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

Saturday, June 21, 2014

week ending June 21

The perils of returning a central bank balance sheet to ‘normal’ - - With the US Federal Reserve on its way to bringing its bond-buying programme to an end, many are asking how to return the central bank’s balance sheet to “normal” – that is, to its pre-crisis size and composition. The same debate is under way at other central banks. Should they sell their bonds, or hold on to them until they mature? And if they are going to sell, which securities should go first? Yet there is another question that is equally important but seldom asked: is it sensible to return central banks’ balance sheets to “normal”? There are good reasons not to. At the beginning of 2007, the Federal Reserve System’s assets totalled $880bn. Today, the balance sheet stands at $4.3tn, including $2.4tn of Treasuries and $1.7tn of mortgage-backed securities. The reason for buying these assets was not to reduce the federal funds rate, which had reached zero by late 2008, but to lower the interest rates at which loans are extended to people and businesses, stimulating demand. The evidence shows that these bond purchases indeed lowered long-term rates relative to short-term rates, and lowered rates on more-risky compared with less-risky obligations. A conservative estimate is that a $600bn bond purchase (the size of the Fed’s second round of bond buying) lowered long-term interest rates by about 25 basis points: not enormous, but a worthwhile contribution to the US economic recovery. And the effect of lower long-term rates was probably reinforced by higher equity prices and a cheaper dollar. The composition of the assets that the central bank buys matters too. Buying mortgage-backed securities narrowed the difference between the interest rate American homeowners paid on their mortgages and the rate at which the US government could borrow. This helped stop house prices from falling and spurred residential construction. Buying or selling bonds gives the Fed a way of influencing longer-term interest rates in general, and mortgage rates in particular. This lever will remain useful long after short-term rates begin to rise. But it will be out of reach if the central bank returns its balance sheet to its pre-crisis state.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 19, 2014: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

Fed looks at exit fees on bond funds - Federal Reserve officials have discussed whether regulators should impose exit fees on bond funds to avert a potential run by investors, underlining concern about the vulnerability of the $10tn corporate bond market. Officials are concerned that bond funds are becoming “shadow banks”, because investors can withdraw their money on demand, even though the assets held by the funds can be hard to sell in a crisis. The Fed discussions have taken place at a senior level but have not yet developed into formal policy, according to people familiar with the matter. “So much activity in open-end corporate bond and loan funds is a little bit bank like,” Jeremy Stein, a Fed governor from 2012-14 told the Financial Times last month, just before he stepped down. “It may be the essence of shadow banking is ... giving people a liquid claim on illiquid assets.” In the wake of the financial crisis, tougher rules on capital and the abolition of in-house trading operations at major US banks have resulted in Wall Street pulling back from helping big funds buy and sell corporate bonds. Bank inventories of bonds have fallen almost three-quarters from their pre-crisis peak of $235bn, according to Fed data. At the same time, US retail investors have pumped more than $1tn into bond funds since early 2009. Exit fees would seek to discourage retail investors from withdrawing funds, thereby making their claims less liquid and making a fire sale of the assets more unlikely. Introducing exit fees would require a rule change by the Securities and Exchange Commission, which some commissioners would be expected to resist, according to others familiar with the matter.

The Fed’s unemployment conundrum - The immediate decision facing the Federal Reserve when it meets in Washington isn’t that momentous. The nation’s central bank will likely continue scaling back its support for the economy by reducing the long-term bonds it is buying by another $10 billion, following a path laid out more than six months ago. But  the bigger question is what’s at the end of that road. In the days leading up to the end of the meeting and Fed Chair Yellen’s press conference on Wednesday, we’ll take a look at the debates that are shaping the central bank’s final destination. Since the recession ended, the Fed has been criticized for consistently predicting that stronger economic growth was just around the corner, only to have the recovery consistently disappoint. But there’s another forecast the central bank has repeatedly gotten wrong: the unemployment rate. And that miscalculation could throw a wrench into its carefully laid plans. While the Fed has been overly optimistic about America’s growth prospects, it has been too pessimistic about the unemployment rate. Standing at 6.3 percent, the unemployment rate has already reached the high end of the Fed’s forecast for the year. Officials will almost certainly be marking down their projections during their meeting this week -- as they’ve done over and over again.  This chart from Regions Bank Chief Economist Richard Moody shows the steady drift downward in the Fed’s expectations for the jobless rate.

FOMC Statement: More Tapering -  Not much change ... another $10 billion reduction in asset purchases. FOMC Statement: Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.  The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month

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

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

Video: FOMC reaction - With the FT’s US markets editor Mike MacKenzie:

FOMC Projections and Press Conference -- Statement here ($10 billion in additional tapering as expected).   As far as the "Appropriate timing of policy firming",  participant views were mostly unchanged (12 participants expect the first rate hike in 2015, and 3 in 2015 - so one participant moved from 2015 to 2016).  The FOMC projections for inflation are still on the low side through 2016. Yellen press conference here.  On the projections, GDP for 2014 was revised down significantly, the unemployment rate was revised down again, and inflation projections were increased slightly.  Note: These projections were submitted before the most recent CPI report.  As of April, PCE inflation was up 1.6% from April 2013, and core inflation was up 1.4%.  The FOMC expects inflation to increase in 2014, but remain below their 2% target (Note: the FOMC target is symmetrical around 2%). 

Yellen Says Fed to Have Big Balance Sheet for Some Time - Federal Reserve ChairJanet Yellen said policy makers have the necessary tools to raise interest rates at the appropriate time and that the central bank will continue to hold a large balance sheet “for some time.” Discussions on exiting from record monetary accommodation now under way “are in no way intended to signal any imminent change” in policy, Yellen said at a press conference in Washington following the central bank’s policy meeting. “The committee is confident it has the tools it needs to raise short-term interest rates” when necessary, she said. The Fed “will continue to have a very large balance sheet for some time.” 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.

Yellen: Fed Still Working Out Mechanics of Raising Rates -- Federal Reserve Chairwoman Janet Yellen said Wednesday that central bankers are still working out the mechanics of how they will raise short-term interest rates in the future. “We’ve made quite a lot of progress in our discussion, but we’ve not yet reached conclusions” about the exact mix of tools that will be put into play to help raise interest rates and deal with the substantial levels of liquidity now found in the financial system, Ms. Yellen said at a press conference that followed a meeting of the Federal Open Market Committee held over Tuesday and Wednesday. At question is a plan the Fed announced in 2011 that laid out the steps the central bank would take to push monetary policy back toward more normal levels. Since then, Fed officials have suggested major parts of that plan are being reconsidered. At the same time, the central bank has been testing new tools it hopes will better control short-term rates, that will likely supplant, at least for a time, the Fed’s traditional strategy of adjusting short-term interest rates by tweaking the level of reserves available to the banking system. In recent weeks, New York Fed chief William Dudley and San Francisco Fed chief John Williams have suggested that the Fed could raise interest rates before ending a policy that reinvests the proceeds of maturing bonds to keep the size of the Fed’s balance sheet steady. If the Fed did this, it would reverse what the 2011 plan said was likely.  “Broadly speaking, some of the principles that were incorporated in those–in that 2011 package, the notion that we fully expect our balance sheet to shrink considerably over time back toward more normal levels, toward levels that would be consistent with efficiently conducting monetary policy, that’s still an expectation,” Ms. Yellen said.

Yellen: Investors Shouldn’t Take Ultra-Low Rates For Granted -- Federal Reserve Chairwoman Janet Yellen warned financial market participants not to become overly confident the central bank’s ultra-easy monetary policy will be around forever. At a press conference after the Federal Open Market Committee meeting, Ms. Yellen was asked about the very low levels of volatility currently seen in financial markets. Some worry overly placid market conditions–which Fed officials have recognized as happening in many different market sectors–could be a problem in the event of unexpected developments. Ms. Yellen admitted that volatility is low and said it’s unclear why. “The FOMC has no target for what the right level of volatility should be,” but if it is due to excessive risk taking and too much borrowing, “that is a concern to me and to the Committee.” Ms. Yellen stopped short of saying she sees a problem in markets. But she added it’s important “for market participants to recognize that there is uncertainty about what the path of interest rates, short-term rates, will be, and that’s necessary because there’s uncertainty about what the path of the economy will be,” Ms. Yellen said. The Fed “will adjust policy to what it actually sees unfolding in the economy over time, and that necessarily gives rise to a certain level of uncertainty about what the path of rates will be, and it is important for market participants to factor that into their decision making.” Yellen thus far, she’s not that worried about the stock market and its gains, which some in markets argue could be well out of line with fundamentals. The Fed “doesn’t try to gauge what is the right level of equity prices,” the Fed chief said. But the central bank does watch the market and based on that, “I still don’t see” the case that suggests stock prices have gone outside of historical norms in terms of prices, Ms. Yellen said.

Yellen To Market: Don’t Be So Sure of Yourself --- Federal Reserve officials spent much of the past few years providing the public with certainty about the path of interest rates. The Fed tried broad promises, like the one about keeping short-term rates near zero for a considerable period. It tried specific commitments, like ones to keep rates low until after calendar dates were reached or unemployment thresholds crossed. Formal interest rate projections, released quarterly, added to the effort to anchor expectations for rates at exceptionally low levels. Now Fed chairwoman Janet Yellen seems to be wondering if the certainty sold by the Fed might be a little too much of a good thing. The watchword of her Wednesday press conference was uncertainty, uttered eight times by our count and in many other forms during her one hour chat with the central banking press. “The Committee’s expectation for the path of the federal funds rate target is contingent on the economic outlook,” she emphasized in her opening statement. “If the economy proves to be stronger than anticipated by the Committee, resulting in a more rapid convergence of employment and inflation to the FOMC’s objectives, then increases in the federal funds rate target are likely to occur sooner and to be more rapid than currently envisaged. Conversely, if economic performance disappoints, resulting in larger and more persistent deviations from the Committee’s objectives, then increases in the federal funds rate target are likely to take place later and to be more gradual.” Got that. No binding low rate promises. It depends on the economy.

Fed Watch: Janet Yellen the Hawk - Yesterday I wrote a fairly conventional analysis of the outcome of the FOMC meeting and the subsequent press conference by Federal Reserve Chair Janet Yellen:  As long as the economy continues to grind upward at a moderate pace and inflation pressures remain constrained, the expected path of short term interest rates is one of a slow rise with the first hike somewhere around a year away.  I think quite the opposite message came through at yesterday's press conference.  Yellen was showing her hawkish side.  First, note that the Fed's terminal Federal Funds rate edged down to 3.75% from 4% in March, a consequence of falling estimates of potential growth.  The Fed thus appears to be conforming to the "new normal" in which equilibrium interest rates have fallen.  In short, the Fed appears to take the terminal Fed Funds rates as exogenous.   The terminal Fed Funds rates, however, is not exogenous.  It is an inflation markup over estimates of potential growth.  The Fed could allow interest rates to return to normal by allowing expected inflation to rise.  From the Fed's point of view, however, the inflation rate is really not an endogenous choice.  They view the 2% target is essentially exogenous, a number handed down in scripture, an element of the Ten Commandments.  Second, it is not clear that the potential growth rate is entirely exogenous.  In her press conference, Yellen commented that lower potential growth estimates are a consequence of slower investment (less capital formation) and persistent damage to the labor market.  In the secular stagnation scenario, however, these are arguably the consequences of holding real interest rates too high and deliberately allowing the cyclical damage to become structural.  But at the zero bound, the Fed would need to target higher inflation expectations to lower the real interest rate further.  That is not on the table.  In other words, Yellen and Co. are so committed to the 2% inflation target that they are willing to tolerate a persistently lower level of national output to maintain that target.   That sounds pretty hawkish to me.

The Fed of magical thinking: why is Janet Yellen ignoring the rest of us?  -- Americans are experiencing one kind of economy – high unemployment, expensive housing, rocketing food prices and costly medical care – but the US Federal Reserve is seeing another kind of economy: the one in which you shouldn’t believe your own eyes. It all comes down to inflation: the measure of rising prices that we all experience in our daily lives. And inflation is rising – fast, much faster than the Fed anticipates. Meat prices are rocketing at plus-7.7% in 2014, and dairy is up 4.2%, a considerable hit to family shopping budgets. Shelter – either mortgages or rent costs – are rising at about 3%, while car insurance is up 5%, and tuition costs and public transportation are both up more than 3%. This means consumers are surrounded by rising prices on all sides – paying higher bills, paying more money at the market, paying more just to get to work. At the same time we’re shelling out more for these necessities, our incomes are stagnant. No more money is coming in. Yet the Fed, which just wrapped a two-day meeting to diagnose the economy, is dismissing these real-world costs as a trick of the charts – a mere math problem rather than a real snapshot of the challenges facing Americans. And its new leader, Janet Yellen, has now officially risked her reputation on a potential misreading of the concerns of regular people. Yellen denied that the patterns in higher prices actually exist:The data we're seeing is noisy … inflation is rising in line with committee's expectations. Translation: Nothing to see here, folks. Move along.

Janet Yellen isn’t giving up on the long-term unemployed - Ever since the recovery began, there have been people looking for an excuse, any excuse, to raise rates. Most of them, like Harvard professor Martin Feldstein, have been making the same, incorrect predictions for years: that inflation is just around the corner (or is it a bubble?), and we need to tighten policy to head it off.Well, they're not going to like Fed Chair Janet Yellen. Now, as expected, the Federal Reserve cut its bond-buying from $45 billion to $35 billion a month at its June meeting. And it reiterated that even after it's out of the asset purchase business completely, which it should be by the end of the year, it could still be a while before it raises rates above zero. But even though this mostly stuck to the same old script — the Fed statement barely changed from April — what Yellen said about it tells us more about their thinking. Here are the three big takeaways.

  • 1. The Fed is focused on the long-term and shadow unemployed.
  • 2. The Fed still isn't worried about inflation.
  • 3. And it's not concerned about a bubble, either.

Fed Issues Surreptitious SNAP Payments to Bankster Welfare Queens At Taxpayer Expense - Here’s something I missed back in May that makes me mad as hell. And it should make you mad as hell too. The Fed has expanded its Term Deposit Operations, moving more spaghetti around on the plate, the plate being the liability side of its balance sheet- aka “money.” The Fed announced that it would do 8 weekly operations with its member banks beginning on May 19. The first 4 are at approximately 26 basis points, then the next 4 at 30 basis points. These deposits are like bank CDs with a term of 7 days. This is a direct giveaway to the banks at the expense of US taxpayers. Subject to the $10 billion per bank limit, the banks will shift as much of their excess cash as they can from their regular deposit accounts at the Fed (aka reserves) to these higher interest bearing term deposits. This is cash which the Fed has given them for free in the first place. Earn free income from free money. Nice work if you can get it. Last week those term deposits grew by $16 billion on the Fed’s balance sheet from an operation conducted June 2. That’s just a drop in the bucket compared to what’s coming. The June 9 operation shifted $78 billion into these giveaways. Meanwhile the Fed will continue to send them more free cash, week in and week out under QE, even though those amounts are somewhat reduced. The trick there is that the Taper does not reduce the excess cash the dealers get because the Fed has been matching QE to Treasury supply. That’s a whole ‘nother story, however, which I cover in depth in the weekly Fed Report (next one coming up this afternoon). This will have absolutely no impact on the Fed’s balance sheet or the Primary Dealer Balance sheets. They’re still short term liabilities to the Fed and short term assets of the banks. To the banks, there’s no practical difference between their regular deposits at the Fed and a one week term deposit.  It’s all excess liquidity which can be used for mischief making whenever they damn well please. The only impact will be that the additional free income the Fed now literally hands over to the banks will increase the banks’ bottom lines. This cash will subsequently be transferred to the pockets of bank CEOs and executives in the form of increased bonuses and stock option buybacks.

Economists: Take Fed ‘Dot Plots’ With a Big Grain Of Salt -- When the Federal Reserve last released its “dot-plot” forecasts at its March policy meeting, many observers were taken aback by what appeared to be an increased appetite among some officials to start raising interest rates. Never mind that in a press conference after the meeting, Fed Chairwoman Janet Yellen affirmed that interest rates would stay low for a long time: many analysts and investors saw these new projections indicating a subtle shift in Fed policy. The charts plot individual officials’ views about when they’ll likely start raising their benchmark short-term rate from near zero and how high the rate will go over the next few years. Bank of America Merrill Lynch economist Michael Hanson warned the dots could also lose information value due to the changes. “The dispersion of the dots could well increase,” he warned. Even then, it might not matter much. RBC Capital Markets told clients “just thinking about it practically, it would take one or more of those members to come in with an extreme view to materially shift the average/median–a low probability event, in our humble opinions.” Other economists also warn to read the dots cautiously. “Some dots are much bigger than others,” Eric Green, economist at TD Securities wrote in a research note to clients. “What the chairman wants matters most.” The only problem is there is no way to know which dot is Ms. Yellen’s. While each Fed official gets a dot, the dots aren’t identified by name.

This is What Happens if You Stare at the Fed’s Dots for Too Long - The Federal Reserve’s Open Market Committee accelerated the taper a bit, even as they downgraded their forecast for GDP growth this year, according to their announcement released this afternoon. The central bank will continue to add to its balance sheet by purchasing Treasuries and GSE-backed mortgage securities, but will now fill up their monthly market basket with $35 billion worth of bonds instead of $45 billion. Now, this may have you scratching your noggin a bit: if they think growth this year is going to be significantly slower than they thought before (see figure), why are they doing less?  Well, for one, they’re always trying to see around the next corner and they think things are generally looking up since that dismal read on Q1 GDP of -1%.  They like the steady payroll jobs growth, diminished fiscal drag, deleveraged households, appreciated home prices.  Though their statement continued to worry about an inflation rate below their 2% target, I wouldn’t doubt that recent accelerated core CPI readings have raised an eyebrow or two over there. For another, they could be wrong.  That is, if you’ve consistently overestimated future growth rates, as has the Fed (along with many others) have, you might consider now an awkward time to decelerate your support for the economy.  There’s still ample slack in the job market and related flatness in wage trends such that letting up on the accelerator is not the obvious move. That said, while I certainly think the above is a cogent argument, I don’t think $10 billion less in asset purchases will make much difference in the movements of the longer term rates they’re targeting with this part of the program.

Key Inflation Measures Show Increase, Year-over-year still mostly below the Fed Target in May -- The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.2% annualized rate) in May. The 16% trimmed-mean Consumer Price Index also increased 0.3% (3.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.  Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.4% (4.3% annualized rate) in May. The CPI less food and energy increased 0.3% (3.1% annualized rate) on a seasonally adjusted basis.  Note: The Cleveland Fed has the median CPI details for May here. This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 1.9%, and the CPI less food and energy rose 2.0%. Core PCE is for April and increased just 1.4% year-over-year. On a monthly basis, median CPI was at 3.2% annualized, trimmed-mean CPI was at 3.2% annualized, and core CPI increased 3.1% annualized.  There key measures of inflation have moved up over the last few months, but on a year-over-year basis these measures suggest inflation remains at or below the Fed's target of 2%. 

Fed’s Yellen: Recent U.S. Inflation Data on High Side, But Noisy - Recent data on U.S. inflation have been “a bit on the high side,” but generally provide evidence that price levels are moving back toward the Federal Reserve‘s 2% target, Fed Chairwoman Janet Yellen said Wednesday.Price gains across the U.S. economy have been sluggish over the past two years. But several gauges of inflation have gained traction in recent months. The Fed’s preferred gauge, the Commerce Department’s personal consumption expenditures price index, rose 1.6% in April from a year earlier. Another closely watched gauge, the consumer-price index, was up 2.1% in May from a year earlier, the Labor Department said Tuesday.“Recent readings on, for example, the CPI index have been a bit on the high side,” but the data are “noisy,” Ms. Yellen said at a press conference following a meeting of the Fed’s policymaking committee. “I think it’s important to remember that, broadly speaking, inflation is evolving in line with the committee’s expectations. The committee has expected a gradual return in inflation toward its 2% objective, and I think the recent evidence that we’ve seen, abstracting from the noise, suggests that we are moving back gradually, over time, toward our 2% objective.”Ms. Yellen said the Fed “would not willingly see a prolonged period in which inflation persistently runs below our objective or above our objective.” She did, however, indicate the Fed might tolerate inflation overshooting the 2% goal if the U.S. economy were still far from the Fed’s goal of maximum employment. Right now, sluggish inflation and elevated unemployment both call for accommodative policy, but “there could conceivably arise policy conflicts or trade-offs somewhere down the road,” Ms. Yellen said.

Is the recent US CPI increase just noise? -  Janet Yellen dismissed the recent inflation report (see chart), that showed stronger price increases in the US, as "noise". Yellen was quite clear. Inflation remains way below the Fed's target and is likely to be there for some time. Perhaps. Inflation sensitive assets such as gold however rallied in reaction to the dovish stance from the Fed. If the CPI report from the US Bureau of Labor Statistics was "noise", is there another indicator that can give us a sense of where prices are headed? Today's Philly Fed report provided one such an indicator. The Manufacturing Prices Paid index clearly showed firmer upstream prices.And inflation expectations, while still relatively low, have definitely moved up recently.  Certainly the Fed wants to see this trend sustained for some time. After all, inflation remains at dangerously low levels in the euro area and we could see price increases soon stalling in Japan (see discussion). But we have clear indications that at least for now, a firmer inflation rate in the US is not just "noise".

What the Gap Between CPI and PCE Means for Fed Overshooting - One of the biggest debates right now over the outlook for inflation is whether the Federal Reserve would allow inflation to overshoot its target – that is, allow inflation to rise above 2% for some period of time. Chicago Fed President Charles Evans and San Francisco Fed President John Williams have argued perhaps it should. (Evans here. Williams here.) But when it comes to overshooting 2%, the Fed’s choice of target becomes really important. The Fed targets the Personal Consumption Expenditures price index, not the better-known Consumer Price Index. As we’ve explained before, the PCE index is persistently lower than the CPI.  Over the past 20 years, the CPI has been, on average, about 0.5 percentage point higher than the PCE. And in some periods that gap has been even wider.  At the end of the 1990s, the gap between the CPI and PCE got even wider, averaging 0.9 percentage point during the final two years of the expansion and the 2001 recession. The important thing to note is that, if this gap remains the same in the future, the Fed will be allowing CPI inflation of above 2%. The mid-point of Fed forecasts place the PCE index at 1.8% at the end of next year. But if the historical relationship holds, that would be a CPI rate of 2.3% using the longer-run average or as high as 2.7% using the gap that prevailed in the late 1990s. If  the Fed allowed PCE to overshoot to 2.5%, an example of a strategy some argue would bring about a stronger labor market, then the CPI would likely be allowed to rise to 3%.

You Can’t Have A Wage-Price Spiral Without Wages - Paul Krugman - There was a fairly characteristic argument over dinner last night about when the Fed should tighten. I’m in the camp that says it should wait until we see wages rising at least at pre-crisis rates. The other side says that wages are a lagging indicator, and if it waits that long the Fed will be behind the curve. My answer to this is that I’m much more worried about a slide into a Japan-style trap of low or negative inflation than I am of a return to 70s-style stagflation, and that the big risk is that the Fed will tighten much too soon. One thing should be clear: there is no sign of wage pressure. It’s important not to pick and choose, highlighting whichever wage measure is going fastest. Jared Bernstein does this the right way, taking the first principal component of a number of different wage series — basically a measure of the underlying wage trend that is imperfectly captured by any one measure, but much better captured by looking at all of them. It looks like this: No hint of wage pressure — and also no hint that we’ve been closing the gap between actual and potential output. So my plea to the Fed: hold your fire.

Merrill Lynch: Inflation: bump up or bust out? -- There are some key questions about inflation right now. Will the recent pickup in inflation continue? Or was it just "noise" (As Fed Chair Janet Yellen said)? This will be important to watch.Here are some excerpts from an article by Merrill Lynch Global Economist Ethan Harris Inflation: bump up or bust out? One of the great ironies this year is that even as growth has disappointed to the downside, inflation has surprised to the upside. Most important, in the past three months, core CPI inflation has risen at the fastest rate since before the crisis. Moreover, the pick-up is fairly broad-based. Both goods and services inflation is higher and there appear to be only a couple anomalies—strong apparel price inflation and a huge 41.6% annualized jump in airfares. Despite the strong numbers, we are reluctant to make significant changes in our inflation call. ... we have incorporated the spring surprises and have raised our sequential forecasts slightly, but that only raises our annual numbers by a few tenths. Why the limited response? To put it simply, the fundamentals don’t support a strong sustained increase. Let’s take a look at the main inflation stories.

The Fed’s oil price challenge -- Recent geopolitical developments in the Middle East and in Ukraine now threaten to complicate the Federal Reserve’s strategy of gradually exiting from quantitative easing. Since those geopolitical developments pose the real risk of a sustained increase in international oil prices, the Fed might be faced with the challenge of lower economic growth and higher inflation than it desired. This would present the Fed with a real dilemma as to what to do with monetary policy. The very real risk of Iraq lurching to a full scale civil war could have a major impact on international oil prices. After all, with current oil production of around 3 million barrels a day, Iraq is OPEC’s second largest oil exporter. Currently it would be difficult to compensate for any major disruption of Iraqi oil supply since such a disruption would be occurring at a time of ongoing supply problems in Libya and Syria.. Russia’s apparent effort to destabilize Ukraine through support to the separatists and through restricting natural gas exports could also pose a threat to global energy prices.  Research by the OECD and the IMF suggests that a sustained increase in international oil prices could have a meaningful impact on both US and global economic growth and inflation. That research suggests that a sustained US$10 a barrel increase in international oil prices could reduce both US and global economic growth by around 0.2% while it could increase inflation by around 0.3% after a year’s lag. Applying these estimates to the approximately 15% increase in international oil prices that has occurred over the past year, one would expect that if  it were sustained US GDP economic growth could be 0.3% below the level it would otherwise have been while inflation could be 0.45% higher.

Fed: Economy Is Doing Better, But Not Enough to Get Excited (Or Worried) About - Following the meeting of the Federal Reserve’s rate-setting body, the news is basically more of the same: Short-term interest rates are staying very low, in the current 0% of .25% range; and the central bank is will continue, as expected, to “taper” the extraordinary program of bond buying that it launched in response to the financial crisis. MORE Stocks Rally as Fed Indicates No Imminent Rate Change Janet Yellen: Cool, Calm, Collected—Yet Again Brazil's Olympic Challenge NBC News Glenn Beck: 'Liberals, You Were Right' About Iraq War Huffington Post Swimmer With Severed Spinal Cord Fights to Recover NBC News In other words, the economy is basically on the path that Fed chair Janet Yellen and other members of the Federal Open Market Committee want it to be on, but it’s far from firing on all cylinders. “Growth in economic activity has rebounded in recent months,” said the Fed’s published statement. “Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated.” Meanwhile, inflation, despite bubbling a bit recently, remains not just tame but in the Fed’s view too low. The Fed again: “Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”The Fed’s read on the economy is important because it shapes the interest rates that businesses, investors, and borrowers can expect in the future.  At the moment, though, markets seem to be reading the Fed’s latest statement as a signal of more of the same. Bond prices rose (and yields fell) slightly in the hour after the Fed’s announcement.One closely watched gauge of the Fed’s thinking is the “dot plot”, which depicts, in the form of anonymous blue dots, where the various Fed officials think interest rates will go in the future. The higher the dots, the more optimistic the Fed would be about the economy, or the more hawkish on inflation. Here’s the latest plot. The dots remain pretty noisy in the near term:

The Fed’s Never-Ending Downward Growth Revisions - Dallas Federal Reserve Bank President Richard Fisher likes citing an old quip from the late economist John Kenneth Galbraith that the purpose of economic forecasting is to make astrology look respectable. Mr. Fisher has good reason to favor that quotation. He and his colleagues at the U.S. central bank have consistently overestimated the U.S. economy’s strength for years. The downward-sloping evolution of the central bank’s forecasts for economic growth in 2014 is a case in point. At the Fed’s meeting Wednesday, it sharply downgraded its 2014 “central tendency” forecast (a range that excludes the three highest and three lowest of the 16 officials’ estimates) for economic growth to just 2.1%-2.3% from 2.8%-3.0% in its March projections. This chart provides a look back at the central bank’s official forecast range for annual growth in 2014 since that year became part of the forecast horizon, in 2012.  Fed officials have conceded their mistakes, as have many private and academic forecasters who not only missed a deep recession but also overestimated the rebound’s likely strength. But Fed officials remain optimistic. Look no further than this week’s revisions which, despite the pessimism about 2014, continues to see a growth pick-up to around 3% next year, a rate above what many economists consider the highest potential rate possible when the economy is fully utilizing its labor and capital resources while maintaining stable inflation.

St. Louis Fed Financial Stress Gauge Hits a Record Low -  Fear is not a factor for financial markets right now. According to a weekly index produced by the Federal Reserve Bank of St. Louis, market stress hit a record low reading in the week ending on June 13. The bank said its Financial Stress Index came in at -1.303 for the week, after standing at -1.264 the prior week. The latest decline was driven by a broad array of forces, led by very low bond market volatility and a decline in inflation expectations over the next decade. During the height of the financial crisis over 2008 and 2009, the bank’s index surged and was above a 6 reading for a time. The St. Louis Fed says a zero reading indicates “normal” financial conditions: negative numbers denote below-average stress, and positive numbers indicate more stress than normal. The St. Louis Fed gauge tracks a wide array of financial sector indicators in both the bond and equities markets. Its rock bottom reading is yet another sign that, right now, investors are in an unusually placid place. That’s good, right? Maybe not. There are rising worries investors are pricing their markets for a perfect, almost risk-free world, especially when it comes to monetary policy. The current world of ultra-low volatility may be at odds with the path the Federal Reserve may have to take in coming years. At the same time, the weak start to the year raises questions about current and future growth, at a time when inflation pressures appear to be mounting. At the same time, the mechanics of normalizing monetary policy is untested. Tools the Fed is exploring to help it manage its coming rate rise campaign will have the central bank heavily involved in markets, to unclear effects. That is why the market’s zen state of mind causes some anxiety.

Conference Board Leading Economic Index Increased Again in May - The Latest Conference Board Leading Economic Index (LEI) for May is now available. The index rose 0.5 percent to 101.4 percent. April was revised down 0.1 percent (2004 = 100). The latest number came in slightly below the 0.6 percent forecast by Here is an overview from the LEI technical notes: The Conference Board LEI for the U.S. increased for the fourth consecutive month in May. Positive contributions from all the financial and labor components of the leading economic index more than offset the large negative contribution from building permits. In the six-month period ending May 2014, the LEI increased 2.3 percent (about a 4.7 percent annual rate), slower than the growth of 3.5 percent (about a 7.2 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators remained widespread. [Full notes in PDF  Here is a chart of the LEI series with documented recessions as identified by the NBER.

New York Times Says "Lack Of Major Wars May Be Hurting Economic Growth" - Now that Q2 is not shaping up to be much better than Q1, other, mostly climatic, excuses have arisen: such as El Nino, the California drought, and even suggestions that, gasp, as a result of the Fed's endless meddling in the economy, the terminal growth rate of the world has been permanently lowered to 2% or lower. What is sadder for economists, even formerly respectable ones, is that overnight it was none other than Tyler Cowen who, writing in the New York Times, came up with yet another theory to explain the "continuing slowness of economic growth in high-income economies." In his own words: "An additional explanation of slow growth is now receiving attention, however. It is the persistence and expectation of peace." That's right - blame it on the lack of war!

Senior Fed Economist Sees Future U.S. Growth Restrained by Productivity Slowdown -- The surge in U.S. workers’ productivity from the mid-1990s to the mid-2000s appears to have been a temporary effect from advances in information technology, a Federal Reserve economist argued in a research paper earlier this month. As a result, the U.S. economy’s potential future growth is more modest than previously assumed because productivity gains in the last decade have returned to their lower historical trend. “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,” wrote John G. Fernald, senior research adviser at the San Francisco Fed, in a working paper. Mr. Fernald also has worked at the Fed Board of Governors, the Chicago Fed and the White House’s Council of Economic Advisers. He has written closely followed papers on productivity and growth. Labor productivity, measured as output per hour worked, is an indicator of the health of the U.S. economy. Gains in productivity can lead to higher living standards and stronger economic growth, while sluggish or declining productivity can drag down growth.Annual productivity gains averaged 1.6% from 1973 to 1995, according to the Labor Department. But from 1996 through 2003, productivity gains more than doubled to an average annual rate of 3.3%. Mr. Fernald, in his paper, said there’s considerable evidence linking that acceleration to “the exceptional contribution of IT — computers, communications equipment, software and the Internet. IT has had a broad-based and pervasive effect through its role as a general purpose technology…that fosters complementary innovations, such as business reorganization.”

Flare-Ups in Iraq, China, Russia-Ukraine Region Add Risks To U.S. Economic Outlook - Sometimes, there is more to fear than fear itself. Turmoil overseas may seem like an old story, but it has thrown a new risk into the U.S. economic outlook. The events, especially the intensifying conflict in Iraq, illustrate how quickly the world view can unravel. The speed with which extreme Sunni militia have thrown Iraq into chaos is one geopolitical event that raises questions about the U.S. and global outlooks, especially because of the resulting increase in oil prices. Add in the continued uncertainty about the Russia-Ukraine conflict, skirmishes between China and its neighbors, unrest in Thailand, and it’s not hard to see why economists surveyed earlier this month by the Wall Street Journal viewed a negative international event as the biggest downside risk to the U.S. economic outlook. Back in the fourth quarter of 2013, the fiscal situation was seen as the biggest risk to the U.S. economy. The main overseas worry just a few days ago was potential problems in China. But now military flare-ups in energy-producing regions have to be the biggest concern. The oil markets have taken note: Analysts at IHS Energy note Brent crude oil front-month futures rose above $114 per barrel in intraday trading on Friday. “Prices will remain elevated during the crisis, all else equal,” they wrote in a research note. Higher oil prices, of course, are a negative to the U.S. consumer outlook. Economists at Nationwide Mutual Insurance estimate that each one-cent increase in gasoline prices “reduces disposable income (that is, income after gasoline payments) by $1.4 billion. This may slow economic activity some.”

IMF cuts 2014, longer-term U.S. growth forecasts - The International Monetary Fund cut its growth estimate for the U.S. to 2% for 2014, down from the 2.8% it projected in April. The IMF still expects 3% growth in 2015. Though there is a "meaningful" rebound, it won't be enough to offset the first quarter that was hit by a harsh winter, inventory drawdowns, a still-struggling housing market and slower external demand, the IMF said. The IMF, in the Article IV consultation which it conducts with every member country annually, also forecasts weaker potential growth of "around 2%" for the next several years due to the effects of population aging and more modest prospects for productivity growth

Economy slumps, Wall Street booms - --  The Federal Reserve on Wednesday cut its projection for US economic growth in 2014 and scaled back its annual growth estimate in the longer term to about 2 percent—far below the post-World War II average of 3.3 percent. Its was an outlook that promises no relief for the vast majority of the population from six years of unemployment, falling wages, and cuts in education, health care and other vital social programs. The Fed’s assessment amounted to an admission that slump and falling living standards for the masses of people are here to stay. The bleak assessment was in line with two other economic reports released in recent days. Last week, the World Bank cut its projection for global growth this year to 2.8 percent from its earlier estimate of 3.2 percent, and downgraded its prediction for the US from 2.8 percent to 2.1 percent. On Monday, the International Monetary Fund revised downward its projection for US growth from 2.8 percent to 2.0 percent. The IMF said unemployment in the US would not return to normal levels until the end of 2017 at the earliest. Wall Street responded to the Fed’s assessment and policy statement Wednesday with a celebratory rally, pushing the Standard & Poor’s 500 stock index to a new record high and boosting the Dow by 98 points. The reason is not hard to fathom. In keeping with the policy of central banks and governments around the world, the Fed made clear that it intends to continue pumping virtually free and unlimited credit into the financial system for at least another year.

Total US debt soars to nearly $60 trn, foreshadows new recession — America - its government, businesses, and people - are nearly $60 trillion in debt, according to the latest economic data from the St. Louis Federal Reserve. And private debt - not government borrowing - is the biggest reason for the huge deficit. Total US debt at the end of the first quarter of 2014, on March 31 totaled almost $59.4 trillion - up nearly $500 billion from the end of the fourth quarter of 2013, according to the data. Total debt (the combination of government, business, mortgage, and consumer debt) was $2.2 trillion 40 years ago. “In 50 short years, debt has gone from being a luxury for a few to a convenience for many to an addiction for most to a disease for all,” James Butler wrote in an Independent Voters Network (IVN) op-ed. “It is a virus that has spread to every aspect of our economy, from a consumer using a credit card to buy a $0.75 candy bar in a vending machine to a government borrowing $17 trillion to keep the lights on.”  Credit card use (or revolving credit) rose by $8.8 billion, while non-revolving credit like auto loans and student loans made by the government surged up by $18 billion in April. Non-revolving credit jumped by 8.2 percent over the last year, while revolving credit only rose 2.2 percent over the same time period.

We are the 100% -- This chart is kind of messy, but it basically outlines a problem with a lot of commentary I see on the economy. This compares growth in commercial loans, the unemployment rate (inverted), inflation adjusted wage growth, and inflation adjusted short term interest rates. This is a mixture of quantities and prices and it's also a mixture of labor and capital. And, they all basically move together.... The economy is overwhelmingly more complementary than competitive. When more labor is utilized, more capital is utilized. When the price of labor rises, the price of capital rises. So, analysis that says that rising wages will lead to inflation or that rising wages means labor has more bargaining power is flat out wrong. Unemployment is falling because frictions in the marketplace are being worked out. Wages are rising because those reduced frictions mean the pie is getting bigger. More workers, more loans, higher wages, higher returns - these are all products of an economy functioning well. This is a tidal chart, and all the boats are being lifted together. Analysis that says rising interest rates is usually the result of a tightening Fed, tamping demand for credit, is flat out wrong. Rates rise because the economy is functioning better. The Fed is usually only able to raise the Fed Funds target because the improved economic context is expanding investment and returns. Policy and punditry that focuses on good guys and bad guys, pitting labor against capital, takings and givings, can be satisfying, and it seems so right. But, it only seems right because our brains evolved in a Malthusian context. I know so many people who recognize the value of the human ability for acceptance and empathy toward diverse and wide-ranging cultures and lifestyles, but when it comes to economics they turn into a bunch of feces throwers. Sometimes these monkey-minds we all are saddled with will just see what they are going to see.  Whether it's with military adventures or social and economic planning, we are suckers for leaders who want to "get tough" with somebody, to our own detriment.

Treasury’s Raskin Says Economy Heading in Right Direction - A top U.S. Treasury official said Tuesday she is optimistic about a continuously growing economy, though she is not expecting an imminent expansionary surge and believes long-term unemployment remains too high. Sarah Bloom Raskin, a former Federal Reserve board governor who recently took over as President Barack Obama‘s deputy Treasury secretary under Secretary Jacob Lew, was speaking at The Wall Street Journal CFO Network annual meeting. Asked if she could say with conviction that economic growth would pick up more firmly later this year and into 2015, Ms. Raskin hesitated. “One thing I do feel very good about is we’re heading in the right direction,” she said. “The growth is sustainable, it’s moving in a direction that we would like to see it moving. We would like to see a broader economic recovery.” The U.S. economy shrank as much as 2% in the first quarter, economists estimate. But most also expect a rebound this quarter and later in the year. However, with the International Monetary Fund and the World Bank both revising their forecasts for 2014 U.S. growth, Fed officials’ forecast range of 2.8% to 3.0% has started to look optimistic.

IMF slashes estimate for US economic growth in 2014 - The International Monetary Fund slashed its forecast for US economic growth on Monday, citing a harsh winter, problems in the housing market and weak international demand for the country's products. In its annual review of the US economy, the IMF cut its growth forecast by 0.8 percentage points to 2%. At a press conference IMF managing director Christine Lagarde blamed the bad winter for much of the cut and said the setback should be temporary. But she warned: “Growth in and of itself will not be enough.” As part of a series of reforms the IMF has called for an increase in the minimum wages in the US, currently the lowest when compared to the average wage in any of the Organisation for Economic Cooperation and Development (OECD)’s 34 countries. She said the number of long-term unemployed, 3.4 million in May according to the Department of Labor, remained too high and the percentage of people in or actively looking for work, the so-called participation rate, remained too low. “We believe that a rise in the minimum wage would be helpful,” she said, especially if complemented with tax policies to help low-wage earners. “We are talking about significant numbers when you have 50 million living below poverty, many of whom are working. That’s why we are recommending it,” she said. The IMF’s latest report into the health of the US economy does predict a meaningful economic recovery. Growth is expected to hit 3% next year. Lagarde said this was the first time in recent years that the report was being compiled at a time when the US was not in the midst of a major political or financial crisis.

The OECD Gets It. Why Don’t We? -- Americans typically don’t like hearing advice from other countries or international bodies about how we ought to handle our affairs. But sometimes the advice is on-target, even if it is the conventional wisdom.Such is the case with the latest annual survey of the U.S. economy by the Organization for Economic Cooperation and Development, what some call the “rich countries’ club.” Here are the main takeaways of the survey released Friday:

  • * The recovery from the Great Recession is the slowest of any U.S. recovery since 1960;
  • * The U.S. labor market is still not fully healed, with many discouraged workers having dropped out of the labor force and too many workers who want full-time employment are working part-time;
  • * The U.S. housing market remains fragile; and
  • * Income inequality in the U.S. remains high.

The OECD’s policy advice also is entirely mainstream. To boost growth, it says, the U.S. needs tax reform (lower rates, fewer deductions and credits), better worker retraining to boost productivity, and immigration reform. Finally, the report commends the U.S. for the fracking revolution that has made this country the world’s largest producer of natural gas, while encouraging us to do more to price greenhouse emissions correctly. So, readers: Does any of this surprise you? Why does it take an outside body to tell us what we already know and seem incapable of doing?

China lowers US debt for third straight month -- China cut its holdings of United States government debt in April for the third straight month, which may reflect a continuing move from US assets, according to an analyst. China, the largest foreign holder of US Treasuries, held $1.26 trillion in US debt as of April, down $8.9 billion from the previous month and below the $1.27 trillion mark for the first time since August 2013, the US Treasury Department said Monday in a monthly report. China's holdings hit a high of $1.317 trillion in November. Kent Troutman, a research analyst at the Washington-based Peterson Institute for International Economics (PIIE), said the decreases each month could be due to benign shifts in the portfolio. "April is the first month where there is a larger decrease, but it is still small. What is worth noting, however, is that, even if China's holdings of US Treasuries are flat, its share of overall foreign exchange reserves is declining," . "What we've seen in the past four months, if we accept that the data accurately reflects China's true holdings of US assets, is the continuation of a shift that began in 2010 of diversifying their portfolio away from US assets," he said. Japan remained the second-largest US creditor in April, increasing its debt securities by $9.5 billion to $1.21 trillion.

Congress’s Deficit Disconnect - The latest head-scratcher when it comes to matching policymaking with rhetoric about the evils of deficits came last week, when the idea was floated to finance the rapidly emptying Highway Trust Fund not by raising the gasoline tax, its only dedicated source of revenue, but by . . . cutting corporate taxes.  Arithmetic sticklers among us should think that’s odd to imagine that spending can be “paid for” by cutting taxes. More precisely, the proposal would allow U.S. corporations to bring back profits currently being held overseas and to pay a temporary preferential tax rate on these repatriated profits.  Now, most estimates show that repatriation tax “holidays” do indeed boost tax collections in the short run. But because these profits were going to come back to the U.S. at some point, allowing them to come in at a preferential rate means that the Treasury loses money in the longer run. Over 10 years, the full cost of this repatriation holiday is around $100 billion. This sort of disconnect–expressions of concern over deficits and the national debt but actions that don’t reflect that–can be seen in other areas. Some members of Congress have expressed unease about the cost of legislation to address gaps in the health-care system for veterans. Some House members have cited the deficit as a reason for not acting to extend the emergency unemployment compensation program, without otherwise paying for the benefits, even though long-term unemployment rates are still higher than when the program was authorized in June 2008.Yet with little fanfare or debate, Congress routinely passes tax-break “extenders”–temporary provisions that are regularly renewed when they expire. My colleague Josh Smith at the Economic Policy Institute has estimated that the annual cost of tax-break provisions that are routinely extended is roughly seven times as expensive as the cost of extending the emergency unemployment compensation program for three months. (And that does not count the offsetting savings in the unemployment bill.) Tax extenders are widely expected to be passed in the fall, most likely in the lame-duck session after the November elections. The only question seems to be whether they will be made permanent or again be enacted temporarily.  So, what does it say when Congress balks at spending $6 billion on extending unemployment compensation but is willing to spend more than $40 billion in tax extenders in one year alone?

Does the Right Hold the Economy Hostage to Advance Its Militarist Agenda? -  Dean Baker -  That's one way to read Tyler Cowen's NYT column noting that wars have often been associated with major economic advances which carries the headline "the lack of major wars may be hurting economic growth." Tyler lays out his central argument: "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."  This is all quite true, but a moment's reflection may give a bit different spin to the story. There has always been substantial support among liberals for the sort of government sponsored research that he describes here. The opposition has largely come from the right. However the right has been willing to go along with such spending in the context of meeting national defense needs. Its support made these accomplishments possible.

Dear Defense Contractor CEOs: Why Is the Pentagon Buying Weapons With Chinese Parts Instead of US Parts?: Last month in Washington DC, a group of legislative staffers from the House and Senate Armed Services Committees attended a briefing on a topic of grave national security: China's complete dominance of rare earth elements and their fabrication into weapons systems that are sold to the US Defense Department. Most startling at the briefing was a slideshow showing the top weapons systems used by the US military - all of which are 100 percent dependent on China for essential rare earth components: Lockheed Martin's F-16, Raytheon's ground-to-air missile, Boeing's Ground-Based Midcourse Defense missile, Northrop Grumman's Global Hawk, and General Atomics' MQ-1 Predator. At least 80 of our nation's primary weapon systems wouldn't work at all without Chinese-sourced rare earth materials. Many Armed Services staffs were outraged to learn the depth of the problem. Many felt that the Department of Defense (DoD) and others had misled them into believing that the problem was mostly rectified. Some staffers promised to take action. How is it possible that our Department of Defense does not want to have a secure national source for weapons technology? Would the Pentagon really rather depend on China for our national security, a country with which we have dubious relations? Or is the DoD pandering to the demands of the multitrillion-dollar defense industry?

A Boon To The Boondogglers - Forty billion fcking dollars. Within minutes, the interceptor's three boosters had burned out and fallen away, and the kill vehicle was hurtling through space at 4 miles per second. It was supposed to crash into the mock enemy warhead and obliterate it. It missed. At a cost of about $200 million, the mission had failed. Eleven months later, when the U.S. Missile Defense Agency staged a repeat of the test, it failed, too. The next attempted intercept, launched from Vandenberg on July 5, 2013, also ended in failure. The Ground-based Midcourse Defense system, or GMD, was supposed to protect Americans against a chilling new threat from "rogue states" such as North Korea and Iran. But a decade after it was declared operational, and after $40 billion in spending, the missile shield cannot be relied on, even in carefully scripted tests that are much less challenging than an actual attack would be, a Los Angeles Times investigation has found. I will leave it to the rest of you to estimate how much good we could have done in this country with, you know, forty billion fcking dollars. I will leave it to the rest of you to collect all the quotes from all the politicians in both the Republican and Democratic parties who moaned so loudly about The Deficit, and who worship still at the altar of Entitlement Reform, and who fought over how much to cut the food stamp program, and yet voted to pour down this obvious rathole forty billion fcking dollars.

Tax Bads, Not Goods -- First, he discussed the MMT view of “modern money”—that is to say, the money that has existed “for the past 4000 years,” at least, as Keynes put it in his Treatise on Money. The money of account is chosen by the sovereign and used to denominate debts, prices, and other nominal values. It is the Dollar in the US. It is like the inch, the pound, the meter, the kilogram, the acre or the hectare—a unit of measure. Mat put it this way: the sovereign can no more run out of “money” than it can run out of “acres” or “inches” or “pounds.” We can run out of land, but we cannot run out of acres. We can run out of trees but we cannot run out of the linear feet we use to measure them. You cannot run out of a unit of measure! The “dollar” is the measuring unit in which we keep our monetary records. We cannot run out. Second, and more relevantly for our story today, Mat said that a guiding principle for choosing what to tax should be “tax bads, not goods.” We’ve previously established that “taxes drive money.” We’ve also established that from the perspective of the sovereign that creates the money, the purpose of the monetary system is to move resources to the public sector. Clearly we do not want to move all resources to the public sector; we want to leave some for the “private purpose.” Further, we want some “efficiency” (I’ll leave the definition of that vague for now) in this process, in the sense that while we want to move some resources to the public sector we do not want to discourage useful private sector activity.

Offshore Cash of $2 Trillion Sparks Hunt for Tax-Friendly Deals - What’s greasing the wheels for the rise in mergers by U.S. companies? The tax man. Two tax-code quirks -- one that charges U.S. companies when they repatriate overseas earnings, the other that allows them to claim a foreign domicile without moving their senior leadership abroad -- are motivating U.S. companies to buy overseas counterparts in part to lower their bills. Takeovers by U.S. companies of targets in low-tax environments -- those with a corporate tax rate of below 20 percent -- have doubled in proportion to all overseas deals, according to data compiled by Goldman Sachs Group Inc. analysts. The desire for such an arrangement, known as a tax inversion, is a factor in Medtronic Inc. (MDT)’s $42.9 billion purchase of Covidien Plc (COV)and Pfizer Inc. (PFE)’s more than $100 billion effort to buy AstraZeneca Plc. (AZN)   “If you have a lot of cash trapped offshore, then the potential tax savings are likely to be larger,” said Marc Zenner, co-head of JPMorgan Chase & Co.’s corporate finance advisory group. “With bigger tax savings, you can offer a bigger premium and it’s harder for a target company to say no to an offer.” $2 Trillion U.S. companies have almost $2 trillion in profits stockpiled offshore, according to a review of securities filings from 307 corporations reviewed by Bloomberg News.

A Repatriation Holiday to Fund the Highway Trust Fund is Not Only a Bad Idea but a Costly One -- In politics, bad ideas never go away, even after being shown to be bad. A repatriation tax holiday is a case in point. Senators of both parties have suggested using revenue generated from a repatriation holiday to plug near-term shortfalls in the Highway Trust Fund, which will be depleted within a couple of months. The problem, of course, is that revenues are only generated in the short-run, and revenue losses in out-years dominate the overall budget impact of a repatriation holiday. Under its baseline budget, the Congressional Budget Office projects a fiscal year 2015 Highway Trust Fund shortfall of about $12 billion. The Joint Tax Committee projects that a repatriation holiday enacted this year would bring in about $13 billion in additional revenue in fiscal year 2015. Sounds like a great fix for a budget problem. What is not mentioned is cumulative Highway Trust Fund shortfalls between 2016 and 2024 total $824 billion and that the repatriation holiday will reduce federal tax revenues by $115 billion over the same period. Consequently, using a repatriation holiday as a short-term fix would increase longer-term federal budget problems associated with underfunding the Highway Trust Fund—increasing projected deficits from $824 billion to almost $1 trillion over the next 10 years. Surely, a repatriation holiday is a bad and costly idea. But there are also other problems with a repatriation holiday, which requires a brief and, admittedly, wonkish review of the 2004 repatriation holiday.

Senators propose a 12-cent hike in federal gas tax - A bipartisan Senate proposal emerged Wednesday to rescue beleaguered federal transportation funding by raising the tax on gasoline by 12 cents a gallon.The proposal to hike the 18.4-cent federal tax for the first time since 1993 came from Sens. Chris Murphy (D-Conn.) and Bob Corker (R-Tenn.) and won quick endorsement from an array of advocates ranging from road builders to AAA.  In addition to increasing the tax by 6 cents in each of the next two years, the senators want the rate indexed to inflation. Failure to keep pace with inflation over the past 20 years, along with steadily increasing fuel economy, has caused the Federal Highway Trust Fund that receives the money to sink to a dangerous level.The Transportation Department projected this week that by midsummer, the fund will no longer be able to meet its obligations. The Obama administration, citing a fragile economic recovery, has been reluctant to endorse a gas-tax increase. Members of Congress facing midterm elections have preferred to look to other sources.

Raising the Federal Gas Tax: When Talking Billions, Context Please!  - Good for Sens. Corker (R-TN) and Murphy (D-CT) for proposing a long overdue 12 cent increase in the federal gas tax that finances the highway trust fund.  The 18.4 cent tax has been unchanged since 1993, despite the increased price of building materials, improved mileage, and more recently, reduction in miles driven.Under the broad assumption that households and businesses want a decent transportation infrastructure, we demonstrably cannot support that with the current revenue stream.  In fact, we have not been able to do so for years now, and Congress has patched the fund with transfers from general revenues. The predictable attacks all reference $164 billion over ten years, which is apparently what the proposal would raise.  Every article I saw had that number in it and none had this number: 0.07%.  That’s $164 billion as a share of GDP over the next decade.  It’s less than 1% of GDP and it’s a) the proper context for such a number–what share of the income generated over the next decade should we spend on roads and transit?–and b) it sounds less scary because it is less scary.  How could it possibly be that the richest nation on earth can’t afford to devote less than 1% of output over the next decade to maintaining its public transportation infrastructure?

The Corker-Murphy Gas Tax Hike: A Good Idea Spoiled - Senators Bob Corker (R-TN) and Chris Murphy (D-CT) deserve enormous credit for having the courage to do what few of their colleagues would: Propose to pay for transportation projects by raising the gas tax. It’s too bad they’d ruin such a sensible, straight-forward idea with a ridiculous budget gimmick. Their bill would hike the gas tax by 6 cents in each of the next two years and then index the levy for inflation. The current federal gasoline tax has been 18.4 cents since 1983 (diesel is an additional 6 cents).  They estimate their tax hike would raise about $164 billion over the next decade—enough to support the Highway Trust Fund at currently projected spending levels for 10 years.The trust fund is currently spending far more than it takes in. To keep it going Congress already has shifted $50 billion from the general fund. Over the next decade, it would have to transfer $160 billion in general revenues.Corker’s and Murphy’s gas tax hike is a perfectly reasonable solution. While not the most creative, it would solve the problem, at least for the next decade. The problem is with the second half of the bill. Largely to insulate themselves from that tax increase charge, Corker and Murphy would offset this new revenue by permanently restoring $190 billion in targeted tax breaks that expired last December.  The lawmakers don’t identify which of the expired provisions they’d resurrect. This is possible thanks to Congress’ arcane budget rules. But let’s get past all the technical scoring issues and cut to the chase: Corker and Murphy would replenish the highway fund with $164 billion in new tax revenues. At the same time, they’d reduce general fund revenues by about $190 billion by restoring the expired tax breaks.

Does He Pass the Test? by Paul Krugman | The New York Review of Books: Midway through Timothy Geithner’s Stress Test, the former treasury secretary describes a late-2008 conversation with the then president-elect. Obama “wanted to discuss what he should try to accomplish.” Geithner’s reply was that his accomplishment would be “preventing a second Great Depression.” And Obama shot back that he didn’t want to be defined by what he had prevented.  It’s an ironic tale for Geithner to be telling, although it’s not clear whether he himself realizes just how ironic. For Stress Test is meant to be a story of successful policy—but that success is defined not by what happened but by what didn’t. America did indeed manage to avoid a full replay of the Great Depression—an achievement for which Geithner implicitly claims much of the credit, and with some justification. We did not, however, avoid economic disaster. By any plausible accounting, we’ve lost trillions of dollars’ worth of goods and services that we could and should have produced; millions of Americans have lost their jobs, their homes, and their dreams. Call it the Lesser Depression—not as bad as the 1930s, but still a terrible thing. Not to mention the disastrous consequences abroad.

More Finance, More Growth? More Finance, More Crises? - A large body of cross-country time-series literature shows that financial development—predominantly measured by private credit as a percent of GDP—fuels growth. But, in light of the many recent episodes of finance driven crisis, these results seem curious. Haven’t we seen that periods of rapid credit expansion are also often periods of economic crisis? The answer to this puzzle might have to do with the time horizon under consideration. A broad theoretical literature argues that credit demand and supply are correlated with growth in the short-run. Credit demand is “pro-cyclical”—firms are reluctant to borrow and invest during business-cycle slumps, periods of low demand and high uncertainty, while the opposite is true for business-cycle booms. Credit supply is also pro-cyclical, as banks are less willing to lend during recessions, when banks have less capital and borrowers have lower net worth, than during upturns. Finance and growth, then, are correlated in the short run, but this does not imply that finance also causes long-run growth. Therefore, it is crucial to address the short-run pro-cyclical fluctuations of credit in empirical studies on the impact of finance on growth. Otherwise, the true long-run growth effect of financial development will be overstated.

It's Time to Recalibrate Financial Reform | Brookings Institution: Leaders of the 20 key economies in the world will be meeting in Brisbane in October with an agenda that includes such a comprehensive reassessment. We ought to encourage this and to take that review seriously. This includes correcting some clear mistakes in the Dodd-Frank Act, the main U.S. financial reform law that was passed four years ago. The U.S. has been caught in a damaging stasis, where Democrats have felt compelled to block any changes to Dodd-Frank because they believe that Republicans would use the opening to reverse important new protections for the financial system. We are in the unfortunate situation where Republicans are calling for wholesale repeal or radical amendment of Dodd-Frank and Democrats feel the need to effectively act as if everything in it is perfect. It's time for a compromise where Republicans accept that Dodd-Frank will remain the law of the land, unless and until they win the Presidency and achieve a filibuster-proof majority in the Senate, and Democrats admit that revisions are necessary. Dodd-Frank is a long and complex piece of legislation that substantially alters regulation of a huge and complex part of our economy. It should be no surprise that it can be improved now that we know more and have thought about it longer.

Wall St. watchdog to review its sanction guidelines: chief  (Reuters) - Wall Street's industry-funded watchdog will review its guidelines for imposing fines in enforcement cases, its chief said on Monday. The Financial Industry Regulatory Authority's (FINRA) review, planned for this year, follows criticism of the guidelines by Commissioner Kara M. Stein of the U.S. Securities and Exchange Commission on May 29. FINRA's review of its sanction guidelines will be its first in at least five years, said Richard Ketchum, FINRA's chairman and chief executive, speaking at Reuters Global Wealth Management Summit on Monday.

Wall Street’s Secret Weapon: Congress - Bill Moyers - Why haven’t any big bankers been prosecuted for their role in the housing crisis that led to the Great Recession? In fact, banking CEOs not only avoided prosecution but got average pay rises of 10 percent last year, taking home, on average, $13 million in compensation. These “gentlemen” are among the leaders of the industry’s efforts to repeal, or water down, some of the tougher rules and regulations enacted in the Dodd-Frank legislation that was passed to prevent another crash. As usual, they’re swelling their ranks with the very people who helped to write that bill. More than two dozen federal officials have pushed through the revolving door to the private sector they once sought to regulate. And then there are the lapdogs in Congress willfully collaborating with the financial industry. As the Center for Public Integrity put it recently, they are “Wall Street’s secret weapon,” a handful of representatives at the beck and call of the banks, eager to do their bidding. Jeb Hensarling is their head honcho. The Republican from Texas chairs the House Financial Services Committee, which functions for Wall Street like one of those no-tell motels with the neon sign. Hensarling makes no bones as to where his loyalties lie. “Occasionally we have been accused of trying to undermine aspects of Dodd-Frank,” he said recently, adding, with a chuckle, “I hope we’re guilty of it.” Guilty as charged, Congressman. And it tells us all we need to know about our bought and paid for government that you think it’s funny. This essay is part of the show Too Big to Fail and Getting Bigger. Watch now »

Wikileaks Exposes Super Secret, Regulation-Gutting Financial Services Pact - Yves Smith  - Wikileaks published an April draft of a critical section of pending “trade” deal called the Trade in Services Agreement, which is being negotiated among 50 countries, including the US, the member nations of the EU, Australia, Canada, Chile, Costa Rica, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Panama, Peru, South Korea, and Switzerland. TISA would liberalize, as in reduce the ability of nations to regulate, a large range of services.  The document that Wikileaks exposed on Thursday is a portion of the financial services section. It is clearly designed to serve the pet interests of big international players. This agreement is designed to institutionalize the current level of deregulation as a baseline and facilitate the introduction of new products, further ease the movement of funds, data, and key personnel, and facilitate cross-border acquisitions and other forms of market entry.  It is distressing to see how the media is pointedly ignoring this damning Wikileaks revelation. As of this hour, my Google News search does not show a single mainstream media outlet reporting on this story. The usual left-leaning stalwarts like Huffington Post, TruthOut, Firedoglake, and CommonDreams have articles up, along with Business Insider and RT. The only country where major news organizations have taken the story up are in Australia, and that appears to be due to the fact that approval of this deal would end Australia’s restrictions on foreign ownership of banks

Citigroup’s Dark Pools: Here’s Why the Public Doesn’t Trust Wall Street --  In 2008, the sprawling global bank, Citigroup, created under the controversial repeal of the Glass-Steagall Act, blew itself up with toxic debt hidden in the dark in the Cayman Islands in an exotic framework called Structured Investment Vehicles or SIVs. The unwilling taxpayer was forced into servitude to bail out this hubris that had occurred at the hands of captured regulators, infusing $45 billion in equity, over $300 billion in asset guarantees, and $2.5 trillion in below-market loans.  At the time of its implosion, Citigroup had over 2,000 subsidiaries, affiliates or joint ventures, many of which operated in the dark in foreign locales. Flash forward to today: in March, the Federal Reserve said Citigroup had flunked its stress test and the Fed prevented it from boosting its dividend. (The so-called stress test is how the Fed measures a mega bank’s ability to withstand a major economic upheaval.) In rejecting Citigroup’s capital plan for 2014, the Fed said that Citigroup “reflected a number of deficiencies in its capital planning practices, including in some areas that had been previously identified by supervisors as requiring attention, but for which there was not sufficient improvement. Practices with specific deficiencies included Citigroup’s ability to project revenue and losses under a stressful scenario for material parts of the firm’s global operations.”  Most Americans, and, sadly, members of Congress, believe that Citigroup is the parent of all those branch banks holding FDIC-insured deposits across America and bearing that angelic red halo over the word “Citi.” But Citigroup is far more than that. A recent record search by Wall Street On Parade suggests that Citigroup may be operating one of Wall Street’s largest collections of dark pools, trading stocks 24/7 around the globe in de facto unregulated stock exchanges which it operates under a dizzying array of different names.

Citigroup, BofA Said to Face U.S. Lawsuits as Talks Stall - Citigroup and Bank of America Corp. are facing the prospect of being sued by the Justice Department after officials broke off talks aimed at settling probes into the banks’ sales of mortgage-backed bonds. Justice Department officials suspended negotiations with the banks June 9 because they’re unsatisfied with the offers, said a person familiar with the discussions who asked not to be named because they are confidential. A civil lawsuit against Citigroup could be filed as early as next week, the person said. The department has asked for more than $10 billion from New York-based Citigroup and $17 from Bank of America, though prosecutors are willing to consider proposals below those amounts, the person said. Bank of America has offered about $12 billion while Citigroup has put forward less than $4 billion, the person said. “Even though talks have broken off, it doesn’t mean they can’t be restarted,” after lawsuits are filed, said Matthew Axelrod, a former senior Justice Department official whose firm is handling lawsuits against banks, including Bank of America and Citigroup, over mortgage-backed securities. The Justice Department is taking a tougher approach following criticism that it hadn’t done enough to punish large institutions for their role in the collapse of home prices and ensuing financial market turmoil. Prosecutors are demanding multibillion-dollar penalties from banks for wrongdoing including tax evasion and sanctions violations and have used the threat of lawsuits to reach settlements.

Bank Of America Wants Meeting With Attorney General Holder - Bank of America is apparently done talking to Justice Department attorneys and wants to go straight to the top dog. CEO Brian Moynihan has asked to meet with Attorney General Eric Holder to discuss a deal on mortgage fraud litigation, Reuters reports.  This type of request is unusual as meetings are usually brokered between law enforcement officials and company lawyers. It looks as if Bank of America is following in the footsteps of JPMorgan Chase, which settled a big case for $13 billion shortly after meeting with Holder.

The need to focus a light on shadow banking is nigh - As progress has been made in reforming the global banking system and as risk appetite returns to financial markets, wider attention has begun to focus on shadow banking. That focus is not new for policy makers. Reform of shadow banking – the extension of credit from entities and activities outside the regular banking system – has been a core part of the Group of 20’s agenda to overhaul the global financial system since the 2009 Pittsburgh summit, when, in response to the crisis, leaders established the Financial Stability Board. The aim has been to deliver a transparent, resilient, sustainable source of market-based financing for real economies. In the run-up to the crisis, opacity in shadow banking fed an increase in leverage and a reliance on short-term wholesale funding. Misaligned incentives in complex and opaque securitisation structures weakened lending standards. Securities financing markets fed boom-bust cycles of liquidity and leverage. Ample liquidity and low volatility drove increasing availability of secured borrowing. That created a self-reinforcing dynamic of more leverage, even greater liquidity, lower volatility and even greater access to secured borrowing. When confidence evaporated, that process went sharply into reverse. Markets seized up, investment vehicles – the size of which had tripled in the three years before 2007 – failed, and money market funds experienced runs. The banking system was not immune. The problems found their way back to the core of the system causing a sharp deterioration in capital and liquidity buffers, threatening the viability of major banks. The supply of credit to real economies was drastically restricted. Authorities recognise that as the banking system is reformed to become more resilient, activity can be pushed into the shadows. New regulatory requirements on banks create incentives to move activities to other parts of the financial system where they are not subject to the same prudential standards.

The Fed’s Ever-Burgeoning Market Manipulation Support -  Yves Smith  - A set of articles in the Financial Times puts a nasty spotlight on what mission creep, or more accurately, mission leap, at the Fed. The central bank is moving unabashedly into price-setting, and stealth or formally backstopping, of more and more markets.  It’s one thing for the central bank to step in to shore up financial firms during a crisis via the means of providing liquidity.  But as we pointed out repeatedly during and after the crisis, the officialdom pretended that the meltdown was a liquidity crisis, simply a massive loss of confidence, rather than a solvency crisis. That belief served as the justification for not forcing writedowns of bad debt, requiring much higher level of capital, and at a minimum imposing management changes on firms that needed bailouts (better yet resolving the worst of the pour decourager les autres).  We’ve refrained from saying much so far about the central bank’s forays into the repo market. Here are the key sections of tonight’s article from the Financial Times: The Federal Reserve Bank of New York has emerged as the single largest player in an important segment of the short-term lending market that was at the epicentre of the financial crisis… Armed with a balance sheet of $4.3tn of bonds purchased during quantitative easing, the Fed is using what it calls its reverse repo programme, or RRP, to trade with money funds at a time when tough new regulatory standards have made such borrowing less attractive for the banks… When official short-term rates are eventually pushed higher, the Fed plans to use the RRP to drain cash from the financial system via short-term loans of Treasuries from its huge balance sheet. Bill Dudley, New York Fed president, warned last month that if use of the repo facility were to grow too quickly it might “result in a large amount of disintermediation out of banks through money market funds and other financial intermediaries into the facility. This could encourage further enlargement of the shadow banking system.” Without a cap on use of repo with the Fed, investors who ordinarily lend to banks could instead flock to the central bank in times of market stress, exacerbating a flight from funding of banks, he warned.

Senator Elizabeth Warren: High Frequency Trading Is Like the Skimming Scam in the Movie, ‘Office Space’ -- Outside of the Washington Times, there was a virtual corporate media blackout on the high frequency trading hearing held yesterday by the Senate Banking Subcommittee on Securities, Insurance and Investment – which came one day after Senator Carl Levin’s hearing on the same topic.The media blackout did a deep disservice to the brilliant perspectives brought to the table by Senators Elizabeth Warren and Mark Warner and two witnesses who deal every day of their lives with the corrupted and disfigured trading venues the SEC has allowed to evolve in what used to be the most trusted stock market in the world. On the Senate’s witness panel were Jeffrey Solomon, CEO of Cowen and Company, and Andrew Brooks, Head of U.S. Equity Trading for T. Rowe Price (who has been a trader for 34 years) at a firm which now manages $711.4 billion of the life savings of Americans. The third witness was Professor Hal S. Scott, the Nomura Professor of International Financial Systems at Harvard Law School – who has been teaching at Harvard for 39 years and has never worked a day as a trader. (Harvard, by the way, received a donation of $150 million in February of this year – the largest donation in its history – from Ken Griffin, CEO of Citadel – a hedge fund that profits from high frequency trading.) Scott’s written testimony launched right in to an attack on the Michael Lewis book, Flash Boys, which has set off public awareness of just how rigged U.S. markets have become. Scott said the debate about high frequency trading can’t be based on “a journalistic tale that makes for a best seller—rather it must be informed by verifiable facts.” (Lewis, actually, went out of his way to verify his facts in the book. It’s those facts which the high frequency enablers don’t want to discuss.)

The Highest-Paid CEOs Are The Worst Performers, New Study Says - Across the board, the more CEOs get paid, the worse their companies do over the next three years, according to extensive new research. This is true whether they’re CEOs at the highest end of the pay spectrum or the lowest. “The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance,” says one of the authors of the study, Michael Cooper of the University of Utah’s David Eccles School of Business. The conventional wisdom among executive pay consultants, boards of directors and investors is that CEOs make the best decisions for their companies when they have the most skin in the game. That’s why big chunks of the compensation packages for the highest-paid CEOs come in the form of stock and stock options. Case in point: The world’s top-earning CEO, Oracle billionaire Larry Ellison, took in $77 million worth of stock-based compensation last year, according to The New York Times, after refusing his performance bonus and accepting only $1 in salary (he made a stunning total of $96 million in 2012). But does all that stock motivate Ellison to make the best calls for his company? The empirical evidence before fell on both sides of that question, but those studies used small sample sizes. Now Cooper and two professors, one at Purdue and the other at the University of Cambridge, have studied a large data set of the 1,500 companies with the biggest market caps, supplied by a firm called Execucomp. They also looked at pay and company performance in three-year periods over a relatively long time span, from 1994-2013, and compared what are known as firms’ “abnormal” performance, meaning a company’s revenues and profits as compared with like companies in their fields. They were startled to find that the more CEOs got paid, the worse their companies did.

Anat Admati Discusses the Still-Too-Big-to-Fail Banks on Bill Moyers - Yves Smith  Anat Admati, along with Simon Johnson, has been one of the most forceful advocates for having banks carry much higher levels of equity than they have in recent decades. In this interview with Bill Moyers, Admati stresses how little has been done to fix the underlying problem: that banks are subsidized to borrow, that creditors are confident that large banks will be rescued and hence don’t exercise any adequate discipline, and that they therefore have a “heads I win, tails you lose” deal with the rest of society: ANAT ADMATI: They got a great deal. And so what they’re going to do is, if they make profit, they want to pay them out and keep borrowing. And so there’s nothing essential about that, or nothing good about that, except for a few people. And then who exactly wins and loses? They might tell– pacify the shareholders by saying, here, we’ll give you dividends, we’ll give you dividends in good times. And then when the bad time come, or when they have fines or anything else happens, the shareholders pay. And who are the shareholders? That’s also all of us through our pension funds. And how did we do on the S&P 500? Very poorly. So the notion that these institutions by living dangerously somehow help us, that’s completely nonsense. And so what we have is a really unhealthy system that we perversely get talked into subsidizing and supporting.

Banks Are Where The Liquidity Is: What is so special about banks that their demise often triggers government intervention? In this paper we develop a simple model where, even ignoring interconnectedness issues, the failure of a bank causes a larger welfare loss than the failure of other institutions. The reason is that agents in need of liquidity tend to concentrate their holdings in banks. Thus, a shock to banks disproportionately affects the agents who need liquidity the most, reducing aggregate demand and the level of economic activity. In the context of our model, the optimal fiscal response to such a shock is to help people, not banks, and the size of this response should be larger if a bank, rather than a similarly-sized nonfinancial firm, fails.

Bank Account Screening Tool Is Scrutinized as Excessive - Ms. Williams, a 25-year-old resident of Queens, is one of more than a million Americans who have been effectively blacklisted from the mainstream financial system because they overdrew their accounts or bounced a check — mistakes that routinely bedevil young and low-income consumers, financial counselors say. While Ms. Williams paid back Bank of America the roughly $700 that she owed, a record of her youthful transgressions remains in a vast private database, preventing her from opening a new account.Such databases, used by Bank of America, JPMorgan Chase and other big banks, were intended to weed out serial fraudsters. Now, regulators say, banks are screening out potential customers and swelling the ranks of the so-called unbanked — the roughly 10 million households in the United States that lack even a basic bank account.On Monday, New York’s attorney general will become the first government authority to take aim at how banks use the databases, according to people briefed on the matter, who spoke on the condition of anonymity. The attorney general’s office is expected to announce that Capital One has agreed to fundamentally change the way it uses the largest database, ChexSystems, barring only customers who land in the database for fraud.

Consumer Finance Movie: Spent: Looking for Change - I just saw Spent: Looking for Change, a documentary about the financial challenges of the unbanked. The film was funded by American Express, but there is no marketing of Amex products in the film. (Amex does offer one of the best non-DDA account options for the unbanked, however.) You can watch the movie for free on YouTube. The movie really puts a human face on the problems of the unbanked. It doesn't get into solutions (that would take a Peter Jackson trilogy), but it does a great job of setting forth what life is like for the unbanked. Highly recommended.

Unofficial Problem Bank list declines to 494 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for June 13, 2014.  Back-to-back quiet weeks for changes to the Unofficial Problem Bank List. This week only Minnwest Bank Metro, Eagan, MN ($209 million) was removed as it found a merger partner to work its way off the list. After removal, the list holds 494 institutions with assets of $153.7 billion. A year ago, the list had 757 institutions with assets of $274.5 billion. Next week, we anticipate for the OCC to provide an update on its enforcement action activity through mid-May 2014.CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The list peaked at 1,002 institutions on June 10, 2011, and is now down to 494.

Blogs review: House of debt -- What’s at stake: The recent release of the book “House of Debt”, by Amir Sufi and Atif Mian, has generated an important discussion on the role of household debt in the Great Recession and whether the attitude of the Obama administration towards mortgage debt relief remains its biggest policy mistake. The debate has also been echoed in Europe where the policy focus is focused on addressing the problems with the supply rather than the demand for credit. The Economist writes that the notion that financial crises are transmitted to the broader economy by the “bank-lending channel” has dominated subsequent policymaking. It is why Bernanke fought so hard to stop the panic in 2008 and to recapitalize the banking system afterwards. David Dayen notes that Sufi and Mian pinpoint the growing belief, which has taken hold among economists and policymakers that saving the banks equals saving the economy.  Lawrence Summers writes that House of Debt is important because it persuasively demonstrates that the conventional meta-narrative of the crisis and its aftermath, which emphasizes the breakdown of financial intermediation, is inadequate. It then goes on to provide a supplementary and in some ways alternative explanation focusing on the deterioration of household balance sheets. Their story of the crisis blames excessive mortgage lending, which first inflated bubbles in the housing market and then left households with unmanageable debt burdens. These burdens in turn led to spending reductions and created an adverse economic and financial spiral that ultimately led financial institutions to the brink.

Mortgage Cramdowns and Monetary Accommodation - There have been programs for mortgage reductions and calls for more.  It strikes me as an unusual position.  Essentially, it is a type of bankruptcy proceeding where the equity holders retain full ownership.  I see the proposal being proposed for homeowners.  I wonder if anyone ever proposes it for commercial contexts?  Where the government intervened with GM to alter the proceedings against the bondholders, it appears to have been for the benefit of the labor unions, not the previous equity holders. I wonder how markets would differ if that was the norm.  What if bankruptcies triggered haircuts for creditors, but equity holders  retained their ownership? Debt would be a lot more expensive and a lot more cyclical.  Creative destruction and flexible asset allocation would be hampered.  Banking would be very difficult. Is the housing context so different from the commercial context that the case for housing cramdowns could be that much better than the case for equity-friendly corporate cramdowns? I suppose an Austrian critique of monetary policy is that monetary accommodation is exactly this - a haircut for creditors while the equity holders retain control, which hampers creative destruction.  So, maybe the incoherent position would be to support monetary accommodation but not to support housing cramdowns.

Repeated Foreclosures on an On-Time Borrower Demonstrates Failure to Fix Servicing and Fallacy of “Save Banks at All Costs” Policy -  Yves Smith  - It was obvious at the time of the various mortgage “settlements” that the Administration’s policy was to make only cosmetic fixes in a badly broken servicing model. And despite evidence of continuing mortgage servicing abuses, from significant errors in records to failure to implement required reforms, like ending dual tracking, the public is being subjected to Big Lies from Timothy Geithner (in his new book) and Larry Summers (in a Financial Times opinion piece) that the only approach possible to the crisis was the one that was taken, of coddling the banks and leaving the greater public bearing the costs in numerous ways, from rising inequality, a lousy job market and weak growth, to a mortgage market that is destined to remain on government life support.  The last point is not as well understood as it needs to be. The failure to make servicers clean up servicing means that there is virtually no private mortgage securitization market. Prior to the crisis, it was 40% to 60% of total mortgage originations.  Mortgages made now are overwhelmingly either government guaranteed or retained on bank balance sheets. Except for a very few deals (jumbos with very large down payments), investors, who were badly burned by servicing abuses, are not willing to be fooled again. As a result, it’s a virtual certainty that new mortgages will depend on government guarantees. The housing-industrial complex has sufficient clout to insist that the Federal government continue to absorb mortgage credit risk, since having banks retain mortgages on bank balance sheets would result in much higher interest charges, and as a result, lower housing prices. We’ll discuss shortly why the failure to force servicers to clean up their shoddy records and procedures means we won’t see a meaningful private mortgage securitization market any time soon, which means government guaranteed mortgages will continue to dominate housing finance.

U.S. foreclosures drive up suicide rate, study finds -- The recent U.S. foreclosure crisis contributed significantly to the nation's jump in suicides, independent of other economic factors associated with the Great Recession, according to a study by Dartmouth and Purdue professors publishing Monday. The study, publishing in the June issue of the American Journal of Public Health and available online now, is the first to ever show a correlation between foreclosure and suicide rates. The authors analyzed state-level foreclosure and suicide rates from 2005 to 2010. During that period, the U.S. suicide rate increased nearly 13 percent, and annual home foreclosures hit a record 2.9 million (in 2010). "It seems that foreclosures affect suicide rates in two ways," said co-author Jason Houle, assistant professor of sociology at Dartmouth College. "The loss of a home clearly impacts individuals and families, and can arouse feelings of loss, shame, or regret. At the same time, rising foreclosure rates affect entire communities because they're associated with a number of community level resources and stresses, including an increase in crime, abandoned homes, and a sense of insecurity." The effects of foreclosures on suicides were strongest among adults 46 to 64 years old, who also experienced the highest increase in suicide rates during the recessionary period.  "Foreclosures are a unique suicide risk among the middle-aged," Houle said. "Middle-aged adults are more likely to own homes and have a higher risk of home foreclosure. They're also nearing retirement age, so losing assets at that stage in life is likely to have a profound effect on mental health and well-being."

JPMorgan sued by Miami over alleged mortgage discrimination  (Reuters) - JPMorgan Chase & Co has been sued by the city of Miami, accusing the bank of predatory mortgage lending in minority neighborhoods that allegedly caused a wave of foreclosures during the last decade's housing crisis. The lawsuit, filed on Friday in federal court in Florida, said the country's largest bank engaged in a continuous practice of discriminatory mortgage lending since at least 2004, violating the U.S. Fair Housing Act. After issuing high-cost loans to minorities in the years before the housing crisis, JPMorgan later refused to refinance the loans on the same terms as it extended to whites, leading to defaults and foreclosures, the complaint said. The lawsuit came just weeks after the city of Los Angeles filed similar claims against JPMorgan, seeking to recoup damages for lost tax revenue and increased city services needed in blighted neighborhoods. true "The Miami City Attorney's claims are baseless and stand contrary to our long record of providing affordable housing to low- to moderate-income families across the region," JPMorgan spokesman Jason Lobo said. Wells Fargo & Co, Citigroup Inc and Bank of America Corp also face lawsuits by Los Angeles and Miami for allegedly giving minorities home loans they could not afford, resulting in massive defaults. The banks have contested the claims, saying they have records as responsible lenders.

Housing Hit the Wall of Wall Street in May - Wolf Richter - It always starts with a toxic mix. Last fall when sales that had been predicted to continue their miraculous ascent were suddenly swooning, soothsayers dealt with it by developing a whole plethora of excuses. At each new disappointment, they dragged out new excuses. But in May, the toxic mix came to a boil, and now there are no more excuses: sales plunged and inventories jumped. The housing market is buckling under its own inflated weight. And what excuses they’d come up with! Last fall, the fiscal cliff, the threat of a government shutdown, the possibility of default that was belittled by everyone supposedly made home buyers uncertain. But these issues were swept under the rug, and sales continued to drop into the winter. Polar vortices were blamed, though in California, where the weather was gorgeous, sales dropped faster than elsewhere. Then the spring buying season came around when massive pent-up demand was supposed to sweep like a tsunami over the land. But sales continued to decline. So tight inventories were blamed. There simply weren’t enough homes for sale, it went.  Alas, in May, new listings rose 6.5% from a year ago to a four-year high in the 30 markets that electronic real-estate broker Redfin tracks. People were dumping their homes on the market; new listings soared 25.5% in Ventura, CA, 15.8% in West Palm Beach, and 15.4% in Baltimore. This is what it looked like for all 30 markets combined:

Lawler: Updated Table of Distressed Sales and Cash buyers for Selected Cities in May -- Economist Tom Lawler sent me the updated table below of short sales, foreclosures and cash buyers for several selected cities in May. Lawler notes that Orlando is one of a few markets in Florida where foreclosure share of sales up a decent amount from year ago. On distressed: 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.

MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey - Mortgage applications decreased 9.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 13, 2014. ... The Refinance Index decreased 13 percent from the previous week. The seasonally adjusted Purchase Index decreased 5 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 4.36 percent from 4.34 percent, with points increasing to 0.24 from 0.16 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Mortgage Applications Re-Plunge As Rates Tick Up 5bps -- While the Fed's magical money transmission mechanism in mortgages (and thus housing 'wealth') broke in the middle of last year, this last week's move is a perfect summary of the sensitivity of whatever is left of the recovery. Mortgage rates rose a mere 5bps but this triggered a 7% plunge in refinancing activity. It appears clear from the chart below that, like most other 'markets' the Fed has intervened in, mortgages are broken - rising rates (from any Fed signaling of confidence in the economy or otherwise) will slump refi activity at the margin no matter how rosy the future; and lowering rates is now having no impact at all on the marginal homeowner's ability to refi. That's another fine mess you've got us into Bernanke/Yellen.

Freddie Mac: "Fixed Mortgage Rates Down Slightly" -- From Freddie Mac: Fixed Mortgage Rates Down Slightly Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates reversing course and moving slightly lower for the week. 30-year fixed-rate mortgage (FRM) averaged 4.17 percent with an average 0.6 point for the week ending June 19, 2014, down from last week when it averaged 4.20 percent. A year ago at this time, the 30-year FRM averaged 3.93 percent.

Mortgage News Daily: Mortgage Rates Down Year-over-year on June 20th --I use the weekly Freddie Mac Primary Mortgage Market Survey® (PMMS®) to track mortgage rates. The PMMS series started in 1971, so there is a fairly long historical series.  For daily rates, the Mortgage News Daily has a series that tracks the PMMS very well, and is usually updated daily around 3 PM ET. The MND data is based on actual lender rate sheets, and is mostly "the average no-point, no-origination rate for top-tier borrowers with flawless scenarios". (this tracks the Freddie Mac series).  MND reports that average 30 Year fixed mortgage rates decreased today to 4.18% from 4.20% yesterday. One year ago, on June 20, 2013, rates were at 4.29% and rising.   So rates are down year-over-year!  The spread will be even larger next week. Here is a table from Mortgage News Daily:

Weekly Update: Housing Tracker Existing Home Inventory up 13.7% year-over-year on June 16th -- 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.This graph shows the Housing Tracker reported weekly inventory for the 54 metro areas for 2010, 2011, 2012, 2013 and 2014. In 2011 and 2012, inventory only increased slightly early in the year and then declined significantly through the end of each year. In 2013 (Blue), inventory increased for most of the year before declining seasonally during the holidays. Inventory in 2013 finished up 2.7% YoY compared to 2012. Inventory in 2014 (Red) is now 13.7% above the same week in 2013. Inventory is still very low - but I expect inventory to be above the same week in 2012 very soon (prices bottomed in early 2012). This increase in inventory should slow price increases, and might lead to price declines in some areas.

Fifty years of data says, house prices lead housing inventory for sale  - Several years ago, Barry Ritholtz wrote a 5-part series on why housing prices weren't bottoming (hey, nobody's perfect).  One of his arguments was that any uptick in prices would bring out such an increase in listings that prices would actually fall further. I have a post up at looking at the relationship between house prices and the number of houses listed for sale.  The bottom line is, prices lead listings, as potential home sellers take their cues from recent price movements, but it takes a while for the "message" to get through to them. Since we may be at an inflection point for house prices, this is a relationship we can watch

Study: Chicago home prices up 20% from 1st quarter 2013 - Single-family homes prices in Cook County posted their biggest year-over-year gain in the first quarter in at least 16 years, led by improvement in some of the Chicago neighborhoods that were hardest hit by the housing crisis. First-quarter home prices rose 20 percent from a year ago within Chicago and about 13 percent within suburban Cook County, according to a county home price index compiled by the Institute for Housing Studies at DePaul University. Despite the improvement, prices remained well below their peak, and are akin to their level in Chicago in early 2003 and in the suburbs in late 2001. In areas heavily affected by foreclosure, home values remain below their 1998 levels. Like the national monthly S&P/Case-Shiller home price index, DePaul’s index looks at a three-month average of repeat sales of the same home over time.

The Downside of Low Interest Rates: Reluctant Home Sellers - Historically low interest rates likely will haunt the U.S. housing market by deterring homeowners from selling in future years after rates rise, housing economists say. Economists theorize that, in the so-called rate lockdown effect, homeowners that landed mortgages in recent years with rates 3.5% to 4% might be reluctant to sell their homes in the coming years, which would cause them to forfeit the rock-bottom rates on their existing mortgages. Rates for 30-year, fixed-rate mortgages, now at 4.2%, are widely forecast to reach 5% by next year. Quantifying the potential drag on home sales from the lockdown effect is challenging, but economists speaking Friday at a Houston conference of the National Association of Real Estate Editors said some type of effect is almost guaranteed. Stan Humphries, chief economist for real-estate website Zillow, projects that an increase in rates to 5% will cause a 5% decline in existing home sales from current levels. A rise to interest rates of 6% will cause an 15% decline in sales, he predicts. “We’ve locked all of these people into these low rates, mostly in 30-year fixed mortgages,” said Mark Fleming, chief economist at real estate data firm CoreLogic at the conference. “There’s a huge disincentive … to sell at any point in the future. My expectation is that housing turnover rates will be down significantly in the future due to this rate lockout effect.”

Housing Falters as Forecasters See U.S. Sales Dropping - The two-year-old U.S. housing recovery is faltering. The Mortgage Bankers Association yesterday lowered its new and existing home sales forecast for 2014 to 5.28 million -- a decrease of 4.1 percent that would be the first annual drop in four years. The industry group also cut its prediction on mortgage lending volume for purchases to $751 billion, an 8.7 percent decline and the first retreat in three years. Bullish forecasts in early 2014 from MBA, Fannie Mae and Freddie Mac have been sideswiped by rising home prices and an economy that isn’t producing higher paying jobs. The share of Americans who said they planned to buy a home in the next six months plunged to 4.9 percent last month from 7.4 percent at the end of 2013, the highest in records going back to 1964, according to the Conference Board, a research firm in New York. “The big housing rally wiped itself out because prices increased too quickly for buyers to keep up,” . “The pool of eligible new buyers is collapsing” because of stagnant incomes and lack of credit, he said. The best-qualified homebuyers jumped into the market last year to grab near-record low mortgage rates that averaged about 3.5 percent after delaying their moving plans during the housing slump,

Student Debt Is Hurting Homeownership For Blacks More than Whites - Is student loan debt causing young adults to retreat from the housing market en masse? No, but it’s having some impact, and the debt burden appears to be hitting black borrowers harder than whites, says a recent paper from researchers of the University of Wisconsin-Madison. The authors look at the relationship between student-loan debt and homeownership for those under age 30. The authors do find an inverse relationship between student loan debt and homeownership, mortgage acquisition and the amount of mortgage debt. But the overall relationship is modest, they write, providing “limited evidence that rising student loan debt is a major culprit in the decline in homeownership among young adults in the overall population, though it may have a small marginal effect on homeownership rates.” The huge jump in student debt has become a top focus of economists and policy makers.  The degree to which student debt could restrain the economy, and particularly the housing market, remains a subject of intense debate. Among those with some post-secondary education, Messrs. Houle and Berger find that having $10,000 more in student debt is associated with a 6 percentage point lower probability of homeownership and a 7 percentage point reduced probability of having a mortgage.One troubling conclusion in the report: To the extent student loan debt is deterring homeownership, the authors find that it is more of a deterrent for blacks than for whites. While the paper finds “no discernible association” between homeownership or mortgage borrowing and student loan debt for whites, having more than $10,000 in student loan debt is associated with an 11 percentage point lower probability of homeownership for blacks and a 9 percentage point lower probability of holding a mortgage for blacks.

Housing Starts at 1.001 Million Annual Rate in May - From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,001,000. This is 6.5 percent below the revised April estimate of 1,071,000, but is 9.4 percent above the May 2013 rate of 915,000. Single-family housing starts in May were at a rate of 625,000; this is 5.9 percent below the revised April figure of 664,000. The May rate for units in buildings with five units or more was 366,000. Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 991,000. This is 6.4 percent below the revised April rate of 1,059,000 and is 1.9 percent below the May 2013 estimate of 1,010,000. Single-family authorizations in May were at a rate of 619,000; this is 3.7 percent above the revised April figure of 597,000. Authorizations of units in buildings with five units or more were at a rate of 347,000 in May.The first graph shows single and multi-family housing starts for the last several years. Multi-family starts (red, 2+ units) decreased in May (Multi-family is volatile month-to-month). Single-family starts (blue) also decreased in May. The second graph shows total and single unit starts since 1968. The second graph shows the huge collapse following the housing bubble, and that housing starts have been increasing after moving sideways for about two years and a half years. This was Below expectations of 1.036 million starts in May.

Housing permits negative YoY, single family homes still stalled -- For the first time this year, housing permits turned negative on a YoY basis, down -1.9% from May 2013: Interestingly, YoY permits for not only single family homes (blue), but also for multi-unit structures (apartments and condominiums) (red) were negative: On an absolute level, we can see that building permits for single family homes remain dead in the water,with no growth since January of 2013 (blue). All of the growth has come from apartments and condominiums (red): Housing starts did remain positive. Single family starts were up +4.7% YoY. Apartments and condos were up +19.2%. Total starts were up +9.4%. Typically permits slightly lead starts, so I expect starts to cool off on a YoY basis in the next month or two. {Note: I'll update with graphs of starts once the St. Louis FRED puts them online]. The bottom line remains:

  • higher interest rates and higher prices have brought the market for new single family homes to a virtual standstill.  It has not shown meaningful growth for nearly the last year and a half.
  • the large "Echo Boom" Millennial generation is piling into apartments and condominiums, partly due to economic distress (inability to afford single family homes).
  • apartment building is also being boosted by historically low vacancy rates and sharp increases in rents, in addition to demographics.

A few comments on Housing Starts -- There were 396 thousand total housing starts during the first five months of 2014 (not seasonally adjusted, NSA), up 6.5% from the 372 thousand during the same period of 2013. Single family starts are up 2.5%, and multi-family starts up 17%. This was just the fourth month with starts at over a 1 million annual pace since early 2008 (Seasonally adjusted annual rate, SAAR). Starts were over 1 million in November and December of 2013 - and then starts were a little weaker in Q1 - and then were at or above 1 million in April and May. The weak start to 2014 was due to several factors: severe weather, higher mortgage rates, higher prices and probably supply constraints in some areas. It is also important to note that the year-over-year comparison will be easier for housing starts for the next several months. There was a huge surge in housing starts early in 2013, and then a lull - and finally more starts at the end of the year. The bottom line is the housing recovery is ongoing and will continue.This year, I expect starts to continue to increase (Q1 will probably be the weakest quarter) - and more starts combined with an easier comparison means starts will probably be up double digits year-over-year. This graph shows the month to month comparison between 2013 (blue) and 2014 (red). Below is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment). These graphs use a 12 month rolling total for NSA starts and completions.

    Despite Volatility, New-Home Starts This Year Surpass Year-Ago Figures - Monthly figures on U.S. home-construction starts make the industry appear bipolar: down significantly in March, up big in April and down again in May. The reality is, when the focus is broadened to the first five months of this year, home starts have exceeded last year’s tally, although the growth has slowed considerably. Tuesday’s headlines noted that housing starts in May were 6.5% less than a month earlier. However, the Census’ monthly figures are subject to volatility and substantial revisions. You can get a more reliable picture at this point by examining year-to-date figures, which include most of the spring season. Consider that, for the first five months of this year, builders started 396,000 dwelling units, not adjusted for seasonality. That’s up 6.6% from the same period last year. Factoring out the fast-growing multifamily sector, you still get a 2.5% increase in single-family home starts in this year’s first five months (255,600) over the same period of 2013 (249,300). “When we look over several months to smooth out that volatility, construction clearly is recovering, especially on the multiunit side,” said Jed Kolko, chief economist for real-estate website Trulia TRLA +2.43%, referring to apartments and condominiums. Mr. Kolko added that, over the past three months, construction starts for both multifamily and single-family exceed the year-ago tally by 10%.

    Stick A Fork In Yet Another "Housing Recovery": Starts Tumble, Multi-Family Permits Collapse Most Since Lehman - Blame it on the... spring? Moments ago, in addition to reporting CPI numbers which showed that the Fed has already met and surpassed its 2.0% inflation target (credible or not), the Dept of HUD released Housing starts and Permits data for the month of May. It was, in a word, disappointing. It was so disappointing in fact, that both housing starts and permits not only missed expectations, but tumbled from the previous month by the most since January and the great "Polar Vortex" which was the kitchen sink used to explain the collapse in US GDP in Q1. Perhaps it was the early arrival of El Nino? In deatil: May Housing starts, expected to print at 1030K, tumbled from a revised April print of 1071K to just 1001K. This was driven by an almost equal decline in both single and multi-family units, which means that it is not only Wall Street investors pulling out of the rental housing (aka multifam) market, but builders continuing to be skeptical about the single-family housing market. To say that this roundly refutes the soaring NAHB index is an understatement, because while on one hand builders say they have not been more confident since Lehman, their actions show something vastly different. With permits, the situation was even worse: the headline number was supposed to print at 1050K, a modest decline from the pre-revised 1080K. Instead, not only was April revised lower to 1059K, but the actual headline number tumbled by 68K to 991K. This was the first triple digit permit number since January, and the biggest drop also since the winter when it was all the polar Vortex' fault.

    NAHB: Builder Confidence increased to 49 in June -- The National Association of Home Builders (NAHB) reported the housing market index (HMI) was at 49 in June, up from 45 in May. Any number below 50 indicates that more builders view sales conditions as poor than good.From the NAHB: Builder Confidence Rises Four Points in June Builder confidence in the market for newly built, single-family homes rose four points in to reach a level of 49 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released today. It remains one point shy of the threshold for what is considered good building conditions.  All three index components posted gains in June. Most notably, the component gauging current sales conditions increased six points to 54. The component gauging sales expectations in the next six months rose three points to 59 and the component measuring buyer traffic increased by three to 36.Looking at the three-month moving averages for regional HMI scores, the South and Northeast each edged up one point to 49 and 34, respectively, while the West held steady at 47. The Midwest fell a single point to 46. This graph show the NAHB index since Jan 1985.

    AIA: Architecture Billings Index increased in May - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Three Point Jump for Architecture Billings Index On the heels of consecutive months of decreasing demand for design services, the Architecture Billings Index (ABI) has returned to positive territory. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI score was 52.6, up sharply from a mark of 49.6 in April. This score reflects an increase in design activity (any score above 50 indicates an increase in billings). The new projects inquiry index was 63.2, up from the reading of 59.1 the previous month.  The AIA has added a new indicator measuring the trends in new design contracts at architecture firms that can provide a strong signal of the direction of future architecture billings. The score for design contracts in May was 52.
    This graph shows the Architecture Billings Index since 1996. The index was at 52.6 in May, up from 49.6 in April. Anything above 50 indicates expansion in demand for architects' services. This index has indicated expansion during 17 of the last 22 months. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions. According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. The index has been moving sideways near the expansion / contraction line recently. However, the readings over the last year suggest some increase in CRE investment in 2014.

    Fed: Q1 Household Debt Service Ratio at Record Low - The Fed's Household Debt Service ratio through Q1 2014 was released this morning: Household Debt Service and Financial Obligations Ratios. I used to track this quarterly back in 2005 and 2006 to point out that households were taking on excessive financial obligations. These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households. Note: The Fed changed the release in Q3.  The household Debt Service Ratio (DSR) is the ratio of total required household debt payments to total disposable income. The DSR is divided into two parts. The Mortgage DSR is total quarterly required mortgage payments divided by total quarterly disposable personal income. The Consumer DSR is total quarterly scheduled consumer debt payments divided by total quarterly disposable personal income. The Mortgage DSR and the Consumer DSR sum to the DSR. This data has limited value in terms of absolute numbers, but is useful in looking at trends. Here is a discussion from the Fed:  The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only an approximation of the debt service ratio faced by households. Nonetheless, this approximation is useful to the extent that, by using the same method and data series over time, it generates a time series that captures the important changes in the household debt service burden. The graph shows the Total Debt Service Ratio (DSR), and the DSR for mortgages (blue) and consumer debt (yellow).The overall Debt Service Ratio decreased in Q1, and is at a record low.  Note: The financial obligation ratio (FOR) is also near a record low  (not shown)

    Rent, Rent Control and Economic Rents -- Instituted during World War II to prevent profiteering, rent control limited the amount landlords could charge existing tenants. This favoured long term residents and penalized the rest of us.  Mia Farrow paid a miniscule sum for the palatial 11room Central Park West pad, featured in Hannah and Her Sisters, whose lease she inherited from her mother. A friend’s parents paid $350 for a vast four-bedroom three-bath apartment with a gigantic living room overlooking the Hudson. Rent control, the story went, impelled existing tenants to stay put, limiting supply, forcing up non market rates, making new residents pay more. Abolish it and everybody else’s rent would go down.  Today, because of changes in the law, only 1% of New York apartments remain under rent control (around 30% in the five boroughs are rent stabilized) and yet, surprise surprise, rents keep getting higher. Good luck finding a Manhattan flat for under $2500.  Deregulating apartments, building luxury flats, and making holding on to a regulated apartment more difficult hasn’t done much to make renting in Manhattan any cheaper. The benefits that had gone to the existing tenants merely shifted to the landlords.  Economists don’t agree about much but they do agree about rent control. In an American Economics Association poll, 93% concurred with the statement that, by interfering with the market-clearing price, “a ceiling on rents reduces the quantity and quality of housing.”   So why has reducing the effect of rent regulation had so little consequence on the price of unregulated apartments in New York?

    The Generational Short: Banks, Wall Street, Housing And Luxury Retail Are Doomed - Those who have lost trust in Wall Street or actively hate it and everything it stands for (neofeudalism, unbridled greed, the corruption and collusion of the revolving door between the state and Wall Street, etc.) will never change their minds and hand their money to Wall Street to play with. If the primary assets held by Boomers (houses and stocks) both decline for these fundamental reasons, there may be relatively little wealth left to pass on to Gen-Y... if Gen-Y avoids bank debt/mortgages, buying conspicuous consumption luxury goods on credit and investing in Wall Street's scams and skims, this generational lack of demand for housing, stocks and luxury goods will effectively crash the sky-high valuations of these assets. These factors suggest a generational bet against banks, Wall Street, housing and luxury retail stocks,

    Video - Evidence Shows Media Reports of Credit Card Spending Growth Are Overhyped and Wrong - Consumer revolving credit has been in the news recently as the Fed’s data on consumer credit  for April reportedly showed a record surge. However, we have more current data and it clearly shows that these reports are another case of hysterical media over reaction.The Fed’s weekly H8 statement reports the aggregate balance sheet of the nation’s commercial banking system every Friday as of Wednesday the previous week. Current data is for the June 4 week. It shows credit card debt up by 1.77% year over year.Whoop dee doo.That’s in nominal terms. Adjusted for inflation, that’s a big fat zero, zilch, nada. So much for “increased consumer confidence,” increased consumer borrowing, yadda yadda, propelling retail sales. As usual, it’s juvenile nonsense from breathless teenage Valley Girl reporters. The vast majority of American consumers remain moribund. The evidence strongly indicates that they are going backward, not forward, as their real income continues to shrink. Whatever gains there are in retail sales, are being driven by the handful of people at the top of the wealth spectrum, and by shopping tourism, as foreigners pour into the US to vacation and shop in steadily growing numbers.Last December, a major commercial bank divested a chunk of its credit card receivables to a non bank. Adjusting for that $16.2 billion drop, credit card loans at US commercial banks looks like this: Note that the annual growth rate maxed out last year just above 2%. It has never been higher than that. That’s about the level of CPI inflation. The current growth rate at 1.77% may actually be below CPI inflation, in other words, negative real growth

    The coming ‘tsunami of debt’ and financial crisis in America -- The US Congressional Budget Office is projecting a continued economic recovery. So why look down the road – say, to 2017 – and worry? Here's why: because the debt held by American households is rising ominously. And unless our economic policies change, that debt balloon, powered by radical income inequality, is going to become the next bust. Our macro models at the Levy Economics Institute are showing that the US economy is about to face a repeat of pre-crisis-style, debt-led growth, based on increased borrowing. Falling government deficits are being replaced by rising debts on everyone else's ledgers – well, almost everyone else's. What's emerging is a new sort of speculative bubble, this time based on consumer and corporate credit. Right now, America is wrestling a three-headed monster of weak foreign demand, tight government budgets and high income inequality, with every sign that these conditions will continue. With that trio in place, the anticipated growth isn't going to be propelled by an export bonanza, or by a government investment boom. It will have to be driven by spending. Even a limping recovery like the one we're nursing along today depends on domestic demand – consumer spending not just by the wealthy, but by everyone else. We believe that Americans will keep consuming at the same ever-rising rates of past decades, during good times and bad. But for the vast majority, wages and wealth aren't going up, so we're anticipating that the majority of Americans – the 90% – will once again do what was done before: borrow, and then borrow more.  By early 2017, with growth likely to stall even according to CBO predictions, it should be apparent that we're reliving an alarming history. Middle- and low-income households have been following a trajectory of an ever-higher ratio of debt to income. That same ratio has been decreasing for the most well-off 10%, who are continuing to see debt decline and wealth rise.

    May Inflation Rises to Fed Target Range -  The Bureau of Labor Statistics released the May CPI data this morning. Year-over-year unadjusted Headline CPI came in at 2.13%, which the BLS rounds to 2.1%, up from 1.95% the previous month. Year-over-year Core CPI (ex Food and Energy) came in at 1.96% (rounded to 2.0%), up from the previous month's 1.83%. The YoY Headline number is at a 19-month high and YoY Core is at a 15-month high. Here is the introduction from the BLS summary, which leads with the seasonally adjusted data monthly data: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.1 percent before seasonal adjustment.  The seasonally adjusted increase in the all items index, which was the largest since February 2013, was broad-based. The indexes for shelter, electricity, food, airline fares, and gasoline were among those that contributed. The food index posted its largest increase since August 2011, with the index for food at home rising 0.7 percent. The increases in the electricity and gasoline indexes led to a 0.9 percent rise in the energy index.  The index for all items less food and energy rose 0.3 percent in May, its largest increase since August 2011. Along with the indexes for shelter and airline fares, the medical care, apparel, and new vehicle indexes all increased in May. The indexes for household furnishings and operations and for used cars and trucks declined.  The all items index increased 2.1 percent over the last 12 months; this compares to a 2.0 percent increase for the 12 months ending April, and is the largest 12-month increase since October 2012. The index for all items less food and energy has increased 2.0 percent over the last 12 months. The food index has advanced 2.5 percent over the span, its largest 12-month increase since June 2012.   [More…] was looking for increases of 0.2% for both Headline and Core CPI. Year-over-year forecasts were 2.0% for Headline CPI and 1.9% for Core. The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since the turn of the century. I've highlighted 2 to 2.5 percent range.

    What "Low-Flation"? Core CPI Jumps Most In 3 Years As Food Costs Push Higher -- The Fed is losing its reasons for printing, leaving it desperate to revive the meme that the US economy is in self-sustaining recovery mode. At 2.0% Core CPI has caught up with the hot-flation of PPI removing the crutch of low-flation easement the Fed has been relying on. While Ex-Food-and-Energy is surging (well above expectations), the food index rose 0.5% in May after increasing 0.4% in each of the three previous months; and the index for food at home increased 0.7%, its largest increase since July 2011. This is all happening against a backdrop of real hourly wages dropping 0.1% YoY.

    Price Index for Meats, Poultry, Fish & Eggs Rockets to All-Time High – The seasonally-adjusted price index for meats, poultry, fish, and eggs hit an all-time high in May, according to data from the Bureau of Labor Statistics (BLS).  In January 1967, when the BLS started tracking this measure, the index for meats, poultry, fish, and eggs was 38.1. As of last May, it was 234.572. By this January, it hit 240.006. By April, it hit 249.362. And, in May, it climbed to a record 252.832. “The index for meats, poultry, fish and eggs has risen 7.7 percent over the span [last year],” says the BLS. “The index for food at home increased 0.7 percent, its largest increase since July 2011. Five of the six major grocery store food group indexes increased in May. The index for meats, poultry, fish, and eggs rose 1.4 percent in May after a 1.5 increase in April, with virtually all its major components increasing,” BLS states. In addition to this food index, the price for fresh whole chickens hit its all-time high in the United States in May. In January 1980, when the BLS started tracking the price of this commodity, fresh whole chickens cost $0.70 per pound. By this May 2014, fresh whole chickens cost $1.56 per pound.

    Real Retail Sales Per Capita: Another Perspective on the Economy:  Last week the Advance Retail Sales Report showed that sales in May rose 0.3% month-over-month and 4.3% year-over-year, as I reported in my real-time update. With today's release of the Consumer Price Index, we can now dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data in its current format. I've highlighted recessions and the approximate range of two major economic episodes. Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function.  The green trendline is a regression through the entire data series. The latest sales figure is 4.2% below the green line end point. The blue line is a regression through the end of 2007 and extrapolated to the present. Thus, the blue line excludes the impact of the Financial Crisis. The latest sales figure is 18.9% below the blue line end point. We normally evaluate monthly data in nominal terms on a month-over-month or year-over-year basis. On the other hand, a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the U.S. economy. The "Real" Retail Story: The Consumer Economy Remains at a Recessionary Level How much insight into the US economy does the nominal retail sales report offer? The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 166.7% since the beginning of this series. Adjust for population growth and the cumulative number drops to 113.9%. And when we adjust for both population growth and inflation, retail sales are up only 24.8% over the past two-plus decades. With this adjustment, we're now at a level we first reached in September 2004.

    Cold Weather Shrinks First-Quarter Retail Profits Despite Sales Gain - A chilly start to 2014 in much of the country didn’t knock down sales at large retailers—but it shrunk profits. After-tax profits for U.S. retailers with more than $50 million in assets fell 11.5% in the first quarter, compared with a year earlier, even as sales grew 3.6%, a Commerce Department report said Monday. Heavy discounting appears to be the culprit for revenue and profits moving in opposite directions. Retailers put products on sale to lure in shoppers otherwise hesitant to venture into the cold to shop,  Unusually cold weather took a toll on consumer demand, especially in December and January. “Retailers ended up with unwanted inventories,” Mr. Sohn said. “The only way to move that is through promotions, and that shaves profit margins.” In the time when shoppers look for discounts online and compare prices on smartphones, mass-market retailers have little ability to pad prices, especially when demand weakens

    The death of the American mall - Dying shopping malls are speckled across the United States, often in middle-class suburbs wrestling with socioeconomic shifts. Some, like Rolling Acres, have already succumbed. Estimates on the share that might close or be repurposed in coming decades range from 15 to 50%. Americans are returning downtown; online shopping is taking a 6% bite out of brick-and-mortar sales; and to many iPhone-clutching, city-dwelling and frequently jobless young people, the culture that spawned satire like Mallrats seems increasingly dated, even cartoonish. According to longtime retail consultant Howard Davidowitz, numerous midmarket malls, many of them born during the country’s suburban explosion after the second world war, could very well share Rolling Acres’ fate. “They’re going, going, gone,” Davidowitz says. “They’re trying to change; they’re trying to get different kinds of anchors, discount stores … [But] what’s going on is the customers don’t have the fucking money. That’s it. This isn’t rocket science.”

    Former Managers Allege Pervasive Inventory Fraud at Walmart. How Deep Does the Rot Go? -- In 2012, Erica Davidson, a Walmart veteran and store manager, took on the daunting task of turning around a struggling store on the outskirts of Greensboro, North Carolina.  Davidson said that one of her primary tasks was to reduce the troubled store’s high rate of “shrinkage”—defined as the value of goods that are stolen or otherwise lost—to levels deemed acceptable by the company’s senior managers for the region. As a result of fierce competition, profit margins in retail can be razor thin, making shrinkage a potent—sometimes critical—factor in profitability. Prior to her arrival, Davidson said, the Greensboro store could see annual shrinkage losses as high as $2 million or more—a sizable hit to its bottom line. There had even been talk of closing the store altogether, she recalled. For years, Walmart’s senior management in North Carolina had been waging a war on shrinkage, Davidson said; it had become a central priority of the company’s local leadership and a source of constant strain for store managers. Though the unrelenting pressure weighed on her, Davidson said she became an asset in Walmart’s battle against shrinkage—so much so that, in 2011, the North Carolina regional team named her a “subject matter expert” on reducing shrinkage and would send her to meetings in the Walmart regional office in Charlotte.  The only problem, Davidson said, was that her superiors’ preferred methods for improving this vital metric were not always aboveboard; they included an array of improper techniques to conceal shrinkage losses and make the inventory numbers—and profit margins—look better on paper than they were in reality.

    LA area Port Traffic: Imports increasing - Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for May since LA area ports handle about 40% of the nation's container port traffic. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).   To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic was up 0.4% compared to the rolling 12 months ending in April. Outbound traffic was up 0.1% compared to 12 months ending in April. Inbound traffic has been increasing, and outbound traffic has been moving up a little recently after moving sideways. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). Usually imports peak in the July to October period as retailers import goods for the Christmas holiday, and then decline sharply and bottom in February or March (depending on the timing of the Chinese New Year). Imports were up 5% year-over-year in May, however imports were only up 1% year-over-year. Imports were 4% below the all time high for May (set in May 2006), and it is possible that imports will be at a record high later this year.

    America As A Lousy Exporter - Paul Krugman -  I find that I have confused Ryan Avent by asserting that the United States is lousy at exporting. Mea culpa — I didn’t explain my criteria. But we are indeed lousy. As Avent says, you can’t assess our export competence by looking at our trade balance — the trade balance is a macroeconomic phenomenon, determined by the excess of savings over investment. What you can look at, however, is the real exchange rate — and, in particular, the relative unit labor cost — at which a given trade balance is achieved.  And what you see here is that the U.S. consistently does well on international productivity comparisons, including those limited to manufacturing; and it also pays manufacturing workers less than many other advanced countries, as I showed in the previous post. So you would expect U.S. manufacturing to be super-competitive on world markets (or you would expect the dollar to rise so that our trade deficit occurs via high labor costs). You don’t.  And this situation, where U.S. manufacturing looks very competitive by the numbers but doesn’t seem that way when you look at trade flows, has persisted for decades. I remember talking about it with Rudi Dornbusch when I was in graduate school! Just to be clear, this isn’t a major problem for the U.S. economy. If we were better at exporting we’d have better terms of trade, and slightly higher real income, but we’re not talking about large numbers. But it is a puzzle.

    Global Drag Threatens Worst U.S. Export Performance In Over 60 Years - Ever since an über-strong U.S. dollar crushed the export sector in the mid-1980s, the U.S. economy hasn’t looked quite the same. This is not a problem of the past however, as export growth already lags behind every one of the past ten expansions, even the 1980s, thanks to a drop in the first quarter.  Fast forward to the present, and export performance may soon be as noteworthy as it was 30 years ago. Risks to the global economy (and exports) include turmoil in oil-producing nations, credit markets that are teetering in China and comatose in Europe, and the backside of Japan’s April sales tax hike.Worse still, export growth already lags behind every one of the past ten expansions, even the 1980s, thanks to a drop in the first quarter: The chart below shows that exports are no longer distinct from other parts of the economy (nearly all of them) that haven’t measured up to a “normal,” credit-infused, post-World War II business cycle. Together with emerging global risks, it begs the question of whether sagging exports can drag the U.S. into recession.

    Labor Department Backtracks on Plans to Cut Export-Price Data - The Labor Department has backtracked on its decision to stop collecting data on export prices used to calculate economic output and measure trade flows. The department decided in February to stop collecting the data because of budget constraints. But the announcement provoked a backlash from users of the data , not least from the Commerce Department, which uses export prices in the calculation of gross domestic product. The export price data are part of a program that also collects data on import prices. The Labor Department compiles a monthly report on import and export prices using data collected from U.S. companies.The Labor Department also scaled back the data it collects in a quarterly program on employment and wages. In response to the protests against the cut to export prices, the Labor Department said in April it was looking for alternative sources of funding for the data in order “to avoid any disruption to the calculation” of gross domestic product.A new deal to fund the federal government reached early this year provided some relief to the acute budget pressures statistics agencies faced last year under a series of broad budget cuts known as sequestration. Still, the $592 million provided for the Labor Department’s Bureau of Labor Statistics for this year remains below 2011 and 2012 funding levels and $21.6 million below what President Barack Obama sought in his 2014 budget.

    US Current Account Gap Worst Since Q1 2012; Biggest Miss Since Lehman - The US Current Account deficit was larger than any of the 40 'qualified' economists expected and missed expectations by the most since Q4 2008 (Lehman). Of course, this will be shrugged off as 'weather-related' but if weather can do as much damage as Lehman (sending the deficit back to the biggest levels since Q1 2012) then one has to wonder just how 'stable' this recovery is.

    Contrary to Neil Irwin, "We" Are Not All Crony Capitalists - Dean Baker - Neil Irwin is trying to implicate the rest of us in his desire to subsidize Boeing and other big corporations through the Export-Import Bank. The Ex-Im Bank provides below market loans to select projects in order to help make sales in both directions. Irwin tells readers the debate over the bank provides:"A fascinating case study in how modern economies really work, and the ways big business and big government are inevitably intertwined in ways that believers in free markets may not like — but may not be able to avoid. In short, we’re all crony capitalists, whether we like it or not." Irwin argues that all foreign governments have similar sorts of subsidies for their businesses and that we would be operating at a serious disadvantage if we didn't subsidize our business deals.  There are two points worth noting on Irwin's argument. First, it goes directly against free trade 101. Remember how we call autoworkers and steelworkers Neanderthal protectionists if they support tariffs or quotas to keep their jobs? The argument that is the basis for dismissing these workers' efforts at protecting their livelihoods is the same argument that would be used against the Ex-Im Bank. (Other countries provide subsidies to their auto and steel industry also. In the standard trade models it doesn't matter.)  The other point worth noting in reference to Irwin's argument is the logic of the textbook story itself. The logic is that if we lose jobs in the steel or auto industry we will get jobs in other sectors that will offset these losses. People can come to different conclusions about the value of the Ex-Im Bank, but it is inconsistent to claim to be a free trader and to support the Bank. Anyone who supports the Bank is clearly willing to have the government subsidize certain businesses. If they claim support for free trade is the reason they don't care about losing auto or steel jobs to foreign competition, they are not being honest.

    Hell on Wheels - David Dayen - Two days before Kevin Roper crashed his Walmart big rig into Tracy Morgan’s limousine, critically injuring the comedian and killing his colleague James McNair, the Senate Appropriations Committee quietly loosened the laws governing truckers’ hours on the road. Senator Susan Collins slipped an amendment into an appropriations bill suspending for one year a rule limiting truckers to 70-hour work weeks, with a mandatory 34-hour “re-start” once they hit that threshold. Under the amendment, the law would revert to an 82-hour workweek. The Truck Safety Coalition denounced the measure: “What is being portrayed as a small change to the rest period actually has a large impact on crash risk and will set back safety for everyone sharing the roads with large 80,000-pound trucks.” In 2012, there were 333,000 large truck crashes, according to the National Transportation Safety Board, leading to nearly 4,000 fatalities and over 104,000 injuries. Three-quarters of the dead were occupants of vehicles other than the large truck, and so were not counted in the Occupational Safety and Health Administration’s official workplace fatality statistics. Overall, large truck accidents have risen steadily since 2009. This is, in part, because there are simply more trucks on the road. In an age of Amazon and e-commerce, more inventory moves around the country. Total tonnage reached record highs over the past year. Around 70 percent of American goods transport by truck, and the industry collects $650 billion in annual revenue, of 5 percent of GDP. But the fact is it’s difficult for truck drivers to make a decent living by playing by the rules, and employers, including Walmart, effectively create a hazardous workplace by constraining pay to make cheating attractive, and ordering faster shipments with deadlines that can only be achieved through cutting corners.

    Gasoline Price Update: Up a Penny - It's time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, Regular and Premium are both up a penny. Prices have been hovering in a narrow range for the past seven weeks. Regular is up 49 cents and Premium 46 cents from their interim lows during the second week of last November.According to, Hawaii, California and Alaska have Regular above $4.00 per gallon, unchanged from last week, and five states (Illinois, Michigan, Washington, Connecticut and Oregon) are averaging above $3.90, up from two states last week. South Carolina has the cheapest Regular at $3.38.How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's a visual answer.

    With Summer Gas Prices Highest Since 2008, Morgan Stanley Issues A Warning -- As oil prices have risen on geopolitical concerns (that have been printed away by central banks in stocks), so gas prices at the pump in the US have risen to their highest for this time of year since 2008 (and that did not end well). We are not alone in our concern as Morgan Stanley's (and esx Fed) Vince Reinhart warns that a more extreme jump in oil prices would be enough to stall the recovery (lowering real GDP growth by 1.7 percentage points one year out; and perhaps more worryingly, raise CPI growth by about 3.6pp, lowering real consumer spending growth by a full two percentage points). A stress test of our model indicates that a more extreme, sustained $50/barrel jump in oil prices would be enough to stall the US recovery, precipitating a single quarter of sub-1% growth and lowering real GDP growth by 1.7 percentage points one year out. A price surge of that severity would also raise CPI growth by about 3.6pp and lower real consumer spending growth by a full two percentage points.

    Stunning Fact Of The Day: In 2014 GM Has Recalled More Cars Than It Sold In 2013 And 2012 - This entire bailout farce is now beyond simply criminal and purely ridiculous: as of this moment, GM has recalled more than double the number of cars it sold in all of 2013, or, another way of putting it, more than the total number of cars it sold in 2013 AND 2012 combined.

    US factory output rebounded in May after April dip - — U.S. manufacturing output rose in May after in shrinking in April, led by greater production of autos, computers and furniture. The Federal Reserve says factory output rose 0.6 percent in May after dipping 0.1 percent the previous month. April's figure was revised upward from an initial estimate of a 0.4 percent decline. Americans are buying more cars, and businesses are ordering more machinery and other goods. Those trends are fueling factory production. Auto sales reached a nine-year high in May. Overall industrial production, which includes manufacturing, mining and utilities, also rose 0.6 percent in May. It had fallen 0.3 percent in April. Mining output, which includes oil and gas production, jumped 1.3 percent, while utility output declined 0.8 percent, its fourth straight drop.

    US industrial production up 0.6% in May vs 0.5% estimate - U.S. manufacturing output rose solidly in May as production increased across the board, bolstering expectations that economic growth would rebound strongly this quarter. Factory production increased 0.6 percent last month after slipping by a revised 0.1 percent in April, the Federal Reserve said on Monday. Economists polled by Reuters had forecast output rising 0.5 percent after a previously reported 0.4 percent decline. The report was the latest evidence the economy was regaining steam after a dismal first quarter. Motor vehicle output increased 1.5 percent last month after dipping 0.1 percent in April. There were also gains in the production of machinery, computer and electronic products, electrical equipment and appliances, and fabricated metal products. Production of primary metals slipped. Mining output rose 1.3 percent in May, adding to April's 1.6 percent increase. But utilities production fell 0.8 percent, declining for a fourth consecutive month. The rise in manufacturing and mining output helped boost overall industrial production by 0.6 percent in May. It had declined 0.3 percent in April.

    Fed: Industrial Production increased 0.6% in May - From the Fed: Industrial production and Capacity Utilization Industrial production rose 0.6 percent in May after having declined 0.3 percent in April. The decrease in April was previously reported to have been 0.6 percent. Manufacturing output increased 0.6 percent in May after having moved down 0.1 percent in the previous month. In May, the output of mines gained 1.3 percent and the production of utilities decreased 0.8 percent. At 103.7 percent of its 2007 average, total industrial production in May was 4.3 percent above its level of a year earlier. The capacity utilization rate for total industry increased 0.2 percentage point in May to 79.1 percent, a rate that is 1.0 percentage point below its long-run (1972–2013) average.  This graph shows Capacity Utilization. This series is up 12.2 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 79.1% is 1.0 percentage points below its average from 1972 to 2012 and below the pre-recession level of 80.8% in December 2007. The second graph shows industrial production since 1967. Industrial production increased 0.6% in May to 103.7. This is 23.8% above the recession low, and 2.9% above the pre-recession peak. The monthly change for both Industrial Production and Capacity Utilization were above expectations - and April was revised up.

    Manufacturing Output Rebounds in May but a Long Steel Recession Continues --The Federal Reserve released the May industrial production figures this morning, the news was mostly good.  The Fed data showed that inflation-adjusted U.S. manufacturing output rose strongly enough last month to send it back above the peak it hit just before the last recession began – in December, 2007.  Also encouraging was the acceleration revealed in real manufacturing production on both month-to-month and year-to-year bases.  One remaining concern:  The U.S. steel industry, pressured by dumped imports, remains in a recession that began back in August, 2011. Here are the crucial details:

    • >Real U.S. manufacturing output rose by 0.65 percent on-month in May, according to the Fed, and April’s monthly production decline was revised upwards from 0.34 percent to 0.11 percent.
    • >These increases pushed inflation-adjusted manufacturing output 0.18 percent above its pre-recession peak, achieved in December, 2007.
    • >Real manufacturing output is accelerating not only month-on-month but year-on-year.  From January, 2013 to January, 2014, this production rose by 1.75 percent.  The comparable May increase was 3.81 percent.
    • >Encouragingly, both the latest April and May year-on-year increases have exceeded their counterparts for 2012-13.  The May, 2013-14 annual improvement of 3.81 percent topped its 2012-13 predecessor of 2.91 percent, and the latest April annual gain of 3.42 percent topped its predecessor of 2.44 percent.
    • >The May Fed figures, however, brought no such good news for the U.S. steel industry.  Its real output fell 1.34 percent on month as artificially cheap imports subsidized by foreign governments kept flooding U.S. markets.  U.S. inflation-adjusted steel output is now down on net for a nearly three-year period (since August, 2011).
    • >The gap between the fortunes of America’s durable and nondurable goods manufacturers remained substantial in May.  Real output in the former increased by 0.89 percent over April, while the latter grew by 0.38 percent.

    The Big Four Economic Indicators: Industrial Production - This morning's Industrial Production headline number for May was a substantial bounce back from the April decline, which is now revised to be less severe than originally reported. Industrial production rose 0.6 percent in May after having declined 0.3 percent in April. The decrease in April was previously reported to have been 0.6 percent. Manufacturing output increased 0.6 percent in May after having moved down 0.1 percent in the previous month. In May, the output of mines gained 1.3 percent and the production of utilities decreased 0.8 percent. At 103.7 percent of its 2007 average, total industrial production in May was 4.3 percent above its level of a year earlier. The capacity utilization rate for total industry increased 0.2 percentage point in May to 79.1 percent, a rate that is 1.0 percentage point below its long-run (1972–2013) average. The chart and table below illustrate the performance of the Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009. We now have the second indicator update for the 59th month following the recession. The Big Four Average (gray line below). The overall picture of the US economy had been one of a ploddingly slow recovery from the Great Recession, and the data for December and January months documented a sharp contraction. The recovery in February and March appeared to support the general view that severe winter weather was responsible for the contraction and that it was not the beginnings of a business cycle decline. Today's industrial Production has strengthened the optimistic view.

    Industrial Production Beats But Autos Drop 3rd Month In A Row - Last month's collapse in Industrial Production was handily revised up to a less taper-terrifying 0.3% drop (from 0.6%) and May saw the production gauge rise 0.6% vs 0.5% expectation for a notably unimpressive 'surge' post weather problems. Utilities fell modestly (as one would expect) but mining and manufacturing picked up slightly. Perhaps most notably, while total vehicle production rose, Auto production dropped for the 3rd month in a row as the Feb/March surge slows. Aprils' plunge was revised higher, making the modest beat in May less impressive.  As auto production slowed for the 3rd month in a row...

    Empire State Manufacturing Continues to Show Strength - This morning we got the latest Empire State Manufacturing Survey. The diffusion index for General Business Conditions continues to show strength, now at 19.3, up fractionally from from 19.0 last month. The forecast was for a reading of 15.0. The Empire State Manufacturing Index rates the relative level of general business conditions New York state. A level above 0.0 indicates improving conditions, below indicates worsening conditions. The reading is compiled from a survey of about 200 manufacturers in New York state. Here is the opening paragraph from the report: The June 2014 Empire State Manufacturing Survey indicates that business conditions improved significantly for a second consecutive month for New York manufacturers. The headline general business conditions index was 19.3, a reading nearly identical to last month’s multiyear high. The new orders index climbed eight points to 18.4, its highest level in four years, and the shipments index inched down to 14.2. The unfilled orders index held steady at a level close to zero. The indexes for both prices paid and prices received were slightly lower, indicating a slowing in the pace of price increases. Labor market conditions continued to improve, with indexes pointing to a modest increase in employment levels and hours worked. Indexes for the six-month outlook remained highly optimistic, with the future new orders and shipments indexes recording notable gains.  Here is a chart illustrating both the General Business Conditions and Future General Business Conditions (the outlook six months ahead):

    Empire Fed Hits 4 Year High Despite Tumble In Employee Index - Empire Fed jumped to 19.28, notably better than the 15.00 expectation and reached highs not seen since June 2010, and up from the 19.01 last month. It doesn't get much better than that - even in the V-shaped recovery off the recession lows: if only sentiment surveys were the same as hard data - the US recovery would never be stronger. Alas, despite all this exuberant cycle high-ness - if only in the eyes of beholders, and certainly not in Q1 US GDP of -2.0%, the number of employees index tumbles from 20.88 to 10.75 and worse still the forward-looking index dropped after 3 months of gains.  However, the worst news, comes for those who continue to, incorrectly, predict a CapEx renaissance: The capital expenditures index fell for a second consecutive month, dropping to 11.8, and the lowest since February.

    Philly Fed Manufacturing Survey suggests Solid Expansion in June - From the Philly Fed: June Manufacturing Survey The diffusion index of current general activity increased from a reading of 15.4 in May to 17.8 this month. The index has remained positive for four consecutive months and is at its highest reading since last September. The current new orders and shipments indexes also moved higher this month, increasing 6 points and 1 point, respectively. Indicators also suggest improved labor market conditions this month. The employment index remained positive for the 12th consecutive month and increased 4 points. [to 11.9]. This was above the consensus forecast of a reading of 13.0 for June.Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through June. The ISM and total Fed surveys are through May. The average of the Empire State and Philly Fed surveys is at the highest level since 2011, and this suggests stronger expansion in the ISM report for June.

    Philly Fed Business Outlook: Fourth Month of Growth --The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. The latest gauge of General Activity came in at 17.8, an increase from last month's 15.4. The 3-month moving average came in at 16.6, up from 13.7 last month. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Today's six-month outlook at 52.0 is the highest last October.Here is the introduction from the Business Outlook Survey released today: Manufacturing firms responding to the June Business Outlook Survey indicated that regional manufacturing activity expanded this month. The survey’s indicators for general activity, new orders, and shipments were positive for the fourth consecutive month and improved from their readings in May. Current employment was also higher among the reporting firms this month. The survey’s indicators of future activity improved notably, suggesting that firms are more optimistic about continued growth over the next six months. (Full PDF Report)Today's 17.8 came in above the 14.0 forecast at first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity. We can see periods of contraction in 2011 and 2012 and a shallower contraction in 2013. The indicator is now off its post-contraction peak in September of last year.

    Philly Fed Beats; Prices Paid & "Hope" Spike Most In 5 Years - The headlines are all about Philly Fed's rise to 9-month highs - just shy of the cycle's highs last September. Employment is up, and orders are improving... all good (buy, buy, buy)... But... the 'outlook' or hope index has exploded in the last 2 months by the most since 2009 rebounding from the winter doldrums. Perhaps most worrisome - though we are sure Yellen will dismiss it as "noise", Prices Paid are surging - up most in the last 2 months since June 2009. This is the biggest surge since the Fed started printing money... furthermore, prices received are down notably (ending the margin expansions dream).

    Creative Destruction Yada Yada - Paul Krugman -- Jill Lepore has a great article in the New Yorker debunking the hyping of “disruptive innovation” as the key to success in business and everything else. It’s not a bah-humbug piece; it is instead a careful takedown, in which she goes back to the case studies supposedly showing the overwhelming importance of upstart innovators, and shows that what actually happened didn’t fit the script. Specifically, many of the “upstarts” were actually long-established firms, and more often than not the big payoffs went not to disruptive innovators but to firms that focused on incremental change and ordinary forms of efficiency and quality. Andrew Leonard reports that Silicon Valley types are not pleased. You can understand why. But their annoyance also tells you why the whole disruptive innovation thing took off: it glamorizes business, it lets nerdy guys come across as bold heroes.The same impulse, I think, is why Schumpeter gets cited so much. Lepore tells us that innovation became a popular buzzword in the 1990s. I guess I thought it came much earlier — I wrote about product-cycle models of trade back in the 1970s, and even then I was formalizing a much older literature. And in trade, as in business competition, it’s far from clear that the big rewards go to those who trash the past and invent new stuff. What’s the most remarkable export success story out there? Surely it’s Germany, which manages to be an export powerhouse despite very high labor costs. How do the Germans do it? Not by constantly coming out with revolutionary new products, but by producing very high quality goods for which people are willing to pay premium prices.

    Skill mismatch will plague corporate America -  More evidence is emerging in support of the growing skills mismatch in the United States discussed earlier. Vacancy rates are rising much faster than hiring rates and the NFIB survey shows smaller firms are having a tough time filling some openings.People forget that corporate needs for skilled labor have changed materially since the start of the Great Recession. The demand for employees with technical and specialized skills has increased in the US as it did in other industrialized nations. Yet over the past couple of decades many US firms have systematically gutted training and apprenticeship programs and shifted a great deal of high tech production abroad. Companies were rewarded with higher share valuations for "offshoring" and cutting investment in training, whether or not it made sense. As an example of lacking specialized skills, iPhones could not be built in the US even if labor costs were not an issue. That's because there simply aren't enough American engineers and technicians who can operate the high-tech/high-volume manufacturing facilities that Foxconn runs in China. US firms (and the shareholders) are partially responsible for this skills shortage that is now plaguing them. The neglect from the federal government also contributed to the situation. Of course it doesn't help that US high school students rank significantly below the OECD average in math and science.

    Where Is the Slack in the Labor Market? - St. Louis Fed --A recent Economic Synopses essay looked into the cause of the slack in the labor market. Carlos Garriga, research officer and economist with the St. Louis Fed, noted that there is a wide range of economic indicators for measuring slack in the labor market, with the unemployment rate being perhaps the most common. During her March press conference, Federal Reserve Chair Janet Yellen cited nine different indicators to argue that considerable slack remains in the labor market. Garriga focused on aggregate nonfarm payroll hours for insight into current sources of slack.1 He found that three sectors—construction, manufacturing and information—have yet to fully recover from the recession, while all others have fully recovered or even surpassed their prerecession levels.2 Garriga noted that the decline in the manufacturing sector is particularly significant as it represents around 20 percent of gross output. The decline in the information sector is substantially less relevant to the overall economy because it represents only 5 percent of gross output and 2 percent of aggregate hours. However, both sectors were already in a secular downward trend when the Great Recession occurred, with aggregate hours dropping around 20 percent for each sector from the first quarter of 2000 through the fourth quarter of 2007. Garriga concluded, “Despite the underperforming sectors, total hours worked for all sectors have nearly recovered to pre-Great Recession levels. Growth in other sectors has offset much of the decline. If there is some slack in the labor market, it is likely attributable to the performance of the construction sector and related activities.”

    Immigration: A Free Lunch for American Workers - The United States, in addition to most countries in the developed world, primarily attempts to increase the amount of human capital by subsidizing education. In 2012, average per-student expenditures in the United States were $12,743 for elementary and secondary education. After high school, states spent an average amount of $9,092 per student on subsidies for public universities. Additionally, the federal government directly subsidizes higher education through grants and loans. Average federal grant dollars per undergraduate student was $7,190, and $7,800 for graduate students. These costs do not include the subsidization of federal student loan interest.  Ignoring the possible inefficiencies caused by federal higher education student aid, and assuming that each student spends a total of 12 years in primary and secondary school, 4 years each in undergraduate and graduate institutions, producing a Ph.D educated worker in the public school system costs the United States government an average amount of $312,000. That number does not include other products that could have been made, had the person been working instead of sitting in class. Additionally, when education is provided by the public sector, it often takes the place of privately provided education rather than simply adding to the total supply. Encouraging high-skill immigration is an alternate, more affordable way to promote the accumulation of human capital. Would-be immigrants with PhDs pay the government for visas and the cost of processing the paperwork. The gains in human capital from immigration comes at virtually no added cost, making increased immigration for advanced degree holders a “free lunch” left on the table by U.S. policy makers. Assuming that a worker’s marginal product can be quantified in terms of wages, the median worker with a Ph.D contributes $84,396 per year to GDP. Under the subsidy method, it would take 3.7 years for U.S.-born workers to make up for the costs they incurred.

    Majority of Latino Workers Are Now U.S.-Born — Not Immigrants -  Immigrants still make up a big share of Hispanic workers in the U.S., but more often than not, they’re born in the U.S.A. For the first time in nearly two decades, the majority of America’s Latino workers are U.S.-born, according to a report by the Pew Research Center released on Thursday. Just under half–49.7%–of Hispanic workers were foreign-born at the end of 2013, down from 56.1% in 2007 and slightly below 1995’s level of 50.5%, Pew says. And early evidence suggests the trend is continuing this year, pushing the share of immigrants among America’s roughly 22 million Hispanic workers to 48.8%. The figures suggest a diminishment of the influx of Latino workers coming to America for jobs in industries such as construction and food-service in recent decades. If current trends continue, Hispanic workers could, in time, be seen as Americans first, and Hispanics second—the same way earlier waves of European immigrants have become part of the nation’s social fabric and altered the course of its politics and economy.

    U.S. Postal Service: ‘The Financial Hole We’re In Is So Deep’ -  A political battle has broken out between the U.S. Postal Service’s union and leadership over the state of its financial condition. Both sides are amping up the rhetoric, but there are few clear answers as to how it will cover its enormous liabilities in the coming years. The Postal Service, which is self-funded and receives no taxpayer subsidies, is a massive agency. About 40% of the entire world’s mail volume is handled by its 500,000 employees. With 31,100 retail offices and more than 200,000 vehicles, it delivers to about 153 million mailboxes, 6 days a week. It is also tapped out. The agency calculates it has $113 billion in total current and future liabilities – including payments to retirees and workers compensation – exceeding assets by $90 billion. Here’s how the liabilities break down and compare to cash on hand, according to a Postal Service white paper:  But stripping out some of these liabilities, the Postal Service would have actually been profitable starting in 2012. Operating revenue increased 3.2% to $67.32 billion in 2013, which would have allowed it to make $600 million. So far this year, it would be making about $1 billion.

    American Workers Need Overtime Protections -  Americans are working longer hours and are more productive than ever—yet wages are largely flat or falling. Indeed, the median worker saw a wage increase of just 5.0 percent between 1979 and 2012, despite overall productivity growth of 74.5 percent. One reason Americans’ paychecks are not keeping pace with their productivity is that millions of middle-class and even lower-middle-class workers are working overtime and not getting paid for it. This is because the federal wage and hour law is out of date—and especially the regulation that sets the salary level below which all employees must be paid time-and-a-half for their overtime hours. Updating overtime rules is one important step in giving Americans the raises they deserve. If the threshold is raised from its current $455 per week ($23,660 annually) to $984 per week ($51,168 per year, the threshold’s 1975 level, adjusted for inflation) millions of salaried workers would be guaranteed the right to overtime pay if they work more than 40 hours in a week.. The Restoring Overtime Pay for Working Americans Act would guarantee overtime pay for millions of salaried workers earning less than $52,000 a year.This bill would go above and beyond the recent announcement by President Obama in strengthening overtime pay regulations.

    Two-Thirds of U.S. States Still Haven’t Recovered the Jobs Lost in the Recession = The U.S. economy last month finally recovered all the jobs lost in the 2007-2009 recession. But it’s been an uneven recovery, leaving two-thirds of states still short of their peak for total payrolls. Seventeen states plus the District of Columbia had more jobs in May than their peaks before or during the recession. Seasonally adjusted total nonfarm payrolls were still below their previous peaks in 33 states plus Puerto Rico and the Virgin Islands, according to figures released Friday by the Labor Department. The patchwork recovery in employment reflects slow and uneven economic growth nationwide since the recession ended five years ago. U.S. economic output had returned to pre-recession levels by the end of 2010. But it wasn’t until May that payrolls finally hit a new record of 138.5 million — and that didn’t make up for population growth in the intervening years. Millions of Americans have moved in search of work as some state economies rebounded faster than others. Texas firms have added more than 1.3 million jobs since nonfarm employment in the state bottomed out in December 2009. Michigan, on the other hand, is down nearly 567,000 jobs since payrolls peaked in April 2000, though the Great Lake State has added about 295,000 jobs since March 2010. Many of the states where payrolls have soared above their prior peaks, like North Dakota, are benefiting from an oil-and-gas extraction boom. Nevada, Arizona and Midwestern industrial states like Illinois and Ohio have recovered more slowly.The national jobless rate was 6.3% in May, down from 7.5% a year earlier, and nonfarm employers added more than 200,000 jobs for a fourth straight month. Most states saw their jobless rates fall or hold steady in May from the prior month, and the unemployment rates in 49 states fell from a year earlier. (Alabama was the only exception.)

    State Jobs Numbers Show a Labor Market That Has Been in Poor Health for Far Too Long - The monthly Regional and State Employment and Unemployment Summary, released this morning by the Bureau of Labor Statistics, showed some signs of continued labor market improvement—but also evidence of a labor market that has been in poor health for far too long. Even as unemployment rates slowly ticked down in most states, too many years of dismal job growth have led to millions of missing workers giving up the job search. Over the period from February 2014 to May 2014, 43 states and the District of Columbia added jobs. The South (+0.7 percent) experienced the largest regional growth, while West Virginia (+2.2 percent), Alaska (+1.2 percent), and Utah (+1.2 percent) had the largest state increases. Seven states lost jobs during this time, with Illinois (-0.3 percent), Nebraska (-0.2 percent), and South Dakota (-0.2 percent) seeing the largest declines. From February 2014 to May 2014, unemployment rates fell in 34 states, with Illinois (-1.2 percent), Ohio (-1.0 percent), and Rhode Island (-0.8 percent) seeing the greatest improvement. Unfortunately, some of these declines were due to workers giving up the job search rather than finding employment, as the labor force shrank in both Illinois and Ohio. As previously noted, Illinois actually had the largest loss of jobs over this period. The unemployment rate was unchanged in 6 states, and rose in 10 states plus the District of Columbia. The largest increases occurred in Alabama (+0.4 percent), Louisiana (+0.4 percent), and West Virginia (+0.4 percent). Once again, seemingly conflicting indicators, this time in West Virginia—where job growth was accompanied by an increase in unemployment—are another sign of a labor market that has been in distress for too long. At least in this case, the data suggest some previously discouraged job seekers may have resumed their search.

    BLS: Rhode Island only State with Unemployment Rate above 8% in May - From the BLS: Regional and State Employment and Unemployment Summary - Regional and state unemployment rates were generally little changed in May. Twenty states had unemployment rate decreases from April, 16 states had increases, and 14 states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today. ... Rhode Island again had the highest unemployment rate among the states in May, 8.2 percent. North Dakota again had the lowest jobless rate, 2.6 percent.This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are well below the maximum unemployment rate for the recession. The size of the blue bar indicates the amount of improvement. The states are ranked by the highest current unemployment rate. No state has double digit or even a 9% unemployment rate. Only Rhode Island (8.2%) is at or above 8%. The second graph shows the number of states with unemployment rates at or above certain levels since January 2006. At the worst of the employment recession, there were 10 states with an unemployment rate at or above 11% (red). Currently no state has an unemployment rate at or above 9% (purple), 1 state is at or above 8% (light blue), and 9 states are at or above 7% (dark blue).

    Weekly Initial Unemployment Claims decrease to 312,000 -- The DOL reports: In the week ending June 14, the advance figure for seasonally adjusted initial claims was 312,000, a decrease of 6,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 317,000 to 318,000. The 4-week moving average was 311,750, a decrease of 3,750 from the previous week's revised average. The previous week's average was revised up by 250 from 315,250 to 315,500.  There were no special factors impacting this week's initial claims.  The previous week was revised up from 317,000. The following graph shows the 4-week moving average of weekly claims since January 1971.

    New Jobless Claims at 212K, A Bit Better Than Forecast - Here is the opening statement from the Department of Labor: In the week ending June 14, the advance figure for seasonally adjusted initial claims was 312,000, a decrease of 6,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 317,000 to 318,000. The 4-week moving average was 311,750, a decrease of 3,750 from the previous week's revised average. The previous week's average was revised up by 250 from 315,250 to 315,500.  There were no special factors impacting this week's initial claims. [See full report] Today's seasonally adjusted number at 312K was below the forecast of 314K. The less volatile four-week moving average is now 1,250 above its nearly seven-year interim low set two weeks ago. Here is a close look at the data over the past few years (with a callout for the past year), which gives a clearer sense of the overall trend in relation to the last recession and the volatility in recent months.

    Initial Jobless Claims Drop; Continuing Claims New 7-Year Lows - Initial claims very slightly missed expectations (312 vs 311.9 exp) for the 3rd week in a row but the signal is no worse and no better as it sits near cycle lows. Continuing claims continue to drop; at 2.56 million, this is the lowest continuing claims since Nov 2007 - the last 4 months have seen continuing claims drop at the fastest rate in over 4 years. The bottom line is 'this is as good as it gets'...And this is what last week's claims looked like broken down by state.

    A long term look at initial jobless claims shows that hiring, not firing, is holding back employment growth -- When was the last time you heard friends, family, or acquaintances worry about being laid off?   Odds are, you've heard very little of that in the last year or two. That's because, American workforces are down to very taut and efficient levels for the level of economic activity. The monthly jobs report is the net of hiring minus firing. In recent months, there have been 200,000+ more hirings than firings in each month. A look at initial jobless claims, representing new layoffs, shows that, adjusting for population, it is at or near all-time low levels going back half a century. First, here are initial jobless claims adjustted by population:The level now is equivalent to the tech boom low of the late 1990s, as well as the pre-Great Recession low. You half to go back nearly half a century, to the late 1960s, to find a lower rate. But this statistic is distorted by the huge volume of retiring Boomers. So, instead of the entire population, let's use the working age 25-54 population: Even using this population as our denominator, layoffs now are at a low only exceeded by the tech boom and the peak of the pre-Great Recession economy. JOLTS data on total quits and discharges only goes back to the turn of the Millennium, but the same pattern shows: We are near the all-time low for this series. In short, people who hold jobs now are as secure in those jobs as at any point in the last half century. The reason that the percentage of the prime working age population of 25 through 54 is still closer to its recession low than its pre-recession peak has everything to do with the slack pace of hiring, and not with firing.

    Recovery hasn’t paid off yet for American workers - This is not how an economic recovery is supposed to work: The average American still earns less now per hour after inflation than he did five years ago when the U.S. exited its worst recession in decades. The lack of wage growth goes a long way in explaining why the recovery is the weakest since the Great Depression. Consumer spending drives about three-quarters of U.S. economic activity and it’s been unusually weak. Absent rising incomes, consumers can’t spend much more than they already do without depleting their savings or going deeper into debt, neither of which seems likely. In May, the real average hourly wage fell 0.2%, the government said Tuesday. Real wages have fallen thee straight months amid a sudden surge in consumer inflation over the same time frame. As a result, the average hourly wage for a typical American worker registered just $10.28 in May, adjusted for inflation and measured in constant dollars. The real hourly wage totaled $10.31 in June 2009, the last month of the 2007-2009 recession. What might be surprising is that the slow growth in inflation-adjusted wages is nothing new. Real wages also grew less than 2% overall from the start of the recovery after the 2001 recession to the end of 2007. Americans supported an unsustainable rate of spending last decade by using the proceeds from a soaring stock market, obtaining home-equity loans amid a bubble in real-estate values or by relying on cheap and easy credit.

    Measuring Recovery? Count Employed, Not the Unemployed - South Carolina’s unemployment rate dropped to 5.3 percent in April, lower than in December 2007, when it stood at 5.5 percent on the eve of the Great Recession. The share of South Carolina adults with jobs, however, has barely rebounded. As the chart below shows, the same contrast is visible in most states. Unemployment rates, the most familiar and famous of labor market indicators, are nearing pre-recession lows. But the shares of adults with jobs — or employment rates — look much less healthy. The reason is that the numbers are not quite two sides of a coin. The employment rate counts everyone with a job, while the unemployment rate counts only people actively seeking work. It excludes most people who are unemployed. After most recessions, the numbers have moved in sync as the share of the population neither working nor looking has remained fairly constant. But after this recession, the middle ground has ballooned as fewer people try to find jobs. As a result, the employment rate has become the more accurate indicator of the nation’s sluggish and perhaps permanently incomplete economic recovery. It shows that the economy is improving. Employment rates have climbed above the post-recession nadir in every state, although the improvements are often quite small. In Mississippi, the employment rate is just 0.1 percent above its recent low.

    U.S. Workers Can’t Get No (Job) Satisfaction - Fewer than half of American workers were satisfied with their jobs in 2013, according to a new survey from the Conference Board. In almost every individual measure—from wages and retirement plans to vacation policies and commutes—workers are less content with their jobs than they were in 1987, when the research group started tracking the topic. Back then, 61.1% of workers said they were satisfied with their work. The decline suggests a steady erosion of trust and loyalty between employers and employees, said Rebecca Ray, leader of the organization’s human capital research unit. “Certainly, the employer contract is dead for the most part,” she said, noting that benefits such as pension plans, 401(k) matches and robust healthcare coverage, which once glued employers and their employees together in a long-term relationship, are disappearing. Among the areas with the largest gaps between satisfaction then and now, according to the survey: job security, health coverage, and sick leave policies. While some of these measures have returned to pre-recession levels, the longer trends are decidedly negative. The only measures on which workers were happier compared with 1987 were the physical environment and quality of equipment at their workplaces. Also, those working 41 to 50 hours are happier now than they were then. On a shorter-term horizon, employees are marginally happier now with their pay, bonus plans, career development and flexible-work opportunities than they were in the period from 2005 to 2007. And overall satisfaction rose a touch from 47.3% in 2012. It reached its lowest point in 2010, at 42.6%.

    Young workers hate their jobs - I mentioned recently that workers remain unusually reluctant to quit their jobs. A new report from the Conference Board confirms that blissful contentment with their work isn’t the reason. Fewer than half of U.S. workers are satisfied with their jobs, based on a set of survey questions about Americans’ opinions about their workplaces, compensation, job security, co-workers, bosses, chances for promotion, etc. The share is much lower than it was in 1987, when the series began. Interestingly, dissatisfaction among the youngest workers seems to be driving the trend; just 28 percent of employed workers younger than 25 were satisfied with their jobs in 2013, versus about twice that share in 1987:Much of the deterioration in job satisfaction among younguns seems to have occurred in the wake of the Great Recession. Which I suppose isn’t terribly surprising, given that lots of young workers (particularly recent college grads) are in jobs that they’re probably overskilled for. Plus, with an unemployment rate still above 11 percent, even those who have been lucky enough to find work probably feel pretty trapped. I’m sure it’s tempting to blame terrible, sloppy stereotypes about millennial entitlement for these trends. But my own age group — 25-to-34-year-olds — also counts as millennials, and we’re the only group slightly happier at work today than our similarly aged counterparts were pre-recession.

    Recent declines in labor force participation are not driven by discouraged workers -- The Federal Reserve officials continue to debate the level of slack in US labor markets. And a large number of economists, analysts, and investors believe that there are so many discouraged workers sitting on the sidelines, companies have a nearly unlimited pool to draw from - even as hiring improves (see chart). After all, just look at the labor participation rate. But there is more to the story here. JPMorgan's economists decomposed this decline in participation rate since the start of the Great Recession. Here are the key drivers. Source: JPMorgan It will be hard for companies to draw from the "disabled" or the "retired" groups, leaving "other" as the source of additional labor (on top of those who are "officially" unemployed currently). That "other" pool has actually not increased over the past 3-4 years in spite of the declining participation rate. Furthermore, the "other" pool can be broken down into three categories as well. The "discouraged" workers are therefore not the driver for declining labor force participation. In fact that group shrank in 2013. JPMorgan: - Fujita’s analysis shows that the initial leg down in the LFPR [Labor Force Participation Rate] was due primarily to a sharp rise in discouraged workers and school enrollments (from the "other" category). These categories since have stabilized. The decline in the LFPR from these categories subsequently was reinforced by a trend rise in disability, although this factor, too, now may be leveling off. More recently, an acceleration in retirement has been pushing down the LFPR.

    Thoughts on the Black Labor Force Participation Rate - Recently, my Economic Snapshot on the resilience of black labor force participation has gotten some attention in a few well-known media outlets.  The main finding of the snapshot was that part of the reason the black-white unemployment rate gap has grown during the post-Great Recession period is because labor force participation has fallen by less for blacks than for whites. In a blog post for the Washington Post, Philip Bump examined the robustness of that observation by comparing historic data on labor force participation rates and unemployment rates for blacks and whites dating back to 1973.  He concludes that “the problem is that Wilson’s explanation doesn’t appear to hold up over time.” But this is only a problem if one assumes I was making a statement about the entire run of post-World War II U.S. economic history. I wasn’t. I was instead looking only at why the black-white unemployment gap grew in the past seven years. Importantly, focusing on these particular seven years is not an arbitrary or random selection—that’s the period of time since the previous business cycle peak, a span of time often looked at by researchers to assess labor market trends. That being said, I think Philip’s exercise is an interesting one and worth repeating, by comparing changes over similar periods of time in previous business cycles..Perhaps the most important conclusion to be drawn from any of this is that there’s lots left to be explained about the historic persistence of the black-white unemployment gap. But, I still think that it is pretty interesting that since the Great Recession this unemployment gap has been propped up by a fact that surprises many: the resilience of black labor force attachment.

    The Unexpected Effect of Recession on Black Teenage Boys - Black teenagers were hit harder by the recession than any other group, but there may have been an unexpected benefit for boys, according to a new study. They spent more time with their parents. While the U.S. unemployment rate reached its peak in October 2009 at 10%, joblessness among blacks kept soaring before hitting 16.9% in March 2010, according to the Labor Department.  A study conducted by Sabrina Wulff Pabilonia of the U.S. Bureau of Labor Statistics looked at the recession’s effects on teenagers’ risky health behaviors, and found a correlation between time spent with parents and change in behaviors. Ms. Pabilonia found that during the recession black teen boys had an additional nine minutes of parental supervision per day for every one point increase in the unemployment rate. That wasn’t the experience of other teenagers. For non-black teenage boys, a one-percentage-point unemployment increase resulted in 10-11 minutes less per day with a parent. During the recession unemployment surged five percentage points on average, which resulted in a significant decrease in parental supervision. “It is possible that these results differ by race/ethnicity because the Great Recession disproportionately affected the unemployment rate of black adults, potentially giving them more time for parental supervision,” Ms. Pabilonia wrote in the paper. Ms. Pabilonia also found black teenagers saw their sexual activity decrease compared with their non-black non-Hispanic peers. She said the findings imply that more parental supervision led to less sex among black teen boys.

    Labor Supply and the Poor: Some Facts That Might (or Might Not) Surprise You - It is way too common in this town to run into people who think that poor people are poor because they don’t work.   . I needed to look into the numbers of working poor persons for a project I’m doing and I found the results kind of interesting (h/t: AS and DT).  I suspect everyone brings different priors to this question, but some might be surprised by these results. In fact, among poor people who are neither kids, elderly, nor disabled, half (49%) worked in 2012, when the unemployment rate was 8.1%.  If you take out those who didn’t work because they were going to school, 57% worked (i.e., among poor, non-disabled adults, 18-64, not in school, 57% worked). Digging a bit deeper in these numbers, of the 46 million poor people in 2012, about 20 million (43%) were kids (35%) or elderlies (8%).  The other 26 million poor were 18-64.  Of those, about 11 million worked and 16 million did not work (rounding screws up the totals a bit). However, of those non-working 16 million adults, 5 million did not work due to illness or disability.  So, of the about 21 million, non-disabled poor adults, half worked (and another 3 million did not work because they were in school).

    Being Out of Work Longer Makes Finding Work Much Harder -  Talk to people who’ve been unemployed for a while and you’ll hear a common complaint: hundreds of applications sent for job postings that go virtually ignored by employers. Recent research suggests this discouraging silence may have more to do with the time spent out of the work force than with the job seeker’s skills, education or age. (A story in today’s Journal examines the heated debate in economic circles surrounding the long-term unemployed.) In 2012, economist Rand Ghayad sent out about 3,500 applications for 600 real job openings across the country using fictional resumes. Mr. Ghayad’s made-up workers varied in two key dimensions: employment status and work experience. More specifically, some of the fictional resumes showed the applicant was currently employed, while others listed unemployment spells ranging from one month to 12 months. On the experience front, some applicants listed experience that closely matched that being sought by the prospective employer; others had no relevant experience. The results: Companies’ interest in extending interviews to an applicant dropped sharply when the individual had been out of work for more than six months, even if the person was qualified for the position. “Turns out that employers would rather actually come after somebody who is short-term unemployed with no relevant experience at all rather than actually going after the guy who has the exact experience but who is long-term unemployed,”

    Studies Show Link Between Long-Term Joblessness and Depression - Long-term unemployment is far more than a drag on the economy and the topic of hot debate among economists and Fed officials. It is also taking a toll on the American psyche. Recent research shows high rates of long-term unemployment are associated with higher rates of depression. Gallup Inc. surveys of 356,599 Americans in 2013 found high rates of depression for people out of work for long stretches. According to the surveys, 10.1% of all Americans reported having or being treated for depression. Among people unemployed for six months or longer, the share reporting depression rose to 18%. Moreover, reported depression rates range higher the longer individuals are out of work, from 13% among people unemployed 6 to 11 weeks, to 15.7% among those unemployed 12 to 26 weeks, and 19% for those unemployed longer than a year. Long-term unemployed also reported smiling and laughing less than the broader population, and spending less time with family or friends. “Psychologists have long associated unemployment with a variety of psychological ailments, including depression, anxiety, and low self-esteem,” Gallup noted. “The causal direction of the relationship, though, is not clear from Gallup’s data. It is possible that unemployment causes poor health conditions such as depression, or it could be that having such conditions makes it harder to land a job.” Other studies point to broad social ills associated with long-term joblessness. Loyola economists found moderate- to long-unemployment spells are associated with higher rates of suicide. University of Connecticut economists, studying recession in the 1980s, found long-term unemployment was associated with higher death rates twenty years later. Other studies have found parental job loss lowers school performance of children. Urban Institute economist Austin Nichols, who studied the broad consequences of long-term joblessness, said there is a great deal economists still don’t know about the social ills associated with long-term unemployment. Some studies have reported unemployed workers getting more exercise, losing weight, and suffering fewer commuting-related casualties. The underlying problem for many might not be the length of their unemployment, he said. Rather, it might be their tendency to command lower wages once they get back to work.

    Credit where Doomer credit is due (but get your numbers right) - There's a rec-listed diary up at the Great Orange Satan now arguing that Congress's cutoff of long term unemployment benefits at the end of last year has led to a significant increase in the number of people who have given up looking for a job.  I happen to think he is correct, and he is citing the correct data series - Not in Labor Force, Want a Job Now. This is because I made the exact same argument last week: The number of discouraged workers rose by nearly 2,000,000 in the wake of the Great Recession. In 2012 and 2013, it declined by about 1/3 of that number.  Disturbingly, it has risen since the beginning of this year by over half a million.  This looks like a real trend.  I suspect it is fallout from the termination of long term unemployment benefits.  Supposedly this was going to spur those lazy moochers < /snark > to finally go out and find employment.  Instead, it looks like it has caused a fair number of  the long-term unemployed to simply give up hope.This is a real issue, involving real hardship for people for whom there simply aren't enough jobs available. At the same time, you need to keep your math correct.  Since the low of November 2013, those people who want a job now but have stopped looking for work have indeed increased by 659,000.  But you can't simply add that number to get to an unemployment rate. That's because the numerator in the unemployment rate is the number of unemployed .  Those who stopped looking for work entirely aren't included.  And during that same time, the number of unemployed has declined from 10.841 million to 9.799 million, or -1.042 million.

    The Big Freeze on hiring -  First, the good news: Employers have more job openings today than they’ve had at any time since the Great Recession began.The bad news: Employers may be posting jobs, but they’re taking longer than ever before to fill them. It now takes 24 working days for the average job opening to be filled. That’s the longest hiring delay since at least 2001, the first year for which numbers are available, according to a recent report from Dice Holdings based on research by Steven J. Davis, R. Jason Faberman and John C. Haltiwanger. To give you some context, when the recovery began five years ago, the average opening took about 16 days to fill.  This means employers are dragging their feet making hires, despite having 10 million jobless workers to choose from (not to mention many more already-employed applicants looking to job-hop). I’ve spoken to workers who have been called back for as many as nine or 10 interviews for a given position, only to be told at the end of the process that the firm had decided to hold off on making a decision “for now.”

    The Economy May Be Improving. Worker Pay Isn’t. -- The latest economic data out Tuesday morning was generally good. Home building activity remained above the one million a year rate. Consumer prices rose 0.4 percent in May, such that inflation over the last year is now 2.1 percent, about in line with what the Federal Reserve aims for.But that inflation news carried with it a depressing side note. Now that the Consumer Price Index for May has been published, it is possible to determine inflation-adjusted hourly earnings for the month. And the number is not good.Average hourly earnings for private sector American workers rose about 49 cents an hour over the last year, to $24.38 in May. But that wasn’t enough to cover inflation over the year, so in real or inflation-adjusted terms, hourly worker pay fell 0.1 percent over the last 12 months. Weekly pay shows the same story, also falling 0.1 percent in the year ended in May.Pause for just a second to consider that. Five years after the economic recovery began, American workers have gone the last 12 months without any real increase in what they are paid.

    Increasing Wages is an Effective Poverty Reduction Tool  -- Broad-based wage growth—if we can figure out how to achieve it—would dwarf the impact of nearly every other economic trend or policy in reducing poverty. Even in 2010, the bottom fifth of working age American households relied on wages for the majority (56%) of their income. When you add in all work-based income including wage-based tax credits, nearly 70% of income for low-income Americans is work-related.  Programs such as food stamps (SNAP), unemployment insurance, and Social Security have helped reduce poverty over the last four decades.  But market based poverty (or poverty measured using only income from wages) has been on the rise and the safety net has to work even harder to counterbalance the growing inequalities of the labor market. There was once a strong statistical link between economic growth and poverty reduction, but rising inequality has severed it, and the results are deeply dispiriting. If the statistical link between economic growth and falling poverty that held before the mid-1970s had not been broken by rising inequality, then poverty, as the government measures it, would be virtually eradicated today. Furthermore, the impact of rising inequality is nearly five times more important in explaining poverty trends than family structure.As the Economic Policy Institute has documented in our paper launching the Raise America’s Pay project, this rise in inequality is simply the flip side of nearly stagnant hourly wage growth for the vast majority of the American workforce in the three decades before the Great Recession. So how to reverse this wage-stagnation, especially for low-wage workers? Below is a list of proposals, all linked in their attempt to rebuild institutions that provide bargaining power to workers who have had it taken from them in recent decades.

    Wages and Compensation -- 28% of US Labor is expected to hold low-wage jobs in 2020 according to the EPI and is the same percentage as what existed in 2010. While real median hourly wages on average dropped 2.8% for all occupations between 2009 and 2012, lower wage occupations saw a much larger drop of 5% or more for occupations such as restaurant cooks, food preparation workers, home health aides, personal care aides, and maids and housekeepers.  While hourly worker wages decreased the average CEO Compensation in 2013 was ~ $15 million with “the value of stock options exercised in a given year, up 2.8 percent since 2012 and 21.7 percent since 2010.” The 2013 CEO to Worker Compensation ratio was 510 to 1.  As EPI points out, CEO compensation does not reflect the market value of CEOs in a market requiring higher performance. The compensation packages awarded to various CEOs reflects the “presence of substantial rents” in the form of stock options, etc. (taxed at a lower level than most payroll wages) embedded in CEO compensation.  If compensation were lower for CEOs or if the compensation was taxed heavier, the impact to labor employment would be zero.

    The Myth Of Wage Inflation Comes Crashing Down: Real Hourly Earnings Slide To Lehman Bankruptcy Levels -- As reported moments ago by the BLS, real average hourly earnings just posted their third sequential decline in a row, dropping from $10.33 in February, to $10.32 in March, to $10.30 in April, to $10.28 in May.  Furthermore, this was the first year over year decline since October 2012. And to put today's $10.28 real average hourly earnings number in context, this is the same real wage seen last in July 2013, July 2012, March 2011 and then, if one goes further back... the month after Lehman failed!

    Wages vs. Real Wages Over Time: How the Fed Destroyed the Middle Class in Pictures - Wages have seemingly been on a tear since 1965 having risen from $2.5 per hour in February of 1964 to $20.5 per hour in May of 2014. A couple charts will show what I mean. Data for all private employees only goes back to March of 2006.  On Monday, a BLS Real Earnings report showed:

    • Real average hourly earnings for all private employees fell 0.2 percent from April to May. This result stems from a 0.2 percent increase in the average hourly earnings being more than offset by a 0.4 percent increase in the Consumer Price Index for All Urban Consumers (CPI-U).
    • For all private employees, real average hourly earnings fell 0.1 percent, seasonally adjusted, from May 2013 to May 2014.
    • Real average hourly earnings for production and nonsupervisory private employees fell 0.1 percent from April to May, seasonally adjusted. This result stems from a 0.1 percent increase in average hourly earnings being more than offset by a 0.3 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
    • Real average hourly earnings for production and nonsupervisory private employees rose 0.3 percent, seasonally adjusted, from May 2013 to May 2014.

    "Real" means adjusted for price inflation. The BLS uses CPI-U as the deflator for all private employees, and CPI-W as the deflator for production and nonsupervisory private employees.  Neither the BLS nor Fred (the St. Louis Fed data repository) shows real wages over time, at least directly. But the data is there. It's just a matter of putting the charts together with the data they provide.  Following BLS methodology, let's compare year-over year growth in CPI-W with year-over-year growth in average hourly earnings for production and nonsupervisory private employees.

    The Many Pipelines That Pump Up Our Wealth -- Back in 1979, notes a new Economic Policy Institute report released last week, households in America’s statistical middle — the 20 percent of households making more than the nation’s poorest 40 percent and less than the nation’s most affluent 40 percent — averaged $16.72, after inflation, per hour worked. In 2012, households in this same statistical middle averaged $16.26 per hour. Over roughly that same period, EPI analysts add, America’s top 1 percent of income-earners doubled their share of the nation’s income from paychecks, dividends, rent, and business earnings, from 7.2 to 14.2 percent. Wage stagnation for average Americans. Record-level “success” for the 1 percent. The two have marched hand in hand for over three decades now, as  EPI’s new Raising America’s Pay paper and two other new studies released last week detail with no small statistical panache. The new EPI study emphasizes how the failure of wages to grow over recent decades has been driving growing inequality, undermining the living standards of America’s “broad middle class,” and stalling all progress against poverty. Apologists for our current economic order blame wage stagnation on technological change — or workers themselves. Workers don’t have the right skills and credentials to get ahead, their argument goes.

    Walmart, Starbucks, and the Fight Against Inequality -  For some time now, Republicans in Congress have given up the pretense of doing anything to improve the lot of most Americans. Raising the minimum wage? They won’t even allow a vote to happen. Cleaner air for all? They may partially shut down the government in a coming fight on behalf of major polluters. Add to that the continuing obstruction of student loan relief efforts, and numerous attempts to defund health care, and you have a party actively working to make life miserable for millions.So, our nation turns to Starbucks. And Walmart. In the present moment, both of those global corporate monoliths are poised to do more to affect the huge chasm between the rich and everybody else than anything that’s likely to come out of John Boehner’s House of Representatives.As long as the Supreme Court says that corporations are citizens, they may as well act like them. Starbucks is trying to be dutiful — in its own prickly, often self-righteous, spin-heavy way — while Walmart is a net drain on taxpayers, forcing employees into public assistance with its poverty-wage structure.“In the last few years, we have seen the fracturing of the American dream,” said the Starbucks chief executive, Howard Schultz, in announcing a company plan to reimburse the cost of college tuition for employees. “The question for all of us is, should we accept that, or should we try to do something about it?”It’s a sad day when we have to look to corporations for education, health care and basic ways to boost the middle class. Most advanced nations do those things for their people. We used to — witness the G.I. Bill, which helped millions of returning soldiers get a lift to a better life. But you go to war against the income gap with the system you have, and ours is currently broken.

    Survey: 56 Percent Of Young Americans ‘Living Paycheck To Paycheck’ -- Four-in-ten young Americans in the workforce, or millennials, consider themselves “overwhelmed” by growing debts, with more than half (56 percent) reporting that they are “living paycheck to paycheck” amid mounting educational debt their baby boomer parents largely avoided.A new Wells Fargo survey of nearly 1,700 millennials (ages 22-33) and 1,500 baby boomers found that 47 percent of these young Americans in the workforce are setting aside more than half of their paychecks to paying off debt, most notably, U.S. student loan debt which has risen to more than $1 trillion nationwide.Millennials will likely continue to struggle under the pressure of debt, as 42 percent say that growing fiscal liabilities are “their biggest financial concern currently.” Four-in-ten of those surveyed say the debt they face today is “overwhelming,” versus less than one-quarter (23) percent of baby boomers.Half of college-educated millennials who have had their diplomas for two years report that they still rely on financial support from their families to make ends meet.Nearly one-third of millennials cited student loan debts as their top financial concern, in comparison to 44 percent of baby boomers who say they are saving for retirement.

    How Inequality Shapes the American Family - How do you decide who to marry, or whether to marry at all? How many children to have? Whether to engage in short-term hookups or long-term partnerships? We don't like to think that economic forces outside our individual control can shape the most intimate aspects of our lives, like whether or not we wed, when to have kids, and what kinds of families we create. But a growing body of evidence suggests that inequality is changing not only American family structures, but the roles men and women play and the calculations they make in pairing and establishing households. Inequality changes who we are, individually and collectively. Inequality is changing the stakes for forming partnerships. It means, for example that there are fewer men with stable economic cicrumstances for women to choose from as appropriate long-term partners at both the lower and middle rungs of the economic ladder. A shortage of men in the less financially stable groups means that the guys who do look like good prospects realize don't feel any particular pressure to commit. So they don't. On the other hand, working-class and poor women who consider marrying men who may get laid off or become financial burdens are less ready to commit themselves. At the top of the economic ladder, conditions are quite different. There people have resources to cope with childcare, good schools, therapy, and other things that can help families succeed. More lasting commitments and greater family stability go hand-in-hand with greater resources.

    Cutting the Poor Out of Welfare - Over the past three decades, Congress has conducted a major experiment in anti-poverty policy. Legislators have restructured benefits and tax breaks intended for the poor so that they penalize unmarried, unemployed parents — the modern-day version of the “undeserving poor.” At the same time, working parents, the aged and the disabled are getting larger benefits.  Before 1996, Aid to Families With Dependent Children was the single most important program that provided direct cash payments to poor families, the overwhelming majority of which were headed by single women. Just under 60 percent of adult recipients were never-married mothers, and 24 percent were divorced or separated mothers. Welfare reform enacted in 1996 replaced A.F.D.C. with the far more restrictive Temporary Assistance for Needy Families, which limited the lifetime receipt of welfare benefits to five years, and required recipients to find a job within two years of entering the program. The number of welfare recipients fell from 12.3 million in 1996 to 4.4 million by 2010. The second legislative change was the enactment, in 1975, of a modest version of the earned-income tax credit. In subsequent years, the number of people covered and the cost of the tax credit has been repeatedly enlarged — in 1986, 1990, 1993, and 2001. More than 40 percent of recipients are married couples, a far higher proportion than in the original A.F.D.C. or the current T.A.N.F. population. In fact, the earned-income tax credit favors married couples by granting them credits at higher levels of income than is the case for single parents. The third legislative initiative was the passage in 1997 of the child and dependent care tax credit, which provides a tax credit to low- and middle-income workers for child care costs. This credit was expanded in 2001 and 2002 and also provides benefits disproportionately to married couples.

    What Happens If You Have No Welfare and No Job? - A few weeks ago I wrote about how the welfare reform of the 1990s led to many poor mothers being kicked off welfare rolls. While some poor adults could still receive help from food stamps and disability insurance, the "Personal Responsibility and Work Opportunity Reconciliation Act" dramatically cut how much cash aid they could collect. The hope was that they would find work, but many didn’t. Meanwhile, spending on Temporary Assistance for Needy Families, or TANF, the only cash assistance program that non-disabled, non-elderly, poor single mothers are eligible for, has dropped precipitously: It was lower in 2007 than it had been in 1970. That left me wondering—what happened to the moms who had neither jobs nor cash assistance through TANF, which comes with strict time limits? The Urban Institute recently released a fascinating new qualitative study that aims to answer that very question. Relying on 90-minute interviews with 29 unmarried women in Los Angeles and 22 in southeast Michigan, the nonprofit examined the lives of these so-called “disconnected” women—meaning they get neither income from work nor TANF money. (About one in eight low-income single mothers was disconnected in 1996, when welfare reform was first implemented, but about one in five was disconnected in 2008.)

    Federal highway fund ‘fiscal cliff’ threatens state, local projects: It’s not just potholes, but the cliff that may prove hazardous for Iowa drivers. Transportation funding is facing a fiscal cliff that could cost the state as well as Iowa cities and counties a half billion dollars and halt new highway and bridge projects. That’s because authorization for the Federal Highway Trust Fund is set to expire Oct. 1. Already, the impact is being felt at the state and local level, according to the Iowa Department of Transportation, which, like all but 15 states, gets at least half of its construction budget from the federal government. In the five-year transportation plan, the Iowa Transportation Commission approved last week, the DOT warned that without funding being reauthorized, improvement projects could come to a halt. Sen. Chuck Grassley, R-Iowa, is optimistic Congress will take action before the Highway Trust Fund runs dry. There is some support for a stop-gap, six-month funding bill before Congress adjourns for its August work session, he said. Then, Congress would take up a six-year highway funding package either in the lame-duck session after the November election or early next year.

    Massachusetts Passes The Highest State Minimum Wage In The Country - On Wednesday night, the Massachusetts House passed a bill that will raise the state’s minimum wage to $11 an hour by 2017. The Senate already passed that wage level, and after a procedural vote there it will head to Gov. Deval Patrick (D), who is expected to sign it into law. An earlier Senate version of the bill would have also automatically increased the minimum wage as inflation rose, but that provision was dropped in the final version.  An $11 wage is the highest passed by any state this year. Eight other states have increased their wages so far: Delaware and West Virginia went above $8 an hour; Michigan went up to $9.25; Minnesota increased its wage to $9.50; Hawaii, Maryland, and Connecticut passed a $10.10 wage; and Vermont went to $10.50 an hour. The $10.10 an hour level is what President Obama and Congressional Democrats had pursued for a federal hike, but Republicans blocked the move. While $11 an hour will be the highest state wage, some cities are going even further. Seattle will raise its wage to $15 an hour over ten years, and a nearby town already passed the same wage, although it’s currently being held up in court. Chicago, New York City, and San Francisco are all eyeing a $15 minimum wage as well.

    Chicago Aldermen Want a $15 Minimum Wage in Their City, Too - Two weeks ago, the Seattle City Council made national headlines when it voted to raise that city’s minimum wage to $15 an hour by 2025, the highest of any metropolis in the country. But just a few days prior, halfway across the country, a group of progressive politicians in Chicago made an even more groundbreaking bid to win the “fight for 15” in their own city.  On May 28, members of the Chicago Progressive Caucus (CPC) or Progressive Reform Coalition (PRC), a group of eight aldermen on the Chicago City Council who seek “to promote a more equal and just Chicago,” introduced a proposal to gradually raise the minimum wage in the city to $15 an hour for all businesses by 2019. The ordinance, which already has support from 21 of the 26 aldermen it needs to pass in a Council-wide vote—pending its approval by the Council’s Committee on Workforce Development and Audit—would require all businesses with more than $50 million in annual revenue that operate in Chicago (including nationwide chains with franchises in the city) to pay employees $12.50 an hour within 90 days of passage and $15 an hour within a year. Smaller firms would have slightly more time to reach a $15 minimum wage: they would pay workers $12.50 an hour within 15 months of the ordinance’s passage; $13 within two years; $14 within three years; and $15 within four. After that, the minimum wage would automatically increase along with the rate of inflation.  This timeline makes it one of the fastest-acting, most progressive proposals of its kind in the country: Even Seattle’s minimum wage ordinance does not fully take effect until 2025.

    No Solution to Record Number of Homeless Families in San Francisco: Last year the San Francisco Chronicle reported the number of homeless families in San Francisco had reached a record high and, now, one year later, San Francisco's Board of Supervisors have decided to act. On April 30, city supervisor Mark Farrell held a hearing in City Hall to discuss cost-effective strategies for housing the homeless, one in a series of five hearings to address different aspects of homelessness in San Francisco. Farrell said he hopes to combat homelessness in a cost-effective way in order to decrease the number of families who have been forced onto the street, while avoiding unnecessary expenses. "At the end of the day, this is a human issue," Farrell said. "We need to provide the best services possible and get these people, these individuals that are on our streets, the best outcome for their own lives." Currently, single homeless people who seek housing may call the city's shelter reservation system and place their name on a waitlist. Each morning, the San Francisco Human Services Agency conducts a lottery and generates random reservation waitlist numbers for the previous day's entries. This means that homeless people who have placed their name on the waitlist are given a number that determines when they will be provided a bed. As of June 11, the waitlist was 517 people long.

    Detroit Reaches Deal With Bondholders in Bankruptcy Talks -- Detroit got closer to resolving its record $18 billion municipal bankruptcy, reaching a deal with the insurer of taxpayer-backed bonds on how to treat debt holders. Details are being put into final written form, according to a statement filed in court yesterday by mediators appointed to help broker an agreement. Since filing for bankruptcy last year, Michigan’s largest city has been negotiating with many of its biggest creditors, including unions, pension plans and some bondholders. The mediators didn’t say how much the bondholders covered by yesterday’s agreement, who are owed about $163.5 million, would recover or how much insurers would have to pay to cover any losses on the limited tax, general obligation bonds known as LTGOs. The city had previously estimated that without a deal, bondholders would get back as little as 10 cents on the dollar. “The settlement recognizes the unique status and niche of the LTGOs in the municipal finance market,” the mediators said. Municipal bond investors have been watching Detroit’s bankruptcy because the city has argued that its general obligation bonds aren’t secured by any collateral. That contradicted long-held assumptions among investors that such bonds had priority over other obligations, such as some government services and employee benefits.

    Savings cuts may be wild card in Detroit bankruptcy vote - As City of Detroit retirees and some active workers contemplate casting ballots for the proposed bankruptcy plan, angst over lost money from city savings accounts could prove a wild card in the voting.Thousands remain upset by the city’s complex move to claw back some interest paid into city savings plan from July 1, 2003, to June 31, 2013. The clawback — fancy words for take back — applies to about 9,900 retirees and active workers’ savings plans. Regardless of frustration, many retirees facing the loss must understand that it can’t be avoided, even if they vote no on the plan of adjustment, Detroit emergency manager Kevyn Orr said. But voting yes and having the plan approved by pensioners would cap how much money can be taken, he said.The clawback, plus regular pension cuts under the city’s proposed bankruptcy plan would be capped at 20% of a pension check, if pensioners vote to approve the plan. Active city workers would see lump sums disappear from their savings accounts, which work like annuities after retirement.

    The Role of Finance in Detroit’s Bankruptcy and State/Local Budget Woes - Yves Smith - This Real News Network interview with INET executive director and political insider Rob Johnson focuses on what he calls “ugly money politics” which for the most part means the role of finance in state and local elections. He points out how the trigger of Detroit’s bankruptcy was an over $300 million derivatives payment triggered by a ratings downgrade of the city. Oh, and the city manager who approved that deal took a job with the firm that profited from this toxic trade.  Johnson also points out why pensions loom so large in budget train wrecks. State and local governments, which have been under stress due to lower Federal contributions as well as weak tax revenues, often persuade themselves that they can underfund pensions and make up the shortfall by investing more in high-risk strategies to earn more returns. That also happens to provide more in fees to powerful financial players. The potential for corruption is obvious. We wrote earlier this week about how the North Carolina Treasurer Janet Cowell is embroiled in a corruption scandal, and is accused of oversight failures that cost taxpayers $6.8 billion. That comes from her mismanagement of state pension assets, which are bottom or near-bottome performers when measured against a peer group. And as reader TheCatSQuid pointed out: A March 2012 article calls Janet Cowell “The Treasurer of Wall Street”, ranking #3 amont State Streasurers according to percentage of campaign funds raised from out of state. In terms of actual amounts of funds raised from out of state, she raised more than the #1 and #2 person combined.

    Detroit fights creditor's request for city retirees' personal information - Detroit’s bankruptcy attorneys want a judge to block an aggressive creditor from gaining access to the personal financial information of 20,000 retired city workers.In their latest legal tussle with bond insurer Syncora Guarantee Inc., city attorneys said the “billion-dollar insurance” company’s request “crosses the line” in its quest to discredit a plan to limit pension cuts at the expense of other unsecured creditors.“Although it is still early, Syncora’s outsized approach to discovery has shown it will stop at nothing to sabotage the Grand Bargain and derail the city’s Plan of Adjustment,” city attorney Deborah Kovsky-Apap wrote in a court filing late Wednesday night.On Thursday, U.S. Bankruptcy Judge Steven Rhodes set a hearing on the issue for June 26.Michigan Attorney General Bill Schuette, who has endorsed the “grand bargain” for Detroit pensioners, said Thursday he will oppose Syncora’s attempt to gain access to retiree financial information.“Detroit’s retired cops and firefighters worked all their lives to protect us and now their privacy needs to be protected,”

    International Human Rights Violations in Detroit -- I recently visited Detroit, Michigan and am shocked and deeply disturbed at what I witnessed. I went as part of the Great Lakes Forever project where a number of communities and organizations around the basin are calling for citizens to come together to protect the Great Lakes as a Lived Commons, a Public Trust and a Protected Bioregion. We are calling for a ban of dangerous toxins on and around  the Great Lakes. But the people of Detroit face another sinister threat. Every day, thousands of them, in a city that is situated right on the Great Lakes water system, which contains one fifth of the world’s freshwater supply, are having their water ruthlessly cut off by the Detroit Water and Sewerage Department. Most of the residents are African American and two thirds of the cut offs involve families with children, which means that in some cases, child welfare authorities are removing children from their homes as because it  is a requirement that there be working utilities in all homes housing children. People are given no warning and no time to fill buckets, sinks and tubs. Sick people are left without running water and running toilets. People recovering from surgery cannot wash and change bandages. Children cannot bathe and parents cannot cook.

    Making Schools Poor - Last week, Superior Court Judge Rolf M. Treu in Los Angeles ruled that five California statutes protecting the job security of schoolteachers were unconstitutional. Likening his brief, sixteen-page ruling to the Supreme Court’s 1954 Brown v. Board of Education decision outlawing racial segregation in public schools, Judge Treu invalidated laws protecting teacher tenure and seniority. He said that the effect of these laws was to deny high-quality education to minority children by making it difficult to fire “grossly ineffective” teachers.  The plaintiffs in the case, Vergara v. California, have powerful backers and Judge Treu’s decision in their favor could have far-reaching implications. The case itself, which was brought on behalf of nine minority plaintiffs, was weak. No evidence was presented that any of the plaintiffs had teachers who were “grossly ineffective.” None of the teachers in question had negative evaluations. One student referred by name to a “bad teacher” who had in fact been named Pasadena’s teacher of the year. Two of the nine students were enrolled in charter schools, where teachers have neither tenure nor seniority. The theory behind the case is that differences in test scores can be largely attributed to the quality of the teacher. Students who have “great teachers” will get high test scores year after year, which means they are more likely to go to college and earn a higher lifetime income. Even one such teacher, so goes the theory, can have this remarkable effect on students. On the other hand, said one of the expert witnesses cited by the judge, one bad teacher can cause students to lose an entire year of learning.  In fact, however, researchers overwhelmingly agree that family income and family education are the largest determinants of academic performance.

    Getting rid of teacher tenure does not solve the problem -- There’s been a movement to make primary and secondary education run more like a business. Just this week in California, a lawsuit funded by Silicon Valley entrepreneur David Welch led to a judge finding that student’s constitutional rights were being compromised by the tenure system for teachers in California. The thinking is that tenure removes the possibility of getting rid of bad teachers, and that bad teachers are what is causing the achievement gap between poor kids and well-off kids. So if we get rid of bad teachers, which is easier after removing tenure, then no child will be “left behind.” The problem is, there’s little evidence for this very real achievement gap problem as being caused by tenure, or even by teachers. So this is a huge waste of time. I’m tempted to conclude that we should just go ahead and get rid of teacher tenure so we can wait a few years and still see no movement in the achievement gap. The problem with that approach is that we’ll see great teachers leave the profession and no progress on the actual root cause, which is very likely to be poverty and inequality, hopelessness and despair. Not sure we want to sacrifice a generation of students just to prove a point about causation. On the other hand, given that David Welch has a lot of money and seems to be really excited by this fight, it looks like we might have no choice but to blame the teachers, get rid of their tenure, see a bunch of them leave, have a surprise teacher shortage, respond either by paying way more or reinstating tenure, and then only then finally gather the data that none of this has helped and very possibly made things worse.

    Billionaires Behind the Attack on Public Education in California Tenure Suit -- Last week, something happened in a Los Angeles courtroom that rocked the education policy world. A judge declared due process rights for teachers—commonly known as "tenure" unconstitutional in the state of California in the case Vergara v. California, so named for one of the several students named as plaintiffs. Virtually everything about the Vergara trial is misleading, starting with the trial’s name. Indeed, some of the people bankrolling it, like billionaire Eli Broad, donated millions to a campaign against the Proposition 30 millionaires’ tax that passed as a ballot measure in 2012, and is designed to restore much needed funding to cash-strapped public schools. Then there’s billionaire David Welch. Vergara v. California really ought to be known as the Welch trial, after the Silicon Valley tycoon whose “lawsuit in search of a district” finally found the one where these students reside, in the City of Los Angeles. It’s bad enough that deep-pocketed special interest groups have been able to use their money to corrupt the electoral process, and to poison public policy conversations to their advantage via their superior access to media and policymakers. But now, thanks to the Welch trial—and the others to come, if the ad campaign just launched by hired gun Rick Berman has its intended effect— we see that not only are the executive and legislative branches of government up for sale, but the judiciary may well be, too.

    U.S. Education Secretary Arne Duncan says politics led to Gov. Mary Fallin's repeal of Common Core academic standards -- On Feb. 21, Gov. Mary Fallin defended Common Core academic standards for schoolchildren and expressed frustration over misinformation about the issue. Thursday, she did an about face and signed a bill repealing the standards. “So what changed?” U.S. Secretary of Education Arne Duncan asked in a White House briefing Monday. “Politics changed.” The political tide turned in a big way against the rigorous math and English standards. They became increasingly linked to the notion of federal overreach, even though they were developed in 2009 in a state-led effort through the National Governors Association, an organization Fallin now heads. In the briefing, Duncan said tough standards are needed. When states have reduced their standards it’s “bad for kids, it’s bad for the country, it’s terrible for education,” he said. The education secretary said Oklahoma is among the states that need to do a better job of educating its young people. “So in Oklahoma, about 40 percent of high school graduates — these are not the dropouts — 40 percent of high school graduates have to take remedial classes when they go to college,” he said. “Why? Because they weren’t ready — 40 percent. About 25 percent of Oklahoma’s eighth-graders in math are proficient — 25 percent. And other states locally are out-educating Oklahoma.”

    Starbucks to Pay U.S. Workers to Get Degree From ASU Online -- Starbucks employees who work at least 20 hours a week and enroll in the university’s online bachelor’s degree will get $6,500 -- about half of their tuition -- for the first two years, the company said in a statement. They will then get full tuition for the final two. “We’ve always known that our partners work hard every day,” Cliff Burrows, president of Starbucks’ Americas region, said in a phone interview. “This is the best way we can serve them.”   Of Starbucks’ 135,000 U.S. store employees, about 25 percent already have a bachelor’s degree. Seattle-based Starbucks has about 11,600 U.S. locations. More schools besides ASU may be added to the program in the future, Schultz said during a webcast earlier today.

    Starbucks Will Pay Full College Tuition For Thousands Of Its Workers -- Starbucks announced late Sunday it will pay for thousands of its workers to take courses through Arizona State University to complete their Bachelor's degree. The Starbucks College Achievement plan will let full- and part-time workers choose from 40 undergraduate degree programs at ASU that will be delivered online. 135,000 employees are eligible. "There's no doubt the inequality within the country has created a situation where many many Americans are being left behind," CEO Howard Schultz says in a video produced to announce the program. "The question I think for all of us is, Should we accept that, or should we try to do something about it?" "We can't wait for Washington," he adds. Workers admitted as a junior or senior will earn full tuition reimbursement. Freshmen and sophomores will receive a partial scholarship and need-based financial aid. Students will have no commitment to remain at Starbucks past graduation. Arizona state's online courses are valued at $10,000 a year.

    Starbucks to Provide Free College Education to Thousands of Workers - Starbucks will provide a free online college education to thousands of its workers, without requiring that they remain with the company, through an unusual arrangement with Arizona State University, the company and the university will announce on Monday.The program is open to any of the company’s 135,000 United States employees, provided they work at least 20 hours a week and have the grades and test scores to gain admission to Arizona State. For a barista with at least two years of college credit, the company will pay full tuition; for those with fewer credits it will pay part of the cost, but even for many of them, courses will be free, with government and university aid.“Starbucks is going where no other major corporation has gone,” . “For many of these Starbucks employees, an online university education is the only reasonable way they’re going to get a bachelor’s degree.”Many employers offer tuition reimbursement. But those programs usually come with limitations like the full cost not being paid, new employees being excluded, requiring that workers stay for years afterward, or limiting reimbursement to work-related courses.Starbucks is, in effect, inviting its workers, from the day they join the company, to study whatever they like, and then leave whenever they like — knowing that many of them, degrees in hand, will leave for better-paying jobs.

    Critics Warn Starbucks Employees To Read The Fine Print Of New Tuition Plan --- Starbucks unveiled a new plan to subsidize its employees’ tuition at Arizona State University (ASU) Online on Monday in New York, with Education Secretary Arne Duncan in attendance alongside officials from both the company and the university.  But the public relations fanfare about the new program buried a key reality about the Starbucks announcement. The new system means the end of an older one that was less generous but more flexible, and it’s difficult to say if the trade-offs that result from that transition will produce a net improvement for the company’s workers. The new plan is open to any Starbucks worker who averages at least 20 hours per week, and will reimburse all tuition costs beyond what ASU and federal financial aid covers for juniors and seniors. Workers who successfully enroll at ASU Online will be able to study any of 40 different degrees without any expectation that their studies will relate to their work for the coffee giant. The old tuition reimbursement system that is ending required that employees work toward degrees that “directly prepare you for a job at Starbucks,” and provided less money (between $500 and $1,000 per calendar year depending on an employee’s tenure).  But it allowed workers to enroll in any accredited college or university based on what made the most sense for them, including in-person classes that experts say are especially critical for low-income workers to succeed in their education.

    Starbucks degree program not as simple as it seems -- It turns out Starbucks isn't contributing any upfront scholarship money to an online college degree program it introduced this week. The Seattle-based company unveiled a program Monday that included a scholarship it described as "an investment" between Starbucks and Arizona State University. The program is designed to allow Starbucks workers to earn an online degree at the school at a steeply discounted rate. Initially, Starbucks said that workers would be able to offset the costs through an upfront scholarship it was providing with Arizona State, but declined to say exactly how much of the cost it was shouldering. The chain estimated that the scholarship would average about $6,500 over two years to cover tuition of about $20,000. Following the announcement, however, Arizona State University president Michael Crow told The Chronicle of Higher Education that Starbucks is not contributing any money toward the scholarship. Instead, Arizona State will essentially charge workers less than the sticker price for online tuition. Much of the remainder would likely be covered by federal aid since most Starbucks workers don't earn a lot of money. Workers would pay whatever costs remained out of pocket for the first two years, and Starbucks would bear no costs. Starbucks had previously declined to say how much it was contributing to the scholarship. But in a subsequent email Wednesday evening, Starbucks said that the scholarship is being "funded by ASU." A representative for Arizona State wasn't immediately available for comment.

    Smaller Share of College Students Are Working Their Way Through School - On Sunday, Starbucks announced a plan to help its employees receive a bachelor’s degree from Arizona State University with a tuition reimbursement program for people who work at least 20 hours a week.. Starbucks estimated about 70% of its 135,000 part-time or full-time workers in the U.S. are current or aspiring college students. A smaller percentage of 16-24-year-old college students are working their way through the higher education experience, according to Labor Department data. In fact, 2013 saw the lowest percentage of students working since 1985 with only 43.9% working either full time or part time while enrolled in school. Working students were at their peak in 2000, when 56% of enrolled students worked. The decline is surely due in part to the recession. But even though the overall unemployment rate for 16-24 year olds has improved since peaking in 2010, the total share of students working has continued to trend lower. The Starbucks announcement comes at a time when many employers are discontinuing their tuition assistance programs. College tuition, room and board and fees hit all-time highs. Four-year universities have seen exponential cost increases in the past 35 years. Since 1979, four-year public universities saw a 651% total cost increase. Private universities increased costs by 600%. Hourly wages haven’t come close to keeping pace, especially not for young part-time workers. Among 16-24-year-old workers who are paid an hourly wage, median pay has increased just 159% since 1979. Taking inflation into account college costs for both private and public institutions have more than doubled, while median hourly wages for young people have fallen by 18%.  Even as a smaller share of college students are working, more are taking on debt. A little over 70% of this year’s bachelor’s degree recipients are leaving school with student loans, up from less than half of graduates in the Class of 1994. As the Journal noted last month, the Class of 2014 is the most indebted ever with an average of $33,000 in student loans.

    Addressing the Academic Barriers to Higher Education | Brookings Institution: A postsecondary education confers numerous benefits both to the individual and to society, including higher earnings, lower rates of unemployment and government dependency, an increased tax base, and greater civic engagement. Access to higher education remains a challenge for many families, however. In 2010, approximately 82 percent of students from high-income families attended college in comparison to only 52 percent of students from low-income families.  There are also large differences in rates of college completion by income: among students who met a minimum standard of being academically qualified for college, 89 percent of high-income students completed a bachelor’s degree within eight years, whereas only 59 percent of low-income students did so.  One major barrier is affordability, as college prices and student debt levels have risen to alarming heights. For many students, however, academic preparation may be an equally formidable barrier to postsecondary education. This is not due to college selectivity—about 80 percent of four-year colleges and nearly all two-year colleges have little to no admissions requirements. Instead, students are required to pass academic placement tests and demonstrate sufficient readiness for postsecondary study. Those who do not pass are placed into remedial or developmental courses. Unfortunately, research suggests that remediation programs do not do a good job of improving students’ outcomes. When comparing similar students in and out of remediation, some researchers have found small positive effects, but most of the research suggests no long-term effects—or even negative effects—from being placed into a remedial or developmental course.This policy memo offers three key recommendations for better addressing the academic preparation problem with the hope of improving rates of college success. The recommendations focus on actions that could be taken by states, university systems, and school districts. The federal government could also play an important role by creating incentives for states and institutions to address these issues or by supporting a central organization with the purpose of providing guidance on best practices to states and institutions.

    What’s Behind the Default Rate on Student Loans? | St. Louis Fed On the Economy: In examining student debt repayment, Monge-Naranjo drew from a working paper he wrote with Lance Lochner, a professor at the University of Western Ontario. They used data on the cohort who earned bachelor’s degrees in 1993 to see where student loan repayment stood after five and 10 years in the labor market. After five years, the number of people in default and deferment/forbearance was about 4 percent each. (The rest were either repaying their debt or had already fully repaid it.) After 10 years, the percentage of those in deferment/forbearance fell to 3 percent, while the percentage of people in default rose to 6 percent. Monge-Naranjo and Lochner also examined the transition probabilities across different states of repayment for the same time period. The repayment status held in 1998 increased the probability of having the same status in 2003. For example, 17 percent of those in deferment/forbearance in 1998 also held that status in 2003. Only 2 percent of those with repaying/fully repaid status and 4 percent of those in default in 1998 were in deferment/forbearance in 2003. Monge-Naranjo wrote, “If such a pattern holds for more recent cohorts, the true default rates for recent years are probably even higher than the measured ones because some default might be temporarily masked as deferment or forbearance. The default projections for recent cohorts might need to be downgraded even further, since the results of Lochner and Monge-Naranjo (2014) are for those with bachelor’s degrees entering a much better labor market.”

    College is ruining lives! How to stop student debt’s paralyzing spiral -  First of all, wrangling over student loans and interest rates and refinancing obscures the long-term vision – public colleges and universities should be free to attend. Or at least as close to free as possible. Though it may take time for the majority of the public to realize it, this idea is not far-fetched. The United States currently spends enough on grant aid, tax preferences and loan subsidies to cover the cost of tuition at every public college and university. Tuition is not the only expense, and more funding would be needed to make college free or near-free. But using existing resources – and moreover, returning them to pre-recession levels – gets us a lot of the way there. Think of it as a two-track alternative: first, a “public option,” subsidized by states and the federal government, available to students attending public institutions. If a student wants to attend a private college instead, that’s fine, but they shouldn’t benefit from public subsidies to do so. Ultimately, competition from a free college option will probably bring down the cost of private higher ed, which can be accomplished by removing the vast administrative bloat, outrageous executive compensation and unnecessary spending that characterizes far too many of these institutions.

    It’s Official: The Boomerang Kids Won’t Leave --One in five people in their 20s and early 30s is currently living with his or her parents. And 60 percent of all young adults receive financial support from them. That’s a significant increase from a generation ago, when only one in 10 young adults moved back home and few received financial support. The common explanation for the shift is that people born in the late 1980s and early 1990s came of age amid several unfortunate and overlapping economic trends. Those who graduated college as the housing market and financial system were imploding faced the highest debt burden of any graduating class in history. Nearly 45 percent of 25-year-olds, for instance, have outstanding loans, with an average debt above $20,000. And more than half of recent college graduates are unemployed or underemployed, meaning they make substandard wages in jobs that don’t require a college degree. According to Lisa B. Kahn, an economist at Yale University, the negative impact of graduating into a recession never fully disappears. Even 20 years later, the people who graduated into the recession of the early ’80s were making substantially less money than people lucky enough to have graduated a few years afterward, when the economy was booming. Some may hope that the boomerang generation represents an unfortunate but temporary blip — that the class of 2015 will be able to land great jobs out of college, and that they’ll reach financial independence soon after reaching the drinking age. But the latest recession was only part of the boomerang generation’s problem. In reality, it simply amplified a trend that had been growing stealthily for more than 30 years. These boomerang kids are not a temporary phenomenon. They appear to be part of a new and permanent life stage. More than that, they represent a much larger anxiety-provoking but also potentially thrilling economic evolution that is affecting all of us. It’s so new, in fact, that most boomerang kids and their parents are still struggling to make sense of it. Is living with your parents a sign, as it once was, of failure? Or is it a practical, long-term financial move?

    Parents, Educators, Politicians All Share Blame for College Grads’ Woes - Despite five years of economic recovery, college graduates continue to face a tough job market. Certainly, young people should take responsibility for their lives, but parents, educators and politicians all share some blame for their troubles. College graduates earn much higher wages and are less likely to be unemployed than high school graduates—and those gaps are increasing. Still many recent graduates cannot earn enough to live independently, and often end up in jobs that don’t require a college education. Those with training in specialized fields generally find a good paying position quickly. For example, 75 percent of engineering and education majors find employment requiring a degree, but among those in liberal arts or communications, the figure is only 40 percent. Essentially, many students paid and borrowed upwards of $100,000 or more to major in French or anthropology and end up working at Starbucks or a Verizon outlet. The most fundamental problem is that high school students too often see four years at college as “an experience” and not “an investment.” And they get a lot of bad advice from adults who should know better. So often mothers tell me they want their son or daughter to study what they love, pursue their passion, and everything will work out. Fathers are worse. “Lacrosse is a big success factor for Sally, and her college really supports female athletes.” High school teachers, coaches and counselors too often echo those sentiments.

    You Can Blame Student Debt for America's Inequality and Shrinking Middle Class -- There is a tendency among elite opinion makers to believe that debt accrued while gaining a college degree is "good debt" that isn't problematic because, as the thought goes, those with college degrees tend to make enough money to recoup their debt over a lifetime. Student debt is supposedly an equalizer -- a way for students to gain access to credit in order to get a degree that will give them an equal chance to enter the middle class and achieve the American Dream. Sadly, like many pundit platitudes, this assertion is grounded in fantasy, not fact. In fact, this is only true for some students -- those who were fairly wealthy in the first place. College is certainly worth the cost, but that at present it is saddling poor and middle-class students with student debt is actually preventing them from participating in the wealth-building processes that previous generations have enjoyed. The debate over student debt usually focuses on those right out of school, but that masks that a substantial portion of those with student debt struggle mightily to pay off their loans in a timely manner, delaying (sometimes in perpetuity) their entry into the middle class. Research by the US Federal Reserve Bank of New York finds that many borrowers still haven't paid off their student loans by their 40s and 50s.

    Finding Shock Absorbers for Student Debt : President Obama last week signed an executive order aimed at easing the debt burden on millions of people who borrowed money for college. Soaring loan costs, he said, have put “too big a debt load on too many people,” and it’s time to do something about it.I agree wholeheartedly. But while Mr. Obama’s initiative is a step in the right direction, it doesn’t go far enough.First, consider the scale of the problem. Forty million people hold student loans. With outstanding debt at $1 trillion, student loans have surpassed credit cards as the third-largest form of household debt. Seven million borrowers are in default and more are behind on their payments.   Government customarily helps protect its citizens from certain commonly borne, extreme risks, including natural disasters (by offering flood insurance) and economic disasters (by offering unemployment insurance). The tax system acts as one big insurance policy, as pointed out in a recent column in this space by Robert J. Shiller, because taxes drop faster than income if families run into tough times.The core problem with student debt is that we don’t adequately insure students against the risk of investing in college. While a vast majority of undergraduates have borrowed much less than some headlines suggest — in one study from the last decade, 98 percent borrowed less than $50,000 and four out of 10 borrowed nothing at all — millions are in default or behind on payments. With damaged credit records, they face higher interest rates on car and home loans, rejected rental applications and lost job opportunities.

    Pension Funds, Dancing a Two-Step With Ratings Firms -- Pension fund investors lost billions of dollars trusting the rosy credit ratings stamped on troubled mortgage securities before the 2008 crisis. In its aftermath, they have spent years and many dollars suing Moody’s and Standard & Poor’s, the main purveyors of those dubious grades. That these funds and other plaintiffs are trying to hold the ratings agencies to account is a good thing.  And yet, there’s a mystifying disconnect in some of these disputes. On one hand, pension funds or state officials are telling the courts that Moody’s and S.&P. were negligent and their ratings marred by flawed methods and conflicts of interest. On the other hand, when the professionals who manage state funds buy bonds or mortgage securities, their investment policies require them to rely on the assessments of — you guessed it — the very same ratings agencies. Consider the $300 billion California Public Employees’ Retirement System, or Calpers. Its 2009 lawsuit against Moody’s and S.&P. contends that the system lost $800 million on mortgage securities it bought based on those agencies’ positive ratings. The ratings, Calpers said in its lawsuit, were negligent misrepresentations. In the meantime, Calpers’ Statement of Investment Policy for Global Fixed Income says the fund can invest in corporate bonds only if they are rated investment grade by “a recognized credit rating agency,” which it defines as Moody’s, S.&P. or Fitch Ratings. Calpers is not alone in taking this oddly contradictory stance. Seventeen states have sued S.&P., contending that they were misled on ratings. But many of these states have similar policies requiring that their investment professionals — such as treasurers and pension overseers — rely on S.&P. ratings.

    Record cutbacks at Social Security as retirement claims surge: As the gradual retirement of the Baby Boomers foists more people onto its rolls than ever before, the Social Security Administration (SSA) has been reducing services and shuttering field offices at a record clip, according to a report released Wednesday by a bipartisan Senate committee. The SSA has closed 64 field offices since 2010, including over two-dozen in just the last year, marking the largest five-year decline in service locations in the agency's history, the Senate Special Committee on Aging notes. It has also reduced a number of in-person services, trying to shift seniors and other beneficiaries into an online system, and it has cut roughly 11,000 workers from its payroll in the last three years. As a result of these closures, the report says, "communities are too often left without the resources they need." ----- SSA officials have blamed the cutbacks on budget constraints, saying they've been squeezed between increasing demand and the same budget pressures that have affected the entire federal government. The SSA has seen a "staggering" 27 percent increase in retirement claims since 2007, from 2.6 million to 3.3 million, according to testimony prepared for the hearing on Wednesday for Nancy Berryhill, a deputy commissioner with the SSA. The report notes the fiscal crunch facing the SSA, explaining, "Continuing budget constraints, which began at the start of the decade, have forced SSA to make difficult decisions to reduce service to the public."

    Wait Times at the VA — An internal Veterans Affairs audit released Monday said tens of thousands of newly returning veterans wait at least 90 days for medical care, while even more who signed up in the VA system over the past 10 years never got an immediate appointment they requested. After talking to Maggie Mahar at Health Beat, she had the time to review Phillip’s book A Salute to the VA on Memorial Day—Part 1. If you not had the chance to read Maggie’s review, now is the time to do so. I In a nutshell, the VA is well beyond the typical commercial healthcare system in providing “evidence-based protocols of care — not inadvertently ordering up dangerous combinations of drugs, or performing unnecessary surgeries and tests just to make a buck and treating the whole patient and not just one part at a time.” Yesterday, Phillip Longman presented the results of the VA audit Just how long are those wait times at the VA really? Remember CNN claims “Audit: More than 120,000 veterans waiting or never got care.”

      • - Of the 6,004,350 total appointments scheduled, 96% of them or 5,763,291 appointment were made in 30 days or less.
      • - Conversely, 242,059 veterans or 4% of the 6,004,350 scheduled appointments were made after 30 days
      • - The audit shows that even appointments at the Phoenix, AZ VA (the ground zero of the VA scandal), 89 percent of people enrolled in the system received an appointment in less than 30 days. The average wait for established patients to see a primary care doc coming to just over 14 days.

    The VA: Another reason for single payer -The uproar over the manipulation of wait times at the Phoenix VA hospital and other VA sites has tended to overshadow the larger issue of whether U.S. veterans have sufficient, unimpeded access to care. The short answer is they don’t, due to the inherent limitations of the VA program and the fragmented nature of our current health system. Among other problems, many veterans don’t even qualify for VA care and are completely uninsured. There are 22 million veterans in the U.S. today. They are mostly poor, and the Vietnam-era veterans are getting to an age where they need more health care. Over the years there have been long waits for different kinds of care at the VA, even as the overall population of veterans is declining. As we now know, some VA administrators have gamed the scheduling system to make their wait times appear shorter, the result of a “pay for performance” scheme that financially rewarded managers if they kept waits to under two weeks – even if that goal was unattainable at their facilities due to doctor shortages, a rapid influx of veterans due to retirement nearby or eligibility changes, or other factors. But the longest and most onerous waits are associated with the time it takes to determine if veterans are eligible to receive care at the VA, and at what level. This determination is done precisely because the VA is not a single-payer system. It doesn't cover everyone; it's not accessible to every veteran; it is just one payer among many in our fragmented system. Currently about 2.3 million veterans and their family members are completely uninsured. In contrast, a single-payer national health program would cover everyone and allow them to choose any provider and source of care in the U.S.

    Veterans and Zombies, by Paul Krugman - You’ve surely heard about the scandal at the Department of Veterans Affairs. A number of veterans found themselves waiting a long time for care, some of them died before they were seen, and some of the agency’s employees falsified records to cover up the extent of the problem. It’s a real scandal; some heads have already rolled, but there’s surely more to clean up. But the goings-on at Veterans Affairs shouldn’t cause us to lose sight of a much bigger scandal: the almost surreal inefficiency and injustice of the American health care system as a whole.  The essential, undeniable fact about American health care is how incredibly expensive it is — twice as costly per capita as the French system, two-and-a-half times as expensive as the British system. You might expect all that money to buy results, but the United States actually ranks low on basic measures of performance; we have low life expectancy and high infant mortality, and despite all that spending many people can’t get health care when they need it. What’s more, Americans seem to realize that they’re getting a bad deal: Surveys show a much smaller percentage of the population satisfied with the health system in America than in other countries.

    The VA, Still The “Best Care Anywhere” -  Today, “Economist’s View showcased Paul Krugman’s latest NYT article“Veterans and Zombies”. Paul discusses how the hyped-up VA issues are being used as an example of under performing government healthcare to emphasize how bad the much larger PPACA healthcare reform could be if allowed to proceed. Of course this is not true; but both Mark and Paul missed the data found by the most recent VA audit. The results of the audit were released June 9th. I left a long reply on the thread detailing the findings of the recent VA audit. There is no comparison to be made of the VA healthcare to private healthcare. The VA is ahead of private healthcare and where private healthcare should be if it were going to improve. In a nutshell, the VA is well beyond the typical private healthcare system in providing “evidence-based protocols of care — not inadvertently ordering up dangerous combinations of drugs, or performing unnecessary surgeries and tests just to make a buck and treating the whole patient and not just one part at a time.” The services for fees cost model does not exist in VA healthcare for veterans.“The nationwide Access Audit covered a total of 731 separate points of access, and involved over 3,772 interviews of clinical and administrative staff involved in the scheduling process at VA Medical Centers (VAMC), large Community Based Outpatient Clinics (CBOC) serving at least 10,000 Veterans and a sampling of smaller clinics.” Included in the finding were these issues:

    - A complicated scheduling process resulted in confusion among scheduling clerks and front-line supervisors.
    - A 14 day wait-time performance target for new appointments was not only inconsistently deployed throughout the health care system but was not attainable given growing demand for services and lack of planning for resource requirements.
    - Overall, 13% of scheduling staff interviewed indicated they received instruction (from supervisors or others) to enter a date different than what the Veteran had requested.
    - 8% of scheduling staff indicated they used alternatives to the official Electronic Wait List (EWL). In some cases, pressures were placed on schedulers to utilize unofficial lists or engage in inappropriate practices.

    Every year, we waste Spain - The other day I posted a link to this Atlantic article on Facebook. I can't offer a pithier summary than the headline: "U.S. Healthcare: Most Expensive and Worst Performing."In my post, I said a quick back-of-the-envelope calculation shows we waste more than $1 trillion a year on health care spending. A blog isn't quite an envelope, I suppose, but here are the numbers: U.S. GDP was $16.7 trillion in 2013, according to the CIA World Factbook (via Wikipedia). According to the article, 17.7 percent of that is spent on health care, far above the portion spent by other countries. Judging from the chart in the article, 9.7 percent would count as middle-of-the-pack, more or less. Well, 17.7 - 9.7 = 8.0, and 8 percent of $16.7 trillion is $1.336 trillion. QED.  How much money is $1.336 trillion? A lot. If our wasted spending were an economy, it would be the 14th largest in the world, just behind Spain. (Wikipedia again.) Spain, in other words, manages to feed, clothe and house 47 million people, maintaining most of them in reasonable First World comfort, and manages to build all the roads, power plants, airports and so on that they need, not to mention hospitals, with what we spend on excess administration and paperwork, redundant and/or pointless procedures and drugs and services that cost way more than they should. Every year, in our health care industry, we waste Spain.

    Buying Health Insurance: A Pig in a Poke - I recently called my pharmacy to refill my blood pressure medication. I have taken this medication for years with good control and no side effects. There has never been a problem with refills other than my family doctor insisting that 5 years really is too long to go without being seen by him.  Until now. This time the pharmacy called to inform me that the prescription would require “pre-authorization” – an interesting term that I can’t really distinguish from plain old “authorization.”  I asked the pharmacy to forward the request to my family doctor, along with a picture of me so he would remember what I look like. Eventually my doctor’s office called and said they couldn’t get the medication pre-authorized and they prescribed another, similar medication that was ok with my insurance company. The difference between these two drugs was the cost. The insurance company, after years of paying for my medication, simply changed the rules and forced me to get another drug that cost less. The alternative was to pay full freight at about $170/month because they wouldn’t cover it at all. The point of this exercise is not that there were cheaper drugs available that had the same pharmacologic action (a topic for another day) but that my insurer could change the rules without my knowledge or approval. As it turns out, when you purchase a health insurance policy, you only think you know what you’re buying. You know parameters such as the deductible, coinsurance, premium, maximum out of pocket, and so on. You know whether or not you have maternity coverage, psychiatry coverage, a lifetime cap – and all sorts of nonspecific things.

    Popular Obamacare plans will see premiums rise in at least 8 states: study - The most popular health-care plans created under Obamacare will see premiums rise by an average of 8% in 2015 if the results of a study are any indication.The examination by Avalere Health of public exchanges in nine states created under the Affordable Care Act show initial rate filings for average monthly silver premiums will go up $324 to $350 apiece on average. Those figures don’t include subsidies available to policyholders. Avalere looked at exchanges that were both state-run and operated by the federal government, and found a wide range in planned silver premium hikes. They go from a 16% increase in Indiana, a federally run exchange, to a 1.4% drop in rates for Oregon’s state-run clearinghouse. Along the way, increases for Connecticut and Vermont will tip the scale with hikes around 12% while increases for Maryland and Rhode Island will be less than 5%.The highest average for silver plans is in Vermont at $466 a month, while Oregon has the lowest average at $272. Premium variations within states are expected to be higher, the report says. Silver plans in Indiana, for example, will range in price from $211 to $587 a month.

    Millions paying less than $100 per month for Obamacare - CBS - A major question about Obamacare was how pricing would shake out for consumers. Would it end up being ruinously expensive, or relatively light on the wallet? Now the numbers are coming in, and it appears that for many Americans the health-insurance plans bought under the new government program are fairly affordable. Almost seven out of 10 people who bought plans through federally run marketplaces and who receive tax credits are paying monthly premiums of less than $100, the U.S. Department of Health and Human Services said on Wednesday. The study doesn't include data from the 14 states that operate their own insurance marketplaces.Over the years, the high cost of health insurance has discouraged millions of Americans from enrolling for benefits. Obamacare, which launched this year under the Affordable Care Act, was created as a way to provide more competition and lower prices for workers who did not get insurance through their employers. The program's main mechanism for helping people afford coverage are tax credits based on income, with the government providing an average credit of $264 per month.  Critics, however, have pointed to the law's costs to taxpayers as a negative, noting that taxpayers will also pay more for the ACA's expansion of Medicaid. The tax credits helped lower the average monthly premium to $82, with credits reducing the per-person premium by three-quarters, the government study found. Overall, 69 percent of people buying plans with tax credits are paying less than $100 per month. About 5.4 million Americans bought health insurance through a federally run marketplace. The share of U.S. residents without health coverage has dropped to its lowest rate since 2008, according to Gallup.

    3,137-County Analysis: Obamacare Increased 2014 Individual-Market Premiums By Average Of 49% - Forbes --There are hundreds of aspects of Obamacare that people argue over. But there’s one question that matters above all others: does the Affordable Care Act live up to its name? Does it make health insurance less expensive? Last November, our team at the Manhattan Institute published a study indicating that Obamacare had increased the underlying cost of individually-purchased health insurance in the average state by 41 percent in 2014, relative to 2013. We’ve now redone the study on a county-by-county basis, complete with a brand-new interactive map. Depending on where you live, the results may surprise you. Our new county-by-county analysis was led by Yegeniy Feyman, who compiled the county-based data for 27-year-olds, 40-year-olds, and 64-year-olds, segregated by gender. We were able to obtain data for 3,137 of the United States’ 3,144 counties. Among men, the county with the greatest increase in insurance prices from 2013 to 2014 was Buchanan County, Missouri, about 45 miles north of Kansas City: 271 percent. Among women, the “winner” was Goodhue County, Minnesota, about an hour southwest of Minneapolis: 200 percent. Overall, the counties of Nevada, North Carolina, Minnesota, and Arkansas haven experienced the largest rate hikes under the law.

    Health Insurers Pressing Down on Drug Prices - In dealing with health plans, drug companies are facing a new imperative — bargain or be banned.Determined to slow the rapid rise in drug prices, more health plans are refusing to cover certain drugs unless the companies charge less for them.The strategy appears to be getting pharmaceutical makers to compete on price. Some big-selling products, like the respiratory medicine Advair and the diabetes drug Victoza, have suffered precipitous declines in market share because Express Scripts, the biggest pharmacy benefits manager, recently stopped paying for them for many patients.“There’s clearly more price competition in the marketplace,” Andrew Witty, chief executive of GlaxoSmithKline, said, talking about Advair in a recent company earnings call.Executives of pharmacy benefit management firms say they must do something to cope with rising prices, particularly for so-called specialty pharmaceuticals, which are used to treat complex diseases like cancer and multiple sclerosis.  Spending on specialty drugs rose 14.1 percent last year and by even greater amounts in previous recent years, according to Express Scripts. Most of that increased spending comes not from new drugs or new patients, but from price increases on older drugs that can often exceed 10 percent year after year.Many other countries control drug prices in some manner, so drug companies have become dependent on increasing prices in the United States to grow.

    The Wonking Dead - Paul Krugman - The Commonwealth Fund is out with a new report comparing advanced-country health care systems, and the (mostly pre-Obamacare) US system looks very bad indeed: vastly higher spending per capita than anyone else, with worse results.Of course, this is nothing new. And as always pointing out the obvious brings out claims that the US system is somehow superior despite its lousy outcomes. Aaron Carroll helpfully reminds us that all of the arguments surfacing here are zombies – arguments that should have died in the face of clear evidence that they’re wrong, but keep on shambling along nonetheless. I think it’s important, however, to be explicit about something Carroll obviously knows but doesn’t emphasize: the reason for the prevalence of zombies in this field. Some of it is chauvinism. But the main reason for the zombies is unwillingness to accept facts that conflict with ideology. The American health care system is by far the most privatized, most market-oriented system in the advanced world; it’s also far and away the most expensive, without any sign of getting anything for all that money. If you are committed to the view that the magic of the market solves all problems, this is disturbing – so it must not be true. Bring on the zombies!

    The Ugly Truth About Electronic Health Records - Yves here. While this post on electronic health records may seem a big far afield of usual Naked Capitalism fare, it illustrates some of the themes we’ve seen in other contexts. The first is code is law, the notion that underlying, well-established procedures and practices are revised to conform to the dictates of computer systems, with result being crapification of the activity. Second is the distressing way that health care is becoming all about the money, with patient outcomes taking a back seat. This article describes in considerable detail how electronic health records, which in theory should reduce errors and allow for more consistent delivery of medical services, were instead designed only with patient billing and control over doctors in mind. As a result, they are if anything worsening medical outcomes.

    Obesity Higher Among Long-Term Unemployed -  Yves Smith -- Gallup released the results of a survey based on interviews in 2013 of 5,000 long-term unemployed and 13,000 short-term unemployed.* Gallup highlighted that obesity is higher among the long-term unemployed: The long-term unemployed are also twice as likely to say they have high cholesterol and high blood pressure. However, the pollster warns against jumping to the conclusion that high unemployment led directly to worse health. Indeed, the short-term unemployed report a lower incidence of these two ailments by virtue of being young: average age of the short-term unemployed is 33.6 years versus 42.6 for the worker pool overall.  It’s appealing to assume that correlation means causation. It isn’t hard to imagine that someone who is unemployed will wind up gaining weight due to the ready proximity of the fridge and to shifting their diet to cheaper foods, which are often higher fat and/or higher simple carbohydrates. Gallup points out that people who are in worse overall health may find it harder to land a job. Curiously, they don’t mention the most obvious reason that the long-term unemployed have higher rates of obesity: that the obese are discriminated against. For instance, at Harvard Business School, the student that the school chose as its graduation speaker for the class of 2013, Brooke Boyarsky, began her talk by stating: “I entered H.B.S. as a truly ‘untraditional applicant’: morbidly obese.” And what was her self-described act of courage at the school? Not graduating as a Baker Scholar, but losing 100 pounds during her second year of study.  Gallup points out that either unemployment itself or poor health can lead to a self-reinforcing downward spiral:

    California whooping cough cases now labeled an epidemic -  California is in the throes of a whooping cough epidemic, state health department officials announced Friday. Dr. Ron Chapman, director of the California Department of Public Health, said 3,458 cases of whooping cough have been reported since Jan. 1 -- including 800 in the past two weeks. That total is more than all the cases reported in 2013. "Preventing severe disease and death in infants is our highest priority," Chapman said in a statement. "We urge all pregnant women to get vaccinated. We also urge parents to vaccinate infants as soon as possible." Whooping cough, or pertussis, is cyclical and peaks every three to five years. The last peak in California occurred in 2010, when a total of 9,159 cases were reported. Chapman said it is likely another peak is underway. Health department officials say infants too young to be fully immunized remain most vulnerable to severe and fatal cases of pertussis. Two-thirds of pertussis hospitalizations have been in children four months or younger. Two infant deaths have been reported.

    Death by prescription painkiller - The number of deaths involving commonly prescribed painkillers is higher than the number of deaths by overdose from heroin and cocaine combined, according to researchers at McGill University. In a first-of-its-kind review of existing research, the McGill team has put the spotlight on a major public health problem: the dramatic increase in deaths due to prescribed painkillers, which were involved in more than 16,000 deaths in 2010 in the U.S. alone. Currently, the US and Canada rank #1 and #2 in per capita opioid consumption. "Prescription painkiller overdoses have received a lot of attention in editorials and the popular press, but we wanted to find out what solid evidence is out there," says Nicholas King, of the Biomedical Ethics Unit in the Faculty of Medicine. In an effort to identify and summarize available evidence, King and his team conducted a systematic review of existing literature, comprehensively surveying the scientific literature and including only reports with quantitative evidence. "We also wanted to find out why thousands of people in the U.S and Canada are dying from prescription painkillers every year, and why these rates have climbed steadily during the past two decades," says Nicholas King, of the Biomedical Ethics Unit in the Faculty of Medicine. "We found evidence for at least 17 different determinants of increasing opioid-related mortality, mainly, dramatically increased prescription and sales of opioids; increased use of strong, long-acting opioids like Oxycontin and methadone; combined use of opioids and other (licit and illicit) drugs and alcohol; and social and demographic factors." "We found little evidence that Internet sales of pharmaceuticals and errors by doctors and patients--factors commonly cited in the media -- have played a significant role,"

    Doctors Aren't Sure How To Stop Africa's Deadliest Ebola Outbreak -- When an Ebola outbreak lasts for months and continues to show up in new cities, health officials take notice.That's exactly what's happening in West Africa. An outbreak that started in Guinea last February has surged in the past few weeks. It's now the deadliest outbreak since the virus was first detected in 1976.When an Ebola outbreak lasts for months and continues to show up in new cities, health officials take notice. That's exactly what's happening in West Africa. An outbreak that started in Guinea last February has surged in the past few weeks. It's now the deadliest outbreak since the virus was first detected in 1976. More than 500 cases have been reported in three West African countries, and the death toll has risen to 337, the World Health Organization said Wednesday. That's up from 208 cases reported two weeks ago, a 60 percent spike. "There are many villages in the eastern part of Sierra Leone that are basically devastated," virologist Robert Garry of Tulane University tells NPR's Jason Beaubien. "We walked into one village ... and we found 25 corpses. One house with seven people, all in one family, were dead. Health officials still don't know how people are getting sick. In the past, people have caught Ebola from eating monkey meat or from bat bites. Then the virus spreads from person to person through bodily fluids.

    Is Air Pollution Aging Your Brain? - Air pollution is a known killer. It can lead to heart disease, stroke, lung cancer, respiratory infections, and chronic obstructive pulmonary disease. According to recent data from the World Health Organization, 7 million premature deaths around the globe every year are linked to dirty air. But now there is mounting evidence that certain types of air pollution can also be bad for your brain. New research shows that exposure to even relatively low concentrations of fine particulate matter (PM2.5) can significantly impair cognitive functioning.  The study examined the cognitive scores of 780 participants, 55 years and older and gathered data on PM2.5 air pollution levels for each participant’s neighborhood based on measurements taken by the U.S. EPA’s Air Quality System. People living in high pollution areas, with 15 micrograms per cubic meter or more of PM2.5 had error scores on their cognitive tests of arithmetic and memory one and a half times those of the participants who lived in low pollution areas with no more than 5 micrograms per cubic meter. The difference remained even after the researchers adjusted for confounding variables like education, employment, gender, and marital status. PM2.5 pollution is released during any combustion process. The most common sources are vehicle exhaust and coal-fired power plants. The particles are just 1/30 the width of a human hair, small enough, researchers believe, to cross into the bloodstream.  This is not the first time that air pollution has been linked with lowered cognitive functioning. In 2012, Jennifer Weuve, at Harvard’s Rush University Medical Center, published similar results. Her study examined the cognitive functioning of 19,000 U.S. women between the ages of 70 and 81 and their short and long-term exposure to particulate air pollution.

    Fake Antibiotics Feed Growing Worldwide Superbugs Threat - Antibiotics now rank among the most counterfeited medicines in the world, feeding a global epidemic of drug-resistant superbugs. A new surveillance and reporting program in 80 countries led by the World Health Organization shows that counterfeit antibiotics are a growing problem in all regions of the world, rivaling fake versions of erectile dysfunction pills like Viagra. Infections become superbugs by gaining resistance when the treatments used against them aren’t strong enough to kill them. It’s a growing problem as substandard counterfeit drugs become more prevalent. The threat is already spurring a strong response from drugmakers such as Pfizer, which has been focusing its anti-counterfeiting efforts on online pharmacies, collaborating with Microsoft Corp. .Earlier studies have found that Southeast Asia is a particularly large source of the questionable drugs, trafficking mostly in penicillin and their derivatives. The WHO says the problem is more widespread.England’s Chief Medical Officer Sally Davies has compared the gravity of the antibiotic resistance threat to climate change, requiring a similarly unified response from governments, industry and society. With genuine medicines already losing potency against bacteria, the surge of counterfeits is particularly troublesome for public health leaders trying to curb the march to what the WHO has referred to as a post-antibiotic era in which everyday infections can kill. “Substandard medicines can create resistance such that the bona fide medicine can’t treat the patient when he gets it eventually,” said John Clark, chief security officer for New York-based Pfizer’s fight against the counterfeit drug trade. “It’s a horrific situation.”

    Infertility in Spanish Pigs Has Been Traced to Plastics. A Warning for Humans? -- A strange catastrophe struck Spain's pig farmers in the spring of 2010. On 41 farms across the country—each home to between 800 and 3,000 pigs—many sows suddenly ceased bearing young. On some farms, all the sows stopped reproducing. On others, those that did become pregnant produced smaller litters.When investigators examined the sows and the semen that had been used to artificially inseminate them—it had been collected from different boar studs and refrigerated—they couldn't find anything wrong. The sperm cells weren't misshapen. None of the sows were diseased. No microbes or fungal toxins were detected in their feed or water. Only one factor was common to all the farms and studs: The plastic bags used for semen storage all came from the same place. This is "the first time that the correlation between reproductive failures and compounds migrating from plastic materials [has been] studied and demonstrated," says Nerín, whose team published last month in the journal Scientific Reports. The implications could extend far beyond the farm. Some of the same chemicals found in the pigs' semen storage bags are routinely used in packaging food for humans and are known to migrate into food. The strange case of the Spanish pigs, Nerín says, "shows the real risks we face." (Explore an interactive showing toxic chemicals that may be lurking in your home.)

    The Energetic Evolution of the US Food System - In The Energy Cost of Food I detailed how incredibly energy intensive the US food system is, particularly noting how it likely requires at least 15 calories of industrial energy inputs to produce, process and distribute 1 calorie of consumed food. It hasn’t always been this way though; before 1900 the US food system likely delivered more calories of food than it required as energy inputs in the form of fuel and labor [1]. Only as our food system industrialized after 1900 did today’s energy deficit emerge. In The Energy Basis of Food Security I make the case for reducing the energy intensity of food systems to sever the link between energy prices, which are rising and highly volatile, and food prices. If we use history is our guide though, the energy intensity of the US food system is on a steep upward trend that even the Arab Oil Embargo couldn’t permanently derail. Given that energy prices have again reached commanding heights – enough to hinder economic growth, according to most economists – I expect that investments within the food sector are already being made to enhance system-wide efficiency. The million dollar question is whether those investments will be enough to make a real, a permanent, difference, or whether they’ll be targeted towards shortsighted measures that amount to putting bandaids on a mortal wound. It takes energy to get food. It always has, and it always will. The US food system, and those of many other countries, has risen to commanding heights in terms of its energy intensity. Rising energy prices will eventually end that trend, or make food so expensive that those of lesser means take to the streets in protest. How we adapt to this reality will define us as a species over the coming century. Food activism is rising up like a wellspring around the world, creating an opportunity for us to ponder whether our food system’s development path is a viable one over the long term, and hopefully the facts and figures I’ve offered here can lead people to engage with their food system’s evolutionary path and lead it towards a better outcome.

    Texas Requests ‘Emergency Use’ of Restricted Herbicide to Kill Superweeds - The U.S. Environmental Protection Agency (EPA) is requesting comments on a petition filed by the Texas Department of Agriculture to permit emergency use of the hazardous herbicide propazine to kill herbicide resistant weeds infesting Texas cotton. Calling the resistant weeds an emergency, Texas requested to use hundreds of thousands of pounds of the toxic chemical on up to three million acres of cotton. “This request clearly demonstrates that that herbicide-resistant crops—by generating an epidemic of resistant weeds—lead directly to increased use of hazardous chemicals,” said Bill Freese, a science policy analyst at Center for Food Safety. “EPA should reject this request.” Propazine is a possible human carcinogen and a “restricted use pesticide”—the EPA’s category for particularly hazardous agricultural chemicals. The EPA has found that propazine, like atrazine, is an endocrine disruptor (disrupts the hormonal system) and that when fed to pregnant rats, it causes birth defects in their young. Propazine is persistent, requiring years to break down, and is detected in both ground and surface waters. The European Union has banned propazine due to its toxicity. Granting the emergency request to use propazine to kill glyphosate-resistant Palmer amaranth—also known as pigweed—would lead to a 10-fold increase in the use of the toxic herbicide, from just 20,000—50,000 pounds in 2010 and 2011 to 280,000 pounds per year.

    It’s Official. Big Food Sues Vermont --Today, Monsanto and the Grocery Manufacturers Association (GMA) filed a lawsuit in federal the U.S. District Court, State of Vermont, to overturn Vermont’s recently passed GMO labeling law. Today, the Organic Consumers Association, through our allied lobbying arm, the Organic Consumers Fund, has committed to contributing as much as we can to defend Vermont’s labeling law, while we also fulfill our $500,000 pledge to help Oregon pass a GMO labeling initiative in November.These battles that pit consumer health and rights against multi-billion corporations belong to all of us. Can you help us raise $250,000 by June 30, so we can defend Vermont and push forward in Oregon and other states? You can donate online, by mail or by phone—details here.  After years of good old-fashioned work, and playing by the rules, the grassroots labeling movement achieved its first real victory this year, when Vermont passed the first no-strings-attached law requiring mandatory labeling of foods containing genetically modified organisms.  But the rules mean nothing to the rich and powerful companies like Monsanto and Coca-Cola, who belong to one of the country’s most powerful lobbying groups—the GMA.

    GM floodgate to open? EU ministers back deal to let nations decide fate of crops - European Union governments have decided to let member states go their own way when it comes to genetically modified organisms (GMOs), allowing EU nations to either ban the crops or grow them as they see fit. The move ends years of legislative deadlock. At a meeting in Luxembourg, EU environment ministers from 26 out of 28 member states put their weight behind a 2010 proposal to give national governments an opt out from rules, making the 28-member bloc a single market for GMOs. Only Belgium and Luxembourg voted against it, although the final decision rests with the European Parliament, which is expected to endorse the plan, Bloomberg Businessweek reports.  A political split in Europe between countries in favor of GMOs, such as Britain and Spain, and those firmly against them, including France, has delayed EU-wide permission to grow them.  This has prompted complaints from trading partners – such as the US, where GMOs are legal – which are seeking to expand the global bio seed market, which is valued at almost US$16 billion a year.  The law will accelerate EU level endorsements for requests from US companies like Monsanto to plant genetically altered crops, which have been cleared as safe by scientists working for the European Commission.

    There are not enough resources to support the world's population - The Worldwide Fund for Nature calculates that by 2050, humankind will need 100 per cent more of the planet’s total biocapacity (forestry, fisheries, croplands) than there is. What are the prospects of finding another planet for humans to plunder by 2050? On a finite planet sustainability is not an option, it’s just a matter of how it is achieved. Will the imbalance be corrected by literally billions of deaths or by fewer births? How strange, given the evidence, that population growth and contraception remain largely taboo. Those who consume way beyond their share, the rich over-consumers in every country, must certainly massively reduce their environmental footprints, but the 'number of feet' is also relevant. Often statements like this are assumed to refer to the poor, but our organisation, Population Matters, stresses that affluent parents must also seriously consider having one less child than they may have planned. The guideline is just two for replacement. All this is hardly rocket science: indeed you could hardly have a better example of Ockham’s razor. Surely, continuing business as usual involves far more unrealistically optimistic assumptions than the precautionary approach. The precautionary approach requires proper resourcing of voluntary family planning services, which still receive a derisory less than one per cent of world aid for reproductive health, and the removal through education and the media of the many barriers that continue to stop millions of women from having the choice to access methods of contraception. This is not an alternative to the other crucial precautionary measure: reducing the size of humanity’s mean environmental footprint. Both are vital; they are two sides of the same coin.

    White House task force charged with saving bees from mysterious decline - Barack Obama is taking steps save honey bees from a mysterious die-off, ordering new research into the pesticides linked to the pollinators' collapse.The presidential memorandum released by the White House on Friday charges a new task force with producing a strategy within 180 days to stop the alarming decline of honeybees, butterflies and other pollinators.The memorandum also for the first time directs the Environmental Protection Agency (EPA) to carry out research into the role of a new class of pesticides, neonicotinoids, that have been linked with the collapse of the honeybees.However, Obama stopped short of a ban on neonicotinoids, as the European Union and some local authorites have done.The die-off of honeybees in many countries over the last decade has caused widespread alarm because so many of the world's food crops require pollination. The decline has been linked to loss of habitat and disease. But there is growing evidence of a direct link between neonicotinoids, the most widely used class of insectides, and colony collapse disorder.

    Saving Tasmania's forests - Imagine the uproar if the Grand Canyon was dug up for mining. There are not many places in the world precious enough for World Heritage listing, so many countries covet this lucrative international recognition. These natural and cultural places are so significant, so exceptional that to deprive the world and future generations of them would be a tragedy. Tasmania's old-growth forests have been included on the World Heritage list as a natural wonder since 1982 and it's not hard to see why. With some of the oldest trees in the world, some up to 3,000 years old,, the forests span more than one million hectares of land, making up one of the last, vast expanses of temperate rainforest in the world. The Tasmanian forests aren't just about the trees, but also the biodiversity they protect and carbon sequestration value they represent. Yet the Australian government couldn't seem to care less. At the upcoming World Heritage Committee meeting in Doha, Qatar, the Australian government will put forward an unprecedented proposal to delist the Tasmanian forests. It is Australian Prime Minister Tony Abbott who has been leading the crusade against Australia's ancient forests. Abbott has been instructing his diplomats to lobby committee members, a rarity within the UNESCO world, to delist the forests so that the trees can be logged and shipped to willing buyers.

    Thirsty West: The No-Water Way --- In a year with (practically) no water, here’s something that was inevitable: farming without any water at all. Small farms around the Bay Area are reviving an ancient technique that is just what it sounds like. Add “dry farming” to the list of ideas that could get this dry state through the worst dry spell in half a millennium. The Hoover Dam’s Lake Mead, the primary water supply for Las Vegas, has never had this little water to start June. Earlier this week, Fresno hit 110 degrees—the second-earliest achievement of that lofty mark in the 127 years that weather records have been kept there. New data on Thursday showed California has now gone five consecutive weeks with fully 100 percent of the state rated at “severe,” “extreme,” or “exceptional” drought. The state is getting by on meager reserves amid a multiyear shortage, and there won’t be any more significant rain until the fall: The annual dry season has begun.  The last measurable rain in San Francisco was April 25, which is about a month earlier than normal. The coast gets most of its drinking water piped in from the Sierras anyway, so a dearth of local rainfall hasn’t done much except make cars and sidewalks extra dusty.

    Thirsty West: Why Californians Will Soon Be Drinking Their Own Pee -- California has a lot of coastline. So why all the fuss about the drought? Desalination to the rescue, right?  Not quite. The largest desalination plant in the Western Hemisphere is currently under construction in Carlsbad in San Diego County at great expense. The price tag: $1 billion.  Right now, San Diego is almost totally dependent on imported water from Sierra snowmelt and the Colorado River. When the desalination plant comes online in 2016, it will produce 50 million gallons per day, enough to offset just 7 percent of the county’s water usage. That’s a huge bill for not very much additional water.   Which brings us to the pee-drinking. This year’s drought has motivated California to invest $1 billion in new money on water recycling efforts statewide, a much more cost-efficient way of increasing potable water supplies. But reusing purified sewer water for brushing your teeth is not without its own set of issues. National Journal describes the biggest holdup: The problem with recycled water is purely psychological. Despite the fact the water is safe and sterile, the “yuck factor” is hard to get over, even if a person understands that the water poses no harm. In one often-cited experiment, researchers poured clean apple juice into a clean bedpan, and asked participants if they’d be comfortable drinking the apple juice afterwards. Very few of the participants agreed, even though there was nothing wrong with it. It’s forever associated with being “dirty,” just like recycled wastewater.

    California Drought Forces Fish Hatcheries To Evacuate To Avoid ‘Catastrophic’ Losses - Fears of potentially deadly water temperatures have forced California officials to evacuate fish from two hatcheries into state waterways, in the hopes of avoiding “catastrophic” fish losses. California’s extreme drought and high temperatures have led to fears that, by the middle of the summer, water temperatures would be too high in hatcheries for young fish to survive. Too-warm water could cause “extensive — if not total — loss of all fish in the hatcheries,” California officials said, so over the past several weeks two of the state’s hatcheries have been releasing rainbow trout and steelhead from two state hatcheries into rivers and lakes. This is the first time these hatcheries have been forced to completely empty out their stocks, said William Cox, California’s Department of Fish and Wildlife’s State Hatchery Program Manager. “We are taking proactive actions to avoid catastrophic fish losses,” Cox said in a release. “It is an unavoidable change, and we need to look for unique opportunities to avert major losses. We will track all changes involved in the evacuation and evaluate how fish react to being released early. Ultimately we could develop new release strategies based on what we learn.” Usually, steelhead are raised in hatcheries until they’re about a year old, at which time they’re released into the American River where they make their way to the ocean. When steelheads reach a year old, they’re physiologically and instinctively prepared to travel to the ocean — at six months, they don’t have that drive to swim out to the ocean, so they’ll try to make it in the river. But high water temperatures, low water flow, and clearer-than-normal river water that makes the young fish easier for predators to spot all make it unlikely that these fish will survive.

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

    May 2014 declared hottest on record by NASA and the Japanese Meteorological Agency from Nick Sundt, World Wildlife Fund: NASA released data today (17 June) indicating that global surface temperatures in May 2014 were 0.76 oC above the 1951-1980 mean. That is well above the previous record of 0.70 oC set in 2010 and again in 2012. This is consistent with the data released yesterday by the Japan Meteorological Agency which also showed that May 2014 was the warmest May on record. For the March-April-May period, NASA data indicates that temperatures were 0.73 oC above the 1951-1980 mean, making it the second warmest such period on record behind only 2010 when May was 0.80 oC above the mean. The japan Meteorological Agency separately calculated that March-April-May 2014 was the warmest on record, just ahead of 2010. These kinds of small differences are common between the datasets maintained by Japan, the US and others.

    Hottest Spring On Record Globally, Reports Japan Meteorological Agency  --The Japan Meteorological Agency (JMA) reported Monday that March-May was the hottest in more than 120 years of record-keeping. It was also the hottest May on record.This is especially noteworthy because we’re still waiting for the start of El Niño. It is usually the combination of the underlying long-term warming trend and the regional El Niño warming pattern that leads to new global temperature records. You may be wondering how the world is setting records for the warmest March, April, and May (the boreal spring) when it wasn’t particularly hot in the United States (assuming we ignore California and Alaska). It turns out there’s like a whole planet out there that has been getting very toasty:

    El Niño Could Make U.S. Weather More Extreme during 2014 - Scientific American: Unusual weather across the U.S. and other parts of the world just became more likely for this summer and autumn. That’s because the chances have gone up that El Niño—an atmospheric pattern driven by water temperature changes in the Pacific Ocean—will develop during that time, according to the nation’s leading climate experts. When El Niño settles in, it has major effects on weather conditions nationally and globally. Scientists speaking at a press conference yesterday afternoon said the odds that El Niño will develop during the summer have risen from 65 to 70 percent. The prediction comes in a new monthly report from the U.S. National Weather Service and the International Research Institute for Climate and Society at Columbia University. The experts also said there is up to an 80% chance that El Niño will develop during the fall and winter. Regions across the U.S. that are normally wet can dry out during El Niño conditions, while normally dry regions can flood. Worldwide expectations related to El Niño are not always accurate, however. “There is an expectation of drought, but not in every single El Niño event do we actually have drought,” Lisa Goddard, director of the International Research Institute for Climate and Society, said during the briefing. In fact, the majority of the continental U.S. has a higher chance of experiencing above-average precipitation in both summer and fall of El Niño years, according to data from the U.S. National Oceanic and Atmospheric Administration. In addition, data from Golden Gate Weather Services, a consultancy in California, show particularly increased amounts of precipitation for southern California in stronger El Niño years, which could potentially help drought-stricken areas there and in other parts of the U.S. Southwest.

    El Nino is ‘already here’ - For the last few months, climatologists around the world have been warning that El Nino conditions may soon emerge, and now a Professor from the University of Southern Queensland says that the phenomenon is already with us. El Nino is the slight warming of the waters of the Pacific Ocean. Although it sounds insignificant, it can have a devastating impact on the weather around the world. Details of the phenomenon can be found here.. Climatologist Roger Stone told Australia's ABC News, "The sea temperatures are already 1 or 2 degrees above normal, and right along the South American coast, perhaps 2 or 3 degrees above normal. "That's the tell-tale sign of an early stage to an El Nino event." El Nino conditions increase the likelihood of a drought in Australia, as well as other parts of the world, such as Indonesia and South Africa. Elsewhere, places such as Peru and the southern US states are more vulnerable to floods. However, as Professor Stone explains, the drought doesn’t appear from nowhere. "The El Nino [pattern] is a little cruel, it allows some early rain to come in at the early stages, before it really develops," he said.

    Air conditioning raising night-time temperatures in the US -- Researchers in the US have identified a way in which city-dwellers are inadvertently stoking up the heat of the night – by installing air conditioners. Because the cities are getting hotter as the climate changes, residents are increasingly investing in aircon systems − which discharge heat from offices and apartment blocks straight into the city air. And the vicious circle effect is that cities get still warmer, making air conditioning all the more attractive to residents. According to scientists at Arizona State University, the air conditioning system is now having a measurable effect. During the days, the systems emit waste heat, but because the days are hot anyway, the difference is negligible. At night, heat from air conditioning systems now raises some urban temperatures by more than 1C, they report in the Journal of Geophysical Research Atmospheres. The team focused on the role of air conditioning systems in the metropolitan area of the city of Phoenix, which is in the Sonora desert in Arizona, and conditions in the summertime are harsh there anyway. But, worldwide, normally warm countries are experiencing increasing extremes of heat, and conditions in cities have on occasion become lethal.To cap this, cities are inevitably hotspots – and it’s not just because of global warming. The concentration of traffic, commuter systems, street and indoor lighting, central heating, light industry, tarmac, tiles, bricks, building activity and millions of people can raise temperatures as much as 5C above the surrounding countryside. At present, 87% of US households have air conditioning, and the US – which is not one of the warmer nations – uses more electricity to keep cool than all the other countries of the world combined.

    Obama will propose vast expansion of Pacific Ocean marine sanctuary - President Obama on Tuesday will announce his intent to make a broad swath of the central Pacific Ocean off-limits to fishing, energy exploration and other activities, according to senior White House officials. The proposal, slated to go into effect later this year after a comment period, could create the world’s largest marine sanctuary and double the area of ocean globally that is fully protected. The announcement — details of which were provided to The Washington Post — is part of a broader push on maritime issues by an administration that has generally favored other environmental priorities. The oceans effort, led by Secretary of State John F. Kerry and White House counselor John D. Podesta, is likely to spark a new political battle with Republicans over the scope of Obama’s executive powers.  The president will also direct federal agencies to develop a comprehensive program aimed at combating seafood fraud and the global black-market fish trade. In addition, the administration finalized a rule last week allowing the public to nominate new marine sanctuaries off U.S. coasts and in the Great Lakes.

    “West Antarctica has tipped and there isn’t anything we can do about it.” - World leaders need to ensure that global warming is kept low enough to avoid “pulling the plug” on vast ice shelves in Antarctica, thereby causing a catastrophic sea level rise across the globe, a leading scientist warned yesterday.Dr Anders Levermann, of the Potsdam Institute for Climate Impact Research, noted last month’s major scientific report warning that a collapse of large sections of the west Antarctica ice shelf had already begun and was now “unstoppable.”“We have entered a new era of irreversible climate change, a tipping point of part of the climate system,” he told a side event at the UN climate talks in Bonn. “West Antarctica has tipped and there isn’t anything we can do about it.” As delegates from 185 countries continued their informal consultations on a new climate treaty, Dr Levermann said parts of the East Antarctic Ice Shelf were also “showing signs of instability” and could be lost if the “ice plug” still holding it was eroded.“We need to keep global warming low enough to avoid pulling that plug,” he warned. Otherwise, the Wilkes Ice Basin and other large glaciers could be “sucked” into the Southern Ocean over time, feeding a rise in sea levels of three or four metres.

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

    S&P: climate change is a global mega-trend with an impact on sovereign creditworthinessOn May 15th, 2014, Standard & Poor’s Rating Services issued Climate Change is a Global Mega-Trend for Sovereign Risk, a report about the potential impacts of climate change on sovereign credit ratings of countries around the world.  In its report, S&P explains how the costs of inaction on climate change in response to increasing frequency and destructive force of extreme weather events will become large enough to adversely influence countries’ credit ratings.S&P labels climate change as a new mega-trend that is increasingly part of public discussion on global economic risks.  The report makes it clear that our lack of understanding of climate change and the interconnected nature of ecological systems make it difficult to predict precisely if and when global warming and changing weather patterns will outweigh other economic trends or risks for most sovereign nations. It particularly specifies three factors that make climate change a challenging problem to control.

    • First, the inherent intricacy of science provides a wide array of possible outcomes and interpretations which leave significant uncertainties and controversies about how climate change will impact national economies and financial systems.  
    • Second, the nature of global collective action leads to the famous prisoner’s dilemma.  Due to the global character of climate change, most benefits from sacrificial efforts of individual societies to respond to climate change will accrue to other nations, resulting in an incentive structure that leads to uncooperative outcomes and to little effective risk mitigation.
    • Third, the expectation of disproportionate impact on poorer countries with less clout in international negotiations further exacerbates the international coordination problem.

    The Pragmatic Case for Fossil Fuel Divestment to Address Climate Change - Yves here. College students and faculty members have started organizing to press college endowments, cities and states, and religious institutions to divest their holdings in fossil fuel companies. Harvard professor Naomi Oreskes describes below why divestment is a way to put pressure on energy producers to stop funding climate change denialism and start focusing on clean energy initiatives. Bear in mind that divestment may not have much impact on securities prices. But as the example of the South African divestment movement shows, it is a powerful means for galvanizing media attention and political pressure.

    Carbon pricing won't solve climate change. Innovation will. Carbon pricing has been the go-to solution for economists and environmentalists alike since climate change was identified as one of the foremost social and environmental challenges of our time. Want a climate rescue plan? Carbon pricing. Want to raise revenue for clean energy deployment? Carbon pricing. It's the "silver bullet" for other things, too. Want to reduce reliance on foreign oil? Or raise revenue to correct other tax inefficiencies? Carbon pricing. This approach appeals to many because of its strong roots in neoclassical economics,, which suggests that higher prices will reduce consumption and lead to a big shift to renewable energy. But as long as nations use carbon pricing as their primary solution, climate change will never be addressed – for two reasons: First, it takes a high carbon price to realistically change consumer habits. (Experts suggest around $30 per ton of CO2 to start.) And no one wants to pay it. Politically feasible carbon prices are too low to shift consumer behavior away from fossil fuels. Adequately high carbon prices are tried and reversed, or are never tried.  Second, carbon prices, whether large or small, only raise the cost of fossil energy – they do not lower the cost of alternatives. They are unable to stimulate the multitude of technology breakthroughs in energy generation and storage needed to lower the cost and improve the performance of clean energy. With the Intergovernmental Panel on Climate Change’s (IPCC) recent – and effectively desperate – declaration that Earth’s warming trend is both “unprecedented” and “unequivocal,” it is a good idea to start thinking about a broader climate rescue plan.

    Cities must prepare for climate change or get sued -  While Congress is still mired in climate-change denial, insurance companies have no doubt about climate change. For them, the only question is: Who pays for its effects? The answer to that question is increasingly obvious: We all will. Farmers Insurance filed nine class-action suits in April against dozens of cities in the Chicago area for failing to prepare for the floods that left some neighborhoods navigable only by rowboat last year. Last Tuesday, the company withdrew the lawsuits, suggesting that the threat alone had accomplished its goal. "We believe our lawsuit brought important issues to the attention of the respective cities and counties, and that our policyholders' interests will be protected by the local governments going forward," company spokesman Trent Frager said in a statement. The lawsuits sought to recover money on the behalf of the insurer's policyholders for losses that could have been avoided if the cities and counties had taken more proactive measures to avoid flooding made more frequent by well-documented increases in annual rainfall. The lawsuit cited the municipalities' disaster preparation efforts and the region's Climate Action Plan adopted in 2008 as evidence that the communities knew the risks but failed to make adequate preparations.

    Atmospheric CO2 Crosses "Ominous Threshold" -- At the beginning of June, the Obama administration proudly announced the EPA's so-called Clean Power Plan, the goal of which is to cut carbon pollution from power plants by 30 percent below 2005 levels by 2030. It was trumpeted as the strongest proposal ever put forth by a US president to reign in greenhouse gas emissions. However, Kevin Bundy with the Center for Biological Diversity's Climate Law Institute was unimpressed, commenting, "This is like fighting a wildfire with a garden hose - we're glad the president has finally turned the water on, but it's just not enough to get the job done." Given the increasingly rapid pace of the impacts of runaway anthropogenic climate disruption (ACD), Bundy's remark is well placed, and these recent machinations by the Obama administration are clearly too little, far too late. This April was the second-warmest April on record globally, and marked the 350th month in a row (29 years and counting) that saw above-average temperatures. Temperatures continue to rise across the planet. In Australia, the last two years have been the hottest ever recorded, and there’s no sign that the heat wave is going to stop any time soon, according to a recently released report. According to data compiled by Australia’s Climate Council, the period from May 2012 to April 2014 was the hottest 24-month period ever recorded in the country, and the trend is increasing.

    The World’s Top Polluters And What They’re Doing About It -- There are still a few people in the world who dispute the existence of climate change, and even more who doubt that it is down to human activity. The vast majority of nations, however, accept that CO2 emissions are a problem and have voiced concern.   Actually doing something to control greenhouse gas emissions puts countries at a huge economic disadvantage. As long as coal and oil are the cheapest energy sources, unilaterally attempting to reduce their use could have a disastrous effect on a country’s competitiveness. The U.S. Chamber of Commerce has released a report that estimates new Environmental Protection Agency regulations designed to cut U.S. emissions will cost $50 billion per year. Yet despite the cost, the world’s biggest polluters are beginning to act. offers a free widget that shows CO2 emissions by country so far in 2014. Using that data the top five global polluters are, in order of highest first: China, the U.S., India, Russia, and Japan. Each government is doing something to control pollution, with mixed results.

    The EPA Is Right and US Chamber of Commerce Is Wrong on Climate Change - The Environmental Protection Agency issued proposed rules for power plants last week, arguing that the extra costs of low-carbon power plants are justified by the even larger gains in avoided climate damages. The EPA measures the avoided climate damages on a global basis, meaning that it calculates not only the benefit to the US but also to the rest of the world. The US Chamber of Commerce has objected, arguing that only the US benefits should be taken into account. The EPA has done things right, both ethically and practically.  The US Chamber of Commerce is wrong, both ethically and operationally. The Chamber's ethical position is that the US does not have to care about the damages it causes to the rest of the world. This is a special kind of arrogance certainly not unknown in the US corporate sector. "We don't care about you," screams the Chamber to the rest of the world. We feel free to wreck your climate at our whim." The US didn't feel quite the same way when a British company, BP, spilled oil in the Gulf of Mexico. Yet while the US could take legal action against BP, the rest of the world can't take legal action for US-caused climate change.

    Carbon Rules Show Bad Arithmetic -- President Obama’s Clean Power Plan–his Administration’s historic proposal to regulate carbon emissions from power plants, hyped by supporters and detractors alike as a revolution in climate-change action–just doesn’t add up.  I say this with some hesitation, even some embarrassment. During Obama’s first term, while environmentalists kept complaining that he wasn’t talking enough about global warming, I kept writing that he was doing more about global warming than anyone who ever lived. His stimulus bill was launching a clean-energy boom, his fuel-efficiency rules were ratcheting down greenhouse-gas emissions from cars and trucks, and his new regulations on soot, mercury and other stuff coming out of power plants were accelerating a shift away from carbon. Coal produces three-fourths of our emissions from electricity, though it generates just over a third of our electricity, and I recently predicted that Obama’s carbon rules would take his well-justified (though often denied) war on coal to the next level.  But while the enviros who spent years trashing Obama’s “climate silence” are now hailing his Clean Power Plan as his crowning climate legacy, I’m underwhelmed. The EPA says that by 2030, it will reduce emissions from power plants 30% from their 2005 levels, but that’s just a forecast–and U.S. power plants are already nearly halfway to that goal. Some of the other forecasts in the 645-page draft are even less ambitious. For example, coal-generated electricity is also expected to drop about 30% from 2005 levels by 2030; it’s already down 20%, and another 10% of the coal fleet is already scheduled for retirement. The plan predicts an absurdly low 21 gigawatts of new renewable-power capacity by 2030, about as much as the U.S. has added in the past two years.In general, the forecasts in the plan would, if anything, undershoot the current pace of decarbonization in electricity. And to the extent that they do have teeth, they won’t bite anytime soon. States will have until 2018 to submit compliance plans and until 2030 to complete them. So if climate hawks don’t win the next several presidential elections, the rules probably won’t matter much.

    Why Ohio’s Budget Update Will Further Crush Renewable Energy  -- Fresh off signing the nation’s first renewable energy freeze, Ohio Gov. John Kasich approved a biennial budget update that could further damage the state’s ability to harness electricity alternatives.  Amid various tax cuts, House Bill 483 contains language requiring wind turbines to be about 1,300 feet from a property line as opposed to previous regulations that required a turbine to be the same amount from a home. Environmental and clean energy advocates say Kasich’s refusal to veto that language from the bill could be the final blow that crushes the state’s renewable energy sector.  “Legislators rammed through restrictive rules without due process, and millions of dollars already invested based on the previous set of rules may now be lost without any public debate. This will force clean energy developers and manufacturers to move to neighboring states with similar resources and friendlier business climates.”  Kiernan said the passage kills about $2.5 billion in wind energy plans, including jobs, leases, payments to local governments, and factory orders. He charges that the section damaging wind energy was added to the budget bill after public debate. According to AWEA, Gabriel Alonso, CEO of EDP Renewables North America, wrote a letter to Kasich stating that the change would make wind energy “commercially unviable.”

    Germany produces half of energy with solar - "German solar demonstrated just what it is capable of in the first two weeks of June," said Tobias Rothacher, expert for renewable energies at Germany Trade & Invest, the country's economic development agency. Analysis from the Fraunhofer ISE research institute showed solar panels in Germany generated a record 24.24 GW of electricity between 1pm and 2pm on Friday, June 6th. And on Monday June 9th, which was a national holiday, solar power production peaked at 23.1 GW, which equalled 50.6 percent of total electricity demand - setting another milestone. The week was unusually hot with highs of 37C and Rothacher put the record down to the warm weather and the fact it was a public holiday. But he added: “I think we could break a new record every two to three months now. We are installing more and more PVs [solar panels].” The success of Germany’s solar production lies with encouraging people to install them on their roof tops rather than building huge solar farms. Rothacher said 90 percent of solar panels in Germany were on individuals’ roofs. He added that solar power production had increased by 34 percent in the first five months of the year compared to last year thanks to the better weather.

    Fukushima’s Ongoing Fallout -- US papers don’t often report on the radiation disaster continuing at Fukushima-Daiichi in Northeast Japan.But June 17 the New York Times noted: “Inside the complex, there are three wrecked reactor cores, twisted masses of hundreds of tons of highly radioactive uranium, plutonium, cesium and strontium. After the meltdown[s], which followed a tsunami and earthquake in 2011, most of the material in the reactors re-solidified, in difficult shapes and in confined spaces, wrapped around and through the structural parts of the reactors and the buildings.  Or at least, that is what the engineers think. Nobody really knows, because nobody has yet examined many of the most important parts of the wreckage. Though three and a half years have passed, it is still too dangerous to climb inside for a look, and sending in a camera would risk more leaks.”The Great Eastern Japan Earthquake and tsunami caused a Station Black Out at Fukushima ¾ the total loss of power used to run cooling mechanisms ¾ and the consequent melting of fuel rods dispersed massive amounts of radiation to the air and to the Pacific. The Tokyo Electric Power Co (Tepco), owners of the Fukushima wreckage, has said it would take 40 years to clean up the disaster. Tepco’s number was probably pulled out of the thin air, because owners of the undamaged Kewaunee reactor in Wisconsin, which shut down last April, said decommissioning of Kewaunee would take 40 years.

    Inside the Koch Brothers' Secret Billionaire Summit - Intriguing in its ambiguity was the "Energy: Changing the Narrative" session, presumably meant to change the narrative of climate change to one of energy independence. Panelists listed include Nancy Pfotenhauer, the president of MediaSpeak Strategies and former director of the Washington office of Koch Industries; Hubbel Relat, a former associate director of the Center for Freedom and Prosperity Foundation; and Karen Steward, the Director of Research at Freedom Partners—none of whom are scientists. According to The Daily Beast, the Kochs are investing large sums in "a new energy initiative with what looks like a deregulatory, pro-consumer spin" to combat President Obama's new regulations on carbon dioxide emissions and liberal billionaire Tom Steyer's $100 million commitment to fight climate change. It is not hard to see why the Kochs, as the owners of a large carbon-based energy conglomerate with interests in oil, natural gas and coal, are some of the most vocal climate deniers. In 2013, Forbes listed Koch Industries as the second largest privately held company in the country.

    EPA Administrator Declares War on Coal on ‘Real Time With Bill Maher’ - video - Those who appear on HBO never need to mince words, especially not on Real Time with Bill Maher. U.S. Environmental Protection Agency Administrator Gina McCarthy refused to tiptoe in describing what her announcement of the president’s emissions proposal and goals really meant. Maher asked McCarthy if the U.S. was truly entering a war on coal, as some politicians, media personalities and energy executives have charged. Judging by her response, they were right. “[The] EPA is all about fighting against pollution and fighting for public health,” she said. “That’s exactly what this is.” Environmental advocates should be mindful that McCarthy made this statement on the same day that the Obama administration announced its first step in selling offshore oil and gas leases that would allow companies to explore the nation’s waters for energy sources. That announcement signaled that the “all-of-the-above” stance on energy remains alive, along with the downsides of dirty oil and gas.

    What Green Revolution? Coal Use Highest In 44 Years  -- U.S. President Barack Obama may be engaging in a “war on coal” with carbon regulations intended to shrink coal’s share of energy production, but worldwide, coal is in its strongest position in decades. In 2013, enough coal was burned to meet 30.1 percent of the world’s energy demands -- its highest share since 1970, according to new data from BP’s Statistical Review of World Energy.  The findings are striking because of trends that appear to be pushing coal to the sidelines: An abundance of natural gas in the United States has utilities switching away from coal; Europe’s efforts to reduce greenhouse gas emissions have led to a high penetration of renewables in electricity markets; and China leads the world in annual installations of solar and wind. But despite those headlines, coal still dominates. In 2013, coal consumption increased by 3 percent, making it the fastest growing fossil fuel. A large reason for its success is its low cost – coal markets have experienced several years of declines in prices. Also, coal is relatively abundant and found around the world.  And despite the inroads made by natural gas and renewables, coal demand continues to climb in China, India and other fast growing developing countries. Coal has also seen a bit of resurgence in the U.S. and Europe, although its duration is likely to be brief.  But the data shows how tough it will be to replace coal. All the efforts at reducing pollution and finding cleaner alternatives could be overwhelmed by the inexorable growth of the developing world.  For now, coal remains behind oil in terms of its share of global energy demand, capturing 30.1 percent compared to oil’s 32.9 percent. But that could change. In a December 2012 report, the International Energy Agency predicted that by 2017, coal would become the world’s top source of energy. Between 2012 and 2017, annual global coal consumption is expected to jump by 1.2 billion tons, which is equivalent of adding the coal consumption of Russia and the U.S. combined.

    Oil and coal must be phased out entirely by 2050 - If we really want to maintain a livable climate, and prevent global temperatures from rising more than 2˚ Celsius, then no nation, anywhere, can burn any oil, gas, or coal at all after 2050, according to a striking new analysis of the latest climate science. “The world must start preparing for a rapid decarbonization of the energy and industry sectors within the next decade… and get to zero emissions by 2050,” Bill Hare, a climate scientist at Climate Analytics, told me in an interview from Bonn, Germany, where the latest round of international climate negations are underway. What Hare is saying is that, in the near future, every country—and every economy—will no longer be able to rely on burning fossil fuels for energy and transport. The Obama administration’s “Clean Power Plan” to cut CO2 emissions from power plants, then, is only a baby step towards the full breakup we desperately need. “The Obama plan sends a strong positive signal but the US will have to do far more,” Hare said Radical as all this seems, decarbonization is actually entirely doable, as detailed in this state-of-the art analysis that combines the work of Germany’s Climate Analytics, Dutch energy experts Ecofys and the Potsdam Institute for Climate Impact Research in Germany. Each of these organizations regularly conduct independent, science-based assessments that track the emission commitments and actions of various countries and publish them as “The Climate Action Tracker”. The results are taken very seriously by many countries, which rely on them to calibrate their emission rates.

    EPA’s Methane Greenwash -- The EPA could regulate methane as a greenhouse gas – if it wanted to. It regulates CO 2 as a greenhouse gas and that regulatory authority has been upheld by the US Supreme Court. (Scalia dissented on behalf of the frackers and Clarence “I concur” Thomas went “ugh”)   The frackers say that methane emissions is not a problem. The new head of the Dept. of Energy, Ernest Moniz, aka “Easy Money” got his job by proving gas wells don’t leak. If so, they shouldn’t have a problem with some regulations. Right ? If the EPA does not regulate methane emissions, we will all get cooked by the fracker’s “best practices”  Here is the NRDC’s and Sierra Club’s take on why the EPA should regulate methane as a potent greenhouse gas. Conspicuous in their absence from the report: The Environmental Defense Frauds. Imagine that.  Full report here. “Attached are comments that we submitted to EPA yesterday along with our colleagues at CATF, Sierra Club and Earthworks, regarding EPA’s technical white papers looking at methane and VOC emissions in the oil and gas sector. The thrust of the comments is that the white papers clearly support direct regulation of methane under Section 111 of the Clean Air Act based on the amount of methane pollution and the reasonable cost opportunities for abatement, and that there are good reasons to believe that the need is even more compelling than presented in the (EPA) papers.  While the loads of technical work may be evident on the face of the comments, what may be less obvious is the coming together of our groups to submit a single set of joint comments, which was a significant feat in itself. Big thanks to our team, in particular Briana (who stayed up late to help see these across the line) and Kate S. (who provided valuable help on framing while covering two big filings of her own), as well as Vignesh and Doniger.

    Princeton Study: Up to 900,000 Abandoned Oil and Gas Wells Pollute Pennsylvania’s Air -- Pennsylvania already has a fracking problem groups struggle to inspire politicians to address. Now, a Princeton University study shows that hundreds of thousands of abandoned oil wells are adding to the state’s pollution. CO2, Methane, and Brine Leakage through Subsurface Pathways: Exploring Modeling, Measurement and Policy Options is a first-of-its-kind study from Mary Klang that describes how abandoned oil wells serve as leakage pathways for carbon dioxide, methane, brine and more. Based on records, Kang estimates that between 280,000 and 970,000 abandoned wells account for 4 to 13 percent of the state’s methane emissions. Three of the 19 wells measured by the team are considered high emitters. Leakage was found in both plugged and unplugged wells.“Existing well abandonment regulations in Pennsylvania do not appear to be effective in controlling methane emissions from AOG [abandoned oil and gas] wells,”

    Up To A Million Abandoned Wells In Pennsylvania Spew Heat-Trapping Methane -- Another week, another bombshell study supporting the conclusion that natural gas has no net climate benefit in any timescale that matters to humanity.  This time it’s a Princeton thesis, which finds “Methane emissions from abandoned oil and gas [AOG] wells appear to be a significant source of methane emissions to the atmosphere.” Natural gas is mostly methane, (CH4), a super-potent greenhouse gas, which traps 86 times as much heat as CO2 over a 20-year period. So even small leaks in the natural gas production and delivery system can have a large climate impact — enough to gut the entire benefit of switching from coal-fired power to gas. Study after study, however, finds that the leaks are anything but small. The research involved “first-of-a-kind direct measurements of methane fluxes” from 19 AOG wells in Pennsylvania. Doctoral candidate Mary Kang found methane leaks in every single one of the wells — even the ones that were supposedly plugged — and 3 of them were “super-emitters.”  Why do leaky abandoned wells matter? Because there are so damn many of them:  "With currently available data, we estimate that there are between 280,000 and 970,000 AOG wells in Pennsylvania, which translates to 4 to 13% of total estimated state-wide anthropogenic methane emissions in Pennsylvania.”  And there are hundreds of thousands if not millions more around the country.

    Fracked Gas to Surpass Coal In Global Warming By 2020 -  A Princeton University study has found that leaks from abandoned oil and gas wellbores pose not only a risk to groundwater, but represent a growing threat to the climate. Between 200,000 and 970,000 abandoned wells in the state of Pennsylvania likely account for four to seven per cent of estimated man-made methane emissions in that jurisdiction, a source previously not accounted for, the study says.  Pennsylvania, much like Alberta in Canada, is the oldest oil and gas producer in the United States and the scene of intense environmental controversy due to the impact of hydraulic fracturing on its well-punctured landscape. By 2012, Saskatchewan, Canada’s second-highest oil producer, had planted more than 87,000 oil and gas wells on the landscape. About 58,000 remain active, but 24,000 wells weren’t pumping hydrocarbons. Of the 24,000 non-producing wells, 9,700 have been dead for five or more years. According to a recent University of Waterloo study, about 20 per cent of the province’s oil and gas wells, active and abandoned, are leaking methane into soils, groundwater or the atmosphere. But no one knows in what amounts. The problem is particularly acute in the Lloydminster region. The province’s auditor general reported in 2012 that “environmental cleanup costs of existing oil and gas wells and their associated facilities” total nearly $4 billion.

    Fracking Boom Threatens U.S. Water Supplies - Since the onset of the fracking boom almost a decade ago, every state in the US has been examining its geological resources in the hope of finding oil or gas it can access through this extraction method. Almost half the states are now producing at least some shale gas, with a few—Texas, Pennsylvania, California, Colorado, North Dakota—sitting on massive deposits. Nearly half a million wells in the US were producing shale gas in 2012. But while many countries now seek to bolster their economies by following the American lead in exploiting this controversial new source of fossil fuels, campaigners in the US are warning of serious collateral damage to the environment: the depletion and contamination of vital water supplies. The process of fracking, short for “hydraulic fracturing”, involves injecting water, sand and chemicals down vertical wells and along horizontal shafts—which can be several miles long—to open up small pores in the rock. This releases the methane for capture. Fracking a well just once uses upwards of five million gallons of water, and each well can be fracked 18 times or more. Texas alone used an estimated 25 billion gallons of water for fracking in 2012, according to a recent report by Ceres, a not-for-profit group advising investors on climate change. Where surface water is lacking, as in Texas, underground aquifers are being emptied at record rates. And while fracking’s water use still trails behind personal and agricultural uses, demand is accelerating even while much of the US is suffering extreme drought, which is probably caused or worsened by climate change exacerbated, ironically, by burning fossil fuels. There is no overarching policy regulating how the industry uses water. In the Energy Policy Act of 2005, a provision known as the “Halliburton loophole” exempts oil and gas operations from almost all federal air and water regulations, leaving protection of these basic life necessities to the states.

    Records show inspection lapse in oil and gas wells -— Federal officials in charge of overseeing the drilling of new oil wells on public land in California let three years pass without inspecting some high-priority sites, according to public records. The U.S. Bureau of Land Management records say 31 of 99 high-priority wells drilled from fiscal year 2009 to 2012 in the state's oil-rich Central Valley were not inspected during that period, the most recently available records provided by the bureau. Each of the uninspected wells is located in Kern County. A BLM official in Sacramento disputes the number of uninspected wells, saying that bookkeeping errors have misrepresented the problem. "The BLM takes its responsibilities seriously and is continuing to improve our internal recording processes and our ability to inspect all high priority drilling operations to ensure they are done safely and responsibly," said spokeswoman Dana Wilson in an email to The Associated Press.Wilson had previously said tight budgets prevented her agency from being more thorough, noting that officials can't charge industry fees to perform inspections. Nationally, the BLM stands by the data provided to the AP that showed a snapshot of three years' worth of inspections. The agency oversees about 100,000 oil and gas wells on public lands, about 3,500 of which received the high-priority designation because they're located near national forests, fragile watersheds or are otherwise identified as higher pollution risks. About 40 percent of high-priority wells hadn't been inspected, showing a department struggling to keep pace with America's drilling boom over the past decade. The records indicate 13 states, including California, have high-priority wells that were uninspected.

    Four in 10 higher-risk oil and gas wells in U.S. aren’t inspected by feds - — Four in 10 new oil and gas wells near national forests and fragile watersheds or otherwise identified as higher pollution risks escape federal inspection, unchecked by an agency struggling to keep pace with the U.S. drilling boom, according to an Associated Press review that shows wide state-to-state disparities in safety checks. Roughly half or more of the wells on federal and Indian lands were not checked in Colorado, Utah and Wyoming, despite potential harm that has led to efforts in some communities to ban new drilling. In New Castle, a tiny community in the Colorado River valley, homeowners expressed chagrin at the large number of uninspected wells, many on federal land, that dot the steep hillsides and rocky landscape. Like elsewhere in the West, water is a precious commodity in this Colorado town, and some residents worry about the potential health hazards of any leaks from wells and drilling. “Nobody wants to live by an oil rig,” Joann Jaramillo, 54, said.  Even if the wells were inspected, she questioned whether that would ensure their safety. She said many view the oil and gas industry as self-policing and non-transparent. “Who are they going to report to?” she asked. Government data obtained by the AP points to the Bureau of Land Management (BLM) as so overwhelmed by a boom in the drilling technique known as hydraulic fracturing, or fracking, that it has been unable to keep up with inspections of some of the highest-priority wells. The agency designates wells as high priority based on a greater need to protect against possible water contamination and other environmental and safety issues. Factors include whether the well is near a high-pressure formation and whether the drill operator has a clear track record of service.

    Montana oil and gas wells go without inspection -  More than two dozen newly drilled oil and gas wells with a high pollution risk went uninspected on federal and tribal lands in Montana during a recent three-year period, according to an Associated Press review. U.S. Bureau of Land Management data examined by The Associated Press show that 25 out of 144 wells in high-priority areas were not inspected between fiscal year 2009 and 2012. That's equivalent to about 1 in 6 wells that weren't assessed. Nationwide, about 40 percent of wells went uninspected during that time period, a finding that underscores the government's struggle to keep pace with America's drilling boom. The BLM designates high-priority wells based on a greater need to protect against possible water contamination and other environmental safety issues. Factors also include whether a well is located near a high-pressure formation, or whether the drill operator lacks a clear track record. Eleven of the uninspected, high-priority wells in Montana were on tribal land and 14 were on federal land. BLM officials acknowledge they've had trouble keeping up with inspections and promised to make changes including prioritizing which wells pose the most risk of causing harm if something were to go wrong.

    Analysis: Ohio gas, oil wells more at risk for pollution - The Medina County Gazette: Ohio is among 19 states with an oil or gas well recently drilled on public lands that was identified by the federal government as having a higher risk of pollution.Ohio has one higher risk gas well, in Bazetta Township in Trumbull County. It was inspected as required by the U.S. Bureau of Land Management. That’s according to data obtained by The Associated Press of drilling inspections for the fiscal years 2009 to 2012. Northeast Ohio’s Trumbull County is home to the Shenango Wildlife Area. In all, the data show that four in 10 new oil and gas wells near national forests and fragile watersheds or otherwise with higher pollution risks escape federal inspection. The Ohio well has been in production since 2010, and the owner is M&M Royalty Ltd. Four in 10 new oil and gas wells near national forests and fragile watersheds or otherwise identified as higher pollution risks escape federal inspection, unchecked by an agency struggling to keep pace with America’s drilling boom, according to the Associated Press review, which shows wide state-by-state disparities in safety checks.

    More Crashes and Arrests Report Examines Social Costs of Fracking in Ohio - The rapid growth of the oil and gas industry is changing the faces of many of Ohio's small towns. A new analysis finds a correlation between certain public safety standards and permits to frack for natural gas in counties over the Utica shale formation.The report from FracTracker looked at road safety and crime rates in the 14 counties with the most Utica permits issued between 2009 and 2014. According to report author Ted Auch, they found the rates changed faster in those counties than in the rest of the state. "Crashes and commercial vehicle enforcement are increasing by about 6.9% and 8.9% per year across these counties," Auch said. "At the state level they're increasing by 6 and 2.8% respectively." The report also found some counties experiencing significantly higher crime rates, including more felony charges, as well as resisting-arrest, weapons and suspended-license violations. The report used data provided by the Ohio State Highway Patrol, with 2009 as a starting point, since the first Utica permit was issued in September of 2010.  Auch said increases in drug violations are likely a byproduct of changes in culture. But other arrest categories and crashes are directly related to the industry and its transient workforce.

    New Ohio Drilling Policy May Be Good for Oil & Gas, Insurance Industries - Insurance Journal - Ohio in mid-April 2014 enacted stricter regulations for oil and gas drilling near faults or areas of past seismic activity, a move that some, including insurers, may view as a step in the right direction. The Ohio Department of Natural Resources said the new regulations, which require the installation of seismic monitors for drilling that occurs within three miles of a known fault or area of seismic activity greater than a 2.0 magnitude, apply to new drilling permits issued by ODNR.Ohio regulators and those in many other states in which previously inaccessible oil and gas reservoirs are being tapped as a result of technological advancements in the technique of hydraulic fracturing, or fracking, are increasingly concerned about the connection between drilling activity and seismic events. A 600 percent jump in earthquakes in the central United States in this century has governmental entities taking notice, said Swiss Re Vice President Michael Diggin. “The U.S. Geological Survey is studying whether those quakes are caused by the sudden, high pressure injection of millions of gallons of wastewater miles below the surface,” Diggin said during an Advisen/ Swiss Re-sponsored webinar on hydraulic fracturing. The new regulations in Ohio, which has seen an uptick in drilling activity in the Marcellus and Utica shale regions, make sense for regulators, oil and gas operators, and insurers, according to Bolz, a geologist who worked in the oil and gas industry before he entered the insurance business.

    Newly Discovered Documents Reveal Kasich Misled Ohioans on Fracking Public Lands - Newly discovered documents released today by Food & Water Watch reveal that the Kasich Administration continued to refine plans that would promote fracking on state lands for months after the Ohio Department of Natural Resources (ODNR) claims the plans were abandoned. The latest revelations in the “Frackgate” scandal raise serious questions about whether the fracking promotion plan was actually implemented.“Simply put, the Kasich Administration has misled the public about how long and how deeply it planned to promote fracking on state lands,” said Alison Auciello, Ohio organizer for Food & Water Watch and an Ohio native.“Governor Kasich must immediately come clean on the true historical timeline and current status of his administration’s discussions about fracking on state lands. Additionally, the attorney general’s office must thoroughly investigate what appear to be glaring inconsistencies and conflicts of interest in this administration’s dealings on fracking in Ohio.”  As reported on EcoWatch, in February the Ohio Chapter of the Sierra Club and Progress Ohio revealed a draft of the communications plan from Aug. 20, 2012, as well as an email including top officials in the Kasich Administration that had been circulated in an effort to set up a meeting to discuss the strategy. Since the release of the documents the Kasich Administration and the ODNR have been publicly denying that the plan was ever implemented.

    Group wants details of Kasich plan to market state lands for fracking - Aurora Advocate, Portage County, OH: An advocacy group continues to push for more details of a plan to allow horizontal drilling for oil and gas on state-owned lands that was developed by Gov. John Kasich’s administration and the Ohio Department of Natural Resources. The plan ultimately was shelved, and the governor says he no longer supports the idea. But Alison Auciello, Ohio Organizer for Food & Water Watch, said June 19 that emails and other documents show the administration pursued the plan longer than it initially indicated. And she questions whether parts of the strategy were implemented. “We feel that it’s pretty clear that the administration and the Department of Natural Resources has misled us about how far and about how deeply it planned to go on with this communications plan to promote fracking,” Auciello said. “It shows a lot of inconsistencies in what the administration is saying about the plan and some conflicts of interest. So we’re asking for the attorney general to conduct a full investigation into how far this plan actually went.” The ODNR plan came to light earlier this year as a result of a public records request from the liberal advocacy group ProgressOhio, environmentalists and newspaper reporters.A section of the plan titled, “Communication Problem to Solve,” states that “an initiative to proactively open state park and forest land to horizontal drilling/hydraulic fracturing will be met with zealous resistance by environmental activist opponents, who are skilled propagandists.”

    Anti-fracking group plans lawsuit after well appeal gets rejected by state - A local anti-fracking group is vowing to continue its struggle against a Torch area injection well in the civil court system after an appeal was denied Thursday by the state Oil and Gas Commission.The Athens County Fracking Action Network filed an appeal of what's known as the K&H2 well in eastern Athens County earlier this year, with the Ohio Department of Natural Resources disputing the standing of the group to make such an appeal. The well in question is one of two injection wells owned by K&H Partners of West Virginia at the site. On Thursday, the Oil and Gas Commission granted the ODNR's motion to dismiss the appeal, siding with the ODNR and K&H in arguing that the commission did not have the authority to consider the appeal. The ODNR has been designated by state law as Ohio's sole oil and gas regulatory authority.

    Watch Late Farmer Terry Greenwood Tell Josh Fox About the Fracking Site That Killed His Cattle --When filmmaker Josh Fox visited Pennsylvania farmer Terry Greenwood during what would be his last days on Earth, Greenwood’s only request was for the Gasland director to “tell my story.” “So what does that mean? Does it mean tell the story of how gas companies barged onto his land,” Fox asked in his a tribute to Greenwood for the Gasland blog. “Does it mean speak about the water contamination they suffered, the insult added to injury when [the Pennsylvania Department of Environmental Protection] ignored his complaints, the death of the cattle, his own death to cancer?” Fox decided that was a big part of the story, along with exposing the generosity, smile and knack for truth-telling that Greenwood possessed. That’s why Fox decided to upload a previously unreleased video interview on Greenwood’s property from four or five years ago. In it, Greenwood describes the lies and bullying he received from the owners of a nearby fracking site and the contamination his animals received as a result.

    Former Pennsylvania Health Employees Say Bosses Enforced Silence on Shale Drilling - A shocking investigative report revealed Thursday that Pennsylvania state health employees may have compounded the danger of Marcellus Shale drilling by systematically refusing to respond to residents’ concerns about it. A former Department of Health employee said she was told not to return phone calls from residents who expressed concerns about natural gas drilling, NPR reported in its State Impact series. “We were absolutely not allowed to talk to them,” said Tammi Stuck, who worked as a Fayette County community health nurse for nearly four decades. Another department retiree, Marshall P. Deasy III, confirmed Stuck’s accusation. He said that drilling was the only public health issue he remembers officials enforcing silence on during his 20 years with the department. Stuck said she was given a list three years ago of words that, if uttered by residents, should be grounds for ending a conversation or handing it off to a supervisor. “There was a list of buzzwords we had gotten,” Stuck said. “There were some obvious ones like fracking, gas, soil contamination. There were probably 15 to 20 words and short phrases that were on this list.  "If anybody from the public called in and that was part of the conversation, we were not allowed to talk to them.”

    Regulators Gagged in Fracksylvania  - Two retirees from the Pennsylvania Department of Health say its employees were silenced on the issue of Marcellus Shale drilling.  One veteran employee says she was instructed not to return phone calls from residents who expressed health concerns about natural gas development. “We were absolutely not allowed to talk to them,” said Tammi Stuck, who worked as a community health nurse in Fayette County for nearly 36 years.Another retired employee, Marshall P. Deasy III, confirmed that. Deasy, a former program specialist with the Bureau of Epidemiology, said the department also began requiring field staff to get permission to attend any meetings outside the department. This happened, he said, after an agency consultant made comments about drilling at a community meeting.  In the more than 20 years he worked for the department, Deasy said, “community health wasn’t told to be silent on any other topic that I can think of.”Public health advocates have expressed concern that Pennsylvania has not funded research to examine the potential health impacts of the shale boom.  Doctors have said that some people who live near natural gas development sites – including well pads and compressor stations – have suffered from skin rashes, nausea, nosebleeds and other ailments. Some residents believe their ill health is linked to drilling, but doctors say they simply don’t have the data or research – from the state or other sources – to confirm that.

    Pennsylvania Instructed Its Employees To Ignore Residents Sickened By Drilling -- The Pennsylvania Department of Health instructed its employees never to talk to residents who complained of negative health effects from fracking, StateImpact Pennsylvania reported Thursday. Two retired employees of the department detailed restrictions on attending meetings, lists of topics they could not discuss, and a general departmental hostility to the idea of health problems linked to shale gas drilling. The state’s governor, Tom Corbett, declined to comment for StateImpact Pennsylvania’s story. Pennsylvania has had more than 6,000 hydraulic fracturing wells drilled within the last six years, and zero state studies on their health impacts. In Pennsylvania, and near fracking operations across the country, people have won settlements from fossil fuel companies after being sickened. In many cases the drilling company imposes a gag order to prevent sickened people from spreading the word about what caused their illness and building the case that fracking has negative health effects.  In 2011 Pennsylvania’s Marcellus Shale Advisory Commission recommended a registry to collect health data from people living near fracking operations. Three years later, it still doesn’t exist. Across the country in Colorado, legislators tried to commission a study on the health effects of living near drilling, but fossil fuel advocates ensured its demise. Doctors want more data on health effects of fracking, but the interests of the drillers usually win out.

    Frick & Frack Caught Dumping Frack Filth --The name of the waste hauler is “Frick & Frack Transport” – I am not making this up.  Note that the authorities correctly identify why this illegal dumping happens so often – the waste haulers are paid by the load, not by the hour, so they have an incentive to simply make the flowback disappear, avoid the tipping fees and go get another load. Repeat. And that is exactly what they do. The trucker, Skyler Fowler Harris, 34, has been charged with “Improper Disposal of Waste Material,” a Class C Felony.  Throntveit said Harris was driving for Frick & Frack Transport, LLC, a Medicine Lake, Mont., trucking company, subcontracted to BOH Trucking, a North Dakota firm, to haul oilfield wastes. A local resident reported the incident. The individual drove by the truck, stuck in mud by the slough, said Throntveit, and thought something “just didn’t look right.” The  individual   noticed a hose coming off the tanker and going into the ditch, which connected to the slough. When Deputy Zach Schroeder arrived on the scene, he witnessed the hose and found Harris with the truck. The amount of frackwater dumped is unknown at this point. Schroeder alleges Harris falsified his log book. His truck  ticket said he was hauling 60 barrels of frackwater. The digital meter on the truck said 72 barrels. This would amount to between 2,500 and more than 3,000 gallons of frackwater potentially impacting the slough.The cleanup is ongoing, Schroeder said. Harris will be charged $200 to $300 for county road maintenance where he got stuck, plus the cost of the clean-up of the spill, Schroeder said.

    Texas gas town ready to revolt against fracking (AP) — Natural gas money has been good to this Texas city: It has new parks, a new golf course and miles of grassy soccer fields. The business district is getting a makeover, and the airport is bustling, too. For more than a decade, Denton has drawn its lifeblood from the huge gas reserves that lie beneath its streets. The gas fields have produced a billion dollars in mineral wealth and pumped more than $30 million into city bank accounts. But this former farming center north of Dallas is considering a revolt. Unlike other communities that have embraced the lucrative drilling boom made possible by hydraulic fracturing, leaders here have temporarily halted all fracking as they consider an ordinance that could make theirs the first city in the state to permanently ban the practice. "I think the people of Denton really want to keep the livability of the town," said Taylor Schrang, a 28-year-old personal trainer. "And fracking is pretty obtrusive." If the city council rejects the ban, it will go to voters in November.

    Wyoming Residents Frustrated With State’s Fracking-Funded Water Contamination Investigation - Wyoming environmental officials continue investigating water wells and whether fracking is the source of water contamination in the tiny town of Pavillion, but some groups in the area are concerned about the credibility of that investigation. That’s because it’s being funded by Encana, the oil and gas firm those groups believe is responsible for adding methane, hydrocarbons, lead and copper into the local water supply. The U.S. Environmental Protection Agency handed the investigation over to the state a year ago, and things have been downhill ever since, according to groups like Earthworks and Pavillion Area Concerned Citizens. State regulators held a meeting late last week that was meant to provide an update to residents. Instead, it reinforced their lack of confidence in the process.  Encana provided a $1.5-million grant to the Wyoming Natural Resource Foundation to be used for the investigation, Jeff Wojahn, president of the company said a year ago. Now, the state says it will allow Encana to provide feedback on data regarding wellbore integrity, surface pits, domestic water wells and a project to install cisterns project before the public views that data, reported.

    Earthquake Insurance Becomes Boom Industry in Oklahoma -- Just a few years ago earthquake insurance wasn’t something many thought much about in Oklahoma. That’s changed with the outbreak of tremors that has rattled the state in recent years, which many blame on increased oil and gas drilling activity.  “Every time there’s a decent size earthquake there’s a spike in interest,” said Matthew Ramirez, an agent for Farmer’s Insurance in Edmond, which has been affected by many of the recent quakes. So far in 2014, Oklahoma has seen 200 earthquakes of magnitude 3.0 or stronger.Standard homeowner policies generally don’t cover damage caused directly by earthquakes (to a building’s foundation, for instance), though they usually do cover the damage that earthquakes can cause, such as burst pipes or fire. Before Nov. 2011 Ramirez insured “three or four homes” for earthquake coverage, “including mine,” he said. On Nov. 6, that all changed. A magnitude 5.6 earthquake—the largest ever recorded in Oklahoma—destroyed 14 homes and injured two people. “In the days that followed, we were flooded with earthquake calls, about 20 per day for 2 weeks,”   Today, he says, more than 40% of the homes he insures are covered for earthquake damage. Statewide, according to the Insurance Information Institute, the number of homes in the state with earthquake policies has more than doubled between 2009 and 2013, to 12,407. According to Amberlee Darold, a seismologist with the Oklahoma Geological Survey, it’s no longer a matter of debate that hydraulic fracturing of oil and gas wells, or “fracking,” causes earthquakes. “It’s known that fracking can cause earthquakes and has caused earthquakes,” she said. Whether or not the injection of fracking wastewater into old wells for storage leads to earthquakes is a matter still up for debate, she said, but “there’s no question with fracking.”

    Fracking Revolving Door Spins Out of Control -  The Fracking Revolving Door spins out of control – and she was responsible for “Climate Change” ?  In which fracking direction ? Warmer or cooler ? Heather Zichal, former Obama White House Deputy Assistant to the President for Energy and Climate Change, may soon walk out of the government-industry revolving door to become a member of the board of directors for fracked gas exports giant Cheniere, who nominated her to serve on the board. The announcement, made through Cheniere’s U.S. Securities and Exchange Commission Form 8-K and its Schedule 14A, comes just as amajor class-action lawsuit was filed against the board of the company by stockholders. In reaction to the lawsuit, Cheniere has delayed its annual meeting.  At that meeting, the company’s stockholders will vote on the Zichal nomination. The class-action lawsuit was filed by plaintiff and stockholder James B. Jones, who alleges the board gave stock awards to CEO Charif Souki in defiance of both a stockholders’ vote and the company’s by-laws. Souki — a central character in Gregory Zuckerman‘s book “The Frackers“ — became the highest paid CEO in the U.S. as a result of the maneuver, raking in $142 million in 2013, $133 million of which came from stock awards. Zichal was nominated to join Cheniere’s audit committee of the board, and will be paid $180,000 per year for the gig if elected.

    Govt opens Maui's dolphin area for oil drilling -  The Government has opened up more than 3000 square kilometres of a marine mammal sanctuary for oil and gas drilling, home to the critically endangered Maui's dolphin. It comes less than a week after the International Whaling Commission urged our Government to do more to save the species. The Maui's dolphin is the world's rarest. It is estimated there are only 55 left. "I think primarily once you go from exploration right through to production, you're not jeopardising the wildlife," says Minister of Energy and Resources Mr Bridges. In April, the Government signed off a block offer – the biggest area ever of sea and land for oil and gas exploration. Now official documents obtained by the Green Party reveal the Department of Conservation pointed out that this is the home of the Maui's dolphin, known as the West Coast North Island Marine Mammal Sanctuary. The area the Government has opened up for potential drilling overlaps 3000 square kilometres into the sanctuary, including large areas off the Taranaki coast.

    Buru to gas frack without EPA assessment - THE West Australian government has decided to allow Buru Energy to frack for gas in the Kimberley region without an Environmental Protection Authority (EPA) assessment. THE junior explorer plans to test tight gas flows using hydraulic fracturing stimulation at four existing wells along its Laurel Formation prospect in the second half of 2014. The EPA told the company in January that the proposal raised several environmental issues but it had decided against subjecting it to an impact assessment process. "The EPA considers that this small scale, `proof of concept' exploration drilling proposal is unlikely to have a significant effect on the environment," it said. Potential impacts such as vegetation clearing and pollution of groundwater due to well failure could be monitored and mitigated by the Department of Mines and Petroleum and the Department of Water, the EPA said.

    Public Outcry Intensifies to Stop Cove Point LNG Export Facility -- Monday marked the end of a contested 30-day public comment period on the Federal Energy Regulatory Commission’s (FERC) draft Environmental Assessment for the controversial $3.8 billion plan, proposed by Virginia-based Dominion Resources, to export liquefied natural gas (LNG) from Cove Point, MD. Dominion’s plan is to convert an existing import facility into an export facility and to pipe fracked gas from the Marcellus shale to southern Maryland, liquefy it and export it to be burned in Japan and India. FERC’s environmental assessment has been widely criticized for failing to address the project’s role in speeding fracking across Appalachia, worsening the climate crisis and threatening the safety of nearby residents in Calvert County with potential explosion and fire catastrophes. The facility, located next to a residential community, is only three miles from a nuclear power plant and 50 miles from Washington, D.C. More than 150,000 comments flooded FERC, arguing that it is clear that without analyzing the foreseeable cumulative impacts this project would have on the environment throughout the 64,000 square mile Chesapeake Bay watershed, FERC’s determination of a “Finding of No Significant Impact” is arbitrary and capricious and violates the National Environmental Policy Act.

    LNG: The Long, Strategic Play for Europe: Interview with Robert Bensh -- Liquefied natural gas (LNG) to Europe isn’t a get-rich-quick scenario for the impatient investor: It’s a long, strategic play for the sophisticated investor who can handle no small amount of politics and geopolitics along the way. When it comes to Europe, Russia’s strategy to divide and conquer has worked so far, but Gazprom is a fragile giant that will eventually feel the pressure of LNG.  Robert Bensh is an LNG and energy security expert who has over 13 years of experience with leading oil and gas companies in Ukraine. He has been involved in various roles in finance, capital markets, mergers and acquisitions and government for the past 25 years. Mr. Bensh is the Managing Director and partner with Pelicourt LLC, a private equity firm focused on energy and natural resources in Ukraine.   In an exclusive interview with, Bensh tells us: 

    •    Why the smart LNG play is a long-term one
    •    How LNG fits into the European energy picture
    •    Why LNG will eventually pressure Russia in Europe
    •    Why Gazprom is but a fragile giant
    •    How Russia combines gas and political influence in Eastern Europe
    •    How the European Union is easy to divide and conquer
    •    Why the Ukraine crisis has brought attention to the South Stream pipeline
    •    Why Bulgaria is the new front line
    •    How Lithuania succeeded in negotiating down Gazprom
    •    What Moscow’s Crimea annexation really achieved
    •    Why it’s game over for Gazprom prices when Turkey steps in

    NATO claims Moscow funding anti-fracking groups - Russian intelligence agencies are covertly funding and working with European environmental groups to campaign against fracking and maintain EU dependence on Russian gas, the head of Nato has claimed. Answering questions after a speech in London, Anders Fogh Rasmussen, Nato secretary-general, said improving European energy security was of the “utmost importance” and accused Moscow of “blackmail” in its dealings with Europe. “I have met allies who can report that Russia, as part of their sophisticated information and disinformation operations, engaged actively with so-called non-governmental organisations – environmental organisations working against shale gas – to maintain European dependence on imported Russian gas,” Mr Rasmussen, former Danish prime minister, told an audience at Chatham House, the international affairs think-tank. His remarks followed a wide-ranging speech on Nato’s mission and purpose after Russia’s takeover of the Crimea earlier this year, and an explosion of jihadist violence in the Middle East. Mr Rasmussen did not detail the nature of his suspicions about Russian involvement with environmental groups. The 28-nation EU bloc depends on Russia for about a third of its oil and gas needs but has significant shale gas reserves that could permanently curb its high dependence on imports.  A Nato official, speaking on condition of anonymity, told the Financial Times that the alliance believed Russia was engaged in “a campaign of disinformation on many issues, including energy”.

    The Real Reason Shell Halted Its Ukrainian Shale Operations: Royal Dutch Shell has blamed air strikes by the government in Kiev against its own citizens in southern Ukraine as the reason it decided to declare a halt to its shale oil projects in the troubled region. In reality, the truth may be closer to the fact that company is disappointed with the economic viability of what it once thought was a large shale deposit and is looking for a way out. After a series of dramatic statements and the signing of a $410-million letter of intent, a veil of uncertainty is being drawn around the myth of Ukrainian shale. Royal Dutch Shell CFO Simon Henry said in an interview with Bloomberg TV that the decision was prompted by the need to protect the company’s business interests in Ukraine.  By walking away, Shell will be able to “freeze” its involvement in the failed initiative while simultaneously minimizing the damage to its reputation. In accordance with the contract, Shell’s Ukrainian counterparts will, in the end, have to wait another 50 years to get their hands on that long-awaited “freedom gas” Shell will also be able to demonstrate its concern for its employees who work in the region where a brutal civil war is on the verge of breaking out.

    7,500 gallons of oil spills in Colorado river - A storage tank damaged by floodwaters dumped 7,500 gallons of crude oil into the Poudre River near Windsor in northern Colorado, slickening vegetation a quarter-mile downstream, but apparently not affecting any drinking water, state officials said Friday. The bank where the storage tank sat next to the river was undercut by the high spring river flows, causing it to drop and break a valve, Todd Hartman of the Colorado Department of Natural Resources said in a statement. The tank released all of its contents, which was 178 barrels of crude oil, or roughly 7,500 gallons, Hartman said. A second tank nearby appeared to be unaffected. “At this time we know of no drinking water intakes affected by this spill. The release is not ongoing,” he said. The tank’s operator, Noble Energy Inc., discovered the spill Friday and reported it to state officials. Colorado Oil and Gas Conservation Commission officials and state Department of Public Health and Environment water quality staff responded, along with a Noble Energy response team, Hartman said.

    Louisiana Levee Board’s Suit Against 97 Oil and Gas Companies Survives Multiple Attempts to Kill It --A New Orleans, LA, area regional levee board voted yesterday to continue pursing an environmental damages lawsuit against 97 (yes, 97!) oil, gas and pipeline companies. The vote—which came almost two weeks after Gov. Bobby Jindal (R-LA) signed off on a bill that strips the levee board of the power to file such lawsuits—was a boon to environmentalists and a bust for opponents, who had hoped the board would dismiss the lawsuit and end its contentious yearlong battle with the Louisiana governor. The drama began in July 2013 with a creatively crafted lawsuit filed by the Southeast Louisiana Flood Protection Authority-East Board (SLFPA-E). The suit asserts that 10,000 miles of oil and gas canals and pipelines have been cut through Louisiana coastal lands, and draws attention to the essential role these coastal regions play as a frontline defense for New Orleans communities against hurricane-induced flooding. “The oil and gas industry is responsible, conservatively, for 600 miles of coastal land loss,” said Steve Murchie, campaign director with the Gulf Restoration Network, an environmental group committed to protecting and restoring the natural resources of the Gulf Region. “We have a $50 billion coastal restoration project that will probably cost closer to $100 billion to get done.”

    Meeting Logs: Obama White House Quietly Coddling Big Oil on “Bomb Trains” Regulations - Steve Horn - The first on-the-books meeting OIRA held in the second quarter of 2014 about the newly-proposed oil-by-rail safety regulations written by the U.S. Department of Transportation (DOT) was with lobbyists, economists and attorneys representing both the American Petroleum Institute (API) and Chevron on May 19. Attendees of that meeting included Misty McGowen, Director of Federal Relations for API and Michael Yoham, Manager Rail Transportation Services for Chevron. This API-Chevron White House visit parallels the one they made together when OIRA mulled over new rules on sulfur in gasoline. In 2012, a group led by API president Jack Gerard went to the White House to discuss this issue with another of President Obama’s closest advisers, Valerie Jarrett. This visit clearly paid dividends for the industry when the new regulations were delayed. Akin to what is currently happening with the oil-by-rail regulations regarding Bakken shale oil and the DOT-111 tank cars, it was coordinated with a big public relations push trashing the regulations as unnecessary.  History, as they say, has repeated itself in the oil-by-rail sphere. A new report touting the safety of oil obtained from hydraulic fracturing (“fracking”) in the Bakken Shale was released by industry groups the same week as the API-Chevron visit with OIRA.

    TransCanada eyes 'bridge' to Keystone XL pipeline approval - Oil producers and Keystone XL developer TransCanada Corp. are exploring the option of transporting Canadian crude oil by railcar as a temporary solution until the pipeline is approved. Still, crude-by-rail isn't a substitute for Keystone XL, Russ Girling, CEO of TransCanada, told The Hill on Thursday.  "Our customers asked whether we would explore with them potentially building rail-car loading facilities at a place called Hardesty, which is the initiation point of the current Keystone XL project, and we've said we will do that, and we'll do it expeditiously," Girling said. Producers like ExxonMobil, Chevron and ConocoPhillips want a temporary way to transport the oil while waiting for the U.S. to act on Keystone XL. "We don't know how long this is going to take, and they want a solution that bridges them between now and whenever we get approval to build the pipeline," Girling said. Despite opposition to Keystone and pressure on President Obama from his environmental base, Girling believes it will be approved, if not by Obama, then after his presidency. The reason: Demand from producers to transport their crude oil isn't going away.

    3 New Reasons Keystone XL May Finally Be Approved - President Obama has three new reasons to approve the long-delayed Keystone XL pipeline. The pipeline would bring 830,000 barrels of Canadian crude oil per day from Alberta to U.S. refineries, which would lead to economic growth and job creation in the United States. 

    • Escalating Conflict in Iraq. Though the fighting is yet to affect oil production in Southern Iraq, uncertainty over how much havoc ISIS will create is driving up futures prices. Disruption in Iraq's production would substantially affect its heavy crude oil exports, the type of oil found in Canadian tar sands. If unrest continues in the region, Canadian oil could help replace lost supply with reliable, stable production.
    • Approval of Canadian Pipeline. The Canadian federal government just approved its Northern Gateway pipeline project, which would send Canadian oil west for export to Asian markets. If the United States does not act quickly, Canadian oil will follow other paths to market. Northern Gateway, to be constructed by Enbridge, is not the preferred route, as the pipeline would transport fewer barrels of oil than Keystone XL in a less efficient way (it would cross rugged terrain and still need to be shipped to China for refining).  Still, the Canadian government’s pro-growth energy policy stands in stark contrast to that of the United States, which is characterized by inconsistencies and lack of certainty. 
    • Senate Committee Moves Bill. Led by Senator Mary Landrieu (D-LA), The Senate Committee on Energy and Natural Resources passed a bill that would bypass the State Department and approve Keystone XL. Senator Landrieu is facing a tough reelection battle and the vast majority of Louisiana residents support construction of the pipeline. Senate Majority Leader Harry Reid (D-NV) is opposed to Keystone XL, but he may decide to bring the bill to the Senate floor in an attempt to keep his majority after the midterm elections..

    Yet Another Attack on the Oil & Gas IndustryIt’s not hard to see the left’s Given all the election-year maneuvering in Washington, it's not surprising that efforts to enact a "tax extenders" measure acceptable to the House and Senate are stuck in the mud. Lawmakers can scarcely agree on the color of the sky, let alone the question of how expired tax provisions should be dealt with in the waning days of the 113th Congress. For many of the 50-plus sections of the Tax Code that are currently in limbo, gridlock may not be such a terrible thing. Favors such as those for NASCAR tracks and racehorses might best be put to rest permanently, devoting any revenue windfalls to across-the-board rate reductions (and certainly not to higher government spending). On the other hand, items such as the research and experimentation credit or enhanced small-business expensing could be workable, critical parts of a streamlined tax system that allows for more rational treatment of pro-growth investments. Consensus is a rare commodity in any discussion surrounding tax policy, but on extenders - and on other pending questions surrounding tax reform - earnest, thoughtful debate is key. That's what makes the recent grandstanding in the House Ways and Means Committee so discouraging. Not once, but three times during a markup of legislation pertaining to tax extenders, Democratic Reps. John B. Larson of Connecticut and Earl Blumenauer of Oregon offered amendments that would have levied punitive new taxes on America's major integrated oil and gas companies.

    We will never run out of oil (which is entirely beside the point) -  Harvard economist Morris Adelman, famous for saying that we will never run out of oil, died last month. What followed the announcement of his death was a predictable set of encomiums like this one from defenders of the oil industry extolling Adelman's infinite wisdom. All of this makes sense only if you keep yourself from thinking about it. But a simple illustration will show just how meaningless the notion that we will never run out of oil is. Imagine for a moment that starting tomorrow one-half of the oil that human society normally consumes each day is no longer available and that this goes on for several months. This certainly would not mean that we have run out. We'd simply be getting significantly less oil than our current global system is designed to run on. The result would surely be a global economic depression. That's how dependent we are on the current RATE of oil production. That's how important the continuous input of high-quality energy from oil is to our collective well-being. This explains the concern of those who believe a decline in the worldwide rate of oil production may be coming within the next decade. And, no one in this group has ever said that we will run out of oil. That's a canard used to confuse people about the real issue which is the RATE of production. But, that's not reflected in Adelman's often truncated observation. Furthermore, what he actually said was that oil would never run out so long as technology advanced and prices were high enough to justify its extraction. Within the very narrow confines of this rather wishy-washy and almost tautological statement Adelman is right. The key word in this statement, however, is "enough."

    Ukraine Gas Talks Break Down; Don't Worry Until September  - Ukraine gets  half of the natural gas it uses from Russia. However, it's not an evenly distributed half. Ukraine get more than half of its needs in winter, and less in Summer. Ukraine has enough gas now to last until September.  Politics being politics, resolution of the dispute could be another two months away before anyone panics. Thus, it should be no surprise that Russian Gas Payment Talks FailUkraine risks the cutoff of natural-gas supplies from Russia after overnight talks to resolve a pricing dispute between the two countries ended without a deal less than eight hours before a payment deadline. Ukraine must pay $1.95 billion to partially settle its debt to the Russian-owned natural gas exporter OAO Gazprom for past deliveries by 10 a.m. Moscow time today, said Sergei Kupriyanov, a company spokesman, by phone. He said the deadline won’t be waived. “The Russian side has stated that if there will be no upfront payment, it will start limiting gas,” said Ukraine Energy Minister Yuri Prodan.  Russian negotiators rejected a compromise proposal by the European Union, according to EU Energy Commissioner Guenther Oettinger, who has been involved in the trilateral talks since they started in May.

    Russia's Gazprom says Ukraine fails to pay debt by deadline (Reuters) - Russia's Gazprom said on Monday Ukraine had failed to pay at least part of its gas debts by a 0600 GMT deadline and would now have to pay up front for deliveries. It said in a statement that Ukraine's state-controlled Naftogaz had also failed to pay for June deliveries, suggesting supplies could now be cut. "Today, from 10:00 a.m. Moscow time, Gazprom, according to the existing contract, moved Naftogaz to prepayment for gas supplies ... Starting today, the Ukrainian company will only get the Russian gas it has paid for," it said.

    Russia Cuts off Gas Supplies to the Ukraine --Yves Smith - Although the Russian move to stop supplying gas to the Ukraine unless it pays upfront is an important, if expected, development, its immediate impact will be blunted by it taking place during the summer. From the Financial Times: Analysts said an immediate energy crisis was unlikely because both Ukraine and gas buyers in Europe have built up plentiful stocks after a mild winter. Benchmark spot gas prices in Europe, which have dropped by almost 40 per cent this year, rose just 2 per cent on Monday.Gazprom – which relies on exports to Europe for a large share of its revenues – has stressed that it will continue to deliver gas to European customers, including increasing supplies through routes that bypass Ukraine, if necessary. Although Ukraine says it has 14 million cubic meters of gas stored, apparently enough to carry the country through December, the relationship between the two sides has become so poisoned that it’s not obvious how a deal could get done before then. And why should Russia make concessions? The FT again:Those talks ended in the early hours of Monday morning with both sides intransigent.“In fact we couldn’t really discuss because Ukraine insisted only on one position,” said Alexei Miller, chief executive of Gazprom, referring to several recent rounds of negotiations aimed at resolving the deadlock. Both sides are also suing each other, with Gazprom demanding $4.5 billion it says is past due, and Ukraine’s Naftogaz countersuing for $6 billion in alleged overcharges since 2010.  More detail from OilPrice:

    Ukraine Suspects Terrorism in Pipeline Explosion - A major natural gas pipeline exploded in central Ukraine on Tuesday, a day after the Russian energy behemoth Gazprom said that it was cutting off supplies to Ukraine in a dispute over pricing, and officials immediately labeled it a possible act of sabotage.Utility officials said that natural gas deliveries were not interrupted and that supplies to Ukrainian customers and other European countries were flowing through alternative pipes.The blast occurred in a sparsely populated area of the Poltava region, which lies between Kiev, the capital, and the embattled regions of eastern Ukraine where a civil war is effectively underway between pro-Russian separatists and the Ukrainian military. Video from the scene showed a huge plume of fire shooting hundreds of feet into the sky. The explosion destroyed a section of the Urengoy-Pomary-Uzhgorod pipeline, which runs more than 1,800 miles from Russia’s Arctic north through Ukraine to the border of Slovakia. Ukraine’s interior minister, Arsen Avakov, issued a statement saying investigators’ leading theory was that the attack was deliberate. “The Interior Ministry is conducting a probe to determine the reason for the explosion,” Mr. Avakov said in a statement. “Several versions are being considered, including a key version: a terrorist attack. According to local residents, they heard two loud pops right before the fire started, which might be evidence of intentional explosions.” The damaged pipeline, which runs about six feet underground, carries Russian gas that is destined for Ukraine, Slovakia, the Czech Republic, Austria, Germany, France, Switzerland, Slovenia and Italy. It has a capacity of carrying 28 billion cubic meters a year.

    Ukraine Gas Pipeline Explosion Won't Affect Supplies to Europe - WSJ: An explosion ripped through a natural-gas pipeline in central Ukraine on Tuesday, a day after Russia said it was cutting off supplies to its neighbor over a payment dispute, officials said. Government officials said that the cause of the blast—which sent a ball of fire more than 200 yards into the air—was unclear and that Ukraine's Interior Ministry was investigating a number of possible causes, including terrorism. Ukraine's state-run pipeline operator, Ukrtransgaz, said the fire from the explosion on a section of the pipeline in a remote area of the Poltava region was extinguished in less than two hours. Supplies to Europe won't be affected, it said, as the gas flow was temporarily shifted to a parallel pipeline. The blast occurred a day after Russia said it would stop supplying Ukraine gas unless it paid for it in advance, citing its failure to settle past gas debts. The shutoff threatens to further destabilize Ukraine's crippled economy and has sparked concerns of possible gas shortages in Europe. Kiev argues that Moscow's price demands are unreasonable and that it is using gas as a political lever over a separatist rebellion in eastern Ukraine.  Slovak pipeline operator Eustream also confirmed on Tuesday that the flow of natural gas into the European Union was continuing uninterrupted. The pipeline runs through Ukraine, connecting Russia with Slovakia, and with smaller offshoots transiting into Hungary and Romania.

    Russian $8.2 Trillion Oil Trove Locked Without U.S. Technology Even as the decision to stop gas supplies to Ukraine aggravates tensions with the U.S. and Europe, Russia faces a dilemma: it still needs Exxon Mobil,Halliburton and BP to maintain output from Soviet-era oil fields and develop Arctic and shale reserves. Russia will require Western companies to provide the modern drilling and production gear -- and techniques such as hydraulic fracturing -- that are essential to unlocking its $8.2 trillion worth of barrels still underground. The cutoff to Ukraine’s gas supply adds another layer of complexity for energy companies navigating a shifting geopolitical landscape in the search for new oil and gas supplies. Decision-makers from some of the West’s biggest oil explorers are gathering in Moscow this week at the World Petroleum Congress to pave the way to new deals. “There’s certainly a prize there,” said Alexander Robart, a principal at PacWest Consulting Partners LLC, a Houston-based consultant that tracks fracking service providers. “For the big guys, it’s certainly one of the top priority future growth markets they’re looking towards, without a doubt.”

    Oilprice Intelligence Report: What Do Ukrainian Energy and Kurdish Oil Have in Common?: Washington has dual concerns right now: Russia’s aggressive energy policy in Europe most recently actuated with the annexation of Ukraine’s Crimean peninsula; and Iran’s growing influence in oil-rich central and southern Iraq, which Iraqi Kurdish oil could push over the edge. This is what’s got Washington in a tither: The Kurdistan region of Iraq is moving towards independence, not so subtly, by exporting oil directly to Turkey, bypassing the Iraqi central authorities in Baghdad. If this leads to a conflict inside Iraq, it could push the Shi’ite-dominated central and southern Iraq—where the real oil is—closer to Iran, which is already wielding a great deal of influence. Losing Iraq to Iran definitively would be a major blow to Washington’s existing Iran policy, and to its hold on Iraqi oil. Adding to fears is the spillover from Syria, which culminated on 10 June in Sunni insurgents seizing control of Mosul, Iraq’s second-largest city which also sits in the “disputed territories” dividing Iraq from Iraqi Kurdistan. In the meantime, some 2 million barrels of Kurdish crude are now seaborne.

    Iraq's a Goner, But Kurdistan Isn't - The impending collapse of the state of Iraq--a patchwork quilt whose borders were arbitrarily drawn by scheming Westerners--has given me flashbacks of the second Gulf War I'd rather forget. For historical background, let us first recall how Iraq came about. When WWI ended, the Ottoman Empire which had encompassed Iraq was dismembered. To fulfill British wishes and grant them international legitimacy, the UK "transferred" decision-making on modern-day Iraq's fate to the short-lived League of Nations: In the aftermath of WWI, the League of Nations (a forerunner to the United Nations) was established. One of its jobs was to divide up the conquered Ottoman lands. It drew up “mandates” for the Arab world. Each mandate was supposed to be ruled by the British or French “until such time as they are able to stand alone.” The League was the one to draw up the borders we see on modern political maps of the Middle East. The borders were drawn without regard for the wishes of the people living there, or along ethnic, geographic, or religious boundaries – they were truly arbitrary. It is important to note that even today, political borders in the Middle East do not indicate different groups of people. The differences between Iraqis, Syrians, Jordanians, etc. were entirely created by the European colonizers as a method of dividing the Arabs against each other. Few deny that Iraq's problems stem from the impossibility of simultaneous self-determination for three ethnicities: Sunni, Shia and Kurds. Especially when energy revenues flow to the central government, it is hard to divvy up the proceeds in a manner deemed fair by all three ethnicities. Today's conflicts are motivated by sectarian violence. The Sunnis who were in power under Saddam Hussein resent the Shias newfound domination and have rebelled. Even it means supporting deranged jihadists, they are at least Sunni deranged Jihadists who seem to be capable of taking the fight to cowardly American-trained Shia "security" forces who certainly don't see the point in defending the non-entity which is Iraq.

    Iraq, oil markets, and the U.S. economy - The group is calling itself the Islamic State of Iraq and al Sham, translated as the Islamic State of Iraq and Greater Syria, or ISIS. And so it may come to be. From Friday’s Wall Street Journal: A militant Islamist group that has carved out control of a swath of Syria has moved into Iraq, conquering cities and threatening the Iraqi government the U.S. helped create and support with billions of dollars in aid and thousands of American lives.  The group– known as the Islamic State of Iraq and al Sham– isn’t a threat only to Iraq and Syria. It seeks to impose its vision of a single radical Islamist state stretching from the Mediterranean coast of Syria through modern Iraq, Kurdish Peshmerga forces in the northeast claimed separately to have taken control of Kirkuk, center for the key oil fields in northern Iraq, and roughly dividing up the country along sectarian lines between the Kurds, Sunni, and Shia.  Let’s start with the immediate implications for Iraq’s oil production. Not too long ago, Iraq was claiming that it would be producing 12 mb/d by 2017. To describe those plans as “ambitious” seems too gentle a criticism. Gross overstatement of what was feasible was a necessary consequence of a bidding procedure in which awards were based on the daily volume that a company promised to produce. Nevertheless, some analysts like Leonardo Maugeri took Iraq’s claims half-seriously (literally), assuming that Iraq would be able to achieve half of those target levels by 2020.  Four years ago, Stuart Staniford tracked down the specific details (reproduced in the table above) behind the proposed increases in Iraqi production. All but 200,000 b/d of the increase was supposed to come from southern and central Iraq, away from the areas now controlled by ISIS.  Only 10% of Iraq’s recent oil exports went through the north, and even these had been shut down for several months before the latest developments. The main oil field in the north is the Kirkuk oil field, which appears now to be in the hands of the Kurds. The New York Times opines: Paradoxically, the unrest may help increase exports from the oil-rich northern Iraqi region of Kurdistan. The Kurdish government has recently opened a pipeline directly linking oil fields in the enclave to Turkey, raising the possibility of substantial exports in the range of 400,000 barrels a day of Kurdish oil though Turkey.

    Only 53 years’ worth of oil left, say experts -- BP analysts predict that global reserves of oil and gas have only a few more decades to last. According to the experts, who aired their prognosis at the recent World Petroleum Conference in Moscow, shale oil offers a viable alternative to the country, predicting that by 2035 Russia will be producing 800,000 barrels daily.Global reserves of oil and gas will last only a few decades, according to a report given by BP analysts at the 21st World Petroleum Conference in Moscow on June 16. However, the experts identified Russia as one of four nations with excellent prospects for developing production of shale oil. Oil remains the main type of fuel in use around the world, but it has been losing ground to other forms of energy for 14 years now. Last year, petroleum accounted for less than 33 percent of energy usage. Foreign analysts calculate that global supplies of the “black gold” will suffice for 53 years, assuming the present rate of production continues, while just under 55 years of natural gas remain. Last year, 12.9 percent of the world's oil was extracted in Russia. By this indicator, our country is only two-tenths of a percentile behind the global production leader, Saudi Arabia. However, once the share of proven reserves is taken into account, the gap in resources is considerably greater. 5.5 percent of the world's most important energy resources are concentrated in the depths of Russia, and that means a faster rate of consumption of those reserves.

    Heads, You Lose - Kunstler - Have they tried diversity training? I doubt it. That’s not how things are done in the Shithole Formerly Known as Iraq (SFKI). They’re headhunters now. For the moment the ISIS hasn’t had the inclination to shrink any of their trophies. Their method for preserving the memory of all that is the smart phone video of decapitation posted on the Internet. So let’s skip the part where both sides talk about their feelings. It all happened pretty quickly last week, but in case you haven’t noticed, Humpty Dumpty fell off the wall over there. The bonehead American news media affects to be too stunned to even ask the pertinent questions, starting with: is that all it took to undo eight years and — what? — maybe two trillion dollars in US-sponsored nation-building? Oh, plus 4,000 US dead and 50,000 wounded. So, my question would be: when do the political recriminations kick in? Pretty soon, I reckon, and when they do, expect them to be fiercely perverse. The theme of who lost Iraq? may cost more than who lost Vietnam? How perverse is the loose talk of Iran joining forces with “the Great Satan” to support the Shiite-dominated government of Nouri al-Maliki. Prediction: not going to happen. Events are moving so quickly that the ultimate nightmare scenario is at hand: the ISIS penetrates the “Green Zone” surrounding the US embassy in Baghdad. They take hostages and commence systematic decapitations of American personnel. This is not something I would like to happen, mind you. Just saying. And the thought must have loosened a few sphincters down at the US Department of State, too.

    Kurds Grab Fourth-Largest Iraq Oilfield Amid ISIL Advance - Kurdish troops were defending Iraq’s fourth-biggest oilfield against Islamist militants after deploying outside their semi-autonomous region in the country’s north to seize the deposit claimed by the central government. More than 100,000 Kurdish fighters, known as peshmergas, are guarding a “front line” from Iraq’s eastern border with Iran to the northern town of Fishkabur near Turkey, Jabbar Yawar, Peshmerga Ministry secretary-general, said yesterday in an interview in Erbil, the Kurdish region’s capital. They now occupy areas around the contested city of Kirkuk where BP Plc has been in talks with Iraq’s government to help reverse declining output at the oilfield discovered in 1927. Iraq’s army abandoned Kirkuk last week amid an offensive by militants from the Islamic State in Iraq and the Levant. Peshmergas now control all energy facilities and oil deposits in the Kirkuk area other than a refinery in Baiji, 50 miles (80 kilometers) to the southwest, which ISIL forces have surrounded, Yawar said. ISIL also seized part of a pipeline for oil exports from Kirkuk to Turkey, he said. Crude flows through the pipeline have been halted for security reasons since March 2, according to Iraq’s oil ministry.

    U.S. Is Exploring Talks With Iran on Crisis in Iraq - — A senior American diplomat met with his Iranian counterpart in Vienna on Monday to explore whether the United States and Iran could work together to create a more stable Iraqi government and ease the threat from Sunni militants.The initial meeting took place after Secretary of State John Kerry signaled that the Obama administration was open to cooperating with Iran on Iraq, raising the possibility of seeking help from a country that the United States has often described as a state sponsor of terrorism that must be prevented from obtaining a nuclear weapon. The Obama administration’s strategy is to pressure Iraq’s prime minister, Nuri Kamal al-Maliki, and his Shiite-dominated government to form a multisectarian government with Sunnis and Kurds in an effort to heal the rifts being exploited by the insurgents. But that goal could be frustrated if Iran decided to back hard-line Shiite leaders or sent Quds Force fighters into Iraq, aggravating the already inflamed tensions. On Monday night, the White House said President Obama had convened a meeting of his top national security advisers to review options in combating the Sunni militant group known as the Islamic State in Iraq and Syria, or ISIS, which routed the Iraqi Army last week. Mr. Obama has made clear that no American military help will be forthcoming unless Iraqis make an effort to bridge their divisions. Earlier, Mr. Kerry said in an interview with Yahoo! News that the United States was “open to discussions if there’s something constructive that can be contributed by Iran.”

    Saudi Arabia Under Pressure To Plan For Iraq Oil Disruption - OPEC met last week – before ISIS began is conquering drive across Iraq – and decided to leave its oil production quota unchanged. Even before the shockingly quick deterioration of Iraqi security, global oil production was already coming dangerously close to just meeting demand (at current prices). In order to avoid a price surge later this year, Saudi Arabia was already going to have to increase production.  Now, with Iraq’s production threatened, pressure on Saudi Arabia to raise outputs is even stronger.  But convincing Saudi Arabia to dramatically increase production could be a challenge. Saudi Oil Minister Ali Naimi has indicated that he’s content with the current market conditions. “Everything is good. Supply is good, demand is good, prices are good and the market is balanced,” he said ahead of the OPEC meeting in Vienna.  That may have been the case before last week, but the danger of a major supply cutoff cannot be ruled out. Iraq’s 3.3 million barrels per day exceeds what Saudi Arabia holds in spare capacity – which stood at 1.96 million barrels per day in the first quarter.

    Iraq Breaks Down, Oil Surges - The Context Underlying The Growing Crisis - The situation in Iraq is serious, and is probably going to get worse before it gets better. The potential for this recent action to morph into a regional conflict is very high. That means that oil could go a lot higher, and if it does, we can expect the odds of a global economic recession and an attendant financial crisis to go up considerably from here. Before we dive into what's actually happening over there right now, we need to begin with a longer and deeper historical context of the region, which is essential to understanding pretty much everything in the Middle East. The western press likes to report on things as if they suddenly occur for no discernible reason, context-free and unconnected to our actions and activities over there. But the story of the Middle East is a story of intense external meddling -- especially by the US, recently.

    Four Rules of Thumb to Gauge How Oil Prices Hit the Economy - The price of oil is once again on the rise, along with fears that instability in Iraq could threaten the nation’s oil production and send global prices soaring. A story in today’s Journal shows the U.S. may be more insulated from the hazards of the international oil market than in the past. But rising oil prices still have ripple effects on the U.S. economy. Here are some handy rules of thumb we worked out with Deutsche Bank chief U.S. economist Joseph LaVorgna to monitor how this could play out. The Hamilton-to-a-Quarter Rule The price of gasoline at the pump is closely related to the international price of oil. An increase of $10 in the price of oil tends to lead to an increase of 25 cents in the price of gas (a bank note with Alexander Hamilton to a quarter). In fact, over the past six years, if you divided the price of oil by 40 and then added 75 cents you’d get pretty close to the national average price of gasoline. So if oil trades at $120, it’s a decent guess that the national average price of gas will be around $3.75 (that is, $120/4 + $0.75). If oil falls to $100 a barrel, it’s a good guess that gas will head toward $3.25. This isn’t accurate enough for a professional oil trader, but it’s good enough to impress friends.

    This Is Not Going As Planned: Iraq Prime Minister Defies US, Accuses Saudi Arabia Of "Genocide" -- Shortly after the US revealed that, in addition to aircraft carriers and amphibious assault ships it was also sending a few hundred "special forces" on the ground in Iraq, contrary to what Obama had stated previously, Washington made quite clear it wants Prime Minister Nuri al-Maliki to embrace Sunni politicians as a condition of U.S. support to fight a lightning advance by forces from the Islamic State of Iraq and the Levant. Then something unexpected happened: Iraq's Shi'ite rulers defied Western calls on Tuesday to reach out to Sunnis to defuse the uprising in the north of the country, declaring a boycott of Iraq's main Sunni political bloc and accusing Sunni power Saudi Arabia of promoting "genocide."

    Jihadi Recruitment in Riyadh Revives Saudi Arabia's Greatest Fear - The al-Qaeda breakaway group that has captured Iraq’s biggest northern city is on a recruitment drive in Saudi Arabia. The evidence showed up last month in Riyadh, where drivers woke up to find leaflets stuffed into the handles of their car doors and in their windshields. They were promoting the Islamic State in Iraq and the Levant, which has grabbed the world’s attention by seizing parts of northern Iraq. The militant group is also using social media, such as Twitter and YouTube, to recruit young Saudi men. Already at war with the governments of Iraq and Syria, ISIL also poses a potential threat to the Al Saud family’s rule over the world’s biggest oil exporter. Saudi authorities gained the upper hand in their battle with al-Qaeda, which targeted the kingdom a decade ago, yet analysts said the latest generation of militants may be harder to crush. ISIL, known as Da’esh in Arabic, has “territorial ambitions and is far more difficult to deal with than al-Qaeda,” Mustafa Alani, an analyst at the Geneva-based Gulf Research Center, said in a telephone interview. “These people are able to hold ground, they have army-like units, and they conduct terrorist attacks.”

    Will the Iraqi Siege Cause Oil and Gasoline Prices to Spike? -- Oil, as I’ve written before, is amongst the most fear driven commodities. Supply and demand are supposed to rule markets, but every time there’s a major conflict in the oil rich Middle East—from the Iranian revolution to the Gulf War—prices go up about 30 percent higher than they should be, regardless of the facts on the ground. Even when supply isn’t interrupted, even when there’s plenty of oil to fuel world markets, the price of crude is typically driven by fear rather than reality.   The refinery that is currently under siege by militants is in the north and used mostly for domestic consumption. That’s not great news for Iraqis, but it has little bearing on international markets. The major oil fields that produce for the export market are in the south of the country, firmly in the hands of the government, and exports are actually increasing. . I think it’s fair to say that if the conflict continues for months, Iraq may struggle to keep production levels high, but I don’t think we’re going to see a major supply disruption unless conflict moves South.  That said, I think there will be small to moderate price hikes in crude, because oil markets pivot so much around uncertainty. Gas prices were already higher than they should be for this time of year because of increased demand in the US, which is growing faster these days, and also maintenance being done on refineries in the South of the US. In terms of any potential supply disruption because of the Iraqi siege, it’s possible that Kurdish oil exports may be affected, but again, that has little bearing on the international market, since they were already down because of other issues.  Long story short—any conflict in oil-producing country is bad news for prices. But I don’t think you’ll see the sort of 30 percent spikes you did in past conflicts unless things get a whole lot worse.

    There’s a case for oil hitting $140, and it doesn’t involve Iraq - Oil prices have been on the rise amid growing conflict in Iraq, but the long-term bull case for the black liquid doesn’t involve the current events in the Middle East at all. Nymex WTI crude oil for July delivery neared $107 Wednesday after militants attacked Iraq’s biggest oil refinery, adding to concerns about export facilities in the south. But what about $140 per barrel? Yves Lamoureux, president of Lamoureux & Co., a market advisory firm based on behavioral economics, says we could get there by the end of 2015 even if the current troubles in Iraq fade away. The turbocharger behind this rise in prices: emerging markets. cln4 To see this in action you have to look at oil over a longer time-frame, something traders attuned to the day-to-day may be loath to do. Emerging markets are driving growth in a world population that uses more oil per capita. Asian markets in particular are seeing growing demand for oil, he says. “The tipping point about world demand for oil came with the emerging market crisis,” he said via e-mail, referring to the sharp sell off across emerging economies last year. The temporary nature of the crisis underscored the underlying strength of such economies, revealing that the selloff was more a result of ill-timed leveraged bets than fundamental economic weakness. “If the fundamentals would have weakened then oil should have weakened too,”

    US oil refiners taking advantage of changing energy landscape -- The US energy markets continue to rapidly adjust to rising domestic production and shifting delivery capabilities. The bottleneck of transporting oil from Cushing, Oklahoma (settlement point for WTI futures) to the US Gulf Coast has been eased via improved pipeline capacity as well as higher rail deliveries. The oversupply of crude at Cushing rapidly dissipated.Crude supplies at the Gulf Coast on the other hand rose sharply (see discussion). However as the second chart below shows, when measured in terms of "days of refinery throughput supply" (the amount of time it takes refineries to absorb all this crude) the region does not look so oversupplied. That's because as more crude was being delivered to the Gulf Coast, the refining capacity in the region continued to grow. EIA: - Gulf Coast refineries have been running at near record levels for much of 2014. Through May, crude inputs at Gulf Coast refineries averaged 8.1 million barrels per day (b/d), an increase of 0.5 million b/d compared with the same period in 2013. Price-advantaged crude oil and natural gas feedstocks have encouraged high utilization rates at PADD 3 [Gulf Coast] refineries. Crude oil distillation capacity additions have also supported higher crude runs. All other factors equal, increased refinery crude runs increase crude inventories required for operations.Part of the reason for this rising capacity is the improving refining profitability. Crack spreads (spread between gasoline or heating oil and crude price) have risen substantially this year.  As a result, independent refinery shares have substantially outperformed the overall equity market.   Some analysts believe that the conflict in Iraq (see discussion) could benefit US refineries further. With supply disruption risks widening the Brent-WTI spread these companies' margins would improve.

    Oil Majors Begin Evacuating Staff as Battles Rage in Iraq - Oil majors including ExxonMobil and BP started evacuating staff from Iraq on Wednesday as Sunni militants battled for control of the north’s main oil facility and clashes continued to rage across the country. Exxon has been pulling expatriate staff out of its West Qurna 1 field in the south of Iraq, while BP has taken non-essential employees out of the giant Rumaila field it runs nearby.  Ed Morse, chief oil analyst at Citi, said the insurgents’ recent military gains would have big repercussions for Iraq’s future oil supply and the world’s oil balance. “The longer the insurgency lasts and the more divisive it becomes, the more difficult it will be for Iraq to even approach its potential to sustain production at 6m barrels a day or more,” Mr Morse said. That would have “radical implications for oil markets” at a time of widespread supply disruptions in places like Libya, he added. As Isis launched an attack on the Baiji refinery on Tuesday night, Nouri al-Maliki, prime minister, sacked four military commanders. He accused them of abandoning their posts last week and of failing to defend the city of Mosul and elsewhere from Isis fighters and allied groups.News agencies quoted officials at the refinery as saying that Isis fighters were shelling the facility with mortars and had taken over several of the important sites at the plant, 250km north of the capital Baghdad. Baiji refinery produces about 170,000 barrels a day of gasoline and other oil products, and supplies northern Iraq and Baghdad.

    Iraq Requests US Air Strikes - Iraq has asked the US to stage air attacks on Sunni insurgents as the Islamist fighters edged closer to full control of Iraq's largest oil refinery and continued to hold out against troops trying to retake the city of Tal Afar.As the war to redefine the region's borders entered a second week, Iraq's foreign minister, Hoshyar Zebari, appeared on al-Arabiya television to issue the urgent plea: "We request the United States to launch air strikes against militants."Witnesses at the Baiji refinery – between the cities of Mosul and Tikrit, both seized by the insurgent group last week – said insurgents broke through the perimeter of the site early on Wednesday and were within sight of administration buildings.Losing control of Baiji would be a critical blow to Iraqi forces still reeling from the capitulation of close to 50,000 troops last week, many of whom have since been replaced by militias raised from the country's majority Shia population. Obama is said to still be weighing options militarily, and US officials for days have quietly signalled that a decision is not imminent. But it will be harder for Obama to rebuke a formal entreaty from a besieged US partner, albeit a frustrating one.

    Sunk Costs and Considering Intervention in Iraq - Senator McCain has argued forcefully for intervention in Iraq, in response to events outlined by Jim. It is conceivable that surgical strikes might tip the balance and restore stability to Iraq. But hope is not a basis for policy (or shouldn’t be).  At this juncture, it might be useful to recall what budgetary costs we have already incurred in Iraq (from this post). Figures 2 and 3 incorporate only direct fiscal costs to the United States government, and excludes interest costs. See here for another tabulation.To recap, the $61 billion war [1] ended up costing (through FY2012) an estimated 874 billion, in FY2010 constant dollars. To place this in more current context, this works out to approximately 934 billion, in FY2013 dollars. Given this investment, one might conclude that we cannot allow the sacrifice of treasure (and blood, see here) be in vain. However, economic theory suggests that sunk costs should not be considered in evaluating whether an enterprise should be undertaken. Rather, the (realistically appraised) costs and benefits of given options should be compared — that is a prospective evaluation is called for. Moreover, this debate should be explicit and public. That is because, should Iraq descend into chaos or break up, there will doubtless be recriminations emanating from certain circles (well, they’re already emanating). In this regard, we do not need a replay of the “Who Lost China?” debate (as if it was America’s to lose), which distorted American foreign policy for decades.

    Andrew Bacevich Discusses How America Made a Mess of Iraq on Bill Moyers -  Yves Smith -- One reason I am particularly taken with this segment on Bill Moyers is that Andrew Bacevich’s incisive remarks are a departure from the usual Serious Television convention of muted, “reasonable” criticism, even when the policies at issue are obviously bankrupt. You can read the transcript here.

    Obama sends U.S. military advisers to Iraq as battle rages over refinery (Reuters) - President Barack Obama said on Thursday he was sending up to 300 U.S. military advisers to Iraq but stressed the need for a political solution to the Iraqi crisis as government forces battled Sunni rebels for control of the country's biggest refinery. Speaking after a meeting with his national security team, Obama said he was prepared to take "targeted" military action later if deemed necessary, thus delaying but still keeping open the prospect of airstrikes to fend off a militant insurgency. But he insisted that U.S. troops would not return to combat in Iraq. Obama also delivered a stern message to Prime Minister Nuri al-Maliki on the need to take urgent steps to heal Iraq's sectarian rift, something U.S. officials say the Shi'ite leader has failed to do and which an al Qaeda splinter group leading the Sunni revolt has exploited. true "We do not have the ability to simply solve this problem by sending in tens of thousands of troops and committing the kinds of blood and treasure that has already been expended in Iraq," Obama told reporters. "Ultimately, this is something that is going to have to be solved by the Iraqis."Even as Obama announced his most significant response to the Iraqi crisis, the sprawling Baiji refinery, 200 km (130 miles) north of the capital near Tikrit, was transformed into a battlefield. Troops loyal to the Shi'ite-led government held off insurgents from the Islamic State of Iraq and the Levant, or ISIL, and its allies who had stormed the perimeter a day earlier, threatening national energy supplies. A government spokesman said at one point on Thursday that Iraqi forces were in "complete control." But a witness in Baiji said fighting was continuing. Two Iraqi helicopters tried to land in the refinery but were unable to because of insurgent gunfire, and most of the refinery remained under rebel control.

    Obama Claims He Does Not Need Congressional Approval For Next Iraq War - President Barack Obama, who won the Democratic primaries and general election in 2008 thanks in large part to his opposition to the 2003 Iraq War, has now told Congress he can launch another war on Iraq without Congress’ approval. Instead, Congress would simply be briefed on what was happening, not asked for authority. Those who were hoping for change from the imperial presidency are out of luck.

    Iraq and the Persistence of American Hegemony - The most recent war on Iraq is widely considered to be George W. Bush’s war but a majority of leading Democrats including Hillary Clinton and John Kerry voted to grant Mr. Bush authority for the war. As its moral, military and geopolitical catastrophes have emerged it is necessary to remember that a large majority of Americans also supported both Mr. Bush and the war on Iraq when it was undertaken. Left largely unsaid in discussion of the events currently unfolding, as the CIA has armed and ‘trained’ Syrian ‘rebels’, is that America’s war sent 1.2 million Iraqis fleeing to Syria to escape violence in Iraq. And a total of four million Iraqis were displaced. The question of precisely how many Iraqis were killed from the U.S. invasion and occupation ranges from the determined undercount of 191,000 on the low end to over one million on the high end. The most plausible count placed the number of ‘excess’ Iraqi deaths at 655,000 by 2006, five full years before U.S. troops left the country.  With ‘official’ America debating how to respond to what at present appears to be a Saudi-Iranian proxy war in Iraq the question both within and outside of the U.S. is: why do America and the Americans have any say in the matter? The last quarter century of U.S. engagement in Iraq has been a series of military and geopolitical blunders with catastrophic consequences across the Middle East. The answer of course, as it was with the mis-sold invasions of 1990 and 2003, is Operation Iraqi Liberation, oil. The dim hubris of Bush / Cheney / Rumsfeld / Rice that broke ‘Iraq’ into Sunni and Shi‘ite factions has been met by leading Democrats with claims that the war was ‘mismanaged’ and that Iraq remains of some vaguely specified ‘vital interest.’ The moral, ethical and societal sickness that has U.S. President Obama now sending murder robots (drones) and additional troops to force the will of ‘official’ Washington onto what remains of the national government of Iraq misses that it was this very same will that caused the social / political catastrophe now claimed to be in need of rectification.

    Qatari: U.S. intervention in Iraq would be seen as war on Sunni Arabs - -- A former Qatari ambassador to the United States offered up a warning to the Obama administration Monday that any military intervention on behalf of the government of Iraqi Prime Minister Nouri al Maliki would be seen as an act of “war” on the entire community of Sunni Arabs. Sheikh Nasser bin Hamad al Khalifa also warned against the United States working with Iran to repulse the advance by the radical Sunni group the Islamic State of Iraq and Syria, something that Secretary of State John Kerry said Monday the United States would be willing to consider. “For the West or Iran or the two working together to fight beside Maliki against Sunni Arabs will be seen as another conspiracy against Sunni,” Khalifa tweeted.

    In Escalating War Of Words, Saudi Arabia Fires Back At Iraq, Warns Of Civil War, Opposes Foreign Intervention - Moments ago Saudi Arabia fired back at Iraq's "harsh words" and warned that Iraq faced the threat of full-scale civil war with grave consequences for the wider region and, in a message to arch rival Iran, warned against outside powers intervening in the conflict. "This grave situation that is storming Iraq carries with it the signs of civil war whose implications for the region we cannot fathom," Foreign Minister Prince Saud al-Faisal told a gathering of Arab and Muslim leaders in Jeddah. He urged nations racked by violence to meet the "legitimate demands of the people and to achieve national reconciliation (without) foreign interference or outside agendas". It was unclear if "foreign interference" includes the US as well, or just limited to Iran.

    Saudis give apparent warning to Iran: don't meddle in Iraq -- Saudi Arabia gave an apparent warning to arch enemy Iran on Wednesday by saying outside powers should not intervene in the conflict in neighboring Iraq. Foreign Minister Prince Saud al-Faisal also said Iraq was facing a full-scale civil war with grave consequences for the wider region. His remarks coincided with an Iranian warning that Tehran would not hesitate to defend Shi'ite Muslim holy sites in Iraq against "killers and terrorists", following advances by Sunni militants there. The toughening of rhetoric about Iraq by the Gulf's two top powers suggested that Tehran and Riyadh have put on hold recent plans to explore a possible curbing of their rivalry across the region's Sunni-Shi'ite sectarian divide. The Sunni-Shia edge to the Saudi-Iran struggle has sharpened in the last few years. The two see themselves as representatives of opposing visions of Islam: the Saudis as guardians of Mecca and conservative Sunni hierarchy, and Shi'ite Iran as the vanguard of an Islamic revolution in support of the downtrodden. Iraq's Prime Minister Nuri al-Maliki, an ally of Iran, has appealed for national unity with Sunni critics of his Shi'ite-led government after a stunning offensive through the north of the country by Sunni Islamist militants over the past week. Maliki has accused Saudi Arabia of backing the militants of the Islamic State of Iraq and the Levant (ISIL), who want to carve out a Sunni caliphate in the heart of the Middle East.

    Iraq crisis: Britain and US must not meddle in Iraq, warns Saudi Arabia - Saudi Arabia warned against Western or regional intervention in Iraq on Thursday, as the country’s ambassador to London joined international calls for a new government to be established in Baghdad. In a an article for the Telegraph, Prince Mohammed bin Nawaf Al Saud said the turmoil affecting Saudi Arabia’s neighbour since the jihadist Islamic State of Iraq and al-Sham’s surge last week should be sorted out between Iraqis alone, describing it as a product of the sectarian divisions in Iraq. As Washington considers an Iraqi request to undertake air strikes against Isis, which has seized a swathe of the north including Mosul, the second city, Prince Mohammed signalled that Saudi Arabia was implacably opposed to any new military intervention. His comments can also be read as a firm statement against Iranian involvement in the fightback against Isis. Qassem Soleimani, the commander of Iran’s special forces, is reported to have been active in Iraq assisting Shia Muslim militias.

    Absurdities, Blatant Lies, Chutzpah, Political Expediency, Odd Couples  - The mess in Iraq is complicated by absurdities, political expediency, blatant lies, and self-serving accusations.Everyone involved attempts to absolve themselves of guilt. Some high-profile politicians even changed their minds as a matter of political expediency. Absurd and Conflicting Realities:

    1. The US wants to overthrow Syrian president Bashar al-Assad.
    2. US ally, Saudi Arabia, also wants to overthrow the Syrian president.
    3. The rebels fighting Assad are primarily Al Qaeda and Isis. Thus the US is in alignment with Al Qaeda and Isis.
    4. The US and Iran want Isis out of Iraq.
    5. The US refuses help from Iran out of fear of making Iran and Iraq allies.
    6. Iran supports Syrian president Bashar al-Assad.
    7. Saudi Arabia is ruled by Sunnis.
    8. Isis consists primarily of extreme Sunnis.
    9. Iran is ruled by Shias.
    10. The US overthrew Saddam Hussein, a secular ruler whose party was dominated by Sunnis.
    11. The US helped install Nouri al-Maliki, who is a Shia, even though the US is at severe odds with Iran.
    12. Maliki is politically aligned with Iran.
    13. Under Maliki's regime, extreme Sunnis got fed up with political oppression, giving rise to Isis. 
    14. Maliki accuses Saudi Arabia of sponsoring Isis and genocide.

    Oil volatility returns as Iraq fears grow - Volatility has returned with vigour to the oil markets, as fears over crude supplies from Iraq send futures trading volumes sharply higher. Swings in the oil price, after a long period of low volatility, could force hedge funds to reappraise their trading strategies. If sustained, the increased volatility may also cause headaches for large fuel users such as airlines. Historical volatility in Brent crude has climbed above 11 per cent, from an extreme low of 8.6 per cent on June 6, Bloomberg data show. The figure is based on daily price changes over the past 30 days. Implied volatility – or the market’s best guess of future volatility derived from options prices – has also risen in the past week, though it still points to expectations of limited daily price moves of 1 per cent. The jump comes as Sunni insurgents battle Iraqi troops and allied militias in northern Iraq. The International Energy Agency, the western countries’ oil watchdog, has warned that the strife puts growth of Opec production capacity at risk. ICE August Brent crude oil was trading slightly higher at $113.57 per barrel on Wednesday, up about $4 from a week ago. Prices have snapped out of the $110 range that has prevailed for most of the past year. In recent days, moreover, prices for crude delivered in 2015, 2016 and afterwards have also risen faster than spot prices, illustrating “the impact of the conflict on future production dynamics”

    Why The Crisis In Iraq Has The Global Oil Industry On Edge - The Middle East is under tumult and Iraq is experiencing its latest upheaval as the Islamic State in Iraq and Greater Syria (ISIS) — also known as the Islamic State in Iraq and the Levant (ISIL) — is clamping down its hold on parts of the country and expanding its territory in others. ISIS is a former al-Qaeda offshoot that wants to redraw Middle Eastern borders while creating an extremist Islamic state, and its rise to power is destabilizing for the entire region. Neighboring Syria is already approaching failed-state status with around a fifth of the population seeking refuge in other countries. The groups is made up of Sunni insurgents, and Iran, a Shiite state, is duly concerned about the escalating violence. Oil is a major dispute in this confrontation just as it has been throughout the modern history of the Middle East.  Iraq may be one of the few places left where hydrocarbon resources have not yet been fully exploited.  After years of war, sanctions, and more war, Iraq’s oil production has surged in recent years and it passed Iran as the second-largest producer of crude oil in OPEC at the end of 2012. The eighth-largest producer of total petroleum in 2012 and the world’s fifth-largest proven reserves holder, Iraq may be one of the few places left where hydrocarbon resources have not yet been fully exploited, according to the EIA. Currently production is at about 3.3 million barrels of oil a day.

    Iraq’s civil war threatens structure of global energy supply for years - Spectacular advances by Jihadi forces across northern Iraq have raised the spectre of a Sunni-Shia conflagration in the heart of the Middle East, triggering a surge in oil prices and throwing into doubt the structure of global energy supply for the next decade. Brent crude jumped above $113 a barrel as the self-described Islamic State of Iraq and the Levant (ISIL) raced down the Tigris Valley towards Baghdad with sophisticated weaponry, seizing on its momentum after the historic capture of Mosul. Oil prices are approaching levels last seen during the Arab Spring. “Iraq is turning into a nightmare. There are real risks that this movement will spread to other countries. Our economies are too weak to pay for oil at $120, and they can’t stand $140 if it spikes that high,” said Chris Skrebowski, a veteran oil analyst and former editor of Petroleum Review. Iraq is Opec’s second-biggest producer, though output has slipped 8pc to 3.3m barrels a day (b/d) since February due to sabotage of the Kirkuk-Ceyhan pipeline to Turkey. Ole Hansen, from Saxo Bank, said a fall in Iraqi output to levels seen in the last Gulf war would cause a $20 price spike. “The entire economic recovery could stall, and we could even slip back into recession in some regions,” he said. The International Energy Agency is counting on Iraq to provide 45pc of the entire increase in global oil supply by the end of the decade, badly needed to meet growing demand in China and India. This requires vast investment – rising to $540bn by 2035 as output tops 8m b/d – but such outlays are implausible as the state slides towards sectarian civil war.

    Who is Behind ISIS? » With its multi-pronged assault across central and northern Iraq in the past one and a half weeks, the Islamic State of Iraq and the Levant (Isis) has taken over from the al-Qa’ida organisation founded by Osama bin Laden as the most powerful and effective extreme jihadi group in the world. Isis now controls or can operate with impunity in a great stretch of territory in western Iraq and eastern Syria, making it militarily the most successful jihadi movement ever. While its exact size is unclear, the group is thought to include thousands of fighters. The last “s” of “Isis” comes from the Arabic word “al-Sham”, meaning Levant, Syria or occasionally Damascus, depending on the circumstances. Led since 2010 by Abu Bakr al-Baghdadi, also known as Abu Dua (see below), it has proved itself even more violent and sectarian than what US officials call the “core” al-Qa’ida, led by Ayman al-Zawahiri, who is based in Pakistan. Isis is highly fanatical, killing Shia Muslims and Christians whenever possible, as well as militarily efficient and under tight direction by top leaders.  The Isis tactic is to make a surprise attack, inflict maximum casualties and spread fear before withdrawing without suffering heavy losses. Last Friday they attacked Mosul, where their power is already strong enough to tax local businesses, from family groceries to mobile phone and construction companies. Some 200 people were killed in the fighting, according to local hospitals, though the government gives a figure of 59 dead, 21 of them policemen and 38 insurgents.

    Why ISIS Won't Stop With Iraq: The slaughterhouse that Iraq has become in the past week is the stuff that nightmares are made of. And this is just the beginning. The threat emanating from the group calling itself the Islamic State of Iraq and the Levant is so serious to the stability of the region -- and beyond – that even Iran said it would not oppose U.S. military intervention if it were aimed at the Islamists who have embarked on a rampage of murder and looting across Iraq. The stunning and unexpected victories by the Islamists are very worrisome. In a region that is no stranger to conflict, this one is particularly frightening and has far-reaching consequences, including the threat of spin-off groups similar to ISIS taking root in surrounding nations. A militarily successful Islamist force straddling over parts of Iraq and Syria will pose a real threat to the security and stability of those countries’ immediate neighbors. Even Syria, where government forces are fighting their own civil war, has offered to send troops to Iraq. Turkey, Jordan, Lebanon, and, of course, Israel, would be the first to feel the effect of a takfiri victory. But so would Saudi Arabia, Kuwait, Bahrain, Qatar, the UAE, Oman and Yemen. If ISIS is successful in Iraq, there is little reason to believe they would stop Left unchecked, the Islamists could eventually threaten the stability of countries in Central Asia.

    FUBAR II: China Must Import More Water Than The US Imports Oil - In one of the most comprehensive studies ever conducted of China’s bubblicious property market, Professor Gan Li at Texas A&M University estimates that there are a whopping 49 million vacant homes in China right now. As a percentage, this is twice the vacancy rate that the US housing market experienced at the peak of its recent bubble… suggesting that China has a rather painful housing collapse in store. But I’ve identified a far greater problem for China… one that few people are talking about. And frankly I’m not sure they can fix it. We discussed earlier that China does not have the capacity to feed itself. By the estimates of one state official, the country’s agricultural imports require more land to grow than the entire land mass of California. The reasons are simple. For one, China doesn’t have enough fertile land in production to support its population’s growing food demand. Theoretically this is fixable. With a bit of time, patience, and technology, barren soil can be rehabilitated In other words, China doesn’t have enough enough productive land capacity to support its population. But the far greater issue is China’s massive freshwater deficiency.

    China, UK Sign Trade Deals Worth More Than $23 Billion --China and the UK signed trade deals worth more than $23 billion during Chinese Premier Li Keqiang’s first official visit to Britain, reports said Wednesday.   Li's three-day visit to the UK, which began Monday, denotes a softening of relations between the two countries, which had taken a turn for the worse after British Prime Minister David Cameron met the Tibetan monk Dalai Lama last year. However, the two countries began mending ties during Cameron's visit in December, when China agreed to invest more than $10 billion in the British economy. According to previous estimates, China and the UK were reportedly expected to sign deals worth more than $30 billion during Li's visit.  "China is ready to work with the UK to foster a partnership for growth and inclusive development to ensure that this relationship will grow faster and in a healthier way," Li said, according to ABC.  Among the noteworthy deals are London-based oil company BP's decision to sign a $20 billion, 20-year supply-chain agreement with state-owned China National Offshore Oil Corporation, or CNOOC, China's largest offshore oil & gas producer, to supply liquefied natural gas.

    Yuan-pound trading begins -  China will allow its currency to be directly traded against the British pound from Thursday, the central bank said, as the country keeps up efforts to boost the yuan's role in international finance and trading. The direct conversion will lower transaction costs, facilitate the use of yuan and pounds in bilateral trade and investment, and strengthen the two countries' cooperation in the financial sector, the People's Bank of China (PBC) said in a statement posted on its website on Wednesday. "This is a vital step for China and the UK to further push forward the development of their bilateral economic and trade relations," the PBC said. The arrangement was the latest move that China made this year to internationalize its currency, as the growth of its economy continues to be dragged down by a cooling real estate industry and a sluggish manufacturing sector.

    China's Collateral Rehypothecation Fraud Is Systemic - It's official - everyone's involved! According to the 21st Century Business Herald, at least 17 financial institutions involved in copper, aluminum and other nonferrous metals financing business face losses of almost 15 billion Yuan (not including the contagious rehypothecated collateral chains involved) due to the over-invoicing of the Qingdao port. Crucially, it appears that the evaporation of collateral (i.e. multiple loans secured by the same collateral) has been confirmed officially and banks such as Standard Chartered have already ceased any new business via this supposedly secured channel.

    China Bigger Than U.S. With $14 Trillion in Company Debt -  Chinese companies borrow more than their American counterparts as the world’s second-largest economy takes center stage in corporate-debt markets. Borrowers from China had $14.2 trillion in debt at the end of last year, exceeding than every other country including the U.S., which had $13.1 trillion in company obligations, according to a report dated June 15 by Standard & Poor’s. Needs of Chinese issuers will increase to $20 trillion through the end of 2018, a third of the $60 trillion in global funding needs. Borrowings in the Asia-Pacific region will overtake both North America and Europe by 2016 as China and neighboring countries widen their lead as the world’s largest group of corporate borrowers, according to S&P. Bonds, as opposed to loans, will also become a more important source of financing, increasing 3.5 percent, or almost $3.1 trillion.

    China Inc borrows $14 trillion, overtakes U.S. as top corporate borrower: S&P (Reuters) - The Chinese corporate bond market has overtaken the United States as the world's biggest and is set to soak up a third of global company debt needs over the next five years, according to rating agency Standard & Poor's, underscoring the growing risk China's debt market is imposing on the global financial system. Chinese corporate borrowers owed $14.2 trillion at the end of 2013 versus $13.1 trillion owed by U.S. corporations with the switch in rankings taking place a year earlier than it had expected, S&P said on Monday. The Asia-Pacific region, led by China, is seen accounting for half of global corporate debt financing needs of $60 trillion over the five-year period to 2018 when the region will account for more than half the projected total debt outstanding of $72 trillion. China, the world's second-largest economy is currently financing a quarter to a third of its corporate debt through its shadow banking sector and this had global implications, S&P said. "This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," the agency said, estimating this at $4 trillion to $5 trillion. "With China's economy likely to grow at a nominal 10 percent per year over the next five years, this amount can only increase." Cash flows and leverage at Chinese corporations are the worst among global peers, having deteriorated from being the best in 2009, according to a corporate financial risk trend measure used by Standard & Poor's. "China's property and steel sectors remain of particular concern," it said, adding that higher land bank and property inventory had led to the sluggish trend in property prices contributing to the decline in steel demand.

    This Chart Shows How China Just Surpassed the US -- China’s corporate debt raced ahead of the US by more than $1 trillion in 2013, to $14.2 trillion, beating analysts’ forecasts by one year, according to a report released Monday by Standard & Poor’s. The new report highlighted not only the growing clout of China’s financial sector, but also its growing appetite for risk.S&P estimates that one-quarter to one-third of the debt originated from China’s shadow banking sector, a system of informal lending that operates outside of government oversight. A series of defaults in that sector alone could expose one-tenth of the world’s corporate debt to a sudden contraction, the report warns. “Given the substantial share that shadow banking contributes in financing not just China’s corporate borrowers but also local and regional government financing vehicles, a sharp contraction would be detrimental for business generally,” the analysts wrote.One graph in particular showed that the risks might be thriving in the shadows. S&P compared cash flows and indebtedness among China’s corporations to 8,500 of their global peers. These measures together offer a rough gauge of their ability to repay loans, and unfortunately here too, China surpasses the rest of the world.

    China's corporate debt: Big, but not the biggest- IT IS one of those superlatives that China could most certainly do without: the world’s biggest market for corporate debt. So concluded Standard & Poor’s, the global ratings agency, in a report published on Monday that garnered attention throughout major financial news media—the latest piece of evidence that China’s debt levels have scaled dangerous heights. But though the S&P report shines light on a murky problem, the headlines appear to have got ahead of the truth. A closer look at the data shows that Chinese companies, while on track to eventually take the crown as the world’s biggest debtors, are still a good distance shy of it for now. The report’s $14.2 trillion figure for Chinese corporate debt is an overestimate, perhaps by as much as 25%. At issue is the definition of “non-financial corporations” as used by the Bank for International Settlements (BIS), the organisation that compiled the numbers underpinning the S&P analysis. BIS relies on data from the People’s Bank of China, which classifies all local government financing vehicles (LGFVs) as non-financial corporations. This is a reasonable position for BIS in its attempt to assess overall credit growth in the Chinese economy. However, for a cross-country analysis of corporate debt, this is a problematic basis for comparison. It makes for an extremely expansive picture of Chinese corporate liabilities: it would be as if the borrowings of Detroit were added to the debts of IBM when tallying up US corporate figures. In China, the difficulty is compounded by the fact that local governments, via their financing vehicles, have racked up vast debts over the past five years as Beijing has leaned on them to fuel growth.

    China May Not Be History’s Economic Growth Champ After All, Report Says -  Nearly every story about China’s extraordinary growth over the past 30 years asserts two things as a given: a). China has grown about 10% a year for 30 years and b). China’s long-term growth record in unsurpassed in modern history. A new report(registration required) by the Conference Board says both of those assertions may be untrue. According to the report, written by economist Harry X. Wu, a senior advisor to the New York-based business research group, China’s economy grew at 7.2% a year between 1978 and 2012 — a rate far lower than what Beijing claims and nowhere near 10%. And looking at a number of Asian economies over a roughly two-decade period during which such countries quadrupled their per-capita GDP, Mr. Wu concludes that China isn’t the growth champ. Japan is, followed by Taiwan. This isn’t just a question of bragging rights, writes Mr. Wu. Businesses base their investment plans on GDP growth, so accuracy is important, especially during down times. “When the economy is, in reality, slowing down or struggling, then the impacts of inaccuracy are farther reaching, potentially undermining efficacy in business, policy and household planning both inside and outside of China,” he writes.

    China’s Brewing Subprime Crisis -- China's infamous "ghost cities" are even scarier than they sound. As home prices across China have fallen 10.2 percent in the first five months of this year, property developers are showing signs of panic. Now they seem to be drawing their inspiration from Angelo Mozilo. Like the former head of Countrywide Financial Corp., they're doing their worst to evade regulations meant to tamp down on property speculation, and have even started offering no-money-down loans to China's 1.3 billion property-obsessed citizens. When you consider how badly such schemes ended for Countrywide, and ultimately the U.S. economy, you begin to understand why this is such a chilling development. More and more economists are warning that China could be approaching a "Minsky moment." That's when a speculative boom comes to a sudden and nasty end as debt accumulation outpaces cash flow. In truth, no one really knows how bad the situation in China might be right now given how rapidly the country's vast and opaque shadow-banking system has grown. When China bulls explain why the world shouldn’t worry about mainland finances, they often cite the requirement for a 30 percent down-payment on real estate. But as Bloomberg News reported on June 13, deals skirting those conventions are starting to appear from Guangzhou and Shenzhen in the south to Beijing in the north. This is adding to risks for property companies, lenders and an economy already heading for the weakest growth in 24 years.

    World Bank Economist: China May Face US-Style Financial Crisis - Add the World Bank’s top economist to the ranks of those worried about China’s debt bubble bursting. China’s been fueling stellar growth in large part through credit. That works in the short term, said Kaushik Basu, the bank’s chief economist at a WSJ CFO conference in Washington Tuesday. But it only delays needed financial reconciliation, he said. “When that adjustment comes, there is a bit of a risk that China will find it very difficult to manage, simply because there is no hard science of financial management,” Mr. Basu said. “We’ve seen that in the U.S. in 2008, and China may have to face up to that sometime in the coming year, or couple of years because of its bloated finances,” he said. In April, the International Monetary Fund urged China to rein in its credit growth, even if it meant slow growth.. Without stronger oversight of China’s lending practices, the IMF warned, the country risks a financial crisis that could send the economy into a nosedive. As the world’s second-largest economy and one of the primary drivers of economic growth around the world, China’s fate is a worry around the globe. A precipitous slowdown would send economic shockwaves throughout the global economy.

    China’s Mini-Stimulus Shows Results, More Support Measures Likely - China’s May economic data brought some pleasant surprises, with the government’s “mini-stimulus” measures credited with producing a modest turnaround after the sluggish start to the year. Many analysts said the data show signs the economy is stabilizing, but others said there’s trouble ahead and that more support for the economy – on top of the stepped-up tax breaks and railway spending already announced – will be needed. The biggest risk to growth is the sagging property sector. “The worst is not over, we believe,”  “We maintain our call that actual activity growth is likely to slow further in the third quarter.”China’s industrial output grew 8.8% year over year in May, up slightly from 8.7% in April. Growth in electricity output also gathered pace, rising 5.9% year over year after a 4.4% gain in April. Nominal retail sales were stronger, and there was an uptick in the official manufacturing Purchasing Managers’ Index. Barclays economists wrote they were raising their second quarter growth forecast to 7.4% — from 7.2% previously – noting “upside risk” to their full-year prediction of 7.2% growth. Meanwhile, Nomura raised its economic growth forecast for the year to 7.5% — in line with the government’s target – from an initial forecast of 7.4%. China’s saw first-quarter gross domestic product growth of 7.4% year on year, down from 7.7% in the last quarter of 2013. “The slight improvement in the activity data in May was mainly due to the mini-stimulus,” . “We expect Beijing to roll out more targeted measures in the coming months.”

    China and Virginia: So far, so good - China is coming to Virginia, again. A subsidiary of the Quan Lin Group is said to be investing up to $2 billion over the next six years in a greenfield facility that could potentially house all types of its pulp and paper production and create 2000 jobs. This is not the first major Chinese investment in Virginia and, if things continue to go well, more Chinese money should be expected. The China Global Investment Tracker is the only public dataset on Chinese investment around the world. It shows the US passing Australia as the top destination for Chinese outward investment in 2013. Chinese investment is no longer soaring but it is still rising, and should continue to do so for years to come. Virginia has become one of the main recipients for Chinese investment in the US. For example, sovereign wealth fund China Investment Corporation (CIC) made a $1.6 billion investment in Arlington-headquartered AES in 2009. Most famously, Shuanghui bought Smithfield last year.

    Into the shadows: risky business, global threat - Today the Financial Times begins a series on how “shadow banking” – a term that covers a wide range of “non-bank” institutions that perform many of the functions of traditional banks, but do so outside the traditional system of regulated banks – is reshaping finance around the world. The last shadow banking bubble, in the US in the run-up to 2008, compounded the global crisis that followed. Now markets and regulators are concerned that the rapid build-up of risk in China’s shadow banking sector could inflict similar damage. Worries about China’s shadow banking system rattled global stock markets this winter, after a wealth management product called “Credit Equals Gold” was reported to be on the verge of default. It was quickly restructured, only to be followed by concerns about a similar product known as “Opulent Blessing”. Although these were small products in relation to the Chinese economy, the financial markets – and regulators – paid attention. Noting how large the sector has grown, many in China warn that the country could face its own “Lehman moment” if it were to see a serious run on shadow banks. The concern is that financing could disappear for the most leveraged and riskiest parts of the economy, from real estate developers to steel mills. China’s investment-reliant growth could come to an abrupt end. “The [traditional] banks have been very strategic about pushing their weakest assets into these channels,” says Charlene Chu, the former Fitch analyst who was one of the first to raise serious questions about the rise of China’s shadow banking sector and who now works for Autonomous, the research group. “The weakest institutions and creditors are the ones engaged in shadow banking, where bad decisions and bad risk management are the norm.”

    "Cluster Of Central Banks" Have Secretly Invested $29 Trillion In The Market --Another conspiracy "theory" becomes conspiracy "fact" as The FT reports "a cluster of central banking investors has become major players on world equity markets." The report, to be published this week by the Official Monetary and Financial Institutions Forum (OMFIF), confirms $29.1tn in market investments, held by 400 public sector institutions in 162 countries, which "could potentially contribute to overheated asset prices." China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, according to officials, and we suspect the Fed is close behind (courtesy of more levered positions at Citadel), as the world's banks try to diversify themselves and "counters the monopoly power of the dollar." Which leaves us wondering where are the central bank 13Fs? While most have assumed that this is likely, the recent exuberance in stocks has largely been laid at the foot of another irrational un-economic actor - the corporate buyback machine. However, as The FT reports, Central banks around the world, including China’s, have shifted decisively into investing in equities as low interest rates have hit their revenues, according to a global study of 400 public sector institutions. “A cluster of central banking investors has become major players on world equity markets,” says a report to be published this week by the Official Monetary and Financial Institutions Forum (Omfif), a central bank research and advisory group. The trend “could potentially contribute to overheated asset prices”, it warns.

    Central Banks Goose Stock Markets - You don’t have to be Einstein or Charlie Munger to work out that since March 2009, central banks have led the recovery (and then some) in global stock market prices (I won’t say value, because they are not the same, just like mistaking volatility for risk). But it turns out it’s not just money printing  and lower (or negative) interest rates that are doing the cooking! An interesting report to be published this week by the OMFIF claims that because of record low interest rates, central banks have “lost” around $200-250 billion in foregone revenue in interest income on their reserves, with the shortfall being made up by directly investing into the world’s stock markets – from the FT: The report, seen by the Financial Times, identifies $29.1tn in market investments, including gold, held by 400 public sector institutions in 162 countries. China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, according to officials quoted by Omfif.  “In a new development, it appears that PBoC itself has been directly buying minority equity stakes in important European companies,” Omfif adds. In Europe, the Swiss and Danish central banks are among those investing in equities. The Swiss National Bank has an equity quota of about 15 per cent. Omfif quotes Thomas Jordan, SNB’s chairman, as saying: “We are now invested in large, mid- and small-cap stocks in developed markets worldwide.” The Danish central bank’s equity portfolio was worth about $500m at the end of last year. Overall, the Omfif report says “global public investors” have increased investments in publicly quoted equities “by at least $1tn in recent years” – without saying from what level, or how the figure is split between central banks and other public sector investors such as sovereign wealth funds and pension funds. The Bank of Japan (BOJ) has publicly led the way with its announcement in April this year, jumping straight into buying 60-70 trillion yen of stocks and ETFs each year, trying to incite inflation and a general recovery:

    Asia’s Dilemma: How to Reform When the Pressure is Off? -- By any measure, Asia has had an extraordinary run these past few years. Despite wobbly demand elsewhere, emerging Asia continued to power ahead. Output is now more than 50% higher than before the global financial crisis, while in the U.S. and Europe output has barely made up lost ground. Much of this extraordinary resilience is due to the region’s ability to leverage up, spurred on by record-low global interest rates and local central banks that aren’t shy to add extra stimulus. That was all well and good — and indeed required — when the bottom was falling out in the West. Over time, however, piling up debt is not a recipe for sustained growth; that requires gains in productivity. And there are signs that these have slowed, whether in China, India or much of Southeast Asia. To address this, far-reaching structural reforms are needed. The trouble is that the steps required are politically unpalatable. Voters, in Asia as elsewhere, are loath to give up cherished income support. Protected firms naturally resist anything that upsets their plush surroundings. Those benefiting from rules and regulations will be reluctant to let go. It takes courage to cut through it all and press ahead with reform. And that’s especially tough when things are still chugging along nicely. The need for reform is a much tougher sell in the absence of a crisis. Calamity, after all, is the ultimate catalyst for decisive action, especially of the uncomfortable kind. In Asia, with money still cheap and few constraints on continued credit growth, there’s little pressure right now to speed up reforms that these economies will eventually need when the inevitable drought in debt one day sets in.

    Caterpillar Asia Sales Crater By 30% - Company Reports Weakest Stretch Of Global Demand Since Lehman Collapse - The chart below, showing CAT latest monthly retail sales for the month of May and broken down by region as well as consolidated for the entire world, paints a vastly different picture than that presented by the company's stock price. The highlights: US retail sales, up 14% in May, were a modest increase from the 12% increase in April. However, the bounce is from a base of a -16% tumble reported a year ago. Still, the US was the only bright spot on a very dreary landscape as the rest of the world continues to slide. In fact, while both the EAME and Latin America region posted their third consecutive month of 20%+ declines (-22% for EAME, -23% for Latin America), it was Asia (read China) where CAT sales have createred, and the -30% plunge in annual retail sales means Chinese demand for industrial equipment is the weakest it has been since the Lehman collapse. Consolidated, CAT retail sales for the entire world declined by 12%, virutally unchanged from last month's 13% drop, which was the biggest also since Lehman, and represents 18 continuous months of declining annual sales.

    The BoJ's balance sheet is about to go parabolic -The Bank of Japan's balance sheet continues to expand at a fairly constant pace. Relative to the size of the GDP, this is already the largest QE program in the world. Yet some analysts believe that the BoJ will accelerate securities purchases later this year.  Here is why. Credit Suisse projects that Japan's inflation rate has peaked and is about to begin declining. In fact CS researchers see a complete divergence between the BoJ's own projection of inflation and reality. This potential decline in inflation dramatically raises the risk of Japan slipping back into deflation - something that the BoJ and the Abe administration have been desperately trying to avoid. As inflation begins to lag the BoJ's projections the central bank will accelerate QE to new highs.nCS: - As long as it sticks to its original commitment to achieve +2% CPI inflation by summer 2015, the BoJ is likely to decide on additional monetary easing once underperformance of the actual CPI inflation rate against its projection becomes visible.The reason many researchers believe Japan's inflation may have peaked has to do with the yen.As discussed earlier (see post), a great deal of the recent inflation improvements in Japan was the result of weaker yen, which declined sharply in 2013. But more recently the yen has been range-bound, which will halt a great deal of the price increases we saw earlier. The inflation rate is therefore expected to begin declining. But can inflation in Japan be sustained without further weakness in the currency? Such an outcome remains unlikely because there is no evidence that labor costs will begin increasing any time soon. It is difficult to sustain price increases without labor costs and wages rising as well.mCS: - We think policymakers are on the wrong track: we refuse to be optimistic about inflation being close to target at end-year given that unit labor costs fell by 2.5% over the last 12 months and seem set to be unchanged for the next year.This tells us that at some point later this year, the BoJ will shift into an even higher gear. The central bank's already bloated balance sheet will go "parabolic" in order to get back on track with the much publicized inflation target of 2%.

    Japan Weighs Tax Change to Push Housewives Into Job Market - The government is considering cutting a tax benefit that critics say deters dependent spouses, mostly housewives, from seeking full-time employment. The change, part of a set of fiscal policy proposals released June 10, could impel some women to work more, helping alleviate labor shortages and increasing tax revenue. However, it would raise the burden for spouses who mostly stay at home, and some observers say the change by itself wouldn’t be enough to bring a significant number of women into the workforce. In Japan, when both spouses work full-time jobs, each gets an automatic deduction of ¥380,000. If one spouse doesn’t work at all, his or her deduction can be transferred to the other spouse. So if the husband works full-time and the wife is a stay-at-home mom, the husband gets a double deduction of ¥760,000 off his taxes. The quirk in the system comes when one spouse works part-time—say, if the wife spends a few days a week stocking shelves at a supermarket, earning ¥1 million a year. In that case, the husband gets to keep the double deduction on his taxes, but that’s not all: The wife gets to deduct nearly ¥380,000 from her income on her taxes too. A double dip becomes a triple dip. Many economists say the system doesn’t make much sense: Housewives have an incentive to take part-time work, but if they want to add hours or go full-time, they get punished on their taxes. The tax advantage given to part-time work phases out after ¥1.03 million of annual income and disappears entirely at ¥1.41 million. Moreover, many companies offer extra benefits to employees with dependent spouses, but such benefits typically stop when the spouse’s income tops ¥1.03 million.

    Japan Looks to Trim Pension Payouts, Whether Prices Rise or Fall - Japan’s government is considering changing the law so public pension payments fall every year relative to consumer prices, regardless of whether prices go up or down — possibly the boldest measure yet to get mounting pension spending under control.  Some actuaries even argue that getting such a system up and working is more important than overhauling the way the nearly ¥130 trillion Government Pension Investment Fund invests its money to meet payouts — something Prime Minister Shinzo Abe has been pushing for. At a news conference Tuesday, Finance Minister Taro Aso said the government was “studying” changes to the law to ensure pension payouts fall, regardless of whether prices go up or down, but declined to comment on specifics. “It’s not my jurisdiction, but it is true that is being considered,” he said. Normally, retirement benefits move in line with consumer prices. But in 2004, Japan introduced a mechanism called the “macroeconomic slide” under which payments increased more slowly than prices. The idea was that over time, that would help stabilize the financial system by adjusting for a smaller working population and longer life expectancy. But the problem was that for much of the past 15 years, consumer prices in Japan actually fell. The system was built on the premise that prices and wages would keep rising. Thus benefits weren’t cut when prices fell. That meant the mechanism that reduced pension payouts relative to prices didn’t function.

    Japan Inc. Continues to Hoard Cash Despite Recovery - Has Abenomics restored animal spirits to corporate Japan? Not quite, at least according to one important measure. The total amount of cash held by companies in Japan continued to rise during the fiscal year ended March 31, reaching a record ¥232 trillion, or about $2.3 trillion, according to data released Wednesday by the Bank of Japan. That suggests firms remain cautious in their outlook despite the recent economic recovery. To explain the long slump in Japan’s economy, experts have blamed its companies for hoarding cash internally, instead of investing the money for future growth or sharing it more generously with shareholders or employees. One of the goals of Prime Minister Shinzo Abe’s pro-growth policies known as “Abenomics” has been to spur banks to lend to companies, by injecting funds into the financial system through monetary easing. With extra cash on tap, companies can spend more to expand their activities, boosting job creation and incomes, and in turn consumption and profits, adding momentum to the recovery in a virtuous cycle. The latest flow of funds data fell short of confirming such an outcome. On the contrary, the BOJ said companies’ cash holdings rose by 4.1% from a year earlier after a 5.2% gain during the previous 12 months, marking the sixth consecutive year of increase. Meanwhile, the balance of borrowing by non-financial companies rose by a miniscule 1.0% to ¥349 trillion. The total financial assets of non-financial firms increased 9.8% from a year earlier to ¥942 trillion, due in part to growth in the value of equity holdings. Similar behavior was evident among financial institutions. The amount of deposits at the nation’s banks soared by ¥31 trillion, while lending only expanded by ¥11 trillion. The figures underscore the difficulty banks face in finding borrowers.

    Central bank is now Japan’s biggest creditor - The Bank of Japan (BoJ) has become the single biggest holder of domestic government bonds for the first time, data showed today, underscoring the scale of its monetary easing programme. The central bank has been aggressively buying Japanese government bonds (JGBs) since unveiling a stimulus scheme in April 2013 as part of Tokyo’s wider bid to kickstart the world’s number three economy. Data supplied by the central bank today showed it had edged out the insurance sector to hold ¥201 trillion (RM6.3 trillion) in JGBs, or 20.1 per cent of the total, at the end of March. Insurers collectively held 19.3 per cent of Japan’s outstanding debt. Pension funds and individuals were among the other holders of the country’s low-yielding government debt. The vast majority of the government’s debt is held domestically, which is why Japan has not faced the same kind of pressure from foreign creditors as Greece and other nations did at the height of the eurozone debt crisis two years ago. But the International Monetary Fund has led calls for Japan to tame its public debt — one of the world’s heaviest burdens at more than twice the size of the economy.

    BOJ Will be Ready When it’s Time to Normalize Policy, Officials Say -- Like the Federal Reserve, which found that ending its extraordinary support for the U.S. economy required patient planning and careful communication, the Bank of Japan is already preparing for the Day After.An opposition lawmaker grilled Bank of Japan Gov. Haruhiko Kuroda at Parliament on Thursday, arguing that the central bank won’t find it easy to terminate its quantitative easing policy. On Friday, two senior BOJ officials issued an article saying there are plenty of tools they can use when it’s time to pull the plug on the bond-buying program.“One thing for sure is that [the BOJ] has a variety of tools and there are many ways to exit,” Kazuo Momma, an executive director at the central bank, and senior BOJ official Shuji Kobayakawa say in their lengthy paper.Among them: letting Japanese government bonds that the BOJ holds mature without rolling them over; and lifting interest rates on excess reserves parked at the central bank. Such proposals have been widely discussed among academics, but it’s rare for BOJ officials to mention specific steps. Mr. Kuroda has declined to talk specifics, saying it’s too early to debate an exit strategy since the central bank is only halfway to achieving its 2.0% inflation target.

    Monetizing QE bonds - Congratulations go to the Bank of Japan who is now the largest holder of the nation’s government bonds. But no worries. This week Lord Turner of Ecchinswell, a former chairman of the UK’s Financial Services Authority (FSA) suggested that the bonds the Bank of England purchased as part of QE should be “monetized”. The bonds would remain permanently on the central bank’s balance sheet without the government ever paying them off. Of course it’s unlikely to happen in the UK in the near future, but Japan looks like a perfect candidate for monetization.

    Japan continues to count cost of idled reactors: Japan's ongoing reliance on imported fossil fuels while its nuclear reactors await permission to restart continues to impact on the country's greenhouse gas emissions and trade deficit. The 2014 Annual Report on Energy, published by the Ministry of Economy, Trade and Industry (METI), shows that Japan depended on imported fossil fuels for 88% of its electricity in fiscal year 2013, compared with 62% in fiscal 2010, the last full-year before the March 2011 accident at the Fukushima Daiichi plant. With almost its entire nuclear fleet offline, Japan reliance on fossil fuels peaked in fiscal year 2012 at 92.2%. Japan was self-sufficient for just 6% of its energy demand in fiscal 2012, primarily from hydro and other renewable sources. With two units at the Ohi plant operating for just a few months, nuclear electricity generation met just 0.6% of its energy needs that year. Compared with fiscal 2010, prior to the Fukushima Daiichi accident, Japan was almost 20% energy self-sufficient, with nuclear energy meeting 15% of its total energy needs. The additional fuel costs that Japan faced in fiscal 2013 to compensate for its nuclear reactors being idled was ¥3.6 trillion ($35.2 billion). Japan reported a trade deficit of ¥11.5 trillion ($112 billion) for the year, largely directly and indirectly due to these additional fuel costs. This compares with trade deficits of ¥6.9 trillion ($68 billion) in 2012 and ¥2.6 trillion ($25 billion) in 2011, following a ¥6.6 trillion ($65 billion) surplus in 2010. In parallel, Japanese energy consumers have faced increasing electricity tariffs over the past three years. Domestic users have seen a 19.4% increase in tariffs between fiscal 2010 and fiscal 2013, while industrial users have seen their tariffs rise 28.4% over the same period.

    Japan's Plan To Freeze Fukushima With An "Ice Wall" Is Melting Down -- A year ago we wished TEPCO the best of luck with the construction of the "Game of Thrones"-esque 1.4km giant wall of ice that was designed to surround the exploded Fukushima power plant and slow the movement of irradiated water below the damaged reactors, preventing it from flowing over into the ocean and surrounding land. A plan so idiotic we were at a loss for words trying to list the ways it could go wrong.  And, as it turns out, making a project overly complicated and ridiculous doesn't assure it will be a success. Quite the contrary. As Japan JIJI reports, Tepco said the project, which remains in its early stages, is experiencing a problem with an inner ice wall designed to contain highly radioactive water that is draining from the basements of the wrecked reactors. A Tepco spokesman added that "We have yet to form an ice plug because we can’t get the temperature low enough to freeze the water."

    Japan logs 23rd month of trade deficit in May -- Japan logged its 23rd successive month of trade deficits in May, as exports and imports both declined despite signs of recovering demand in the U.S. and Europe. The deficit in May was 909 billion yen ($8.8 billion), the Finance Ministry reported, as exports to the U.S. fell by nearly 3 percent from a year earlier. Exports fell 2.7 percent to 5.6 trillion yen ($54.9 billion) while imports dropped 3.6 percent to 6.5 trillion yen ($63.7 billion) Japan began running deficits after its nuclear plants closed following the disaster at the Fukushima Dai-Ichi plant in 2011, initially leading to higher imports of crude oil and gas to offset the lost generation capacity. Imports of fuel and other raw materials fell 9 percent in May from a year earlier, but exports of mainstay products such as cars and electronics also weakened or were flat. The trade deficit is expected to narrow in coming months as imports fall following a tax hike in April. May's decline in year-on-year terms was the first since October 2012. The impact of a sharp weakening in the value of the Japanese yen has been exhausted, having failed to significantly boost exports while sharply increasing costs for imports, especially of oil and gas.

    Japan May exports disappoint, cloud growth outlook - Reuters - Japan's exports suffered their first annual decline in 15 months in May as external demand remained soft despite a recovery in advance economies, suggesting a bumpy ride for the world's third-largest economy. Exports to Asia and the United States fell during the month, Ministry of Finance data released on Wednesday showed, which is likely to heighten concerns about Japan's growth outlook at a time when consumption is being crimped by a national sales tax increase. Exports fell 2.7 percent in the year to May, the MOF data showed, compared with a 1.2 percent drop seen by economists and a 5.1 percent rise in April. On a seasonally adjusted basis, exports fell 1.2 percent in May from the prior month. true The data will be a worry for Bank of Japan Governor Haruhiko Kuroda who last week said the timing of export recovery may have been delayed. The BOJ is counting on exports growth to partially offset the impact of a sales tax hike to 8 percent from 5 percent in April, and sees shipments eventually picking up as overseas economies, mainly advanced economies, recover.

    The TPP negotiations: Endgame follies - We are—hopefully—entering the endgame of negotiations to complete the Trans-Pacific Partnership trade agreement, with all parties staking out serious, and not so serious, positions on key sensitive issues. A lot of press attention recently has been devoted to the bilateral market access combat between the US and Japan over liberalizing access to agricultural products, particularly rice, wheat, pork, beef and dairy products. Interest groups, and now a number of congressmen, are demanding that the administration accept nothing less than zero tariffs and barriers as a legally enforceable long-term goal. Some business associations have suggested that if Japan will not agree to these terms, the US should take the lead in forcing Japan out of the overall negotiations until such time as it is willing to make this long-term commitment. Several days ago, Rep. Devin Nunes (R-CA), chairman of the trade subcommittee of the House Ways and Means Committee, added his voice to the fray by also demanding that the president and USTR Michael Froman accept nothing less than the zero option. He went further and stated that should Japan and Canada (for which dairy products are a sensitive political item) refuse to go along they should be dropped from the TPP talks. Nunes is an able and responsible legislator and a strong supporter of market-opening FTAs. But here’s why in this case his rigid stance is misguided (even granting that this may just be a tactic to strengthen the administration’s hand in the endgame). First, the US certainly places a top priority on agricultural products, and we will reap great benefits from opening Japanese (and other TPP nations’) markets to our grain and meat product farmers. But we have many other irons in this TPA fire—services, industrial goods, investment rules, state-owned enterprises unfair competition, intellectual property, among many others. To place inordinate attention and demands on any one set of items is an unbalanced and unfruitful negotiating tactic.

    Down Under, Smiles Over Pacific Trade Talks Are Frowns - U.S. officials are smiling over progress with Japan on Pacific trade talks, but the sentiment is reversed in the Southern Hemisphere. Australia and New Zealand warned in the last two days about potential delays to clinching a 12-nation trade agreement because of differences with Japan and U.S. political hurdles.  American officials said the Obama trip in April helped take the negotiations with Japan to a new level by opening up some progress in the divisive areas of agricultural and car markets. Supporters of the trade framework, known as the Trans-Pacific Partnership, or TPP, hoped Japan’s willingness to compromise in agriculture would boost momentum among the broader group. The Japanese proposals include scaling back duties on imported pork and beef, according to a person close to the negotiations. But not everyone is happy in the Antipodes. Take New Zealand, a major agricultural exporter in Asia. “The Japanese economy needs to reform its agricultural sector,” New Zealand Prime Minister John Key said Thursday at a breakfast at the U.S. Chamber of Commerce, the biggest U.S. business lobby. “We can cut them some slack and give them some time.” “I don’t think we can trade time for the quality of the deal,” Mr. Key said, referring to the trade parternship. The TPP countries had hoped to complete the pact last year, and U.S. officials concede there is more work to be done negotiating with Japan. The details of the talks remain secret. On Wednesday, Australian Minister for Trade and Investment Andrew Robb predicted the TPP won’t be completed this year, and he pointed at political resistance in the U.S.  “The Republicans expect it will not get through this year, they have said to me privately,” Mr. Robb said. “Next year I think in the first half of the year there is a political opportunity in the U.S.”

    Skeptics Aside, Obama Steams Toward Pacific Deal - President Barack Obama is steaming ahead to finish a Pacific trade pact with 11 other nations as early as this year, despite unfavorable winds from Japan and Capitol Hill. Mr. Obama, whom Republicans frequently criticize for not flying the flag of his free trade policy, on Friday said after a meeting with New Zealand’s prime minister that a framework for the Trans-Pacific Partnership, or TPP, could be finished by the time of an Asia-Pacific leaders’ gathering in November.“We discussed a timeline where before the end of the year we are able to get a document that can create jobs both in New Zealand and the United States and the other countries that are participating,” Mr. Obama said. Only a day earlier, New Zealand’s John Key told a breakfast at the U.S. Chamber of Commerce, the biggest U.S. business lobby, that more time might be needed to finish the TPP because of difficulties getting Japan to open up its agricultural markets sufficiently. On Wednesday, Australia’s trade minister predicted no agreement would be signed this year, citing his own meetings with Republicans in Washington. Trade is sensitive in a congressional election year, since workers feel agreements that lift barriers with low-income countries could move some jobs overseas. After missing a goal of wrapping up the TPP last year, trade officials have been reluctant to establish a new deadline, saying any final deal depends on the willingness of all partners to bridge gaps.

    Trade deals, Investment Treaties and the Death of Democracy – How companies sue whole nations and win. - This is a talk I gave dealing with Trade Deals such as the TPP and TPIP and the threat posed by them and the Investment Treaties and Investor State Dispute Settlement mechanism they contain. The talk was held in Friends House in Manchester, England and was organized by the Green Party and Equality Northwest.  The talk was absolutely packed. The room was hot and there was standing room only and yet no one left. The day before I had given the talk to a meeting held in Sheffield, organized by the Sheffield Green party.  If my non-scientific evidence is anything to go by, there is a growing discontent and a determination to question mainstream assurances and find new answers.
    Trade Deals and the Death of Democracy Part 1
    Trade Deals and the Death of Democracy Part 2
    Trade Deals and the Death of Democracy Part 3
    Trade Deals and the death of Democracy Part 4 ( Democracy and You)

    TISA - The Trans Pacific Partnership (TPP) trade pacts, the increased desire to ‘invert’ ownership and headquarters by ‘American’ companies, TISA (published only by Wikileaks?), points us to a world managed by what organizations? Via Alternet comes a note in TISA, a trade agreement that tries to frame itself in the private/government rhetoric, but we need to substitute ‘free’ for ‘managed’ trade in our discussions, and figure out ‘managed for what and who’:As with leaks from the secret Tran-Pacific Partnership negotiations, this leak shows that the largest corporations are working to bypass recent efforts by governments to rein them in by pushing through “trade” agreements that override their ability to write their own laws and regulations. This time the leak is the “Financial Services Annex” of the Trade in Services Agreement (TISA). It shows that the TISA negotiations are an effort to not only undo the minimal regulation of Wall Street that occurred after the financial crash, but to further deregulate financial markets worldwide. TISA is a huge “trade” agreement that covers the services sector, which includes audiovisual; finance; insurance; energy services; transportation, logistics, and express delivery services; information technology services; and telecommunications. TISA currently has 50 countries participating in the negotiations: Jane Kelsey, Law Professor at the University of Auckland in New Zealand, has provided a preliminary analysis of the draft.  In Memorandum on Leaked TISA Financial Services Text, Kelsey writes that the secrecy “runs counter to moves in the WTO [World Trade Organization] towards greater openness,” that the agreement appears to be “a new template for future free trade agreements and ultimately for the WTO” and that participating governments “will: be expected to lock in and extend their current levels of financial deregulation and liberalisation; lose the right to require data to be held onshore; face pressure to authorise potentially toxic insurance products; and risk a legal challenge if they adopt measures to prevent or respond to another crisis.”

    Philippines Central Bank on Hold But Inflation Rising - The Philippine central bank is unlikely to raise rates at its meeting Thursday. But a recent pickup in consumer prices and money supply growth is starting to cause some worries. All 11 economists polled by the Wall Street Journal expect the Bangko Sentral ng Pilipinas to keep overnight rates at record low 3.5% for borrowing and 5.5% for lending. But four economists think rising price pressures mean the central bank will raise banks’ reserve requirements by another percentage point to cool domestic liquidity growth. A reserve requirement is the minimum amount of deposits that commercial banks must place in the central bank’s vaults. Inflation remains within the bank’s target range of 3%-5%, but its trajectory is worrying due to rising food and oil prices as well as transport costs. The uptick has narrowed the scope for the central bank to hold policy rates at record lows. Many economists expect the central bank will start raising rates in the second half of this year to guide inflation to a lower target range of 2%-4% in 2015. The central bank this year has raised banks’ reserve requirements by a total two percentage points, siphoning around $2.7 billion in liquidity out of the monetary system.

    Thailand’s Costly Rice Scheme is Officially Dead, Junta Says - Among the pressing tasks facing Thailand’s ruling military junta is cleaning up the mess from the former government’s disastrous rice-subsidy scheme. One thing’s for sure: The subsidy is dead, at least for now. Thai army chief Gen. Prayuth Chan-ocha, who seized power May 22, officially confirmed last Friday that there are no plans to revive the multibillion-dollar program. That ends speculation about the future of a program that cost Thailand its crown as the world’s largest rice exporter and was a significant factor in the previous government’s downfall. “Today, if you ask me, there will definitely be no rice scheme, but whether we will have one in the future is a different matter,” Gen. Prayuth told senior military and government officials at a meeting on the country’s budget. The decision could be left to the new interim government, which Gen. Prayuth said will be set up by early September at the latest.

    Indonesian Candidates Promise to Cut Budget-Busting Fuel Subsidies - Whoever wins Indonesia’s July 9 presidential election will face tough political and fiscal choices on the issue of fuel subsidies. Both Jakarta Governor Joko Widodo and Prabowo Subianto, a former commander of military special forces, have promised to phase out fuel subsidies, which amount to 150,000 rupiah ($12) per day for each driver in Indonesia. In recent years the subsidies have become a growing burden for the government amid rising sales of motor vehicles in one of Asia’s most vibrant consumer markets. Despite a reduction to subsidies last year that sharply drove up prices of gasoline and diesel, the fuel subsidy bill has risen from about 0.7% of gross domestic product in 2007 to an estimated 2.8% of GDP this year, according to recent research from Goldman Sachs. The subsidy regime is designed to keep the cost of fuel stable for consumers. That means any increase in the price of oil, or a decrease in the rupiah currency, will increase the cost to the government.

    Indonesia on the knife’s edge - Indonesia’s presidential election on 9 July will determine not only the future government of the country but also the fate of its democracy. Over the past decade and a half, Indonesia has been the democratic success story of Southeast Asia. Thailand has lurched back to its tradition of military coups, and Malaysia and Singapore have languished under semi-democratic regimes, but Indonesian democracy looked like it was striking deep roots. Nobody would claim that the country didn’t have serious political problems – chief among them, pervasive corruption – but its many achievements include the evolution of a robust media, the sidelining of the military from daily political life, a strong culture of open electoral competition, and significant devolution of power and finances to the regions. Now, the country faces a stark choice that could determine not only the health of Indonesian democracy, but perhaps even whether it survives. The two candidates running in this election embody very different aspects of Indonesia’s recent political history, and they promise to take the country in very different directions.

    Malaysia On Track to Cut Deficit, Raise Incomes, Official Says - Malaysia’s economy has been growing strongly, with gross domestic product expected to expand by as much as 5.5% this year, but the debt burden remains a problem. The government is aiming to shrink its budget deficit by cutting fuel and power subsidies, while robust economic growth will boost government revenue, a senior official said this week. Idris Jala, a government minister without portfolio who also is chief executive of Pemandu, a government think tank, said Malaysia’s government will cut the fiscal deficit to 3.5% of gross domestic product this year, from 3.9% in 2013. A consumption tax of 6%, set to take effect next year, is expected to further narrow the gap to 2.8% of GDP.The proposed goods-and-services tax will help reduce the government’s reliance on revenue from petroleum products and will bring more items under the tax net. Sustainable spending is part of the government’s 10-year Economic Transformation Program, which aims to turn Malaysia into a high-income economy by 2020. That would mean raising per capita income to $15,000 — the World Bank’s definition of high income– within the next six years, from $10,060 last year. Mr. Idris spoke with The Wall Street Journal on the progress to date, and what lies ahead. The following is an edited excerpt of the interview:

    Despite Defenses, Asia Remains Vulnerable to Capital Outflows -- Global portfolio flows are coursing into emerging Asia again, buoying asset prices and pulling down the cost of borrowing. When it ends – and economists and investors agree it almost certainly will – the ensuing riptide of capital is likely to hit some economies harder than others. Last year’s market turmoil prompted policymakers to redouble efforts to redress potential weaknesses, such as India’s efforts to reduce its current account deficit and additional moves by Singapore and Hong Kong to curtail property speculation.  But the surge of inflows has, according to Citigroup, pushed interest rates into negative territory in Hong Kong, Indonesia, Malaysia, the Philippines, Singapore and Thailand. With rates lower than inflation, domestic borrowing has surged, particularly for property investment. HSBC notes that household debt relative to gross domestic product is higher in Malaysia, Taiwan and Thailand than in the United States. “The issue implies that consumer spending is to a large extent driven by leverage, and hence sensitive to a tightening in financial conditions, whether because of regulatory scrutiny or a broader rise in funding costs.” In the most extreme cases, rapid capital outflows can cause the kind of currency devaluations seen during the Asian financial crisis of 1997 and 1998, push up local interest rates and trigger a wave of credit defaults and an economic recession.

    Inflation in India? Yes. Inflation-Linked Bonds? No Thanks. - An initiative of Indian central bank Governor Raghuram Rajan to wean Indian investors away from gold hasn’t found many takers. Soon after taking over as governor last fall, Mr. Rajan had announced that the Reserve Bank of India would launch bonds whose returns would be linked to inflation experienced by consumers. These inflation-linked bonds were meant to provide an alternative to traditional favorites like gold. India has been desperate to slow its seemingly insatiable demand for the precious metal as gold imports are one of the reasons the country has a chronic current account deficit.The inflation-linked bonds promise an annual interest rate of the inflation rate plus 1.5 percentage points. For example, if inflation is 8%, these bonds pay an interest of 9.5%, and if inflation goes up to 8.5%, the bonds pay 10%. In a country where consumer price inflation often rises above 10%, the bonds should have been popular. But Reserve Bank of India Deputy Governor H.R. Khan said last week that the bonds were “unsuccessful”, and their sale had been discontinued for now. Poor marketing and high taxes have kept these bonds from taking off, analysts said

    Plotting Shape of India’s Recovery - Optimism abounds in India following Narendra Modi’s unexpectedly strong election victory. It’s still early days, but the new government’s priorities and coherence are a breath of fresh air. As India’s economy gets back on its feet, one question is whether the recovery will be shaped like a U, a V or a square root. In other words: Can growth rebound as quickly and strongly as it did after the global financial crisis? Unfortunately, the answer is no: India’s recovery will be gradual and uneven, at least in the near term. Growth will accelerate sharply from fiscal 2016 onward. It’s worth recalling the sting from the global financial crisis. Gross domestic product growth, as measured by production, plunged to 5.8% on-year in the final quarter of 2008, from 9.8% in the second quarter. Growth in expenditure GDP – a less reliable measure – dropped even more, to 1.5% on-year from 8.1%. The main casualty was growth in gross fixed capital formation, which typically enhances an economy’s productive capacity. This fell from 13.9% in the second quarter to 2.1% in the fourth quarter – then declined by nearly 10% in early 2009. There are three key differences between now and then. First is the nature of the investment collapse: During the financial crisis, investment fell mainly because domestic and external financing dried up. This quickly reversed as global and local policy responses revived financial markets. In contrast, the investment drought now stems from corruption scandals – with their lingering effects on the bureaucracy — and policy paralysis. Unfreezing delayed projects will be a gradual process, with most stuck because of issues at the state level, where Mr Modi’s ability to get them moving again is limited.

    India’s power deficit - Want to know why Modi is so focused on energy reform? From Goldman’s Tushar Poddar and team: On July 30th 2012, India’s northern electricity grid broke down due to overdrawing by states, plunging an estimated 640 million people into darkness. As factories couldn’t operate, homes remained dark, and people were stuck in elevators, the realization dawned that the Indian economy just could not grow without the country resolving its energy problem. India has a fifth of the world’s population, but only a 30th of its energy. It just doesn’t produce enough to meet its needs. Hence, it has to import energy – oil, gas, and increasingly coal. In FY14, India’s net energy imports were 6.3% of GDP. Without energy imports, all else being equal, we calculate it would have run a current account surplus of 4.6% of GDP. We forecast India’s net energy imports could increase to $230 billion by FY23 from $120 billion currently. Ouch. And while I won’t pretend to be expert* on this I would point you to John Kemp’s column from earlier in the month on the dodgy, politically compromised, nature of India’s power system; Nick Butler’s on why Modi needs to centralise the system; and to these charts from Goldman (click to enlarge): They emphasise the low base any reforms hoping to rely on renewable energy would have to work from and the dominant position coal occupies — let’s face it it’s pretty unlikely that the recent moves by India’s market regulator to force a selldown in government stakes in listed companies are going to have an impact on the stagnant productivity and supply problems of state behemoths like Coal India. Basically, it’s hard to see how India really moves away from coal, which has obvious environmental implications. There’s plenty more in the usual place, but the gist is that since India suffers from production constraints, it would be well served focusing its reform efforts on a switch to natural gas over oil, increased conservation of energy — “While the global average is that 1 unit of energy input produces 4.3 units of energy, India only produces 2.8 units for a unit input” — and power reform to reduce transmission and distribution losses.

    Chinese Analysts Interpret Modi’s New India: The landslide victory by Narendra Modi in India’s national elections has raised questions throughout Asia about India’s role in the region. Chinese experts have watched the transition with great interest, many seeking historical analogies to explain the new leader. One of the most optimistic is the idea that Modi could be “India’s Nixon,” a concept which originated in The Shanghai Institute for International Practices, and which forecasts an “opening to China akin to the U.S. President’s. This optimistic analysis also suggests that, given his focus on the Indian economy, Modi could choose to emulate the PRC’s model for economic growth, and thus draw inspiration from Deng Xiaoping. Others have expressed the fear that he might prove to be an “Indian Shinzo Abe,” playing to nationalism and intensifying a border dispute with China. While the China-India border has been stable and largely quiet in the decades since the Sino-Indian Border War in 1962, last year’s standoff at Dalit Beg Oldi fed suspicion in New Delhi, especially as it came just ahead of Premier Li Keqiang’s visit to India and the PRC claimed not to have made any wrongful incursion. Chinese analysts fear a Japanese effort to build a democratic coalition in Asia. A contest between two security visions, one implicit in the United States “pivot” and alliance system, and the other set out by Chinese President Xi Jinping during Shanghai’s CICA Summit, could shape the larger environment in which the BJP makes its foreign policy. Echoing Xi's ideas, Chinese experts suggest that Beijing may be able to leverage Modi's development ambitions to enmesh Delhi in a Chinese version of regional order.

    India’s female economic participation -- India is in many ways at a crossroads in mid-2014. It will have a new government, it will need ignition to restart the growth engine and make it more inclusive. But if this is to happen, then Indian women will have to be given the chance and the incentives to participate more in the labour market. Indian women already show signs of starting gradually to assert themselves more. Currently, female labour force participation is among the lowest in the emerging markets and declining. OECD calculations show that growth could be boosted up to 2.4% points with a package of pro-growth and pro-women policies. Understanding the nature and causes of female labour force participation in India is important to identify these policies. This study goes into more depth than many previous ones to assess female labour market dynamics.

    Negative Interest Rates Signal Final Currency War -- Financial analyst Andy Hoffman says the negative interest rates installed last week by the European Central Bank will eventually mean depositors will pay the banks in Europe to hold their money.  Hoffman explains, “I believe that will happen in time . . . inevitably there are only so many tools in the arsenal of the central bank.  They can print money and lower interest rates . . . all that stuff.  Now, the ECB, like the Bank of Japan, and the Fed are at the bottom of the barrel. . . . What they are trying to get them to do is for the banks to take the money out and lend it. . . . Of course, it’s ridiculous because they are not going to lend anything.  They are insolvent.  That’s why the ECB is also reinstating . . . their Long Term Refinancing Operation to liquefy banks like Deutsche Bank and Portugal’s Espirito Santo because they are in big trouble.  So, will it get down to depositors?  Well, you have two choices.  Either eat those losses, and I just mentioned, they are already drowning in insolvency, or pass them along to depositors.  Yes, I think in the coming months, you will see banks with negative deposit rates. . . . I would take my money out.”

    It’s Hysteresis: Why the World Might Be Forever Poorer Thanks to the Great Recession -- Hysteresis is, supposedly, an economic malady—the idea that “a deep recession can cause irreparable damage to the economy,” as the Washington Post’s Matt O’Brien has succinctly put it. With America’s recovery still plodding, more economists seem to believe that we’re suffering an acute case of the illness. Typically, we expect economies to fully heal after a recession. But if a downturn is powerful enough, and its effects are allowed to linger long enough, the thinking goes, a country can end up permanently scarred. The unemployed drift from the workforce for good. Companies cut back on investing in new tools or research, which makes them less productive and innovative in the future. Ultimately, the economy’s potential—its size if everything were functioning normally, judged by fundamentals like labor availability and capital stock—simply shrinks. Hysteresis sets in. And Americans aren't the only ones supposedly suffering. Most of the developed world appears to be infected, too. Recently, Johns Hopkins economist Laurence Ball released a working paper looking for signs of hysteresis across 23 countries in the Organization for Economic Co-Operation and Development. Based on forecasts for 2015, he finds that the loss of potential economic output comes out to about $4.3 trillion. “The total damage from the Great Recession," he writes, "is slightly larger than the loss if Germany’s entire economy disappeared." Here, for reference, is how the U.S. evolution looks over time. The green circles show the growth trend for our potential output prerecession. The red line shows the lower-postrecession trend. The black line is what the economy is actually producing. As you might notice, we're still failing to grab that lower bar.

    Are hysteresis effects reversible?: Though the title of this piece may sound like gobbledygook to non-economists the idea is actually fairly simple. Hysteresis effects describe the process by which people who are unemployed for a sustained period of time suffer a disconnection from work. This, in theory, produces a diminution and degeneration of their skills, a reduction in their motivation to search for a job and a general social stigmatisation (including from prospective employers) that prevents them from easily returning to the labour market. Under normal circumstances a high level of unemployment exerts downwards pressure on wages as there is more competition for available work and so people are willing to bargain down their wages to secure employment. The longer unemployment sustains, however, the greater the likelihood of hysteresis effects which effectively remove increasing numbers of the unemployed from the competition for work – raising the chances of those who continue to seek employment finding a job and being able to bargain for better pay. In economics parlance, hysteresis effects produce higher structural unemployment – people who have left work permanently – versus cyclical unemployment – people who have found themselves out of work due to an economic downturn but plan to return.

    Australia's richest 1% own as much as bottom 60%, says Oxfam -- The richest 1% of Australians now own the same wealth as the bottom 60%, according to a new report designed to bolster the case for global and domestic action to shrink the gap between rich and poor.   The Oxfam Australia report also indicated that the nation’s nine richest individuals had a net worth of US$54.8bn, which was more than the combined bottom 20% of the population, or 4.54m people. The report, released on Monday, follows previous warnings by Oxfam International that the 85 richest people in the world now own the same as half of the world’s population, or 3.5bn people. “Income inequality in Australia has been on the rise since the mid-1990s, despite all sections of Australian society experiencing some increase in income during the same period,” the report said.

    IMF Issues Warning on Argentina Debt Defeat - The major legal defeat Argentina suffered Monday in its decade-long fight against holdout bondholders could ricochet around the world’s sovereign debt markets, the International Monetary Fund warned Monday. “We are concerned about possible broader systemic implications,” the IMF said in a statement. “The Fund is considering very carefully this decision.”Last year, the IMF warned that if Argentina lost its case against creditors, the case could set a precedent that gives holdouts outsized power over nations struggling to pay back their debts. That, the IMF warned, could undermine sovereign debt restructurings around the globe. Cutting the amount of debt owed to creditors is a last-chance emergency measure sometimes needed to prevent the collapse of entire economies. Many experts think Argentina will now negotiate a settlement with the holdouts. “We feel fear of a default, which would have negative political and economic consequences and put the government’s policy agenda at risk, will push the government to negotiate, though the process could be messy and the 30 June payment could be at risk,”. Argentine President Cristina Kirchner indicated as much Monday night. But the impacts are far broader. “We now have a glimpse of the sovereign debt world after Argentina,” said sovereign debt expert and Georgetown University law professor Anna Gelpern. “This world is fraught with uncertainty, perhaps more so than it has been since the early 1990s.”

    Argentina flirts with debt swap as fear of default rises (Reuters) - Argentina is taking steps to place its restructured debt under local law so it can continue making payments despite a string of adverse U.S. court rulings, Economy Minister Axel Kicillof said on Tuesday as fears of default increased. Under the move, Argentina would swap bonds that are governed by U.S. law for those governed by Argentine law, meaning they would no longer be subject to the U.S. courts. "We cannot allow (holdouts) to prevent us from honouring our commitments to creditors," Kicillof told a news conference. "For this reason we are starting the steps to start a debt swap to pay them in Argentina under Argentine law." The U.S. Supreme Court declined on Monday to hear an appeal by Argentina in its decade-long battle against hedge funds who refused to take part in its debt restructuring after its catastrophic 2001-02 default. This left a lower court ruling intact ordering it to pay them $1.33 billion (784 million pounds), something Argentina has vowed not to do. It also set the clock ticking ahead of June 30, when the government is due to service restructured bonds. If a resolution is not found before then, Argentina would be barred by the U.S. court decision from making the payment, pushing the country into technical default 12 years after its devastating debt crisis. Analysts said a new swap into locally governed bonds was a risky. 

    Argentina fears new crisis as vultures circle after US supreme court ruling -- Argentinians, battered by decades of apparently cyclical economic crises, fear a new one following a US supreme court ruling this week that could make the country liable for up to $15bn (£11bn) owed to so-called "vulture funds". The vultures, led by a US billionaire, are mainly hedge fund investors who snapped up Argentinian bonds at rock-bottom prices following the country's $95bn default on its foreign debt in 2001. The court in Washington DC has ordered that they be repaid in full – and that ruling threatens a new default, possibly within weeks. Argentina descended into chaos after the 2001 financial crisis, then the largest in world history. "My husband and I were never the same afterwards," said María Inés Ochoa, a schoolteacher from the small city of Funes in the central province of Santa Fe. Violence erupted across the nation after Argentina declared itself unable to meet its payments in the last week of December 2001. The widespread rioting, supermarket looting and the death of young social volunteers by police fire took their toll on Ochoa. "That's when I had my first panic attacks, which completely affected my life afterwards and even today." Argentina had lived through hyperinflation up to 12,000% in 1989. There had been economic collapse in 1975 and decades of military rule. But what happened in 2002 was unique, even in comparison to those catastrophes. Bank accounts were frozen and withdrawals banned. Barter clubs sprouted like mushrooms after rain everywhere. Old clothes were exchanged for vegetables, psychology sessions for cuts of meat.

    Argentina Says Next Bond Payment 'Impossible', Default Looms: (Reuters) -- Argentina threatened to default on its debt Wednesday when the government called it "impossible" to pay bond service due on June 30, citing a U.S. court decision earlier in the day that increased pressure on the economically ailing country. Buenos Aires is locked in a 12-year legal fight with creditors who refused to participate in two restructurings that followed Argentina's 2002 default on $100 billion in bonds. The long impasse in the U.S. courts has kept the country from accessing international capital markets as its economy stagnates, inflation soars and central bank reserves fall. On Monday, the U.S. Supreme Court declined to hear an appeal by Argentina in its battle against the hedge funds that refused to take part in restructurings offered in 2005 and 2010. This left intact a ruling by U.S. Judge Thomas Griesa in New York ordering the country to pay the hedge fund "holdouts". The 2nd U.S. Circuit Court of Appeals on Wednesday lifted the stay it had placed on an injunction by Griesa barring payment to holders of restructured bonds via U.S. banks unless the "holdouts" were paid $1.33 billion at the same time.

    IMF Seeks a “Reprofiling” Middle Ground Between Bailouts and Defaults -- The International Monetary Fund is looking for ways, when the pressure builds, to calm restive creditors before they all flee.  A couple of years ago, some European countries, unable to borrow on the markets, came to the IMF for help. IMF rules say it can’t make big loans to a country unless it finds a “high probability” that, with IMF-blessed policy changes, the country will be able to pay all its debts. (It’s intended to avoid using IMF money to let private creditors pull their money out before a country defaults.)  To reach that threshold, the IMF sometimes had to make heroic assumptions. When that became impossible to lend to Greece under its existing rules, it created a special exception to waive the “high probability” for some European borrowers at a time of “high risk of international systemic spilllovers.” That didn’t go over well with some of the IMF’s non-European members, particularly those who had, in the past, accepted the IMF’s tough conditions to get desperately needed loans. It doesn’t want to go through anything like the euro crisis again. So the IMF staff is now proposing to its board a new approach: One recommendation is to eliminate the “systemic spillover” exception to its lending rules on the grounds that is has become, as the staff puts it, “an increasingly significant loophole.” (The U.S. thinks this is a bad idea. It wants to preserve the IMF’s flexibility at times of crisis.)

    Hey Canada, Why Don’t You Have Food Stamps? -- For as long as I’ve lived in the US, I’ve heard Americans gleefully laud my home country for its cheap education, socialized healthcare, and free prescription drug program. You guys threaten to move north every time the political landscape in the great USA skews a bit right (clearly, your understanding of immigration law is somewhat lacking). Yet it is a little-known, and highly ironic, fact that Canada is missing any formal nutrition assistance programs at the federal or provincial level. Where America has federally-funded programs like Supplemental Nutrition Assistance Program (SNAP), nutrition for Women, Infants and Children (WIC), and school lunch programs, Canada has…nothing. Plus, we’ve got Stephen Harper, who is basically our version of George Bush, Jr., but with no expiration date. “I’m not entirely sure why we don’t have nutrition assistance,” Amanda Sheedy, the program director at Food Secure Canada, admitted when I asked her. “It continues to shock me that Canada is one of the only countries in the industrialized world that doesn’t support school meals, for example.”Yes, that’s right: the beacon of North American liberalism doesn’t even have a plan to feed kids at school, regardless of income.

    EU-US trade talks hit roadblock on banks -- The US has defended a decision to exclude financial regulation from a vast transatlantic trade pact amid mounting pressure from the EU and the financial industry to include it, arguing that doing so would only complicate the regulatory landscape unnecessarily.  European negotiators have spent much of the past year lobbying the US to include co-operation on financial regulation in the talks under way to draft a Transatlantic Trade and Investment Partnership, or TTIP. But according to leaked documents confirmed by European officials, the EU is now poised to increase the pressure on the US by threatening to exclude any discussions on financial services altogether unless Washington agrees to Brussels’ demands to put regulation on the table.  The move could have big consequences for the financial industry on both sides of the Atlantic as it could see banks and insurers left out of what would be the biggest regional trade agreement in the world, covering almost half of global output.  Michael Froman, the US trade representative, said that the US did not plan to make new concessions to the EU, arguing the existing transatlantic dialogue between watchdogs and other international venues were adequate settings to discuss regulatory matters.  “Unlike the other sectors in TTIP, there are multiple existing forums focused on the co-ordination of financial services regulation, including a bilateral forum,” he told the Financial Times. “The Europeans have yet to show us what they would like to see improved about these forums or why having the same group of people talk about the same issues in a new forum would add value or yield a different outcome.”

    French budget deficit to 'exceed target': France's budget deficit will overshoot targets this year, heading for 4.0 per cent of national output or more and there is little evidence of promised government spending cuts, national auditors have warned. The report on Tuesday from the highly influential body will be seen as a blow to Socialist President Francois Hollande, who has a record unpopularity rating and has based a U-turn on economic policy on cutting charges on business to be matched by huge cuts in planned spending. France had been supposed to get its public deficit down to 3.0 per cent of output but won a reprieve from the European Commission, and was aiming for 3.8 per cent this year. But the top national auditing body, the Accounting Court, said that the deficit was on track to overshoot targets again, heading for 4.0 per cent or slightly more of gross domestic product. 'If this risk materialises, the direction for public finances from 2015 to 2017 will be undermined,' the auditors said in a report on the state of national finances.

    German Labor Costs - Krugman -- I gather from some of the reactions to my post on innovation hype that many readers don’t know about the remarkable German export story. Here’s the key point: German labor is very expensive, even compared with the United States:  And this has been true for decades. Yet Germany is a very successful exporter all the same. How do they do it? Not by producing the latest trendy tech product, but by maintaining a reputation for very high-quality goods, year after year. If Germany seems remarkably competitive given its high costs, the United States is the reverse; our productivity is high, but we seem consistently bad at exporting — and have all my professional life. I used to think it was our cultural insularity, our difficulty in thinking about what other people might want. But is that still plausible?

    Portugal to be monitored until 2045 despite bailout exit -- Portugal will remain under fiscal surveillance for up to 30 years despite exiting its international bailout programme last month and sticking to the European Union‘s austerity demands to beat the eurozone crisis. The European Financial Stability Mechanism (EFSF), which was responsible for Portugal‘s bailout in 2011, will continue to monitor the country‘s financial situation until Lisbon has repaid its bailout loans in full, Spanish newspaper Publico reported Tuesday. This is not expected to happen before 2045. The European Commission and the International Monetary Fund (IMF) will be monitoring Portugal‘s finances until 2037 and 2021 respectively. These measures have been put in place so that any economic risks can be detected early. The 78-billion-euro (106-billion-dollar) rescue programme assembled by the EU and the IMF in 2011 for the nearly bankrupt country was formally concluded in May. Portugal‘s budget is in much better shape and its borrowing costs are at an eight-year low.

    IMF says Italy's recovery fragile, needs 'bold, quick' reforms (Reuters) - Italy's economic recovery remains fragile and Matteo Renzi's government needs to take rapid steps to increase the country's growth potential and cut debt, the International Monetary Fund said on Tuesday. In its written conclusions after a visit to Italy, the IMF called on the government to tighten the budget to achieve a modest fiscal surplus next year in structural terms and urged Italian banks to step up efforts to reduce bad loans. "The recovery remains fragile and unemployment unacceptably high, highlighting the need for bold and quick policy actions," the IMF said in the document. Italy's economy contracted by 0.1 percent in the first quarter after emerging at the end of 2013 from a two-year recession. Renzi, who replaced party rival Enrico Letta as prime minister in February, has promised a raft of reforms to overhaul the euro zone's third-biggest economy and its political system but little of his ambitious agenda has been implemented so far. He is seeking budget flexibility from the European Union in order to be able to spend more on investments to re-generate the economy, which has been sluggish for more than a decade and is struggling with high unemployment above 12 percent.

    The EU Is Still In a Recession -- Yesterday, Mark Thoma linked to a piece on Vox, which was itself a link to a posting from the CEPR.  The topic was simple: did the last EU recession ever actually end?  Here is their conclusion:The CEPR Business Cycle Dating Committee met on 11 June 2014 to determine whether the Eurozone is out of the recession that started after 2011Q3. The Committee decided that there is not yet enough evidence to call a business cycle trough. Thus, in two successive meetings, the committee refrained from declaring the end of the recession while recognising that the data are not showing further deterioration. That is a very strong conclusion, but one which is supported by the facts. First, consider overall GDP growth (or lack thereof). The posting contained the following graph of EU GDP. Looking at this data from a non-adjusted perspective (which, considering the EU is flirting with deflation, is actually a pretty accurate picture of the region), we get this picture: Let's look at a few other common, coincident indicators, starting with employment: Overall employment is dropping, which explains the currently high unemployment level (This is a lagging indicator. But, the fact it is still rising tells us the employment picture is still in poor shape). And industrial production is also moving sideways: The smaller subset of IP data of manufacturing production has a similar chart: The NBER uses DPI less transfer payments as its coincident wages indicator. While I don't have access to a similar metric for the EU, eurostat does have a labor cost metric which was recently released: The above chart indicates there is no meaningful wage inflation, which adds more evidence to the argument the EU is still in at best a period of weak growth.  To sum up: overall GDP growth is very weak, industrial production is still meaningfully below pre-recession levels, employment growth is non-existent and wage growth is paltry.  All of these data points strongly support the conclusion the EU is essentially still in a recession.

    Debunking the Hype about the European “Recovery” - A new and suitably data-driven post by Zsolt Darvas and Pia Hüttl at the Bruegel blog throws cold water on the notion that Europe’s hardest-hit economies are on the mend. The key section: On the one hand, our findings continue to suggest that the public debt ratio is set to decline in all three countries under the maintained assumptions and in fact their future levels are now projected to be slightly lower than in our February simulations (eg for 2020 our new results are 2-3 percent of GDP lower). But on the other hand, the debt trajectories remain highly vulnerable to negative growth, primary balance and interest rate shocks, especially in Greece and Portugal, though also in Ireland.  For example, if nominal GDP growth turned out to be 1 percentage points lower than in our baseline scenario (either due to weaker real growth or lower inflation), Greek public debt would still be 133% of GDP in 2020 and 113% in 2030, the Portuguese debt ratio would be 119% in 2020 and 106% in 2030, while the Irish debt ratio would be 107% in 2020 and 87% in 2030… Under the combined shock of 1 percentage point slower growth, 1 percent of GDP smaller primary budget surplus, 1 percentage point higher interest rate and 5% of GDP additional bank recapitalisation of the banking sector by the government (which is not an extreme scenario), the debt ratio would explode in Greece and Portugal and stabilise at a high level in Ireland (Figure 2). Furthermore, we highlight that our goal with the debt simulation was not the calculation of a baseline scenario which best corresponds to our views, but to set-up a baseline scenario which broadly corresponds to official assumptions of the IMF and the European Commission and current market views…. We think that today’s markets may be overly optimistic…ill remain a challenge when there is an austerity-fatigue in most periphery countries. Also, the weak euro-area growth and too-low inflation do not favour debt sustainability of the euro-periphery.

    The European single currency system spirals further out of control -- The European Central Bank (ECB), which formulates eurozone monetary policy, recently announced plans to impose negative interest rates on deposits held by banks at the ECB. It also extended up to 400 billion euros in cheap loans to these banks in order to boost private-sector lending in the eurozone. Most of the analyses thus far, ever focused on the immediate economic indicators, viewed the ECB’s decision as a response to the threat of deflation, which continues to haunt the bloc. However, it is important to view the bank’s decision against the backdrop of local and European elections last month. In the European parliamentary elections in May, voters chose a motley crew of Euroskeptic parties, including far-right groups such as France’s Front National and the Danish People’s Party and far-left parties like Greece’s Syriza and Sinn Féin in Ireland. The success of parties from across the political spectrum left many European observers confused. European Union officials, or Eurocrats, as they are derogatively known, have completely lost control over the systems of governance they built in the decades since World War II. In the words of economist John Maynard Keynes, the Eurocrats have “blundered in the control of a delicate machine, the working of which they do not understand.” The roots of this problem are economic.

    UK's disinflation contagion - With the UK's property prices continuing to rise (see chart) and the labor markets improving (see chart), the only major factor that could force the Bank of England to delay the first rate hike until next year is the slowing inflation rate. Part of the issue for the UK is the "contagion" from the Eurozone. Half of UK’s trade is with Europe.   It's hard for UK companies to raise prices when you have disinflationary pressures and declining labor costs across the Channel.

    Will Yellen follow Carney’s hawkish surprise? -- Mark Carney delivered a substantial hawkish surprise to the markets in his Mansion House speech on Thursday. After appearing to be a convinced dove ever since he became BoE Governor in July 2013, he now says that the first UK interest rate rise could come “sooner than expected”, with the decision on the timing of the first rise “becoming more balanced”. Market expectations of forward short rates in 2015 immediately jumped by 20 basis points.Although the Governor is still talking about a very gradual rise in UK rates, he appeared to have changed the dovish tone of the forward guidance given by the BoE last year. This has made investors nervous, with many asking whether Fed Chair Janet Yellen may do the same in her press conference on Wednesday.  This seems unlikely, because the US economic recovery is still lagging that in the UK. Nevertheless, the parameters within which investors view forward guidance, including the Fed’s “dots” showing the future path for interest rates, may have been somewhat shaken. The BoE will no doubt argue that they never gave the markets any cast iron reason to believe that the first rate rise would be delayed far into 2015 or 2016. “When conditions change, I change my mind”, was the gist of what Mr Carney said at the Mansion House. But the central banks do seem to want it both ways: the main point of forward guidance, according to many economists, was to pre-commit to policies that would not change when conditions changed.

    BOE’s Weale Says Gradual Rate Rises Imply Earlier Rate Rise -  Interest rates in the U.K. should rise sooner rather than later if the Bank of England is to stick to its plan for a gradual and limited increases in borrowing costs in the years ahead, one of the U.K. central bank’s nine rate-setters said Wednesday. Martin Weale, one of four members of the rate-setting Monetary Policy Committee drawn from outside the central bank’s ranks, said in a speech in Belfast, Northern Ireland, that lifting the BOE’s benchmark interest rate in small steps from its historic low of 0.5% wouldn’t necessarily disrupt the economy’s recovery. “Even after interest rates have started a gradual rise, monetary policy will still be providing a great deal of support for the economy,” Mr. Weale said, according to a text of his remarks. “Moreover, other things being equal, the policy of raising Bank Rate gradually does imply that the first rise needs to come sooner than would otherwise be the case,” he added, referring to the BOE’s benchmark rate. Mr. Weale voted alongside the rest of the MPC this month to keep BOE policy on hold but is often singled out as the official most likely to break ranks and start voting for higher rates before others are ready.   Investors expect the BOE to begin tightening policy by the end of the year, roughly six to nine months before the Federal Reserve.  Officials have said they expect rate rises will be gradual and limited, with the BOE benchmark rising no higher than 3% or so for several years to come.  In his speech, Mr. Weale highlighted some of the mixed messages on inflation emanating from Britain’s labor market that BOE policy makers are grappling with. Fed officials are trying to get their heads around similar cross currents in the US.

    BOE voted 9-0 to keep rates at record low, QE unchanged - -- The Bank of England's Monetary Policy Committee voted unanimously to keep rates on hold and its quantitative-easing program unchanged at its June meeting, according to minutes released on Wednesday. All nine members voted in favor of leaving the key interest rate at a record low of 0.5% and making no changes to its 375 billion pound ($636 billion) asset-purchase program. After a recent string of solid economic data in the U.K., market participants have been speculating about when the central bank will make its first rate hike. At the time of the June meeting, most economists expected the first monetary tightening to come in 2015. The minutes revealed that the MPC members were surprised by the "relatively low probability attached to a bank rate increase this year implied by some financial market prices". The central bank also said it continues to expect a modest slowing in quarterly growth rates in the second half of the year, but that "latest surveys suggested some upside risk to that assumption." The pound slipped after the release, trading at $1.6950, down from $1.6966 just ahead of the minutes

    BOE Hasn’t Cracked the Mystery of U.K. Productivity Collapse - An abiding mystery of the U.K.’s recent economic experience has been an unprecedented collapse in the nation’s productivity. A new paper from the Bank of England tries to explain the shortfall but the authors admit they still haven’t fully cracked it. British productivity was growing steadily if slowly in the years before the financial crisis struck but it’s now some 16% below its precrisis level. Official data shows the U.K.’s productivity performance against its peers has been even more horrendous. Productivity, usually measured as output per worker or output per hour, or output generated by a mix of labor and capital, is an important gauge of an economy’s health and a key to rising living standards. More productive economies tend to grow faster over the long-run. It is also an important indicator for a central bank. Poor productivity growth means an economy tends to start bumping up against capacity constraints sooner, stoking inflation. The BOE paper, published in the central bank’s quarterly bulletin of economic research, examines the competing explanations for the productivity puzzle and has a stab at estimating how much of that 16% shortfall they can account for. At best, the authors say they can explain about nine percentage points, underscoring just how deep a mystery this is.

    Productivity in the UK is not such a Mystery - I see that the low productivity in the United Kingdom is still a mystery. (WSJ article by Paul Hannon) Since the beginning of 2013, productivity in the UK has been stalled. Last week I posted a model of effective demand that showed how productivity stalls at the effective demand limit. This model is new and unknown. Yet, it shows that productivity in the US stalls every time that the economy hits the effective demand limit. The UK does not know about this model of effective demand. But would the model apply to UK as it does to the US? Yes… When an economy is up against the effective demand limit, one thing that you will see is that capacity utilization drops as unemployment comes down. Unemployment is definitely coming down. And capacity utilization has also fallen since the beginning of 2013. It may seem contradictory to employ less capacity as more labor is being employed, but that contradiction describes how firms are able to maintain profit rates at the effective demand limit. Once effective demand begins to grow in relation to real output, productivity will be able to increase again. But this scenario usually means a recession is forming. So the productivity in the UK is not a mystery, neither is the stalled productivity in the US.

    English Industry Body Blames Increase In Worker Mental Health Problems On Austerity - First the good news. According to the "Sickness Absence" survey of 330 firms, conducted by the EEF, or the UK's manufacturing association, the number of days taken off work through sickness is at a record low. The survey found that over the past two years overall levels of worker absence reached a record low of 2.1%, equal to 4.9 days per worker per year. Now the bad news: while short-term absence is indeed at record low levels, long-term absence has increased, with almost two fifths of companies saying long term absence has increased in the last two years. Among the problems associated with long-term absence: mental health problems. Finally, the hilarious news. Since every organization these days has a clear and present agenda, the EEF being no exception, it was quick to scapegot the increase in long-term absence on what else - the same bogeyman that everyone in Europe now hates, one which despite constant pleas to crush it continues to be perpetually elusive: austerity.

    UK bans teaching of creationism in any school that receives public funding:  On Thursday, the United Kingdom expanded its ban on the teaching of creationism from all state schools, to all state schools as well as semi-private Free Schools and Academies.  The decision effectively means that no school in the United Kingdom can teach creationism or any other “anti-scientific” dogma without losing the entirety of its funding, as they would be violating “the requirement on every academy and free school to provide a broad and balanced curriculum.”  According to a press release from the British Humanist Association (BHA), the new rules “explicitly require that pupils are taught about the theory of evolution, and prevent academy trusts from teaching ‘creationism’ as scientific fact.” Not even Intelligent Design — the favored faux-scientific theory of American creationists who wish to import biblical beliefs into public school classrooms — can be taught, as “creationism” is defined by the new rule as “any doctrine or theory which holds that natural biological processes cannot account for the history, diversity, and complexity of life on earth and therefore rejects the scientific theory of evolution.”

    No comments: