Have "De-Dollarized", Will Transact In Euro & Renminbi -- Following Obama and Putin's "caught on tape" meeting Vine'd by the French President, we can't help but wonder if the Russian leaders comments were something akin to "this is not over yet." With "De-Dollarization" efforts already broadly under discussion, ITAR-TASS reports that Gazprom had signed additional agreements for clients to switch from dollars to euros and renminbi, "nine of ten consumer had agreed to switch."

"This Is A Trend": Increasingly More Russian Companies Set To Drop Dollar, Switch To Chinese Yuan -- As we have been reporting (and forecasting for the past several years), the Eurasian anti-US Dollar axis is rapidly taking shape, with recent events catalyzed and certainly accelerated by US foreign policy in Ukraine, which has merely succeeded in pushing Russia that much closer, and faster, to China. The latest proof of this came overnight when the FT reported that Russian companies are preparing to switch contracts to renminbi and other Asian currencies amid fears that western sanctions may freeze them out of the US dollar market, according to two top bankers. Andrei Kostin, chief executive of state bank VTB, said that expanding the use of non-dollar currencies was one of the bank’s “main tasks”. “Given the extent of our bilateral trade with China, developing the use of settlements in roubles and yuan [renminbi] is a priority on the agenda, and so we are working on it now," ... "It looks like this is not just a blip, this is a trend,” said Mr Teplukhin of Deutsche Bank.

Russian Companies Plan to Denominate More Trade in Renminbi -- Yves Smith - The lead story in tonight’s Financial Times is Russian companies prepare to pay for trade in renminbi, on how Russian companies are seeking to protect themselves from the impact of possible increasing US sanctions against Russia by denominating more of their foreign transactions in the renminbi and other non-dollar currencies. The critical question is: how serious a development is this? The short answer is that there is less here than there appears to be. In general, the eagerness to see a declining and increasingly aggressive and inept hegemon get its comeuppance has led a lot of commentators to look forward to the demise of the dollar. However, changes of currency regimes are protracted affairs that typically entail a great deal of instability.  Nevertheless, the US’s deliberate and heavy-handed use of its influence over the international payment system to engage in economic warfare is leading countries like Russia and China to look more seriously than they would have otherwise into to building up independent payment and financing networks. Key sections of the Financial Times’ account: Russian companies are preparing to switch contracts to renminbi and other Asian currencies amid fears that western sanctions may freeze them out of the US dollar market, according to two top bankers. “Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies and to set up accounts in Asian locations,” Andrei Kostin, chief executive of state bank VTB, said…“Given the extent of our bilateral trade with China, developing the use of settlements in roubles and yuan [renminbi] is a priority on the agenda, and so we are working on it now,”  “Since May, we have been carrying out this work.”

CHART OF THE DAY: Iron Ore Prices Are Down 18% In 2014 - The relentless fall in iron ore in 2014 has drifted out of the headlines but as this chart from HSBC shows, there has been no let-up recently with more weakness in March. HSBC Economics said of global commodity prices during the month: Metals prices were a key area of weakness. Iron ore prices fell -8.1% in the month, to be -18% lower so far this year. Copper prices also fell -5.2% in the month. Indicators of Chinese activity have continued to weaken recently and this has weighed on the outlook for industrial commodities demand more broadly, with tight credit conditions in China a further disruptive factor. It is also apparent why news of BHP potentially demerging its aluminium business is also making headlines again over the past 24 hours, even though it has been likely for many months. Yesterday’s RBA Commodity Price index suggested that the Aussie dollar is around 10% overvalued and this report from HSBC simply reinforces that with our biggest export tanking in 2014, the RBA is probably right to be wanting the Aussie dollar lower – otherwise our export earnings might tank too.

Bronze Swan Lands: Goldman Explains How The China Commodity Unwind Will Happen - Over a year ago we were the first to bring the topic of China's shadow banking system's problematic rehypothecation issues to the general trading public. In "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?" we explained how the Chinese commodity financing deals (CCFDs) worked and how they would inevitably be a systemic event for the nation so dependent on the shadow banking system for its credit (and its "growth"). The day has arrived when the Bronze Swan is landing (and it's unlikely to be soft). As we have discussed recently, the probe into 'missing' collateral (or multiple-used collateral) at China's Qingdao warehouse is a major problem... and now Goldman confirms, the Qingdao situation likely to continue ongoing CCFD unwind and has the potential to leave foreign banks with undercollateralized loans and/or losses.

China's Rehypothecation Scandal In One Chart - Remember how small Greece was and how it wasn't relevant to US stocks... until suddenly it got close to breaking up the EU and the world's markets slumped. Remember how small subprime was? Remember how Lehman was not a 'big' bank? We hear the same "why would that impact us?" chatter now about the China rehypothecation scandal and we suspect the outcome will be just as dramatic a "whocouldanode" moment for many. The problem, as this chart so simply explains, is "more warrants than the volume of the underlying physical commodities have been issued in the repo business" and that is a problem for every foreign bank that was tempted into China's carry trade (which is "every" bank). Simply put - the collateral that I promised you on my loan... I also promised to between 10 and 30 other people... but we're good right?

China’s Resource Imports Ebb, But Signs of Health Remain -- China’s imports of major resources fell in May, though they continued to extend modest on-year gains, signaling that macroeconomic uncertainty and metal-financing probes may have taken the edge off trading appetites. The data reflect a broader trend of strong exports offset by relatively weaker imports in the world’s second largest economy, which is also in key cases the world’s largest buyer of industrial commodities such as iron ore and copper. Analysts widely expected a step back from near-record levels of commodity purchases posted in April. Imports of crude oil fell 6.4% from April to 6.37 million barrels a day, though they were up 8.9% from a year ago, data from the General Administration of Customs showed Sunday. Iron ore and copper followed the same tack. Imports of the steelmaking ingredient fell 7.2% from April to 77.4 million metric tons but rose 13% on year. Copper shipments ebbed 15.6% from April but gained 6% from the same month in 2013 to reach 380,000 tons in May. The government has been closely monitoring the role of copper and iron ore imports for their potential to exacerbate China’s vulnerability to financial instability. An estimated third or more of Chinese metal imports are believed to be used as collateral for loans in China’s vast shadow-banking system, instead of feeding actual demand. Chinese authorities are investigating whether companies used the same copper, aluminum and iron ore held as stock in Qingdao– a relatively small port in China’s Shanghai-centered copper trade–as collateral for multiple loans, people familiar with the matter said. News of the probe lowered Chinese copper prices by 4% last week.

Iron Ore Prices Hit Fresh 21-Month Lows As Commodity Ponzi Probe Escalates -- Anxiety over the Qingdao port and warehouse probe is slowly but surely creeping through all the commodities that were used in China's commodity-financing-deals (as we noted here). With Copper hurting (and gold picking up), Iron Ore prices have tumbled to 21-month lows (near the lowest since 2009) as 'real' demand slows as the economy slows and 'financial' demand is crushed as "banks are more vigilant about iron ore financing." As Bloomberg reports, investigators are trying to determine if individual batches of commodities were used multiple times to secure loans. This is making banks nervous (shadow and non-shadow) and while iron ore inventory is falling, prices are adjusting lower rapidly as traders anticipate "financing problems forcing traders to dump ore."

China faces trade war impasse as TPP members close new admissions -- After joining the World Trade Organization (WTO) more than 10 years ago, China and the WTO are sensing the pressure of being "marginalized" in the restructuring of the international trade system, especially with the nation facing the pressure of joining the Trans-Pacific Partnership (TPP), reports the Shanghai-based China Business News. Once related countries complete the TPP talks, China will have a difficult time joining in — comparable to joining the WTO for the second time, the report said. In the Asia Pacific region, led by the high standards of the United States, the TPP, which covers both the US and Japan, has recently seemed to reach a crucial stage in negotiations. The Regional Comprehensive Economic Partnership (RCEP), which involves talks with China, has yet to reach any substantive phase of negotiations. In the WTO headquarters of Geneva, China especially has felt the impact from the US standard-led plurilateral trade agreements, with the Information Technology Agreement (ITA) and the Trade in Services Agreement (TISA) talks testing the bottom lines of China's current systems. Several trade ministers in the TPP-involved-countries, such as Canada and New Zealand have decided not to expand the membership of the TPP. They will consider the joining of other interested nations, including China, after the rules of the TPP have been completed.

China Now Has More Millionaires Than Any Country but the U.S. - There are now more millionaires in China than in Japan, as the wealthiest Chinese reaped huge returns from shadow-banking-related financial products, a new study revealed. China had 2,378,000 millionaire households in 2013, a rise of 82% from the previous year and almost double the 1,240,000 millionaire households in Japan, according to the Boston Consulting Group Global Wealth 2014 report unveiled on Tuesday. China’s millionaire population is now the world’s second-largest, trailing only the U.S., which boasted 7,135,000 millionaire households in 2013. BCG defines a millionaire household as those with $1 million in total liquid wealth, including stocks, cash and other financial investments but not real estate, collectibles or luxury items.The firm said it calculated total wealth by reviewing national accounts and other public records, then distributed the wealth over a curve based on wealth-distribution statistics available in each country. It also researched national statistics to identify the types of assets owned by those in different countries.The Chinese saw their portfolios swell as wealth in the country grew by a whopping 49% to $22 trillion last year. The report’s authors attributed that explosive rise to specialized financial products such as trusts — the amount of wealth in trusts rose 82% in 2013 — “reflecting the country’s rapidly expanding shadow-banking sector.”

China’s Real Estate Downturn Spells Trouble for Global Economy - The world's largest trading nation's economic growth remains heavily dependent on property, meaning a sharp downturn in that sector would be felt across Asia and beyond.  “Will the government save the market if housing prices fall?” That was the question being asked in China this week — not by stressed-out mortgage holders, but by the country’s most famous (and wealthy) property mogul, Pan Shiyi. Pan, the chairman of giant real estate developer SOHO China, has made a series of pronouncements in recent weeks that reflect an increasingly bearish long-term outlook for China’s property sector.At an industry forum in late May, Pan compared the nation’s real estate prospects to the Titanic. “It [the real estate industry] will soon hit the iceberg in front of it,” he declared.Pan’s outlook may be bleak, but is borne out by statistics. According to Standard & Poor’s, residential housing prices in China will drop by 5% this year — a dramatic reversal from last year’s rise of 11.5%.That’s bad news for China’s property holders, but potentially also a worrying sign for global investors. With Chinese economic growth heavily dependent on the real estate sector, which accounts for 20% of GDP by some estimates, a sharp slowdown in the property market would be felt far beyond China’s borders. (China is, after all, the world’s largest trading nation.)

Mindblowing Fact Of The Day: China Has Over 52 Million Vacant Homes -- Over 1 in 5 homes (with $674 billion of mortgages) in China stand empty... and if you think that urbanization will fix that, as WSJ reports, a 10 percentage point rise in the urbanization rate (already at 54%) would result in only a 2.6% drop in vacancy rates. China has a major over-supply issue thanks to property developers who had rushed into the market to build homes, which have been a popular investment as prices seemed bound to keep rising. But now, as Vanke recently warned, things are changing and "the golden era" of China's property market are over. The vacancy rate of sold residential homes in urban areas reached 22.4% in 2013 and as new home prices are slashed to move product, a 30% drop would leave 11.2% of Chinese homes underwater on their mortgages...

China No-Money-Down Housing Echoes U.S. Subprime Loan Risks - China’s home buyers are being offered no-money-down purchases in an echo of the subprime lending that triggered a U.S. economic meltdown and the global financial crisis Deals skirting government requirements for minimum 30 percent down payments have emerged this year from Guangzhou and Shenzhen in the south to Beijing in the north as real-estate sales slump, according to state media and statements by government agencies and developers.  “The risk is severe for developers and third parties because there is no commitment from home buyers,” said Ding Shuang, senior China economist at Citigroup Inc in Hong Kong. “Zero down payment has appeared in the U.S. before. It basically enabled unqualified people to buy houses,” said Ding, who used to work for the International Monetary Fund. “We need to see whether this will become widespread,” The practice threatens to add to the build-up of risks in China’s $7 trillion shadow banking industry, with developers or third parties arranging funding to cover down-payment requirements

NABE: Majority of U.S. Business Economists Expect Debt Crisis in China - A little more than half of U.S. business economists think China is headed toward a debt crisis in the coming years, according to a new survey from the National Association for Business Economics. Some 52% said they agreed with the statement that “China will face a debt crisis within the next few years,” while 25% said they disagreed and 23% said they neither agreed nor disagreed. The responses came in a NABE poll released Monday. “The biggest concern that has been in discussion is the housing boom and bust in China,” “I think it’s just an overexpansion like we’ve seen in other housing bubbles that have occurred, here in the United States and elsewhere.” In addition to China’s weakening housing market, burgeoning local government debt has been flagged as a potential threat to economic growth, and the government has recently sought to tighten oversight of shadow-banking services.Still, the International Monetary Fund’s Changyong Rhee said in April that the chances of a full-blown financial crisis in China remain low. Mr. Kleinhenz said a Chinese housing bust “shouldn’t have an impact globally” like the U.S. housing crash that helped trigger the 2008 financial crisis. The 47 NABE members who took the survey, which was conducted May 8-21, also saw risks to growth in Europe. An overwhelming majority, 84%, said they believe tensions between Russia and Ukraine “will hinder the economic recovery in Europe,” though just 34% said fallout from the crisis will hinder U.S. economic growth. In the U.S., the NABE economists predict a rebound from the weak first quarter, when gross domestic product contracted at a 1% seasonally adjusted annual rate. The survey’s median forecast is for GDP to expand in the second quarter at a 3.5% pace, and 2.5% for the full year. That’s a little less than economists had predicted in NABE’s March survey, when the median forecast for GDP growth in 2014 was 2.8%.

IMF’s 7% solution not a forecast - On Thursday, the International Monetary Fund’s number two, David Lipton, officially urged China to reduce its growth target to 7% from the current 7.5%. That’s a big deal because the annual growth target is used by Beijing to signal to the provinces whether to let growth slow as a way to incorporate reforms that might cause some short-term pain. A seven-percent solution, in other words. But some media reported the IMF had reduced its estimate of how fast China would grow to 7% in 2015 from the 7.3% the IMF had last forecast.Two IMF officials said there has in fact been no change to the forecast. The officials said the IMF was making a pitch to Chinese leaders that they should be willing to live with somewhat slower growth. One way to do that would be to reduce the growth target, which is set early every year. But the IMF didn’t make any adjustment to its forecast of what growth rate China would actually achieve. “The headlines got ahead of reality,” said one of the officials.

Risky Business in China’s Financial System - Is China heading for a financial crisis? Some risk indicators have risen markedly over the past twelve months: Interbank rates are more volatile, with liquidity shortages increasingly common; there have been a few minor bank runs; and the country experienced its first corporate default in recent history earlier this year.  Moreover, though official figures suggest that just 1% of loans are non-performing, bank balance sheets likely aren’t as healthy as they seem. Evidence from a range of countries suggests that credit booms – as China experienced from 2009-‘13 – result in substantially higher levels of non-performing loans (NPLs). A more realistic assumption that 10%-20% of total loans might go bad implies total NPLs of RMB6-12 trillion (US$1-1.9 trillion). The higher end of the range would suggest a bad-asset problem comparable in scale to the one that followed the U.S. subprime loan crisis. That’s risky enough — even before taking into account the rapidly expanding shadow banking sector. Shadow banking, which is more lightly regulated than conventional banking, now accounts for around 15% of total financing to China’s economy, up from less than 5% in 2005. The existence of such a large shadow-banking sector is a warning sign about the true extent of financial-market risk. The shadow banking sector largely developed to help banks circumvent government restrictions, so asset quality there is likely lower than in the formal banking sector. Indeed, non-bank lending institutions have been key factors in other regional financial crises, notably in Thailand in 1996-97 and Korea in 2003.

Has China got an external-debt problem? Not likely - China’s growing taste for offshore financing has come into focus following revelations that much of the collateral behind billions of dollars in foreign loans was pledged for multiple loans. With authorities trying to curb soaring credit as China’s economy slows, companies have resorted increasingly to tapping cheap global credit and investors hungry for higher yields have been only too happy to oblige them. Overseas loans to China grew 50% in 2013 to $1.1 trillion, according to the latest data from the Bank for International Settlements. If that seems like a rapid increase, it is: the only countries in Asia that saw a faster surge in foreign credit was Laos. That puts China second in Asia behind Japan in terms of total borrowing from foreign banks. Where does  the money originate? Of the 26 countries whose banks report to the BIS, China’s biggest exposure is to banks from the U.K., a group that includes British-domiciled banks with most of their assets in Asia, HSBC and Standard Chartered Bank. Loans from British banks to China grew 37% last year, according to the BIS, to $195 billion. Fitch Ratings reckons Asian banks have increased their exposure to China two-and-a-half times since 2010, to $1.2 trillion. And in April, the Hong Kong Monetary Authority warned that lending to China by Hong Kong’s banks had become “a key risk factor to watch for.” The second largest exposure is to U.S. banks, a group that would include Citigroup. American banks boost their loans to China by 14.6% in 2013 to $80.9 billion. That doesn’t include the surge in offshore bond issuance by China in recent years. The amount of China’s debt securities offshore surged 58% last year to $274.3 billion, according to the International Monetary Fund, most of it by nonbank financial institutions.

Inflation: The One Bright Spot in China’s Economic Figures - At least one part of the Chinese economy is cooperating with policymakers, judging from Tuesday’s release of inflation data. Moderate consumer price increases in May were essentially in line with expectations — neither high enough to constrain a more accommodative monetary policy should growth weaken further, nor low enough to raise alarm bells over deflation — which should give Beijing’s economic kingpins one less thing to worry about. The one stand-out in China’s May consumer price index was the food prices component, notably pork, which saw a more than 5% rise. Still, the increase appears to mostly be a one-off, according to a research note by Capital Economics, an independent macroeconomic research group – a rise driven by the government’s desire to prop up the pork market by restocking its pork reserve. In China, it’s hard to keep too much pork stashed away, given that pork accounts for nearly three-quarters of the country’s meat consumption. According to the nonprofit Earth Policy Institute, the average Chinese eats over 80 pounds of pork a year, compared to around 60 pounds per capita for Americans.Over the next few months, pork supplies seem likely to tighten, so prices could rise again, the note said. “That said, we don’t expect inflation to get out of hand this year,” May’s consumer inflation figures of 2.5% year over year for China compares with a 1.8% year-on-year rise for April, well below Beijing’s inflation target of under 3.5% for the full year and in line with the “good inflation” of around 2% that economists say helps borrowers repay their debts and nudges consumers to spend.

Hopeful Signs that China’s Industrial Deflation is Finally Easing - China’s factory-gate prices have been stuck in negative territory for 27 straight months, but some analysts say industrial deflation is beginning to turn as commodity prices recover. China’s producer-price index recorded its strongest reading so far this year in May, down 1.4% from a year earlier. That’s still well in deflationary territory, but is a significant improvement from April’s 2.0% decline.On a seasonally adjusted basis, the PPI edged up 0.1% in May from April – its first sequential rise in six months. Deflation in the PPI could simply reflect weak prices of commodity inputs used in industry. But it also could be a sign of overcapacity and weak industrial demand as China’s economic growth slows. Falling producer prices make it tougher for makers of industrial goods and commodities to make profits, pay off their debts and pay their suppliers on time. “The latest easing in PPI deflation pressure likely reflects the recent moderate upturn in global commodity prices and the weakening in the yuan,” J.P. Morgan economist Zhu Haibin wrote in a research note. The yuan has fallen about 3% against the U.S dollar so far this year. A cheaper yuan makes imported raw materials more costly, which may be contributing to the improving PPI. Prices of non-ferrous metals rose 1.4% on-month in May — their first increase since February — and oil and gas prices also climbed in the past three months. Coal and steel prices continued to fall, though the pace of decline slowed.

China cuts reserve ratio for small banks - China has taken a fresh step to boost flagging growth by cutting the amount of cash reserves some lenders must hold at the central bank in a bid to boost lending to small businesses and the rural economy. The People’s Bank of China said it would reduce the “required reserve ratio” by 0.5 per cent for banks that mainly lend to small businesses and rural borrowers. In the first quarter of this year, China’s economy grew by an annual 7.4 per cent, down from 7.7 per cent expansion in the final three months of 2013. Even if the country hits its official growth target of 7.5 per cent for 2014, it will be the slowest pace since 1990. Many economists believe even that target is unrealistic: Morgan Stanley’s Helen Qiao on Monday lowered her growth forecast for this year to just 7 per cent. The PBoC’s latest move suggests that industrial production, fixed-asset investment and inflation data due out this week are likely to show a further softening in the second quarter. The property market is a further focus of concern, with prices declining month on month in May for the first time since 2012. Chinese policy makers are attempting to strike a fine balance between preventing a sharp economic slowdown or “hard landing” and reining in credit growth, which risks enlarging the country’s worrying debt burden and fuelling an overheating property market.

China ramps up spending to spur economy, central bank sees stable policy (Reuters) - China's central bank said on Wednesday it will keep monetary policy steady in 2014, even as the finance ministry said fiscal spending had surged nearly 25 percent in May from a year earlier, highlighting government efforts to energize the slowing economy. Total fiscal spending in May rose to 1.3 trillion yuan ($208.75 billion), quickening sharply from a 9.6 percent rise in the first four months of the year. China's cabinet also revealed on Wednesday that it was now planning more big infrastructure projects, including highways, train networks and oil and gas distribution and storage facilities, as part of its efforts to keep the economy growing at a stable rate. true The higher spending comes after the world's second-biggest economy got off to a soft start to the year, growing at its slowest pace in 18 months in the first quarter. The economy has since shown some signs of stabilizing, but the recovery appears patchy and analysts do not rule out further stimulus measures, especially if the cooling property market starts to deteriorate rapidly.

US consumer and domestic stimulus reducing China's economic risks -  American consumers are helping to pull China out of its economic malaise. The recent credit card driven spending surge in the US (discussed earlier) sent China's trade surplus to new highs. The trade balance clocked at almost 元36 billion (vs. 23 billion expected). Risks surrounding China's credit markets, stemming from property developers and "wealth" products, will persist.  However Beijing's stimulus efforts, combined with increased US consumer spending, should keep China's economy avoid a more severe slowdown.Scotiabank: - China’s economy is on the mend compared to concerns that spanned the winter months. ... As the government increases spending on targets including railways and broader infrastructure and the People’s Bank of China lowers reserve ratio requirements and injects fresh liquidity into markets, the policy bias in China is to take out insurance against further downside risks in an effort to preserve its 7.5% GDP growth target. Default risks across China’s shadow banking sector remain material over 2014H2 but improved fundamentals may be a significant offset from a market standpoint.

Korea’s Income to Overtake Japan, France, Moody’s Says - Moody’s Investors Service predicts Korea will likely surpass Japan and France by one measure of personal income in the next four years, as part of its “breakout” growth trend. In a report Monday, the ratings firm notes that Korea, Asia’s fourth-largest economy, has exceeded the median average annual growth of 32 countries with per-capita income of $30,000 or more in purchasing power parity terms in the past five years — and will likely continue to do so. Moody’s expects South Korea’s per-capita income to jump to $38,451 in 2018 from $31,950 in 2012 in PPP terms. Japan is expected to rise to $37,826 and France to $37,647 over the same period. PPP measures a currency’s actual purchasing power after adjustments are made for the differing costs of goods and services across countries. Since goods and services are generally cheaper in South Korea than in Japan, South Korea gets a boost when the two economies are compared in PPP terms. “Looking out over the next four years, Korea will likely remain on a relatively robust growth path, and it will continue to close the gap in living standards with the mature and advanced economies,” Moody’s said. The ratings firm notes risks to the Korean economy such as high levels of household debt, but predicted appropriate policy measures would ensure continued solid growth.

Japan c/a data shows biggest trade deficit for month of April (Reuters) - Japan logged its biggest trade deficit for the month of April as imports of fuel and electronics parts outpaced shipments of cars, leading to a smaller-than-expected current account surplus, Ministry of Finance data showed on Monday. The trade deficit stood at 780.4 billion yen ($7.61 billion) in April, up 10.2 percent from the same month a year earlier. The current account came to a surplus of 187.4 billion yen, undershooting a median forecast for 322.5 billion yen as trade shortfalls widened and income gains narrowed. The current account data also showed that the travel balance swung to a surplus of 17.7 billion yen, the first surplus since July 1970 as foreign visitors outnumbered Japanese travellers abroad.

The Only Chart You Need To See To Trade Japan's GDP "Beat" - While Japan's Trade balance missed expectations once again (bigger deficit than hoped or expected), the flashing red headlines of the night belong to Japan's 1.6% QoQ GDP print (better than expected)  - the 'best growth' since Q3 2011. The initial reaction was JPY weaker, which meant Nikkei higher (and oddly JGBs rallied too). But... and it's a big but... Japanese consumer spending shot up by 2.2% in Q1 - the biggest on record... matched only by Q1 1997, the quarter before Japan's last tax-hike decision. What happened the quarter after that? Take a look...

What’s Behind Japan Capex Surge? Old Windows May Play a Role -  The surprise upward revision to Japan’s gross domestic product for the first quarter of 2014 might have been helped along by an unlikely source: Microsoft’s decision to end support for its Windows XP operating system. The Japanese government said Monday that real GDP grew 6.7% on an annualized basis in the January-March quarter, higher than a preliminary estimate of 5.9% issued three weeks ago. The change was “a surprise for many,” said Norio Miyagawa, a senior economist at Mizuho Securities Research and Consulting. Many economists were expecting the GDP figure to be revised down, to 5.0%-5.5%. The biggest contributor to the upgrade was corporate capital spending, which rose 7.6% from the previous quarter period – far more than the 4.9% growth in the initial estimate. The government doesn’t release details of investment. But economists said one likely factor was purchases of new computer hardware or software related to Microsoft ending support for its old operating system in April. “It’s hard to estimate how much it contributed to overall capital spending, but judging from related surveys, corporate demand was strong. So it’s probably not something you can ignore,”

Japan Seeks to Squelch Its Tiny Cars - As farmers’ trucks, family cars, delivery vans and even tiny cafes-on-wheels, keis are everywhere in Japan. They are more popular than ever, thanks to the country’s high gasoline prices, a preferential tax system and an uneven economic recovery that have made the wee cars enticing value propositions.Keis have terrific fuel economies that rival the Prius, but they sell for half the price. Last year, a record 40 percent of all new cars sold in Japan were keis.But industry and government officials are increasingly worried that these microvehicles have become a distraction for the nation’s automakers — still bastions of the Japanese economy — and are moving to wean drivers off them. In April the government took what its critics charged was a hard-line route. Kei drivers were hit with a triple whammy of a higher sales tax, higher gasoline tax and higher kei car tax, the last of which the government raised by 50 percent, sharply narrowing their tax difference with regular-size vehicles.

Japan to Decide Later This Year on Further Sales-Tax Rise - Japan’s government reaffirmed earlier this week that it will decide by the end of this year whether to raise the nation’s sales tax again, this time to 10% — seen as a crucial step to getting its fiscal house in order. After raising the tax to 8% from 5% on April 1 – a move expected to take some wind out of the economy’s sails, at least temporarily – the government is bound by law to raise it further in October 2015. But a supplement to the law says the government can defer that move if economic conditions are too weak.Cabinet members have said economic data, especially for the July-September quarter, will be key to the decision. Gross domestic product data for that quarter will be released Nov. 17, then revised on Dec. 8.Japan’s economy grew strongly in the first quarter of the year – the pace was revised up on Monday to an annualized rate of 6.7% – but is expected to contract in the second quarter as the higher sales tax bites.With Japan’s debt-to-GDP ratio well above 200% — the worst among industrialized nations – economists say Japan must find a way to improve its fiscal outlook. Without such discipline, bond yields could eventually surge, making it difficult for the country to finance its debt. Last week, Japan’s ruling party laid the groundwork for a corporate tax cut from next year, something the government hopes will revive investment and keep production at home — but which could hit government revenue. Policy makers have set a goal of halving the primary balance deficit from fiscal year 2010 by fiscal 2015, and aim to achieve a surplus in fiscal 2020.

BOJ mulling over keeping huge balance sheet after hitting inflation goal–insiders: BANK of Japan (BOJ) officials are considering maintaining a large balance sheet for the central bank, even after it achieves its inflation target, reducing the risk of a surge in long-term bond yields, according to people familiar with the discussions. Under the potential strategy, the BOJ would use cash from maturing securities in its portfolio to buy long-term government debt, said the people, who asked not to be named, as the talks are private. BOJ Governor Haruhiko Kuroda and his colleagues have yet to meet their inflation target, and pledge to continue asset purchases until consumer prices are rising at a 2-percent pace. The possibility of permanently large balance sheets—in Japan’s case, now amounting to more than half the size of the economy—may become a global legacy of unprecedented stimulus measures. The BOJ discussions parallel preparations at the US Federal Reserve (the Fed) to avoid an exit strategy of asset sales. “There’s no need for the BOJ balance sheet to go back to where it was,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former central-bank official. “It’s a realistic approach to keep the size of the balance sheet large for a while to avoid a spike in yields.” Any abrupt end to government bond purchases by Japan’s central bank could send borrowing costs soaring, because the BOJ currently purchases the equivalent of about 70 percent of the new securities issued.

Japan to keep printing money for years to come, so learn to enjoy it - There are no one-way bets in global finance, but Japan's stock market comes close. The authorities are about to funnel large sums into Japanese stocks openly and deliberately under the next phase of Abenomics, both by regulatory fiat and by purchasing the Nikkei index directly with printed money. Prime minister Shinzo Abe is unshackling the world's biggest stash of savings, the $1.3 trillion Government Pension Investment Fund (GPIF). Officials say the ceiling on equity holdings will rise from 12pc to around 20pc as soon as August, opening the way for a $100bn buying blitz. Fund managers are suddenly in a race to get there first. Japan Post Bank - where Mrs Watanabe dutifully places the family money, confiscated from her Salaryman each month before he can spend it - is itching to rotate more of its $2 trillion holdings into equities before inflation pummels the bond market. So is Japan Post Insurance, no minnow either at $850bn. Mr Abe's move comes sooner than expected and amounts to a market shock, though nobody should be shocked anymore as he keeps doubling down on the world's most radical economic experiment. The Nikkei index stalled in December after rising almost 100pc since September 2012, even though the Bank of Japan (BoJ) is still showering the economy with money, buying $75bn of bonds each month.  The Bank of Japan is helping it along, buying exchange traded funds based on the Nikkei and Topix indices. "They purchase whenever the market falls, usually by about $200m each time," he said.  The BoJ's balance sheet will reach 70pc of GDP by March 2015, three times the US Federal Reserve's.

Japan’s Top Creditor Title at Risk as Surplus End Looms - Japan risks losing its position as the world’stop creditor nation, as dwindling savings become insufficient to finance growing public debt, a Bloomberg News survey of economists indicates.   A run of current-account surpluses that drove Japan’s net asset position to the largest in the world starting in 1991 is set to reverse, according to 10 of 16 economists in a Bloomberg News survey, with nine projecting sustained deficits by the end of 2020. Japan had net assets of 325 trillion yen ($3.2 trillion) at the end of 2013, withChina in second place with 208 trillion yen, according to Japan’s finance ministry.  As an aging population draws down its savings, Japan will become more dependent on foreign creditors to finance its budget deficits and manage the world’s biggest debt burden. A swing to current-account deficits could augur a surge in bond yields as investors reassess the nation’s prospects, and clear the way for China to overtake it as the world’s biggest net creditor.  “Chances are high that China will surpass Japan as early as 2020 in the size of net overseas assets,”

Philippine Call Center Ascendancy & 'Accent Neutralization' - In the past I've posted about how the Philippines has surpassed India in terms of both call center employees and revenues even if India still retains an advantage in higher value-added business process outsourcing services. Working in a call center isn't exactly considered a glamor job by any stretch of the imagination: You have to work the night shift and field complaints from ornery Americans who can't distinguish a phone socket from a Ethernet socket. That said, starting salaries can be quite high, and pay-for-performance packages quite lucrative. What is the Philippines' secret of success? Simply put, they can easily pretend to be American over the phone--something which Indians cannot supposedly do as readily.  Indeed, Filipinos have managed to not only imbibe American pop culture but to be among its architects. Despite making America-bashing a blog pastime, even your humble blogger knows what a "flea flicker pass" is as well as a "4-6-3 double play." Gotta relate to the throngs of US-based readers, see.  Even in the impersonal world of call centers, familiarity with the customer goes a long, long way. Though it's an exceedingly politically incorrect term from a cultural studies perspective, "accent neutralization"--sounding like someone from the United States' Midwest obviously ignores diversity and downplays the fact that English came from, well, England--is now recognized as an advantage:

IMF Urges Vietnam to Rein In Deficit - The International Monetary Fund says it expects Vietnam’s real GDP growth to accelerate this year but has urged the country to work harder to rein in public debt. Helped by continued robust exports and foreign direct investment, Vietnam’s real GDP is set to grow by 5.5% in 2014, the organization said on Wednesday. However, activity has been dampened by weaker domestic demand, slow progress in implementing reforms to state-owned enterprises and banking-sector difficulties, which limit the impact of easier monetary conditions on credit growth, the IMF said. The IMF said Vietnam’s near-term outlook is favorable, but risks exist, including from surges in global volatility, higher global interest rates or from geopolitical tensions.  Recent scuffles between Chinese and Vietnamese vessels in the South China Sea have  added to unease in the region and led some analysts to question whether foreign investment in Vietnam might falter.  Domestic risks may materialize from existing banking-sector difficulties without a comprehensive reform package, particularly financial resources and legal reforms to accelerate bank restructuring and resolution of nonperforming loans, the IMF said. It added that risks may also arise if state-owned enterprise reform is slow. The IMF pointed out that public debt has risen noticeably, to a level that needs increased attention.

Thai junta holding the mother of all garage sales -- A couple of weeks into the coup and the intentions of the National Council for Peace and Order are now becoming clearer with the junta working hard at winning the hearts and minds of the people through their wallets. For farmers, the junta has arranged for long-delayed payouts for rice and has ordered a crackdown on loan sharks, while the middle class has seen food, fuel and income tax freezes or cuts. On the other extreme, investors are promised a wide menu of infrastructure projects to pick from ranging from water management to rail, but key of which for the telecom sector is the 900/1800-MHz auction pencilled in for August. Army commander and junta leader General Prayuth Chanocha also appointed himself as the chairman of the Board of Investment and has been busy courting Chinese investors while his minions hold happiness concerts and crackdown on sandwich-wielding protesters (do not ask). State-owned telco TOT corporation has announced it has written to the Junta asking for permission to participate in the spectrum auction.

Story of a Fraying Capitalism in India - - French economist Thomas Piketty has written a scholarly tome with the humdrum title, Capital in the 21st Century.  The book has become an overnight sensation because Piketty documents an inherent tendency for ever-increasing inequality of income and wealth in capitalist economic systems.  India’s capitalist dynamic — as in other emerging economies — is different from that in the richer countries that Piketty focuses on. Yet, the lessons Piketty offers should ring a cautionary bell. Indeed, even more so than in the rich countries, India could find itself in a low growth, high inequality and high insecurity trap. These are the real fears that bubble under the theatrics and ugliness of the ongoing political debate. Piketty sees capitalism as central to the innovation and entrepreneurial risk-taking needed for economic growth. But, using conventional tools of economic analysis, he warns that there is no automatic, ultimately benign, broad sharing of income and wealth over the development process. Rather, greater inequality — which perpetuates itself over generations — is the more likely outcome. And deepening inequality can fray capitalism’s virtues.  Piketty finds that countries are on the path to “patrimonial capitalism”, with inherited wealth increasingly concentrated in few families. As long as the rich earn a return on their wealth that is somewhat greater than the country’s growth rate, inherited wealth will rise relentlessly faster than national income. This process was interrupted, and reversed, in the first half of the 20th century, because the two World Wars destroyed private wealth and then helped create the political basis for the welfare state. But, over the past three decades, the wealth-to-income ratio has steadily recovered much of the lost ground and looks set to keep rising.

Stop Blaming the Monsoon: Bad Rains Don’t Cause India’s Inflation - The annual monsoon rains starting to soak southern India, and some are dancing in the downpour while others are starting another yearly tradition: drought dreading.  If the June-through-September monsoon fails to bring enough water to India’s rain-fed fields, goes the millennia-old worry, then a drought will cause production will plummet, farmers will suffer, and prices will soar. This year there is extra hand-wringing as people worry about the El Niño weather phenomenon which is associated with droughts in India. While the weather dread is woven deep into India’s DNA, one Indian this week—R. Sivakumar, head of fixed income at of Axis Mutual Fund—said in a report that much of it may be based on myth. He said a simple review of recent rainfall, agricultural production and inflation figures surprisingly show that: El Niño often doesn’t trigger drought in India; droughts do not lead to lower production; droughts do not lead to inflation. “India has changed from the 70s,” . “We didn’t have much technology back then…That has changed. Our ability to deal with the rain has changed.” While there is a strong correlation between El Niño years and those with below-average rainfall, the Axis report said the weather phenomenon leads to bad monsoons only about half of the time. In the last 23 years, for example, there have been seven El Niño years but only three of those had droughts.Thanks to better irrigation and other technology, agricultural output continued to grow in India in the last decade—even during the some of the worst droughts in 2004 and 2009

Why Do India’s ‘Cheapest Cities in the World’ Feel So Expensive? -- India’s top cities were ranked among the least expensive places in the world in another survey this week, once again leaving residents of Delhi and Mumbai scratching their heads. Even the most affluent locals and expats of both megacities are sure things are getting more expensive every year, so how do their cost-of-living rankings keep sliding? The answer is part forex part baskets—a result of currency swings as well as the basket of goods used for the surveys. The global surveys by Economist Intelligence Unit, Deutsche Bank and this week ECA International show cost of living in Delhi, Mumbai and some of India’s other cities as being as little as one third of the cost of living in New York. In the ECA International survey, Indian cities slipped even further down the rankings this year with New Delhi coming in at 208th most expensive out of 262 global cities while Mumbai was ranked 225th and Kolkata number 251. The most expensive cities toward the top of the ECA list included Tokyo, Seoul, Beijing and Moscow.

India’s New Government Faces a Challenge: Liquidity -- Fresh off an emphatic election victory, India’s new government went to work in late May. The formation of a relatively lean Cabinet confirms expectations that Prime Minister Narendra Modi’s government is keen to come across as hard-working and committed to business-friendly reforms. Already, the government is signaling that it will ease investment norms, discourage retrospective taxation, deal in an integrated manner with power production and coal supply, fast-track some key infrastructure and mining projects, expedite sales-tax reform, and support Reserve Bank of India Gov. Raghuram Rajan’s fight against inflation.However, pledges to maintain fiscal and monetary discipline mean no substantive stimulus measures are in the pipeline, the cost of capital will remain high and a major turnaround in the banking system will take time. A key question then is how the economic cycle will turn in favor of investment and growth. Prime Minister Modi may improve the running of government and clear the logjam of stalled projects, but we don’t think that’s enough to get the ball rolling for India’s economy. India is short of liquidity at this juncture, meaning the cost and availability of project financing will remain an issue. To find additional liquidity, India needs to attract higher domestic and external savings. But confronted with slowing growth and soaring inflation, Indian households in recent years have reduced their savings: After peaking at 31.4% of gross domestic product five years ago, gross household savings have fallen recently to 27.4% of GDP. As a share of income, household saving has declined by five percentage points since 2010.

Alternatives to Currency Manipulation: What Switzerland, Singapore, and Hong Kong Can Do: Economists have long decried the efforts of large, advanced economies to manipulate their currencies to boost net exports at their trading partners' expense. But the International Monetary Fund appears to have ignored the beggar-thy-neighbor exchange rate policies of countries with developed, highly open economies. This Policy Brief examines Switzerland, Singapore, and Hong Kong, which have actively kept the value of their currencies low since the 2008–09 global recession. In each case, greater fiscal and especially domestic monetary ease would have achieved similar macroeconomic outcomes with less currency intervention and declining current account surpluses. If such countries had adopted these strategies to increase domestic demand, the global economy would have rebounded faster.

World Bank Cuts Global Growth Forecast After ‘Bumpy’ 2014 Start - The World Bank cut its global growth forecast amid weaker outlooks for the U.S., Russia and China, while calling on emerging markets to strengthen their economies before the Federal Reserve raises interest rates. The Washington-based lender predicts the world economy will expand 2.8 percent this year, compared with a January projection of 3.2 percent. The U.S. forecast was reduced to 2.1 percent from 2.8 percent while outlooks for Brazil, Russia, India and China were also lowered. The setbacks may be temporary: the 2015 estimate for world economic growth was unchanged at 3.4 percent. “The global economy got off to a bumpy start this year buffeted by poor weather in the United States, financial market turbulence and the conflict in” Ukraine, the World Bank said in its Global Economic Prospects report yesterday. “Despite the early weakness, growth is expected to pick up speed as the year progresses.”  Developed economies, where domestic demand is improving as fiscal pressure eases and labor markets recover, are providing the global expansion with momentum just as their developing counterparts fail to accelerate. The bank is projecting growth in China and Brazil will slow this year from 2013.

The recovery of global goods demand  -- This nifty chart from a recent Credit Suisse note shows the rejuvenated growth in global goods demand since roughly the start of 2013, a favourable sign for industrial production.An excerpt: Understanding global goods demand starts with knowing its composition. Exhibit 7 shows a breakdown of global goods demand adjusted according to industrial inputs given by input-output tables of the various economies. (We make these adjustments to create a measure of demand more comparable to global industrial production). The composition of demand has changed significantly in recent years, especially for China, where the share of global demand has tripled from 7% in 2004. Chinese investment, US goods consumption, and “rest of the world” investment and consumption have been the major drivers of global goods demand in recent years. These are the things that have required global manufacturing to grow. In contrast, US, Japanese and European investment, and Japanese and European goods consumption, have not grown much overall since 2000, so they have not required growing factory output. Note that Europe’s goods consumption and investment growth since 2001 has been near zero. In 2012, Europe went from being a large economy not contributing to global demand growth to being a large economy shrinking rapidly, causing a major global shock, which was further inflamed by Europe’s growing current account surplus....

The Baltic Dry Index Is Having Its Worst Year Ever - At 906, the Baltic Dry Index slumped to 12-month lows showing absolutely no signs whatsoever of the Q2 renaissance in global growth that has been heralded by all the highly-paid meteoroconomists. In fact, thanks to increasing fears over China's commodity financing ponzi scheme, this is the worst year for the Baltic Dry on record. 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.

CFOs Expect Labor Unrest Will Hit Economic Growth in Latin America - Nearly three-quarters of chief financial officers in Latin America expect labor unrest over the next year will weigh on their national economies, according to the latest Duke University/CFO Magazine Global Business Outlook Survey. The quarterly survey, released Wednesday, polled 843 business executives, mostly CFOs, around the world. In Latin America, 73.1% of executives said they expected strikes, work stoppages or other forms of unrest to affect their country’s economy in the next 12 months. So did 50% of executives surveyed from Africa. That compares with 21.6% in Europe, 10.3% in Asia and 9.4% in the U.S.  Most executives cited wage pressures and problems in the general economy as the top drivers of labor unrest. Also in the survey:

  • In the U.S., 37.5% of executives said they were more optimistic about the economy than they were during the first quarter, while 19% were less optimistic and 43.5% hadn’t changed their outlook.
  • A plurality of U.S. CFOs, 46.5%, said they were more optimistic about their own company’s financial prospects than they were three months ago, while 21% were less optimistic and roughly a third had not changed their minds.
  • Asked about their own firms, U.S. executives said they expected earnings to grow 4.1% in the next year, down from 7.1% growth in the previous survey that was released in March. Capital spending is expected to grow 9.3%, up from 6.8% in the March poll, and full-time employment is expected to grow 1.9% compared with 1.2% growth predicted in the prior survey.

IMF: Home Prices Look Overvalued in Canada, Norway, Australia - The era of “benign neglect” of home-prices boom is over, says the International Monetary Fund. But if that’s true, the premise could soon be put to the test. The IMF on Wednesday launched “Global Housing Watch,” part of an effort to curb complacency among regulators and policy makers about housing booms, which can help boost economic growth—both through increased construction and consumer spending—but which can have painful after-effects, as the U.S. has learned over the past decade.The IMF’s global house price index shows that prices rose in 33 of 51 countries measured last year. Broad measures of housing affordability, which include comparing home prices to their long-run relationship with rents and incomes, show that home prices are moving “well above the historical averages” in several countries. Relative to their long-run relationship with rents and with incomes, prices in Canada, New Zealand, Norway, Belgium, Australia, France and the United Kingdom are well above average. Prices are roughly in line with the traditional price-to-rent ratio for the U.S. and they look undervalued on a price-to-income basis. Prices look undervalued on both metrics in a handful of countries, including Japan, Portugal, Slovakia, and Germany.

IMF sounds global housing alarm - The world must act to contain the risk of another devastating housing crash, the International Monetary Fund warned on Wednesday, as it published new data showing house prices are well above their historical average in many countries. The warning from the IMF shows how an acceleration in global house prices from already high levels has emerged as one of the major threats to economic stability, with countries making limited progress in keeping them under control. Min Zhu, the IMF’s deputy managing director, said the tools for containing housing booms were “still being developed” but that “this should not be an excuse for inaction”. House prices “remain well above the historical averages for a majority of countries” in relation to incomes and rents, Mr Zhu said in a speech to the Bundesbank last week, which was only released on Wednesday because it clashed with a European Central Bank announcement. “This is true for instance for Australia, Belgium, Canada, Norway and Sweden,” he said. In the wake of the global recession central bankers have cut interest rates to record lows, pushing house prices to a level that the IMF regards as a significant risk to economies as diverse as Hong Kong and Israel.

Brussels fears European 'industrial massacre' sparked by energy costs -  "We face a systemic industrial massacre," said Antonio Tajani, the European industry commissioner. Mr Tajani warned that Europe's quixotic dash for renewables was pushing electricity costs to untenable levels, leaving Europe struggling to compete as America's shale revolution cuts US natural gas prices by 80pc. "I am in favour of a green agenda, but we can't be religious about this. We need a new energy policy. We have to stop pretending, because we can't sacrifice Europe's industry for climate goals that are not realistic, and are not being enforced worldwide," he told The Daily Telegraph during the Ambrosetti forum of global policy-makers at Lake Como. "The loss of competitiveness is frightening," said Paulo Savona, head of Italy's Fondo Interbancario. "When people choose whether to invest in Europe or the US, what they think about most is the cost of energy." A report by the American Chemistry Council said shale gas has given the US a "profound and sustained competitive advantage" in chemicals, plastics, and related industries. Consultants IHS also expect US chemical output to double by 2020, while Europe's output will have fallen by a third. IHS said $250bn (£160bn) in extra US manufacturing will be added by shale in the next six years.

Europe’s Crisis –The Rise of the Ultra-Right is the Left’s Fault - Yanis Varoufakis - The international press has summed up the 2014 European Parliament election outcome as a sign that the economic crisis plaguing Europe has caused voters to be lured by the two ‘extremes’, meaning the ultra right and the extreme left. This is a verdict that the European elites, whose shenanigans are responsible for Europe’s deconstruction, are comfortable with. They see it as evidence that, despite ‘some errors’, they are on the middle road, with some wayward voters straying off the ‘right’ path both to the left and to the right. And they hope that, once growth picks up again, the ‘strays’ will return to the fold. This is a misrepresentation of current economic and political reality. Europeans were not lured by the two extremes. They drifted to one extreme: that of the racist, xenophobic, anti-European right. Extreme, anti-European, leftwing parties saw no surge in their support anywhere in Europe.[2] For four years now, European institutions are the field on which incompetence and malice compete with one another in a bid to win the prize for the most inconspicuous obfuscation of the truth: (a) that the Eurozone’s construction was faulty; and (b) that, once the never-ending crisis had began, the elites were solely interested in shifting banking losses from the banks’ asset books onto the shoulders of the weaker citizens. If the financial sector has been stabilised, it is because the combination of massive central bank liquidity and stringent austerity propped up finance, shielded bankers (without cleansing the banks), and reflated many of the burst bubbles. And this at the cost of untold damage on Europe’s real economy, social fabric, and democracies. The interesting question, however, is: Why has the Left not benefitted from the trials and tribulations of the Eurozone’s neoliberal design and from the great pain inflicted upon the majority by the neoliberal ‘cure’?

The ECB’s Unprecedented Monetary Stimulus - Jeffrey Frankel - er the recent Draghi press conference announcing new measures to ease monetary policy in euroland, I responded to live questions from the Financial Times: “The ECB Eases,” podcast,  FT Hard Currency, June 5, 2014 (including regarding my proposal that the ECB should buy dollar bonds).

  • Many critics point that these measures do not solve the economic problems of the Eurozone and in that they only benefit the financial markets. Do you agree?JF: It is too much to expect monetary policy by itself to solve all the economic problems of the Eurozone. But I think the measures announced by the ECB today were steps in the right direction. Mario Draghi emphasized steps to facilitate the transmission of easier money to the real economy, as part of the Targeted LTROs, and also as part of possible plans for Quantitative Easing in the future.
  • The ECB also announced that long term loans will be monitored to assure the liquidity is allocated as new loans to businesses. Is that feasible? F: There is no guarantee. It is hard to stimulate increased lending to firms and business fixed investment if firms are not experiencing demand for what they are producing already. The ECB can only try and the Target LTROs look like a good attempt.
  • If at the same time the ECB cuts GDP projection for this year and forecasts inflation at 1.4% in 2016, under 2%, is not that a kind of recognition of the limitations of monetary policy? F: It is a recognition that the euroland economy has been weaker lately, and inflation lower, than they had hoped.
  • Will these measures be enough to boost the recovery? Even when there are still structural problems in the Eurozone? F: There are limits to what monetary policy can do, especially when interests are at the Zero Lower Bound, as they are. Far more needs to be done in structural reforms, for example.

Negative interest rates -- The European Central Bank announced on Thursday that it is moving interest rates into negative territory, charging banks for maintaining deposits with the ECB rather than paying the banks positive interest. The hope is that lower (now even negative) interest rates may provide some stimulus to the European economy which might help bring European inflation closer to the ECB’s 2% target. Here I offer a few thoughts on this move. Let’s start by clarifying what the measure will not do. The measure is not intended, as many people seem to suppose, to get banks to “lend out” their ECB deposits. The reason is that when an individual bank makes a loan or buys an asset, what they do is instruct the ECB to transfer the deposits from their account with the ECB to the bank of the counterparty who received the loan or sold the assets. The deposits of Bank A go down, but those of Bank B go up, with the result that some bank somewhere must always be left with those deposits at the end of the day. Actions by the ECB itself, or direct borrowing or cash withdrawals by banks from the ECB, could change the aggregate level of deposits that banks hold in their accounts with the ECB. But the lending and investment decisions of individual banks would not change aggregate ECB deposits. But that doesn’t mean that individual banks won’t try to free themselves from this extra cost. If you know you’re going to be charged 0.l% (at an annual rate) for deposits you end up with at the end of the day, but see a 3-month government security paying say 0.2%, you’d want to buy the security on the open market. When Bank A makes that purchase, it gets itself out of a 0.1% loss and into a 0.2% gain. But Bank B receiving the deposits will realize that they’d also be better off using those deposits to get the 0.2% return, so they’ll also be buying any short-term securities that yield 0.2% in hopes of not getting stuck paying a fee on deposits. None of these efforts will change the fact that some bank somewhere will be left at the end of the day paying the 0.1% fee. But if all banks are out there trying to buy short-term government securities as a result of these incentives, what’s likely to happen is that the price of short-term government securities gets bid up above par. Once that happens, the 3-month securities effectively offer a negative return just like deposits with the ECB, and banks would be indifferent between buying the government security and getting stuck with the bill for reserves.

ECB Officials to Markets: Chill a While and Let Our Actions Take Effect - European Central Bank officials were out in force Friday explaining the bank’s decision Thursday to take extraordinary measures to stimulate the euro-zone economy and boost inflation. They largely stuck to the themes from ECB President Mario Draghi‘s press conference Thursday. The ECB was unanimous in choosing to adopt a negative interest rate on bank deposits–a first for such a large central bank–and making hundreds of billions of euros in targeted, cheap loans available to banks at four-year maturities. Officials are committed to preventing inflation–currently 0.5% annually–from staying too low for too long.The common message for financial markets Friday from ECB officials: we’ve done a lot; we’re open to doing more; but chill out for a while and check back in with us later in the year to see if more is required. “If the situation doesn’t improve, the central bank can do more,” Belgium’s central bank governor Luc Coene said, adding that it would make sense to wait until the end of the year to “see how the economy reacts to this relatively large injection of liquidity.” That point was echoed by the head of Germany’s central bank, Jens Weidmann. “Now we have to wait and see” what the effects of Thursday’s measures are, Mr. Weidmann said in an interview with German daily Bild. He said it would be “absurd” to begin speculating on what the ECB’s next moves may be.

Is liquidity stuck at banks? - Last week the ECB announced new monetary policy actions to help restore growth in the Euro area and bring inflation closer to its 2% target. Interest rates were reduced and further provision of loans to commercial banks were announced. In addition, there is a plan to implement purchases of asset based securities.  The effectiveness of recent monetary policy actions by central banks has been met with some skepticism because it does not deliver the necessary increase in lending to the private sector. While liquidity is introduced, it seems to get stuck in the accounts that the commercial banks hold at the central bank (reserves). Because of this, both the Bank of England and now the ECB are implementing injections of liquidity that are linked to increased lending to the private sector by the financial institutions that are borrowing that liquidity. The role that reserves play in the recent monetary policy actions by the ECB leads some times to confusion. Some seem to think that the high level of reserves that banks hold is a measure of the failure of central banks to generate additional loans to the private sector. The logic is that reserves stay high because of the lack of willingness to lend. This is the wrong view of reserves, they cannot simply be seen as resources that are waiting to be provided as loans to the private sector.  Reserves are a liability in the central bank balance sheet that it is created when the central bank decides to allocate more loans to commercial banks or when it decides to buy securities. If a commercial bank decides to give a loan to one of its customer (household or business), the reserves do not disappear. Once that customer uses its loan for a purchase, these reserves are transferred from one commercial bank to another, but the level of reserves remains constant.

Why Draghi’s New Measures Won’t Solve the Low Inflation Problem -- In yesterday’s Financial Times, Jörg Bibow addressed Mario Draghi’s recent announcement that the ECB will take new steps (including cutting its deposit rate to -0.1 percent) in an attempt to deal with (or, one might argue, in an attempt to appear to deal with) the fact that inflation in the eurozone is too low, according to the ECB’s own alleged target. For Bibow, the proposed measures are unlikely to get the job done, and the same could be said, he argues, for any last-ditch attempt at quantitative easing (a prospect mentioned by Wolfgang Münchau in his last column). The problem is that it’s hard to characterize eurozone disinflation as some unforeseen bump in the road:The driving force behind the eurozone’s disinflation process is wage repression – exercised to a brutal degree across the currency union. In fact, wage repression – joined by fiscal austerity – is the eurozone’s official policy meant to resolve the euro crisis … With wages in übercompetitive Germany creeping up at a mere 2 to 3 per cent annual rate, the rest are forced into near, if not outright, deflation to restore their lost competitiveness. … The ECB was late to diagnose the issue and super-late to act. But the real issue is that neither its recent move nor any imagined future quantitative easing will do anything to reverse deflationary wage trends any time soon – trends established by deliberate policy. Read Bibow’s letter here.

Spanish 10-Year Bond Yield Lowest Since at Least 1789; Reflections on Absurd Risk Assumptions - Those searching for absurdity in government bonds can find it in a multitude of places. For example, and via translation from Libre Mercado, please note Spanish 10-Year Bond Yield is Lowest Since at Least 1789.  The interest rate offered on the secondary market for Spanish bonds maturing in ten years is at historic lows, below equivalent yield in U.S. treasuries, which has not happened since April 2010. The evolution of Spanish debt is even more striking when viewed from a broader temporal perspective. Today the Spanish 10-year bond is the lowest since at least 1789, the year of the French Revolution, as noted in the graph above. This is something unprecedented. ZeroHedge picked up on this as well, in his post: The Great Insanity In Context (200 Years Of European Bonds), citing France and Italy as well as Spain.  As Deutsche's Jim Reid notes, Draghi has certainly made a huge impact on financial markets as Friday saw some landmark levels hit across different assets. Many European bond markets hit yield lows with quite a few hitting fresh multi-century all time lows and many others flirting close to them. 10 year French yields hit 1.654 intra-day which was the all-time low covering our entire data history back to 1746. 10 year Spanish yields also hit all time lows with our data going back to 1789. Italy has only been lower in yield for a few months in early 1945 (data back to 1808).  Never has risk been so high and risk assumptions so low.

Thanks Draghi: Spanish 10 Year Yield Slides Below US - Earlier today something happened which we haven't seen since a very brief period of time in 2010, and then going all the way back to 2007: Spanish 10 Year bond yields tumbled below those on US 10 Year Treasurys. So is this an indication that the Spanish bond market is suddenly safer, and more credible than that of the US? Of course not. All we are seeing is merely the manifestation of the latest ECB carry trade pushing local banks not to lend the ECB's cheap money out to consumers, but to engage in yet another Draghi-subsidized carry trade.

Europe's Age of Diminished Expectations - Paul Krugman - Joe Weisenthal informs us that Spanish bond yields are now about the same as US yields. This is telling us two things, one good, one bad. The good news is that investors no longer have much fear of a euro crackup any time soon. The bad news is that they expect Europe to remain depressed for a long time.On that second point, you do find people saying that because the euro area has resumed positive growth, the crisis is over. I find it useful here to point out that Japan’s long stagnation consisted mostly of periods when the economy was growing. In fact, it spent most of the time growing faster than Europe is currently managing:Growth rates in Japan and Europe.So when people ask me whether it’s possible that Europe will experience a Japanese-style lost decade, I tell them that the real question is whether it’s possible that it won’t; recovery, not stagnation, is the hard story to tell.

Well, what did you expect in a negative rate environment? --Gary Jenkins at LNG Capital brings us news on Wednesday that… yes, peripheral eurozone bond yields are or in some cases are just about to trade through US Treasuries.But why should we be shocked about this? Or as he puts it: There has been a few headlines recently which suggested that we should be shocked that Spanish 10 year government bond yields now trade through treasuries and that the Italian equivalent is just a few basis points away. I think that these Eurozone countries should trade through treasuries. I think Portuguese bonds should do the same. Greece? Not so much… The fact is that since Mario Draghi started acting like a modern day central banker and the leading politicians looked into the abyss of what the default of a major European country like Spain might look like the yields on the so called ‘periphery’ European bonds have been converging with those of the core at a rapid rate. With the unprecedented intervention of the world’s major central banks one could argue that we have now gone to a situation where rather than everything being credit risk, everything is now interest rate risk.Thus it is perfectly rationale for investors to consider the likes of Italian and Spanish government bonds on the basis of traditional fixed income analysis rather than credit analysis. From that viewpoint it is logical for them to trade through treasuries.

Austerity and the Employment Rate -- In 2010, after an initial round of coordinated stimulus from both wealthy and developing countries, deficit hawks around the world regrouped. Pointing to growing deficits and debt, they demanded that countries reverse course and begin moving toward balanced budgets. The deficit hawks argued that deficit reduction could be accomplished without impairing growth because of the effect it would have in boosting confidence among businesses and consumers. Many economists argued against this drive towards austerity at the time. They noted and rigorously explained the fallacious logic in the idea that deficit reduction could be expansionary. They also pointed out how fiscal policy had already saved the economy from a second depression and that more stimulus would likely be necessary. However, now we have more than three years of data, so we no longer have to speculate. A simple picture can be worth a thousand words (or in this case, billions). The figure plots the change in the structural balance since 2010 against the change in the employment rate (the percentage of the workforce that is employed) over the same time period. The structural balance is an accounting tool that is designed to measure changes in fiscal policy. For this reason, it tries to pull out the effect of cyclical fluctuations. This means that if the structural deficit gets smaller it is because the government has changed its policy to move toward smaller deficits with budget cuts and/or tax increases. The more negative the change in the structural deficit, the larger the mix of spending cuts and tax increases. Plotting the change in the structural balance against the change in the employment rate gives us a picture of how countries that abandoned fiscal policy strategies quickly have fared since 2010.

Spanish Government Goes Digging For GDP, Asks Brothels: "How Many Services Do Your Hookers Provide?" -- First Italy, then Britain, and now Spain has decided that the key to reducing its debt-to-GDP ratio is not fiscal responsibility, growth, inflation, or restructuring but simply changing the denominator to better reflect reality - in other words, as El Pais reports, Spain is putting an official number on its sex trade and therefore juicing GDP. Prostitution, which is in legal limbo in Spain, is expected, according to revised figures released by the INE on Thursday Spanish GDP increases by between 2.7% and 4.5% after illegal activities such as prostitution, drug trafficking and smuggling are included. The Spanish government is undertaking a sexual services survey to better understand the industry...

Spain s public debt hits record, trade deficit grows -(AFP) - Spain's public debt hit a new record in the first quarter of this year, reaching 96.8 percent of economic output, the central bank said on Friday. The debt of the euro zone's fourth-biggest economy is expected to top 100 percent next year, the bank added -- far above the 60 percent limit set by EU authorities. Spain kept its debt relatively low before a real estate crash in 2008, at 36.3 percent of gross domestic product in 2007, but it has since soared in a double recession that ended last year. The public debt reached 93.9 percent of GDP by the end of 2013 and is expected to climb to 99.5 percent this year and 101.7 percent next year, according to government forecasts. Financial concerns over Spain have calmed since the height of the crisis in 2012, however. The interest rates demanded by investors to lend to Spain have eased, making officials confident it can refinance its debts. The economy grew by 0.4 percent in the first quarter of this year. The unemployment rate remains close to 26 percent, however. Millions of Spaniards were thrown out of work by the crisis. Overall Spain's public debt totalled a record 989.925 billion euros ($1.344 trillion) in the first quarter of 2014, up from 924.132 billion a year earlier, the bank said.

TLTRO impact questioned as the carry trade provides easy money - The Eurozone banks' longer-term borrowings from the central banking system continue to decline, a trend that many economists view as a form of  "passive" tightening in the area's monetary conditions.As discussed earlier (see post), the ECB will attempt to replace some €400bn of the lost balances with a new program dubbed TLTRO ("targeted" LTRO). Here is the official description: The ECB: - Counterparties will be entitled to an initial TLTRO borrowing allowance (initial allowance) equal to 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. In two successive TLTROs to be conducted in September and December 2014, counterparties will be able to borrow an amount that cumulatively does not exceed this initial allowance.  The interest rate on the TLTROs will be fixed over the life of each operation at the rate on the Eurosystem’s main refinancing operations (MROs) prevailing at the time of take-up, plus a fixed spread of 10 basis points. Interest will be paid in arrears when the borrowing is repaid. Starting 24 months after each TLTRO, counterparties will have the option to repay any part of the amounts they were allotted in that TLTRO at a six-monthly frequency.  Counterparties that have borrowed under the TLTROs and whose net lending to the euro area non-financial private sector, excluding loans to households for house purchase, in the period from 1 May 2014 to 30 April 2016 is below the benchmark will be required to pay back borrowings in September 2016.

How to destroy the web of Debt -- Here’s a question for you. Why have we heard nothing in the media or parliament about A People’s or a Sovereign Debt Jubilee? Is it because a People’s Debt Jubilee is simply a nice but unworkable fantasy dreamt up by crackpot bloggers like me? This is what I have been wondering. And then in response to the Jubilee article, a regular contributor to this blog, Hawkeye, wrote to me and suggested I take a look at “The Great EU Debt Write Off”. The web site contains details of a ‘proof of concept’ study of the Jubilee idea done by Professor Anthony  Evans and his colleagues at The ESCP Europe Business School. The study used up to date figures from the IMF and the Bank of International Settlement (BIS) to see what would happen if Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany simply cross cancelled all the foreign debt they owed each other – a Sovereign debt jubilee. The web of mutually destroying debt they studied looks something like this. The image is from a New York Times article called Europe’s Web of Debt. (The original article has a larger version)

Apple, Starbucks, Others Under EU Tax Investigation -- No sooner do I comment on the difference between tax planning and tax avoidance than Richard Murphy points out that several multinational corporations are having their tax deals looked at for potential violations of the European Union’s state aid rules. As The Guardian and The Wall Street Journal report, there are three cases currently under investigation by the European Commission, but more investigations may be opened in the near future.First is Apple in Ireland. What a surprise! It has a subsidiary it claims is taxable nowhere, incorporated in Ireland but managed from California, which under Irish law makes the subsidiary not subject to Irish tax. Of course, since it is incorporated in Ireland, Apple can defer its U.S. taxation on the unit’s profits until it repatriates them, if it ever does so. Two issues are relevant here: Did Ireland’s creation of this class of entity provide firms with state fiscal aid? Second, did Ireland negotiate a special deal with Apple giving the company a tax rate far below Ireland’s already low 12.5% corporate income tax rate, as Apple CEO Tim Cook testified last year before the U.S. Senate, under oath. In fact, according to the New York Times, the company paid ” as little as one-twentieth of 1 percent in taxes on billions of dollars in income.” One source quoted by the Times said the company saved $7.7 billion in taxes in 2011.The second case is Starbucks and possible fiscal aid from the Netherlands. I have already reported on how the company happily tells investors how profitable its British subsidiary is, but books a loss in the United Kingdom and had no tax liability for 14 years. As discussed then, the issue ultimately revolves around transfer pricing between the “loss-making” U.K. affiliate and the Dutch subsidiary which holds Starbucks’ intellectual property and collects 6% of revenue as royalties, plus transfer pricing into Switzerland. Theoretically, the case could also expand to the Swiss transfer pricing as Switzerland is also subject to state aid rules as part of its free trade agreement with the European Union.

The productivity slump -  - Productivity growth is still falling. Today's statistics show that hours worked rose by 1.5% in the three months ending in April, but the NIESR estimates that GDP grew by only 1.1% in the period.This is weird in two senses.First, it means that productivity is now significantly lower than it was in 2007. Such a prolonged fall is almost unprecendented. My chart shows that, except for the transitions to peacetime after the two world wars, we haven't seen a six-year long fall in productivity since the late 1880s*.   Secondly, it gravely weakens the most optimistic explanation for the post-2008 drop in productivity. We had hoped that this was due in part to labour-hoarding; firms hung onto skilled workers in the downturn in anticipation of needing them in the recovery. This theory, though, implies that productivity should now be rising as output recovers and hoarded labour is utilized more intensively. That it is not doing so suggests that there's some other reason for the productivity slump.  But what? There are several possibilities, including a slowdown in technical progress (pdf) and the possibility that the fall in bank lending is retarding the "external restructuring" that usually contributes so much (pdf) to productivity growth.

The UK housing sector: fighting the last war -- The media and the blogosphere continues to buzz about the risks building in the UK residential housing sector. Just look at this housing price index - we are way above the pre-recession peak. Compare it to home prices in Spain to see this massive divergence (see chart). It's a bubble and it's about to burst...Hogwash. As discussed before (see post), the UK is struggling with a housing shortage. Unlike the US and Spain who overbuilt prior to the financial crisis, the UK started the recession with an insufficient housing inventory. And the new supply of homes entering the market remains inadequate. Here is a chart of UK housing starts...... and here is the UK population over the same period.Furthermore, there is little evidence of any material speculative investing activity in resi property markets that we saw in the US prior to the crisis. And most importantly there is no evidence of aggressive mortgage lending. In fact the amount of new mortgages approved in the UK is declining this year after last year's increase. So for all of you folks who are looking for financial bubbles across the globe, this is not one of them. And yes, you hear regulators, IMF officials, and politicians talk about this as being the next scary problem for the UK. In reality however these people are just "fighting the last war".

'Homeless spikes' installed outside London flats - Metal spikes have been installed outside a block of luxury flats in London to deter homeless people from sleeping there. But the installation of the studs has provoked criticism from some after a picture was uploaded to Twitter, the social networking site. Users said the use of the studs meant homeless people were being treated the same way as pigeons, as similar metal spikes are used to deter them. Andrew Horton, 33, of Woking, Surrey, took the picture of the inch long studs outside the flats on Southwark Bridge Road as he walked to work on Wednesday. Mr Horton said: "I can't say for certain but it certainly looked like they were placed there to deter homeless people. "It's dreadful."

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