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

Saturday, January 10, 2015

week ending Jan 10

This chart shows the Fed’s balance sheet is still fueling stocks - The monster rally in stocks over the past few days may be attributed to calmer oil prices or soothing comments from Federal Reserve officials, but one strategist says it’s all about the balance sheet of Janet Yellen’s Fed.  There is little doubt that the Federal Reserve’s efforts to prop up the stock market since the 2008 financial crisis through monetary stimulus measures, like buying up government bonds and other assets — better known as quantitative easing, or QE — have fueled one of the longest bull runs in history.  But those who predict a cratering of the market with the cessation of QE have, so far, been proven wrong. But perhaps for the wrong reasons.  The markets downturn Friday, with the Dow Jones Industrial Average showing a triple-digit decline in early morning trade, comes after two days of monster gains, which pushed U.S. stocks into positive territory for the year. The Fed’s $4 trillion balance sheet is not shrinking. In fact, it has been quietly growing, according to Lance Roberts, strategist for STA Wealth Management. In the chart below, he estimates that the change in the Fed’s balance sheet last week was positive, helping to spur the so-called V-shaped recovery from the latest pullback in U.S. stocks.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--January 8, 2015: Federal Reserve statistical release H.4.1: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

FOMC Minutes: "Participants would want to be reasonably confident that inflation will move back toward 2 percent over time" -- Participants expressed more concern about low inflation and the FOMC might wait on rate hikes until they are "reasonably confident that inflation will move back toward 2 percent over time".  From the Fed: Minutes of the Federal Open Market Committee, December 16-17, 2014. Excerpts: Participants generally anticipated that inflation was likely to decline further in the near term, reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices. Most participants saw these influences as temporary and thus continued to expect inflation to move back gradually to the Committee's 2 percent longer-run objective as the labor market improved further in an environment of well-anchored inflation expectations. Survey-based measures of longer-term inflation expectations remained stable, although market-based measures of inflation compensation over the next five years, as well as over the five-year period beginning five years ahead, moved down further over the intermeeting period. . It was noted that even if the declines in inflation compensation reflected lower inflation risk premiums rather than a reduction in expected inflation, policymakers might still want to take them into account because such changes could reflect increased concerns on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. In the end, participants generally agreed that it would take more time and analysis to draw definitive conclusions regarding the recent behavior of inflation compensation. ...With regard to inflation, a number of participants saw a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the Committee's commitment to that objective.  ...With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time

Highlights From the December Fed Minutes -- What caught our eye in the minutes from the Federal Open Market Committee’s December meeting released Wednesday. Fed officials are still very much concerned about the international economic outlook, even as they forecast strengthening growth. “Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient,” the minutes said.  When Chairwoman Janet Yellen said at her press conference last month that the Fed likely wouldn’t raise rates at its January or March policy meetings, she wasn’t speaking off the cuff. Minutes from the meeting say the same thing: “Most participants thought the reference to patience indicated that the committee was unlikely to begin the normalization process for at least the next couple of meetings.”  Fed staff is projecting an acceleration in GDP growth in 2015 and 2016, and that growth will temporarily outpace the economy’s potential output, according to the minutes. The jobless rate should continue to decline, central bank staffers said, and will “temporarily move slightly below the staff’s estimate of its longer-run natural rate.” Fed staff forecasts see a lower path for oil prices and a higher path for the dollar, the minutes say. But “although the projected path of the dollar was revised up, the staff revised down its estimate of how much the appreciation of the dollar since last summer would restrain projected growth in real GDP.” That should be good news for anyone worried about a currency drag on economic growth. The Federal Reserve has been missing its inflation target for 31 months now. Yet officials still believe they will make progress toward their goal as the labor market improves further and after a waning of what officials see as “temporary” effects from the plunge in oil prices and a rallying dollar. With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the committee might begin normalization at a time when core inflation was near current levels, the minutes said. “In that circumstance participants would want to be reasonably confident that inflation will move back toward 2% over time.”

Fed Holds Fire on Disinflation Threat -- The US Federal Reserve released its minutes from the December FOMC meeting just a few hours ago AEDST time (available here). The reaction on the markets has been mixed, whereas the pundits are chewing at the bit for signs of where the Fed shall strike next, with any rate rises put off until at least April.Adam Button at ForexLive has the sceptical take on inflation: The FOMC minutes show a total disregard for the signals markets are sending about disinflation. Five year breakeven rates are plunging, implying that 1.09% average inflation over that period. The Fed discussed this problem of signaling rate hikes while the market signals disinflation in the Dec 16-17 FOMC minutes and had this to say.Instead of listening to the market. The Fed decided to listen to its models — the same kinds of models that assumed house price declines wouldn’t happen or be limited. On top of that, Yellen specifically mentioned the University of Michigan survey on inflation expectations, which has overestimated inflation by 200 basis points for the past three years. This hearing disorder probably has grown out of an optimism condition, with most members dismissing any external risks, e.g deflation in Europe or fallout from the oil price collapse, with most betting on the ECB and others “doing something”, although some saw downside risks if “foreign policy responses were insufficient”. The question of rate rises by the Fed is being pushed out further and further, with the key point raised but not yet widely analysed is the lack of any acceleration in wages, although the huge relief from oil halving is sure to have an impact on disposable income.

Fed’s Rosengren Says Bank Can Be Patient in Lifting Rates - The Federal Reserve can be patient in raising interest rates because U.S. inflation and wage growth both remain low, Federal Reserve Bank of Boston President Eric Rosengren said Saturday.  “A patient approach to policy is prudent until we can more confidently expect that inflation will return to the Fed’s 2% target over the next several years,” Mr. Rosengren said in remarks prepared for delivery in Boston during the annual meeting of the American Economic Association. “Such patience also provides support to labor markets, boosting the prospects of the many Americans who were adversely impacted by the financial crisis, severe recession and slow recovery.” The Fed is expected to begin raising its target for the federal funds rate, which has been pinned near zero since December 2008, this year as the economy heals from the 2007-2009 financial crisis and recession. The precise timing remains up in the air, though Fed Chairwoman Janet Yellen said in December that the first rate increase was “unlikely” to come at the Fed’s next two meetings, which are in January and March. Mr. Rosengren said the timing of the first rate increase will depend on incoming economic data. But, he noted in his prepared remarks, “while market participants worry about whether liftoff will occur in April, June or August, in fact most models imply that the macroeconomic implications of such differences are quite small.”

San Francisco Fed’s Williams Sees No ‘Rush’ to Tighten Monetary Policy -- The Federal Reserve is in no rush to raise interest rates, and an initial rate increase coming in mid-2015 would be a “reasonable guess,” Federal Reserve Bank of San Francisco President John Williams said Monday. “The U.S. economy is improving, unemployment’s coming down” and “so we are getting closer to the point where I think it’d be appropriate for us to think about the pros and cons of raising interest rates,” Mr. Williams told reporters during the annual meeting of the American Economic Association in Boston. But, he said, “I see no reason whatsoever to rush to tightening. I don’t see any upside risks to inflation. I think these financial stability concerns that people do raise are real things we want to take into account, but that doesn’t argue for moving today or in the next few months relative to, say, later in the year.” Mr. Williams is a voting member this year of the Fed’s rate-setting panel, the Federal Open Market Committee. He served as the San Francisco Fed’s research director when Janet Yellen, now the Fed’s chairwoman, was president of the regional reserve bank. The Fed is expected to begin raising short-term interest rates, which have been pinned near zero since December 2008, sometime this year as the economy heals from the 2007-2009 financial crisis and recession. Ms. Yellen said in December that the first rate increase was “unlikely” to come at the Fed’s next two meetings, which are in January and March. Federal Reserve Bank of Cleveland President Loretta Mester said Friday she could see rates beginning to rise in the first half of the year, given the economy’s recent progress. Federal Reserve Bank of Boston President Eric Rosengren said Saturday the Fed should be patient because inflation and wage gains both remain unusually low.

Fed’s Rosengren: Exact Timing of Rate Increases Not a Huge Deal - Federal Reserve Bank of Boston President Eric Rosengren said Thursday that while Wall Street might obsess over the timing of central bank interest rate increases, in the broader scheme of things, the exact point of liftoff isn’t that critical. For the economy as a whole, the actual meeting at which central bankers choose to raise rates “doesn’t make that much of difference” in terms of overall activity levels, Mr. Rosengren said. He added that the decision to raise rates is a tricky one for Fed officials and is an “art, not a science.” Mr. Rosengren’s comments were made at a gathering of Wisconsin-area bankers. His formal remarks repeated a speech given on Jan. 3 in Boston. He reiterated his belief that the Fed hasn’t been “unusually patient” about raising short-term borrowing rates and, said with inflation at very low levels, the Fed faces little urgency to begin the process of lifting borrowing costs. Mr. Rosengren has been one of the Fed’s most steadfast supporters of keeping short-term rates at their current near-zero levels. Central bankers enter 2015 amid broad-based expectations that they will raise rates, most likely in the middle of the year. Mr. Rosengren won’t have a vote on the monetary-policy setting Federal Open Market Committee this year due to the normal rotation of regional bank presidents. Mr. Rosengren’s speech Thursday, including his responses to audience questions, largely repeated his long-held belief the Fed faces little urgency to boost the cost of borrowing.

Fed’s Evans Tells CNBC Don’t Raise Rates Until 2016 - Federal Reserve Bank of Chicago President Charles Evans told financial news network CNBC Friday that although the labor market is clearly on the mend, he doesn’t want to see the U.S. central bank raise rates this year. “I think employment growth has been very good for a long time now, and that’s an important criteria” for the Fed, Mr. Evans said in the interview. But with inflation well below the Fed’s 2% target rate, he said “I’m in favor of being patient on raising interest rates.” “We shouldn’t be raising rates before 2016 if things transpire as I’m expecting,” Mr. Evans said. Mr. Evans spoke to the television channel immediately in the wake of the release of robust hiring data for December. The U.S. economy added 252,000 jobs last month and saw the unemployment rate drop from 5.8% to 5.6%, its lowest reading since June 2008. With December’s data in hand, 2014 proved to be the best year for job growth since 1999. But less favorably, the jobs data continued to show meager levels of wage gains. Mr. Evans zeroed in on this factor as part of his argument that while the economy is clearly doing well, inflation is too weak. “We are going to have to see wages increase more” to get inflation to return to the 2% level desired by central bankers, the official said. Mr. Evans will hold a voting slot on this year’s interest rate setting Federal Open Market Committee. The central banker has been one of the strongest supporters of taking strong action to aid the economy. His current outlook for monetary policy puts him at odds with many of his colleagues, the majority of whom expect to see short-term rates moved up off their current near zero levels this year. Key Fed officials have pointed to the middle of the year as the most likely time for action.

Fed’s Evans: U.S. Might Not Hit Target Inflation Rate Until 2018 - Federal Reserve Bank of Chicago President Charles Evans said Wednesday the U.S. might not hit the Fed’s target inflation rate until 2018 and he doesn’t advocate raising interest rates until 2016. Mr. Evans, long-known as a proponent of accommodative policies, said the economy is currently exhibiting strong signs of growth, but low interest rates in the U.S. and weak economic performance elsewhere in the world should give the Federal Reserve pause as it determines when, and by how much, to raise interest rates. “We should be patient about maintaining the stance of our current policies,” said Mr. Evans at an event sponsored by the University of Chicago and held at the Federal Reserve Bank of Chicago. “We should be in no hurry to raise interest rates.” The Chicago Fed President said he would advocate hewing to “explicit” numerical targets for Fed policy, specifically, ensuring that a target 2% inflation is hit before reining in accommodative policy. The Fed has shown a lack of success thus far by not being able to goad rates up to that 2% mark, he said. “We ought to provide an appropriate amount of accommodation to hit the inflation goal,” he said. Mr. Evans, who will hold a voting slot on the monetary-policy-setting Federal Open Market Committee this year, spoke in the wake of the release of the meeting minutes from the central bank’s mid-December policy meeting. At that gathering, officials continued their preparations for what most believe will be an increase in what are now near zero short-term interest rates some time in the middle of this year. The meeting minutes reaffirmed that any move to boost short-term interest rates is unlikely to happen until after the spring. Mr. Evans said only one member of the committee advocates for more accomodative policy than does he. He didn’t identify that person.

Fed’s Kocherlakota: Fed Taking Risk On Credibility of 2% Inflation Target - Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Thursday the U.S. central bank is taking a big gamble by not acting more forcefully to defend its official 2% inflation target. Noting that inflation has fallen short of the target for two and half years, Mr. Kocherlakota said financial markets are taking notice of the Fed’s lack of action to push price pressures back up to levels the central bank says it officially desires. If this situation persists, he warned the public made lose confidence that the Fed is willing to take the steps necessary to push inflation higher. The Fed “has not provided sufficient stimulus to hit its inflation target,” the official said in Town Hall gathering held at his bank. “Persistent deviations” from the 2% target may weaken beliefs the Fed really wants inflation on target, Mr. Kocherlakota said. Market-based measures of future inflation are taking heed of the Fed’s lack of “substantial policy action” to falling inflation expectations, he said. The Fed’s “lack of response,” Mr. Kocherlakota said, “creates additional downside risk to the credibility of the 2% inflation target.” Mr. Kocherlakota, who will leave the Fed at the start of next year, has been for some time one of the central bank’s strongest supporters of taking robust steps to stimulate growth and push price pressures higher. He dissented at three Fed meetings last year, fearing the central bank’s slow evolution toward raising rates was out of line with the economy’s likely path.Most on the Fed expect to raise rates this year, with key officials pointing to the middle of the year as the most appropriate time to act. If that proves to be the case, Fed officials will almost certainly be boosting borrowings at a time when inflation is well below 2%. Many economists expect to see negative price readings through the start of the year due to falling energy prices, and some predict a deflationary environment for much of the year. To raise rates in such a climate would be unprecedented.

The Fed’s Puzzle: How Low Can Unemployment and Inflation Both Go? - The December jobs report falls right in line with the course the Fed is trying to chart for its monetary policy, and the upshot is that the numbers mean the Fed is most likely not going to hike rates any earlier than April, WSJ chief economics correspondent Jon Hilsenrath said this morning on the MoneyBeat show. But there’s an economic puzzle that the numbers underscore. Taking the report in the whole, the numbers suggest the Fed is going to stay in its “patient” stance, he said. “It means they’re not going to do anything before April, and they’re probably going to wait until the middle of the year before they raise interest rates.” Under the surface, though, he said the numbers point to a debate brewing within the Fed. “The big question is this: How low can the unemployment rate go before it starts to put upward pressure on wages and inflation?” Friday’s jobs report showed an economy that is creating jobs but not wage growth, which is keeping inflation from feeling any pressure. If that trend keeps up, it means unemployment may be able to sink even lower than the Fed previously assumed before any inflation starts to build. The corollary question is this: given those trends, how long can the Fed remain patient?

Checking Accounts at the Fed? - WSJ: Would you be more comfortable if your cash was held on deposit at the Federal Reserve? The central bank has been contemplating a larger role in the U.S. financial system, and details could come as soon as today with the release of minutes from the December meeting of the Fed’s Federal Open Market Committee. As usual, all of the financial world will be watching today’s release for clues on the timing and size of interest-rate increases expected within months. But some market players will also be looking for more information on an idea that received a brief mention in the October minutes: segregated cash accounts. This program would allow a large depositor—via a commercial bank—to establish an account at the Fed. Unlike an account simply held at the commercial bank, the money would theoretically be safe even if the bank fails. Remember, bank deposits are only insured up to $250,000. So the Fed may have an irresistible offer for corporations and other large institutions looking for a safe place to park their cash. And some Fed staff believe the program would provide a useful tool to manipulate interest rates upward once the central bank (finally) decides to end six years of near-zero rates. But do we want the lender of last resort to also be the borrower of last resort?

Could Lower 10-Year Yields Spark A More Aggressive Fed? -  Falling long-term interest rates pose a quandary for Federal Reserve officials. Yields on 10-year Treasury notes have fallen for eight consecutive trading sessions, by a total of 0.31 percentage points to 1.95% Wednesday. The 10-year yield is now around levels that prevailed before the famed “taper tantrum” of the summer of 2013, when it was considering ending its bond-buying program known as quantitative easing. If falling yields are a reflection of diminishing inflation prospects, as is typically the case, it ought to prompt the Fed to hold off on raising short-term interest rates in the months ahead. If, on the other hand, lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner or more aggressively than planned. The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made at length in a speech in December. He argued the Fed had the wrong reaction to lower long rates in the 2000s, a mistake that might have contributed to the housing boom that ended disastrously. Here is a key passage:  During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1 percent to 5.25 percent in 17 steps. However, during this period, 10-year Treasury note yields did not rise much, credit spreads generally narrowed and U.S. equity price indices moved higher. Moreover, the availability of mortgage credit eased, rather than tightened. As a result, financial market conditions did not tighten. As a result, financial conditions remained quite loose, despite the large increase in the federal funds rate. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector.

Fed Hands Record $98.7 Billion Back To Treasury For 2014 Operations -- The Federal Reserve said Friday earnings on its massive holdings of Treasury and mortgage bonds allowed it to return a record amount of money back to the Treasury Department in 2014. The Fed said in a press release that it handed back $98.7 billion in excess profits to the government, as it is required to do by law. The Fed’s earnings are driven mostly by the interest it makes on bonds it owns. Services the central bank offers to financial institutions also contribute. The central bank returns to the Treasury all of its profits outside of the money needed to operate the Fed. The money sent to the Treasury for last year’s operations is the greatest since 2012, when the Fed handed over $88.4 billion. The figures released by the Fed Friday are preliminary and subject to revision.

Fed Will Continue Reverse Repo Tests Through January 2016 - The Federal Reserve in December authorized another year of tests for a program designed to set a floor under short-term interest rates, while shelving another idea it had considered to help it raise rates when the time comes. The  Fed decided at its policy meeting last month to continue experimenting with its so-called overnight reverse repurchase facility through Jan. 29, 2016, according to minutes of the meeting released Wednesday. The program had been set to end this month. The Fed also decided to put aside plans to create a so-called “segregated accounts” facility. This tool had been mentioned in the minutes of the Fed’s October policy meeting, but had drawn little comment by central bank officials. The minutes said “operational, regulatory, and policy issues” that are unlikely to be addressed in a “timely fashion” led to the abandonment of the idea. The extension of the reverse repo program was not a surprise. Fed officials have for some time described the effort as a key part of their tool kit for raising short-term rates from near zero.

Fed Backs More Overseas Stimulus -  Federal Reserve officials, worried about weak growth overseas, are endorsing new measures by foreign officials—most notably at the European Central Bank—to stimulate their economies.  Fed officials rarely comment on the decisions taken by foreign central banks and have generally played down risks to domestic growth emanating from abroad. Yet minutes of the Fed’s Dec. 16-17 policy meeting included several references to the urgency U.S. officials and market participants are placing on new policy actions to counteract slow growth outside the U.S. ...The minutes showed Fed officials “regarded the international situation as an important source of downside risks to domestic real activity and employment.” They added that the risks were particularly serious “if foreign policy responses were insufficient.” In another place in the Fed minutes, officials warned that financial markets had been “importantly influenced by concerns about prospects for foreign economic growth and by associated expectations of monetary policy actions in Europe and Japan.”

Minneapolis Fed’s Kocherlakota Opposes Policy Rule to Decide U.S. Monetary Policy - The Federal Reserve should have discretion in setting monetary policy and shouldn’t be forced to follow a formal policy rule, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Sunday. For the U.S. central bank, “discretion’s going to be better than any rule,” Mr. Kocherlakota said while speaking to the Korea-America Economic Association in Boston during the annual meeting of the American Economic Association. A policy rule, such as the Taylor rule, is a mathematical equation that calculates the appropriate level for interest rates. Mr. Kocherlakota said such rules can be useful when a central bank on its own would allow too much inflation. But, he said, there’s “little evidence” of a pro-inflation bias on the part of Fed officials. House Republicans last year introduced legislation that would have, among other things, required the Fed to adopt a formal Taylor-style rule. Rep. Jeb Hensarling (R., Texas), chairman of the House Financial Services Committee, said a “clear, predictable rule” would decide policy “free from political micromanagement.” The proposal faced strong opposition from Democrats and Fed leaders. “It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule,” Chairwoman Janet Yellen told lawmakers last summer.

A handy tool — but not the only one in the box - FT.com --  Martin Wolf  - Richard Koo has a big hammer: it is the idea of the “balance sheet recession” — which happens when the indebted focus on paying down debt. But people with hammers tend to view everything as a nail. Here, the chief economist of the Nomura Research Institute shows the virtues, but also the limitations, of his intellectual tool. Balance sheet recession is a development of the concept of “debt deflation”, advanced by American economist Irving Fisher during the Great Depression. Fisher noticed that, if the price level falls, the real value of debt will rise. If many people are highly indebted, the economy then risks falling into a vicious downward spiral. Koo argues that much the same thing will happen after the implosion of a debt-fuelled asset-price bubble even with little (if any) deflation. He had a ringside seat at just such an event in Japan in the early 1990s. The collapse of asset prices shifted the private sector into huge surplus, as income that would otherwise have been spent was devoted to repayment. A shortage of willing and solvent private borrowers rendered low interest rates ineffective. The government had to use fiscal policy, borrowing and spending instead. Moreover, the surpluses of the private sector also allowed the government to borrow easily and cheaply for years. The Escape from Balance Sheet Recession develops this argument, laid out in The Holy Grail of Macroeconomics (2011), in three ways. First, it argues that one legacy of a balance-sheet recession is “debt trauma”, which discourages people from borrowing for years. Second, it states that unconventional monetary policies, particularly quantitative easing, have more dangerous consequences than prolonged fiscal deficits. Finally, it extends his analysis to the US, the eurozone and China since the global financial crisis. In particular, Koo argues that policy has been mistaken in the US and the eurozone because of inadequate (in the US) or no (the eurozone) understanding of balance-sheet recessions — as well as because of America’s over-reliance on QE.

Not Invented Here Macroeconomics - Paul Krugman -- Martin Wolf writes sympathetically about Richard Koo’s latest; let me be a bit less sympathetic. As Wolf notes, Koo had a big and important idea: he realized that Irving Fisher’s notion of debt deflation can explain persistent economic weakness even without literal deflation. As long as some part of the private sector has, for whatever reason, taken on levels of debt that now look excessive, the efforts of debtors to pay off their debts can act as a persistent drag on aggregate demand — one that is hard to counter with monetary policy, because many players in the economy can’t or won’t spend more no matter how cheap money becomes. Koo argues further that deficit spending can play a useful role in a balance sheet recession, not just by providing a temporary boost, but by providing a favorable environment for debtors to deleverage, setting the stage for durable recovery. This is a very useful insight, and one that many of us have taken on board, fully acknowledging Koo’s contribution.  But Koo hasn’t just argued for the usefulness of fiscal stimulus in balance-sheet recessions; he has engaged in a relentless jihad against any attempt to use monetary policy, either as a supplement to fiscal policy or as the best you can do if fiscal policy is paralyzed by politics. And it’s very hard to see why.

In defence of NGDP targets: Tony Yates had recently written a couple of posts (here, and here, but see also the discussion with Andy Harless on the second) slamming the idea of NGDP targets. (From now on I assume this refers to targeting the level of NGDP.) Now you might think that NGDP targets do not need any support from lukewarm advocates like me, given all the supporters in the econ blogging world. That would be wrong, because - as Tony rightly says - most advocates of NGDP targets tend to argue in a model free way. Both he and I want to stay close to the academic literature, at least as a starting point. I think Tony is wrong when he says that “the case for levels based targets – including NGDP levels targets – is, both practically and analytically, extremely weak”. In making such a claim, Tony should be very worried that one of the supporters of NGDP targets is Michael Woodford, who literally wrote the book on modern monetary theory. ...  Having said all this, it is great that Tony is opening up the discussion on the correct level, so we can get away from what often seems like faith based arguments for NGDP targets. I think the framework that he seems to have in mind is also the correct one: the ultimate policy target would be inflation (and the output gap: I would want a dual mandate), and NGDP would be an intermediate target to achieving welfare maximising paths. So I hope this discussion continues. My one last plea is that arguments make clear whether a NGDP targeting regime is being compared to some form of optimal policy, or policy as currently practiced: as I suggest here these are (unfortunately) different things.

Permanent QE and helicopter money - what impact can QE have on inflation and growth, and what are the pros and cons of helicopter money? : What’s at stake: As the ECB contemplates its own version of quantitative easing, this review clarifies the conditions under which this policy is believed to matter (beyond the portfolio channel) for inflation and growth. Unlike what was done in the US, the associated monetary base growth needs to be permanent. Within this framework, this review also discusses the pros and cons of helicopter money – i.e. overt money-financed deficits – as compared with permanent QE. (linked summary to the debate)

Gauging Inflation Expectations with Surveys, Part 1: The Perspective of Firms - Atlanta Fed's macroblog - Inflation expectations matter. Just ask any central banker (such as the Federal Reserve, the European Central Bank, the Bank of England, or the Bank of Japan). Central bankers measure inflation expectations in more than a few ways, which is another way of saying no measure of inflation expectations is entirely persuasive. Survey data on inflation expectations are especially hard to interpret. Surveys of professional economists, such as the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters, reveal inflation expectations that, over time, track fairly close to the trend in the officially reported inflation data. But the inflation predictions by professional forecasters are extraordinarily similar and call into question whether they represent the broader population. The inflation surveys of households, however, reveal a remarkably wide range of opinion on future inflation compared to those of professional forecasters. Really, really wide. For example, in any particular month, 13 percent of the University of Michigan's survey of households predicts year-ahead inflation to be more than 10 percent, an annual inflation rate not seen since October 1981. Even in the aggregate, the inflation predictions of households persistently track much higher than the officially reported inflation data (see the chart). These and other curious patterns in the household survey data call into question whether these data really represent the inflation predictions on which households act.

Gauging Inflation Expectations with Surveys, Part 2: The Question You Ask Matters A Lot - Atlanta Fed's macroblog -  In our previous macroblog post, we discussed the inflation expectations of firms and observed that—while on average these expectations look similar to that of professional forecasters—they reveal considerably more variation of opinion. Further, the inflation expectations of firms look very different from what we see in the household survey of inflation expectations.  The usual focal point when trying to explain measurement differences among surveys of inflation expectations is the respondent, or who is taking the survey. In the previous macroblog post, we noted that some researchers have indicated that not all households are equally informed about inflation trends and that their expectations are somehow biased by this ignorance. For example, Christopher Carroll over at Johns Hopkins suggests that households update their inflation expectations through the news, and some may only infrequently read the press. Another example comes from a group of researchers at the New York Fed and Carnegie Mellon They've suggested that less financially literate households tend to persistently have the highest inflation expectations. But what these and related research assume is that whom you ask the question of is of primary significance. Could it be that it's the question being asked that accounts for such disagreement among the surveys?

Jeffrey Gundlach: A Bold Prediction on U.S. Interest Rates and Deflation - Jeffrey Gundlach, the bond guru who was prescient on Treasury yields plunging in 2014, has been making some bold predictions for rates in 2015. On December 9 of last year, Gundlach told Reuters’ Jennifer Ablan that the yield on the benchmark 10-year U.S. Treasury note could fall to 1 percent this year. Gundlach is quoted as follows in the article: “I still believe that there is a danger of repeat of a Treasury meltup that 2014 did end up bringing, particularly into the crescendo of October 15. If something can’t go up, it has to go down. Yields can’t seem to go up. They might go down. And if they go down any amount again, if the 10-year goes below 2 percent, even below 2.20 percent, that’s the line in the sand I am talking about.”  A month before the Reuters interview, Gundlach was opining to Forbes’ Matt Schifrin on why the Fed wants to raise interest rates and the impact that will have on the U.S. dollar. On the Fed’s motivation, Gundlach said: “They don’t really need the rates to be higher, but they seem to want to reload the gun so they aren’t stuck at zero without any tools.” Here at Wall Street On Parade, we were thinking along the same lines back on October 14. As for the dollar, Gundlach told Schifrin that if the Fed tightens in 2015, the dollar will strengthen further, causing commodity prices to also fall: “[we will] import deflation and you will see an episode of deflationary scare,” Gundlach said. Why does a rising U.S. dollar worsen the outlook on deflation inside the United States? Consumers in this country buy imported goods with their dollars. The imports are priced in currencies which are declining in value to the dollar, lowering the cost of what consumers pay for the imports.

Don't Worry, Be Happy: Falling Treasury Yields Edition - Long-term treasury interest rates are falling again with the 10-year treasury briefly dipping below 2% this week. Some observers see this decline in yields as an omen for the U.S. economy: The United States economy is accelerating... Yet a huge bond market with a strong track record for predicting economic problems is flashing a warning sign right now. The prices of Treasury bonds are rallying fiercely. The slide in oil prices has elevated concerns about growth in the global economy, and investors, as they do in times of stress and uncertainty, are seeking out the safety of government bonds.  The rally in global government debt is pushing their yields, which move in the opposite direction from their price, to astonishing lows... “Make no mistake, these low levels of rates are challenging the notion that we are going to see robust and constant growth,” said George Goncalves, a bond market analyst with Nomura. In other words, the bond market is raising the specter that a period of economic growth that may have already felt lackluster to many Americans could be on the verge of losing steam. So is this dire view of the falling interest warranted? I am not convinced that it is, but before I explain why it is worth noting that even monetary authorities are bewildered by it. According to the Wall Street Journal's Jon Hilsenrath (AKA the "Fed Wire"), Fed officials are not sure how to interpret what is going on with yields: Falling long-term interest rates pose a quandary for Federal Reserve officials... If falling yields are a reflection of diminishing inflation prospects, as is typically the case, it ought to prompt the Fed to hold off on raising short-term interest rates in the months ahead. If, on the other hand, lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner or more aggressively than planned. [...]  The Fed’s next policy meeting is three weeks away. It is clear officials will spend a considerable time debating the correct response to a perplexing lurch down in long-term rates.

The Dollar’s Recent Rise in Perspective -- The dollar has exhibited substantial strength in the past few months, both against the euro, and against a basket of currencies, as noted in the press (e.g., [1] [2]) While this assessment is correct, it’s useful to keep the dollar’s movement in perspective.  The appreciation since July looks substantial on a broad basis — 7.8% in log terms, bringing the value back to where it was in the wake of the Lehman collapse. Figure 2 provides a longer view. In real (CPI deflated) terms, the appreciation is less pronounced; as of November, it’s some 8.4% lower than it was in March 2009. If nominal matches real in December, then it’ll be about 6% lower.  Furthermore, as discussed in previous posts, it’s not clear that CPI deflated measures of the real exchange rate are the most useful for measuring international competitiveness. A more useful concept would be the labor productivity adjusted measure, namely the unit labor cost (ULC) deflated real rate. I plot both series in Figure 3, over a long time span. Figure 3 demonstrates that we are some way away from a deterioration in competitiveness rivaling that of the early 2000’s, let alone the mid-1980’s, using either the CPI or ULC deflated measures (although there will be some reduction in output relative to counterfactual, as discussed in this post). Working the other direction, it might be that US imports are more substitutable with home production, and US exports with foreign production, than in decades past. I suspect that’s the case, but I don’t know of any specific empirical work that validates that view.

Don’t believe what you hear about the US economy - Dean Baker - The end of the year produced a number of media celebrations for the United States’ economic comeback. News stories endlessly touted the 5.0 percent GDP growth figure for the third quarter, contrasting it with weak growth in Europe, slowing growth in China and a recession in Japan. Reporters also touted the 321,000 jobs gained in November — the strongest such growth in almost three years. In addition, the month’s 0.4 percent rise in the average hourly wage was taken as evidence that workers were now sharing in the benefits of growth. The economic news was so positive, in fact, that the Republicans switched from blaming Obama for his allegedly job-killing taxes and regulations to taking credit for the economy’s performance. Leading Republican anti-tax crusader Grover Norquist credited the budget cuts demanded by Republicans in 2011 for the economy’s strength. As usual, just about everything we’ve heard about the economy is wrong. To start, the 5.0 percent growth number must be understood against a darker backdrop: The economy actually shrank at a 2.1 percent annual rate in the first quarter. If we take the first three quarters of the year together, the average growth rate was a more modest 2.5 percent. The economy is very slowly making up the gap between potential GDP and actual GDP — that is, the value of the goods and services the economy could be producing but isn’t because of a lack of demand. The Congressional Budget Office puts the size of this gap at 3.6 percent of GDP, which comes to more than $600 billion annually, or more than $4,000 per household. This is a lot of money to be throwing in the garbage every year. At the economy’s growth rate through the first three quarters of 2014, we will close this gap in 12 to 36 years.

2015 U.S. Budget Debate Depends On These Top 5 Things - Stan Collender This year the leadership is trying to tell that same story on the federal budget: compromise is ahead. But never mind what’s being said, five federal budget events will tell the real story about whether anything beyond the hyper partisan recriminations of the past few years can and will be accomplished this year.

  1. Will House Republicans be able to agree with Senate Republicans on a budget resolution? - House Republicans are far more uncompromisingly conservative than their Senate colleagues. In addition, 24 of the 34 senators up for reelection in 2016 will be Republicans, many of them will be from blue states and some will have political problems voting for the changes in Medicare, Medicaid, Social Security and Food Stamps the House GOP will likely include in its proposed budget resolution. It’s not at all clear whether the House will agree to the more moderate proposals the GOP Senate majority is likely to offer in response. For that matter, it’s not clear that tea party Republican senators will agree to them either.
  2. Can the GOP compromise with the White House on anything budget-related? For the past six years many House and Senate Republicans considered compromising with the White House to be the political equivalent of collaborating with the enemy.  It’s not at all clear how much, if anything, of that has changed now.
  3. Will dynamic scoring be a litmus test for the new CBO director? The speculation…and for now that’s all it is…is that House and Senate Republicans want a CBO director who is fully committed to “dynamic scoring,” the estimating process that assumes a greater positive economic effect from cutting taxes, reduces the projected revenue loss and, therefore, doesn’t assume as big an increase in the deficit. That will reduce the procedural hurdles and make the politics of a tax cut much simpler.than cooperative.
  4. Will the Senate parliamentarian make it possible to make big changes to Obamacare in reconciliation?
  5. Will the tea party try to use the debt ceiling to force the GOP leadership (and White House) to do something?

Dynamic Scouring - -- Mark Thoma and Edward Kleinbard both have op-eds about Republican proposals for "dynamic scoring" of tax cut legislation. It would be helpful to point out that dynamic scoring is a euphemism for "secondary and indirect benefits" -- particularly those arising from what is known as the Keynesian multiplier. Sandwichman has been documenting the controversy over secondary and indirect benefits in the early 1950s that eventually resulted in their virtual exclusion from standard cost-benefit analysis, as per Bureau of the Budget Circular A-47. Implementing dynamic scoring for tax cuts would, in effect, declare "multipliers for me but no multiplier for thee." As the panel of consultant's report from 1952 outlined in excruciating detail, there are limits to the usefulness and transparency of incorporating secondary and indirect benefits in a quantitative cost benefit analysis. There are also huge pitfalls in disregarding these difficult or impossible to quantify outcomes. Familiarity with the panel's discussion could inform deliberation over the dynamic scoring proposal.  I have so far posted Parts I and II of the report. I have scanned in and proof read Part III but its considerable length poses some formatting challenges for posting on the blog.
Part IA. Instructions of Michael W. Straus, Commissioner, Bureau of Reclamation, to Panel of Consultants on Secondary or Indirect Benefits
Part IB. Summary Response to the Commissioner's Instructions
Part IIA. Conclusions and Recommendations: Introduction
Part IIB Conclusions and Recommendations: Summary of Principal Recommendations

White House Budget Director Blasts GOP ‘Dynamic Scoring’ Plans -- Shaun Donovan, the director of the White House’s Office of Management and Budget, criticized the push by House Republican leaders to require congressional budget analysts to estimate growth boosts from tax cuts and other legislative changes. As part of the legislative process, the Congressional Budget Office and the Joint Committee on Taxation create estimates of how much new legislation will impact taxes and revenues. The move by Republicans calls for these official tallies to also estimate the macroeconomic impacts of legislation, known in budget jargon as “dynamic scoring.” For example, if tax cuts make the economy grow faster, then additional revenue from faster growth should count as an offset for the revenue lost to the tax cut. Using this set of assumptions, the estimates of lost revenue from tax cuts can be much smaller. “Dynamic scoring can create a bias favoring tax cuts over investments in infrastructure, education, and other priorities,” wrote Mr. Donovan in a blog posted today on the White House website. The White House will have little scope to influence the decision, however. Appointing the director of the CBO falls to House and Senate leadership – both in Republican control. The Joint Committee on Taxation, too, is controlled by the majority party. But the skirmish is laying the groundwork for further clashes and gridlock between the Republican-controlled Congress and President Barack Obama’s White House. The change would make congressional tax-cutting proposals appear more cost-effective – perhaps easing their passage among lawmakers mindful of appearing fiscally prudent – but only by using math that the White House rejects. The switch to dynamic scoring would require budget scorekeepers to “make assumptions in areas with unusually great uncertainty,” Mr. Donovan said in the post. “While all budget estimates are uncertain, there is substantially more disagreement among economists and experts about how policy changes affect the macroeconomy than about most other scoring issues.”

U.S. House votes to adopt contentious changes to cost estimates  (Reuters) - More macroeconomic projections will be included in cost estimates for major fiscal legislation in the U.S. House of Representatives under a rule change approved on Tuesday, a move critics said could mask the true impact of tax cuts. The move toward "dynamic scoring," as the approach to gauging the budgetary effect of tax and spending changes is known, was part of a rules package passed on a 234-172 party-line vote as the Republican-controlled Congress began its work. The change, which applies only to House bills for now, requires that more macroeconomic effects be taken into account when analyzing "major legislation" and its estimated cost estimates, work done by the Congressional Budget Office and the Joint Committee on Taxation. true Republicans say the CBO's and JCT's current estimating methods fail to reflect government revenues generated when tax cuts or other legislative changes boost economic growth. Democrats blasted the change as "voodoo economics" that would make it easier for Republicans to cut tax rates without increasing federal deficits in their tax reform plans this year. The change would apply to House bills that involve spending or taxation equal to 0.25 percent of U.S. gross domestic product, or those deemed important by the chairmen of the JCT and House Budget committees.

House Republicans Change Rules on Calculating Economic Impact of Bills - — After the drama of electing a new speaker of the House and the changing of control in the Senate, the House on Tuesday approved an obscure but significant rule change requiring the economic effects of legislation to be included in a bill’s official cost to the Treasury. The change on “dynamic scoring” — ardently sought since the 1990s by Republicans — could ease passage of major tax cuts by showing that their impact on economic growth would substantially reduce their cost to the Treasury. The move is widely seen as a way for Republican leaders to set ground rules for an ambitious overhaul of the entire United States tax code. “We’re saying, ‘If you think a piece of legislation is going to have a big effect on the economy, then include that effect in the official cost estimate,’ ” said Representative Tom Price, Republican of Georgia, the new chairman of the House Budget Committee. “So if you think a bill is going to help or hurt the economy, then tell us how much.” Democrats blasted the change as “voodoo economics,” a “gamble” and “tax fraud.” Opponents said the rule change would invite politicized scorekeeping, further tilt policy to benefit the rich, and expand the budget deficit. Shaun Donovan, the White House budget director, implored the House not to “upend the level playing field that has existed for decades” and “call into question the accuracy, consistency and fairness” of congressional budget estimates.“The basic problem remains that macroeconomic work is useful in the laboratory but not in the field,” said Edward D. Kleinbard, a law professor at the University of Southern California and a longtime chief of staff at the congressional Joint Committee on Taxation, which officially tallies the cost of tax proposals. “The models are too simplistic and the range of the possible outcomes so great that it opens the process to too much in the way of political intuitions.”

Republicans Make 1+1=3 « Yesterday, the GOP House changed how the fiscal costs of legislation are calculated:  The House on Tuesday adopted a controversial rule to require macroeconomic scoring on major legislation in the new Congress, which opponents say will politicize impartial budget analyses. … So-called “dynamic scoring” typically offers a more favorable view of cutting taxes, which is part of why Republicans support the method. Chait claims the new GOP Congress is going after math itself:  The new, “dynamic” CBO will be systematically biased to make conservative proposals appear misleadingly cheap and liberal proposals misleadingly costly to the public fisc. This would be true even if the Republicans were soliciting a fair range of forecasting perspectives. By its design, the dynamic scoring rule allows the party in power to game its effects. It applies “dynamic scoring” only to legislation affecting 0.25 percent of Gross Domestic Product. As Chye-Ching Huang and Paul Van de Water point out, congressional leaders can manipulate this requirement easily: They can break up large pieces of legislation into smaller bills to avoid dynamic scoring, or combine smaller pieces into a major bill, if needed to make their agenda appear more affordable. Dynamic scoring is subject to abuse by its very design.

Rep. Goodlatte would abolish taxes, balance the budget: Sometimes, the strangeness on Capitol Hill takes your breath away. Representative Bob Goodlatte (R-VA) introduced three bills as soon as the new Congress was sworn in this week. The first would abolish the entire tax code and replace it with…something else.  The other two would amend the Constitution to require a balanced budget. One specifically bars Congress from spending any more than it collects in revenue. Regrettably, Rep. Goodlatte did not explain exactly how he’d pay for government without a tax code. Nor did he describe what revenue collection method would replace the existing system. Rather, he seems to see repeal as something of a forcing mechanism. His logic: If Congress has a deadline after which there are no taxes (his would be 2019), it will have to replace the current code within that window. And we all know how well Congress does with deadlines. What is truly remarkable about this is that Goodlatte is no back-bencher. He is chairman of the House Judiciary Committee and thus a relatively important person on the congressional pantheon. The House has passed versions of his tax code repeal and his balanced budget amendment in the past.

New GOP Congress Fires Shot At Social Security On Day One: With a little-noticed proposal, Republicans took aim at Social Security on the very first day of the 114th Congress. The incoming GOP majority approved late Tuesday a new rule that experts say could provoke an unprecedented crisis that conservatives could use as leverage in upcoming debates over entitlement reform. The largely overlooked change puts a new restriction on the routine transfer of tax revenues between the traditional Social Security retirement trust fund and the Social Security disability program. The transfers, known as reallocation, had historically been routine; the liberal Center for Budget and Policy Priorities said Tuesday that they had been made 11 times. The CBPP added that the disability insurance program "isn't broken," but the program has been strained by demographic trends that the reallocations are intended to address. The House GOP's rule change would still allow for a reallocation from the retirement fund to shore up the disability fund -- but only if an accompanying proposal "improves the overall financial health of the combined Social Security Trust Funds," per the rule, expected to be passed on Tuesday. While that language is vague, experts say it would likely mean any reallocation would have to be balanced by new revenues or benefit cuts. House Democrats are sounding the alarm. In a memo circulated to their allies Tuesday, Democratic staffers said that that would mean "either new revenues or benefit cuts for current or future beneficiaries." New revenues are highly unlikely to be approved by the deeply tax-averse Republican-led Congress, leaving benefit cuts as the obvious alternative.

Senate passes terrorism insurance bill, the first cleared by the new Congress - The Washington Post: The Senate overwhelmingly passed a six-year extension of a terrorism insurance program Thursday, wrapping up work on an unfinished piece of business from the last Congress and sending the bill to President Obama for his signature. The passage of the bill marked the first time legislation was cleared by both chambers of the 114th Congress. The bill passed the House on Tuesday Wednesday. The Terrorism Risk Insurance Act (TRIA) was signed into law in 2002 by then-President George W. Bush after the 2001 terrorist attacks. It allows the government to serve as a financial backstop for businesses suffering losses due to catastrophic attacks. Sen. Elizabeth Warren (D-Mass.) introduced an amendment to the bill that would strip it of a provision that would alter the Dodd-Frank financial regulation law. Warren's amendment failed.

Getting It Wrong on Disability Insurance -- I’ve explained that a new House rule will make it harder to reapportion payroll taxes between Social Security’s retirement and Disability Insurance (DI) trust funds to avert a one-fifth cut in benefits to severely impaired DI recipients in late 2016.  In a revealing statement, co-sponsor Representative Tom Reed (R-NY) says the change is designed to prevent Congress from “raiding Social Security to bail out a failing federal program.”  He’s doubly wrong.First, far from “failing,” DI has grown mostly in response to well-understood demographic and program factors like the aging of the baby boom, and the program’s trustees have long anticipated the need to replenish the trust fund next year...  Second, DI isn’t distinct from Social Security; it’s an essential part of Social Security.Social Security is much more than a retirement program.  It pays modest but guaranteed benefits when someone with a steady work history dies, retires, or becomes severely disabled. ...  Statements like Representative Reed’s implicitly attempt to pit Social Security retirement and disability beneficiaries against each other.

New U.S. Stealth Jet Can’t Fire Its Gun Until 2019 - The Pentagon’s newest stealth jet, the nearly $400 billion Joint Strike Fighter, won’t be able to fire its gun during operational missions until 2019, three to four years after it becomes operational. Even though the Joint Strike Fighter, or F-35, is supposed to join frontline U.S. Marine Corps fighter squadrons next year and Air Force units in 2016, the jet’s software does not yet have the ability to shoot its 25mm cannon. But even when the jet will be able to shoot its gun, the F-35 barely carries enough ammunition to make the weapon useful. The tri-service F-35 is crucial to the Pentagon’s plans to modernize America’s tactical fighter fleet. The Defense Department hopes to buy 2,443 of the new stealth jets in three versions—one for the Air Force, one for the Navy, and one for the Marines. Versions of the jet will replace everything from the air arm’s A-10 Warthog ground attack plane and Lockheed F-16 multirole fighter, to the Navy’s Boeing F/A-18 Hornet carrier-based fighter, to the Marines’ Boeing AV-8B Harrier II jump-jet. But the F-35 has been plagued with massive delays and cost overruns—mostly due to design defects and software issues. There have also been problems with the jet’s engine. An F-35 was destroyed on takeoff earlier in the year when a design flaw in its Pratt & Whitney F135 engine sparked a fire.

Tax Inversion Remains (Huge) - Yves Smith -  When normally MEGO (My Eyes Glaze Over) inducing tax schemes become a topic of national debate, it's because despite their complexity, they've become too big and ugly to ignore. Mind you, multinationals already have tons of ways to escape from the tax man, starting with clever transfer pricing so as to claim pretty much all their profits occurred in super low tax domiciles. But the trick that has caused consternation is tax inversions. In crude terms is using mergers as a way to move the headquarters of a company from a higher tax to a lower tax jurisdiction. The acquired company in the lower-tax location becomes the new parent company. The Treasury Department was so concerned about potential revenue loss that it took measures to reduce tax inversions. This article argues, in effect, that while Treasury may have made it more difficult, that the incentive to enter into inversion remains. The analysis is clever and compelling. It also happens to debunk the argument made by defenders of Antonio Weiss, the Lazard banker nominated to a Treasury post who is fiercely opposed by Elizabeth Warren. Weiss was an important advisor on the Burger King-Hortons merger, the deal that (according to the Wall Street Journal) that led Treasury to put rules in place to combat tax inversions. The defenders argued that the tax rates between US and Canada weren't all that different, so that the tax considerations weren't important to the deal. This article mentions the Burger King deal and the difference between US and Canadian inbound divident repatriation tax rates at 10%, more than enough to be motivating.

By The Way, Tax Extenders Are Expired Again -- It’s worth remembering that the tax extender compromise approved three weeks ago is already expired again. The “extenders,” tax provisions that are approved on a haphazard temporary basis, were last month approved retroactively only for 2014, leaving their 2015 status in doubt. Taxpayers, including small businesses with expansion plans, will need to plan around deciding whether some of these provisions will be extended retroactively again.  Needless to say, this is just objectively dumb. Instead, we should decide once and for all which of these tax breaks should become permanent and which should be discarded. Around this time last year, we compiled a helpful guide for lawmakers on which extenders could actually be worth preserving. Instead of rehashing that, I’d just like to consider how short the life of the 2014 extenders was. Two weeks. Tax extenders, we hardly knew ye. If you were spending your holidays with family and friends and not paying attention to legislation, you may have entirely missed the life of the tax extenders. Their life was shorter than most celebrity marriages. It was even shorter than the portion of the NFL season where the Jets actually have playoff hopes.

The Real Winners Of The Recovery: The Superrich --Much has been made of the yawning gap between the 1% and the 99% and that America is by and large a plutocracy. But inequality is also expanding within the commanding heights of the US economy as new research shows that the top .1% has broken away from their uber-wealthy peers and amassed more than 22% of the wealth . In other words, the top one-thousandth of the country controls one-fifth of the wealth. There are both short term and long term trends that led to this highly stratified economy. The short term trend is, obviously, the financial bailouts. The top 1% and .01% own a disproportionate amount of financial assets such as those saved and augmented by TARP. The average American has a tangential relationship with the stock market or financial markets generally. The overwhelming amount of activity is generated by and for the rich and superrich which is why the Dow Jones Industrial Average (DOW) is a terrible indicator for general prosperity – the measure is nearly irrelevant to the lives of average people except when it crashes. The long term trend exacerbating wealth inequality is the structure of compensation for corporate executives. Corporate executives are now siphoning off more and more of a firm’s wealth while the pay of the average worker is treading water. According to the AFL-CIO, the CEOs of S&P 500 Index companies made, on average, $12,259,894 in 2012, or 354 times that of the average rank-and-file U.S. worker. Meanwhile, in Japan, the average CEO earned $2,354,581 in 2012, or 67 times what his or her average worker earned.

The CBO’s Bad Math: Putting $7 Trillion of Notional Value of Derivatives in Taxpayer-Backstopped Depositaries Will Cost Zero --  Yves Smith --So why did Elizabeth Warren lose her battle last month to stop banks from continuing to park $7 trillion notional value of risky derivatives like the credit defaults swaps in taxpayer-backstopped depositaries? One of the less well-recognized reasons is that the CBO’s dubious analysis said it would not cost taxpayers a dime.The Congressional Budget Office forecasts have enormous clout on the Hill. Yet as we’ve written, one of its most influential analyses, that of projected Medicare cost increases, was so rancid that two fiscal budgeting experts from the Fed roused themselves to write a lengthy academic paper demolishing it. That CBO work was so problematic on so many fronts, including that it violated CBO policies for the preparation of long-term forecasts in multiple ways, that it raises questions as to the intellectual honesty of the exercise. In the case of the so-called swaps pushout rule analysis, the CBO came to a similarly dubious conclusion. We’ve embedded a report from the House Committee on Financial Services, which includes the CBO’s budget estimate on pages 5-6. The key bit is that “any impact on the cash flows of the Federal Reserve or the FDIC over the next 10 years would not be significant.” In budgetary terms, that is tantamount to saying it will have no cost.  This is absurd on multiple levels. There is an obvious subsidy to the banks here, otherwise Jamie Dimon would not have been lobbying personally to get the bill passed. FDIC insurance is widely acknowledged by banking experts to be underpriced, so increasing the risk held in depositaries, particularly of positions can and do go boom, makes the odds of going though the FDIC’s kitty even greater.

The Republican Strategy To Repeal Dodd-Frank – Simon Johnson - The initial target is the Volcker Rule, which limits the ability of megabanks to place very large proprietary bets – and their ability to incur massive losses, with big negative consequences for the rest of us. But we should expect the House Republican strategy to be applied more broadly, including all kinds of measures that will reduce capital requirements. The repeal of Dodd-Frank will not come in one fell swoop. Rather House Republicans are moving in several stages to reduce the scope of the Volcker Rule and to gut its effectiveness. The first step in this direction came on Wednesday, with a bill brought to the floor of the House supposedly to “make technical corrections” to Dodd-Frank. This legislation was not considered in the House Financial Services Committee, and was rushed to the House floor without allowing the usual debate or potential for amendments (formally, there was a “suspension” of House rules). Buried in this legislation is Title VIII, which will extend the deadline for one important aspect of Volcker Rule compliance to 2019. (The specific topic is by when big banks should divest themselves of some Collateralized Loan Obligations, CLOs – on how these investments function as internal hedge funds at the largest three banks, see this primer from Better Markets, a pro-reform group.)Some very large banks and House Republicans previously asked to extend this deadline for CLO compliance through 2017, and a full extension was actually granted by the Federal Reserve in 2014. Now that Citigroup, JP Morgan Chase and Wells Fargo already have the extension through 2017, they immediately ask for… an extension through 2019.

How the Republican Campaign to Gut Dodd Frank is a Huge Gimmie to Banks and Hedge Funds - Yves Smith - The Republicans have been quick and shameless in using their control of both houses to try to crank up the financial services pork machine into overtime operation. The Democrats at least try to meter out their give-aways over time. Their plan, as outlined in an important post by Simon Johnson, is to take apart Dodd Frank by dismantling key parts of it under the rubric of "clarifications" or "improvements" and to focus on technical issues that they believe to be over the general public's head and therefore unlikely to attract interest, much the less ire. However, as Elizabeth Warren demonstrated in the fight last month over the so-called swaps pushout rule, it is possible to reduce many of these issues to their essential element, which is that Wall Street is getting yet another subsidy or back-door bailout. Today's example is HR 37, with the Orwellian label "Promoting Job Creation and Reducing Small Business Burdens Act".

Volcker criticizes Congress’ attempt to weaken Dodd-Frank - Former Federal Reserve Chairman Paul Volcker criticized Congress’ attempt to delay provisions of the Dodd-Frank law rule that bears his name. On Wednesday, the House of Representatives voted down a bill that would have delayed a provision of the so-called Volcker rule that would have given banks until 2019 to comply with rules regarding collateralized loan obligations, a type of security backed by debt, often high-risk commercial loans. Volcker previously criticized banks for not being able to comply with another part of the rule, which required banks to divest from hedge funds and private equity funds.“I realize that lobbying is eternal, but instead of extending the compliance period, the Congress should focus on closing the remaining loopholes,” Volcker said in a statement. The provision failed to pass after a suspension of the rules that required a two-thirds majority to pass, but will likely receive another vote since only one Republican voted against the bill. Supporters of the law have also voiced concerns that Republicans, who now control both the House and Senate, will try targeting Dodd-Frank through spending bills or through other important legislation.  This was the case with the terrorism risk insurance bill that passed the House Wednesday that included a provision on derivatives regulation.

Risks lurk in failure to simplify finance - FT.com: A prolonged period of ultra-low interest rates and abundant liquidity has artificially boosted bond, equity and property markets. Corporate and speculative debt issuance is at record levels. Credit underwriting standards for loans have reverted to pre-2008 conditions. Covenant-lite, second lien and pay-in-kind loans have remerged. Auto and student loans may be the new subprime. Derivative volumes remain high. Structured investment products are booming. Structured credit, such as collateralised loan obligations, has recovered to pre-crisis levels. Shadow banking volumes are high, proliferating into emerging markets. In a market priced for perfection, compensation for risk is inadequate. Low returns and the need for income are driving the dash for trash. With returns low, leverage amplifies small potential gains. Low borrowing costs encourage carry trades or structures with embedded leverage. Intervention in markets has created anomalies encouraging investors to take risks on forward rates, volatility and correlation. Guidance that policy rates are unlikely to normalise soon encourages investors to take positions against market forward rates anticipating a quicker pace of tightening. Lower volatility, resulting from policy actions, leads investors to bet on continued benign market conditions to boost returns. Even governments have resorted to financial engineering. The EU used loss allocation techniques from structured credit for its original bailout fund and now for its new Infrastructure Investment initiative. The European Central Bank is promoting securitisation to increase outstanding asset backed securities to facilitate its policies. To recapitalise banks, regulators have approved risky hybrid securities, such as contingent capital and bail-in bonds.

Morgan Stanley reveals theft of client data - FT.com: Morgan Stanley said that up to 10 per cent of its wealth management clients had their account information stolen by an employee who may have been looking to sell it. The US bank’s wealth management arm has about 3.5m clients. An employee “briefly” published to the internet the account names and numbers of about 900 of those clients. The employee was fired and the incident reported to law enforcement and regulators, Morgan Stanley said, adding that there was “no evidence of any economic loss to any client”. The Federal Bureau of Investigation has been notified. A person familiar with the matter said the employee was a financial adviser named Galen Marsh, a 30-year-old based in New Jersey. The Wall Street Journal first reported his identity. The person familiar with the matter said Morgan Stanley believed Mr Marsh was attempting to sell the data. However, Mr Marsh denies this. The data breach is large: Morgan Stanley operates the second-biggest wealth management operations in the US, behind Merrill Lynch, and serves the equivalent of more than one in 100 Americans, who use brokerage accounts to trade stocks and bonds.

The WSJ Is Outraged That Someone Would “Loot a Company” By William K. Black - George Akerlof and Paul Romer’s famous 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit” introduced what criminologists call “accounting control fraud” to the economics literature. The people who control the firm (typically the CEOs) use its seeming legitimacy as a “weapon” to loot shareholders, creditors, and, if the resultant losses are large enough, the U.S. Treasury. Their article discussed several examples of such fraud epidemics, including the savings and loan debacle. Criminologists, the S&L regulators, and over 1,000 successful felony prosecutions of the S&L looters confirmed Akerlof & Romer’s insights. The most recent crisis was driven by the three most destructive epidemics of financial looting in history. The three fraud epidemics hyper-inflated the financial bubble and caused the enormous losses that led to the financial crisis and the Great Recessions in the U.S. and in Europe. In the U.S., the Great Recession is projected to cause a loss of $21 trillion in GDP and over 10 million jobs. Both of those catastrophic figures are far larger in Europe. The amazing fact is that the Department of Justice has refused to prosecute any of the senior bank officers who led the three fraud epidemics – appraisal fraud, liar’s loans, and secondary market sales through false “reps and warranties.”  The poster child for this is Benjamin Wagner, the most senior prosecutor that Attorney General Eric Holder assigned as a leader of the mortgage fraud task force. “Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. ‘It doesn’t make any sense to me that they would be deliberately defrauding themselves,’ Wagner said.” As Wagner used the pronouns, “they” refers to the CEO and “themselves” refers to the bank. Wagner’s “reasoning” is that the CEO and the bank are the same entity, which is nonsensical. It makes perfect economic “sense” for the CEO to loot the firm – as Wagner knows full well.

Is Nothing Sacred at JPMorgan? - JPMorgan appears incredibly adroit at ever creative means of running its reputation through the mud. Last August the Christ Church Cathedral in Indianapolis filed a lawsuit in Federal Court alleging that its endowment funds meant to feed and shelter homeless families and children, keep food banks stocked, and give exhausted pastors a sabbatical, ended up as a wealth transfer scheme at JPMorgan. The complaint alleges that JPMorgan engaged in “self-dealing,” made “fraudulent misrepresentations,” omitted material facts about their “widespread and profound conflicts of interests and created “toxic investment products” which resulted in “the surreptitious transfer of wealth from the Christ Church Trusts to JPMorgan.” Out of the 177 different investment products JPMorgan purchased for the Christ Church endowment, the percentage of its own proprietary products that JPMorgan purchased from itself “ranged from 68% to a staggering 85% of the portfolio” according to the lawsuit. At the time of the filing of the lawsuit last August, wire services around the globe picked up the story; it then spread to U.S. newspapers and religious publications like Christianity Today. Now the story is back in the headlines with an expanded article yesterday by Bloomberg News reporter Neil Weinberg that reveals yet another church endowment, the Sandscrest Foundation which benefits the Episcopal Diocese of West Virginia, has made similar allegations in a lawsuit against JPMorgan.

Credit Suisse Waiver and Too Big to Bar -- Last year, Credit Suisse AG said it will plead guilty to charges that it aided and assisted U.S. taxpayers in filing false income tax returns and other documents with the Internal Revenue Service (IRS).  But the giant financial firm has to wrap up some loose ends. It turns out that the Department of Labor has a “bad actor” rule that automatically disqualifies institutions from claiming the status of qualified professional asset manager (QPAM) — those who advise pension funds and other investment funds. Credit Suisse wants to continue in the business — and it has asked the Department of Labor to grant it a waiver from disqualification. The Department has set a hearing on the waiver issue for January 15, 2015. As turns out, automatic disqualification in this area is not automatic disqualification. The Department of Labor is permitted to waive the disqualification, provided that it finds that the waiver is “administratively feasible, in the interests of the plan and of its participants and beneficiaries, and protective of the rights of participants and beneficiaries of the plan.” In an October 2014 letter to the Department of Labor calling for the hearing, three Democratic members of Congress — Maxine Waters, Stephen Lynch and George Miller — said that since 1997, the Department has granted waivers for all 23 firms seeking individual waivers — and that included a waiver for UBS, after a Japanese subsidiary pled guilty.

Nobel Laureate Stiglitz Blocked From SEC Panel After Faulting High-Speed Traders  -   Joseph Stiglitz, the Nobel laureate economist who called for a tax on high-frequency trading, has been blocked from a government panel that will advise regulators on issues facing U.S. equity markets, according to people familiar with the matter. Stiglitz’s rejection shows the partisan infighting that has bogged down Securities and Exchange Commission Chair Mary Jo White’s plan to set up a panel of experts to advise the agency on topics ranging from rapid-fire stock trading to dark pools. Republican Commissioner Daniel Gallagher opposed Stiglitz’s nomination in recent weeks as White sought to complete the list of participants, according to two people who asked to not be identified because the deliberations were private. Democratic Commissioner Luis Aguilar had pushed for Stiglitz, who has said high-frequency trading isn’t good for financial markets and should be curbed, possibly through a tax.

Even The Regulators Are Rigged: Prominent HFT Critic Stiglitz Blocked From SEC Panel -- That markets are rigged, at both the macro level, through central banks, and micro, through HFTs, dark pools and purposeful market fragmentation, should be painfully obvious to everyone by now. But when even the regulators engage in "jury rigging", or in this case blocking prominent HFT-critic Joseph Stiglitz, a Nobel prize winning economist (a prize which doesn't count for much on these pages but should - at least on paper - impress such statist cronies as the SEC), has been blocked from a government panel that will advise regulators on issues facing U.S. equity markets, it becomes clear as day that the rigging is not just in the markets: worse, it is openly involves the market's "regulator" and "enforcer."

Boston Fed’s Rosengren Says Progress Since Financial Crisis ‘Relatively Modest’ - U.S. regulators have made only modest progress since the 2007-2009 financial crisis in addressing potential risks to the stability of the financial system, Federal Reserve Bank of Boston President Eric Rosengren said Saturday. “We’ve made some progress,” Mr. Rosengren said during a panel at the American Economic Association’s annual meeting in Boston. “I’d say the progress has been relatively modest, given the shock that we experienced.” One success in efforts to address stability risks, he said, are the Federal Reserve’s “stress tests” that evaluate whether big banks could survive an economic downturn.The Fed’s supervision of banks in 2007 was “tied to backward-looking earnings,” he said. But now, he said, the central bank can move quickly to address potential problems, for example by halting banks’ dividend payments. He called the stress tests “one of the major innovations” in efforts to prevent another crisis. But, Mr. Rosengren added, “there’s still an awful lot of risk” in the financial system. He mentioned wholesale funding as a particular area of potential concern. Mr. Rosengren used to head the Boston Fed’s regulation and supervisory efforts until he became the regional reserve bank’s president in mid-2007. In recent years, he has argued for additional efforts to address stability risks in financial markets, including money-market funds, broker-dealers and short-term funding.

Oil Plunge Leaves $27 Billion of Energy Bonds Junk Priced - The biggest plunge in oil prices since 2008 is prompting bond traders to treat $27 billion of investment-grade energy debt as junk amid concern those companies will have to cut spending to conserve cash. Investors are demanding more yield premium to own the debt of high-grade companies including Transocean Ltd. (RIG), Noble Corp. and Continental Resources Inc. than the average for bonds with the highest junk rating, according to data compiled by Bloomberg. Oil has slumped 8.7 percent this year to $48.65 a barrel through yesterday, adding to the more than 50 percent decline since its June 20 peak. The collapse in the price of petroleum spurred by a global supply glut has seen investors dump energy-company bonds as returns shriveled in 2014. The amount of the sector’s debt outstanding hasn’t migrated much across ratings, reflecting the more static and backward-looking nature of rating-company metrics, according to a Jan. 7 UBS AG report. “The ratings firms try to rate through the cycle and are slower to move than the market,” Spencer Cutter, a Bloomberg Intelligence analyst, said in a telephone interview. “Markets do overreact but unlike the 2008 price drop, which was a result of an economic shock, this is a result of excess supply and that’s not going away.”

Does Citigroup Have Emerging Markets Trouble?: It’s relevant to note at this point that Citigroup’s stock would have closed yesterday at $5.07 rather than $50.70 had it not performed a 1-for-10 reverse stock split back in 2011, stripping its shareholders of 9 shares for each 10 they owned while levitating the price to a respectable level. Citigroup back then was the poster child for the largest bank bailout in history, receiving $45 billion in TARP funds, over $300 billion in asset guarantees, and more than $2 trillion in low cost loans from the Federal Reserve to keep it afloat. What might have been troubling the market yesterday about Citigroup? Bloomberg News reported on Monday that emerging-market debt traders Ilia Poliakov and Steven Gooden had up and left Citigroup. According to Bloomberg reporter Alastair Marsh “Poliakov, who traded sovereign bonds and created structured notes linked to emerging-market securities, left the U.S. lender after a 14-year career, according to one of the people, who asked not to be identified because they’re not authorized to speak publicly. Gooden also traded emerging market debt.” A few weeks earlier, on December 18, analysts at Keefe, Bruyette & Woods issued a report on Citigroup’s exposure to emerging markets. The report noted that: “Although Russia is in focus these days, Citi actually has larger exposure to Brazil which has $27.4 billion of disclosed assets that represent 1.4 percent of the company’s total assets. Russia would be the second largest hot spot since Citi has $1.6 billion of net investment in Russia and total third-party assets of $7.4 billion in the company’s Russia subsidiary.”

The Ghosts of Bailouts Past, Bailouts Present and Bailouts Yet to Come -- Alternative Banking Group, Occupy Wall Street --The US Treasury Department has just declared the bailout is over -- and that it was profitable too! But nothing could be further from the truth. Both claims are false. Technically, what recently happened is that the Treasury sold its last shares in a financial affiliate of General Motors and had earlier unwound the last of its direct investments in the financial industry made under TARP. So presumably we should all be happy and encourage the Treasury to become a consistent player in the stock market; maybe its Warren Buffet-like trading savvy will eventually lower our taxes. Thinking about the bailout this way is both factually wrong, and suggests a frighteningly flawed metric for determining when, if ever, the U.S. government should be throwing public money at failing private firms. First, even if we accepted the Treasury's accounting and treated it like just another private trader, its returns are abysmal. The $15 billion profit the Treasury says it turned on its (claimed) $426 billion investments in Detroit and Wall Street represent less than a 4 percent total (not annual) returns. That is a bit better than most of us are getting in our pitiful savings accounts, but not much. Had there been a mythical private entity out there in a position to prop up the banks and GM in 2008 on the scale the Treasury did -- do you really think they would have done it at that price and without gaining complete control of these companies? The Treasury is apparently an abysmal equities trader, which is actually fine, because that is not its job. Second, it is actually an even worse trader than its lousy proclaimed returns suggest because it can't properly count how much aid it gave -- and continues to give -- these businesses. Beyond the $426 billion of actual capital acquisitions the Treasury made, it provided guarantees and other support to these industries that experts have valued at more like $9 trillion. Calculate the $15 billion profit the Treasury is now bragging about using a $9 trillion base as the money that was put at risk and you start calculating minuscule returns like the 0.1 percent you'd see in a Chase money market.

Worker Flows in Banking Regulation - NY Fed - In the aftermath of the 2008 financial crisis, job transitions of personnel in banking supervision and regulation between the public and private sectors—often labeled the revolving door—have come under intense scrutiny and have been blamed by certain economists (Johnson and Kwak), legal scholars (John Coffee in the Financial Times), and policymakers (Dodd-Frank Act of 2010, Section 968) for distorting regulators’ actions in favor of banks. However, other commentators have downplayed these distortions and presented a more benign viewpoint of these worker flows—as a means for regulatory agencies to attract higher-ability and skilled workers. Because data on job transitions in banking regulatory agencies are scarce, these discussions are mostly informed by anecdotes. Our recent paper brings more rigor to this debate by contributing a first set of stylized facts based on data related to incidence and drivers of worker flows in U.S. banking regulation. Our data show clear evidence of higher worker inflows to the regulatory sector during bad economic conditions. When we study worker flows as a function of an enforcement proxy, we find evidence to be inconsistent with the often-cited “quid-pro-quo” hypothesis. We instead posit an alternative “regulatory schooling” hypothesis that may better explain the empirical evidence.

Have Large Scale Asset Purchases Increased Bank Profits?: This paper empirically examines the effects of the Federal Reserve’s Large Scale Asset Purchases (LSAP) on bank profits. We use a new dataset on individual LSAP transactions and bank holding company data from the Fed’s FRY-9C regulatory reports to construct a large panel of banks for 2008Q1 to 2009Q4. Our results suggest that banks that sold Mortgage-backed Securities to the Fed (“treatment banks”) experienced economically and statistically significant increases in profitability after controlling for common determinants of bank performance. Banks heavily “exposed” to MBS purchases should also experience increases in profitability through asset appreciation. Our results also provide evidence for this type of spillover effect and suggest that large banks may have been more affected. Although our results suggest that MBS purchases increased bank profits, we find only mixed evidence that these were associated with increased lending. Our findings are thus consistent with the hypothesis that the Federal Reserve undertook these policies, at least in part, to increase the profitability of their main constituency: the large banks.

Unofficial Problem Bank list declines to 400 Institutions  This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Jan 2, 2015.  This past Monday, the FDIC released an update on its enforcement action activities through November 2014. The release contributed to several changes to the Unofficial Problem Bank List this week. After three removals and two additions, the list holds 400 institutions with assets of $124.8 billion. A year ago, the list held 618 institutions with assets of $205.6 billion. The FDIC terminated actions against Legacy Bank of Florida, Boca Raton, FL ($275 million); First Home Bank, Seminole, FL ($76 million); and Bank of Wrightsville, Wrightsville, GA ($52 million). The FDIC issued actions against The Elkhart State Bank, Elkhart, TX ($53 million) and State Bank of Burnettsville, Burnettsville, IN ($49 million). Next week likely will be slow in terms of changes to the list.  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 400.

Q&A: What to Know About the New Plan to Lower Mortgage Costs - On Thursday in Phoenix, President Barack Obama unveils a plan to reduce premiums charged by the Federal Housing Administration. The FHA insures loans made to borrowers who make down payments that are as small as 3.5% of the value of a home. That makes it popular among first-time home buyers and others with little wealth for a down payment. The move comes as home sales slow and prices grow less quickly. While the rest of the economy accelerates, growth in the housing sector is falling behind. With that in mind, here are the things to remember as the new mortgage plan is rolled out. The FHA, which is overseen by the Department of Housing and Urban Development, by the end of the month will cut the annual premiums it charges for a typical new borrower to 0.85% per year from 1.35%. That half a percentage point drop translates into about a $1,000 annual savings for a borrower with a $200,000 loan. FHA-insured borrowers also have to pay an upfront premium, and that stays the same. The insurance will still have to be paid over the life of a loan–even if a borrower’s home equity rises to the point where they wouldn’t need FHA insurance on a new home loan.

Update on FHA Mortgage Insurance Premium (MIP) Reduction - Jann Swanson at Mortgage News Daily Update on Mortgage Insurance Cut: FHA to Allow Case Number Cancellation According to the executive order announced yesterday FHA will almost immediately cut .5 percent from the annual premium for the FHA backed loans with terms greater than 15yrs. For most FHA loans this will reduce the annual premium from 1.35 percent of the loan balance to .85 percent. Loans with balances above the loan limits in effect in most areas and with current MIP of 1.50 to 1.55 percent will see new premiums of 1.00 or 1.05 percent respectively. The upfront premium for all loans will remain unchanged at 1.75 percent.  Borrowers with FHA Case Numbers issued on or after January 26 will be eligible for the new premium rates. However, today's letter has good news for borrowers already in process of getting their FHA loan. Lenders will temporarily be allowed to cancel Case Numbers issued before that date.  Key points:
1) Cut applies to loan greater than 15 years (15 year loan are already at lower levels).
2) Borrowers with FHA-insured loans can refinance and obtain the lower annual MIP, as long as the original endorsement was after May 31, 2009 (Older loans have a lower annual MIP. The annual MIP was increased from 0.55% to 0.90% in October 2010, to 1.15% in April 2011, to 1.25% in April 2012, and to 1.35% in April 2013 for borrowers with less than 5% down.)  Note: HUD told me yesterday that they expect 100,000 to 200,000 FHA-insured borrowers to refinance in the next year.
3) Lenders can cancel loans in process so borrowers can obtain lower annual MIP. As Swanson notes, there will probably be a surge in loans starting January 26th (all the canceled loans, and an increase in refinance activity).

Why Am I Paying for Your House?: -  2002, President George W. Bush, trumpeting “the ownership society,” proclaimed, “We want everybody in America to own their home.” Never mind the bursting of the housing bubble; it’s still the Washington creed. That’s why Fannie Mae and Freddie Mac, the government agencies that now guarantee most home loans in the U.S., just announced that they will guarantee mortgages for first-time home buyers who make down payments of just three per cent. Advocates argue that this will make it easier for low-income families to buy homes, and will give a boost to the sluggish housing market. It’s an easy sale to make. Since the nineteen-thirties, the U.S. government has been committed to the idea that homeownership is an unalloyed good. The list of things the government does to support the housing industry is long. The Federal Housing Administration offers low-interest mortgages. Fannie Mae and Freddie Mac, by repurchasing and guaranteeing mortgages, help hold down interest rates. Homeowners get a variety of tax breaks, including a mortgage-interest deduction and a property-tax write-off, which add up to more than two hundred billion dollars a year in lost tax revenue.  Yet it’s far from clear that these programs actually do much to increase the over-all number of homeowners. Other Western countries don’t have anything like our range of pro-housing enticements, and their rates of homeownership aren’t much different from ours. The main impact of the mortgage-interest deduction and other subsidies is not that they get people to buy houses. It’s that they get people to buy bigger, costlier houses than they otherwise would. The bigger your mortgage, the larger the tax deduction you get. This is why real-estate agents, during the housing boom, advised their clients to buy as big a house as possible, since the government was helping them pay for it. The result is that almost all the economic benefits of the mortgage deduction go to people earning more than a hundred thousand dollars a year. The average middle-class homeowner saves little or no money. “It’s a classic upside-down subsidy: it goes to all the wrong people. If you really want to help people buy homes who otherwise wouldn’t, we’ve chosen exactly the wrong tool.”

Will the Supreme Court Annihilate One of the Most Effective Tools for Battling Racial Segregation in Housing? -- The U.S. Supreme Court could be on the verge of issuing a major setback to racial integration efforts. In two weeks, it will hear oral arguments regarding whether the federal government and states should be permitted to pursue policies that perpetuate or exacerbate racial segregation in housing—even where no intent to segregate is proven.  The segregation of low-income minority families into economic and racial ghettos is one cause of the ongoing achievement gap in American education. Students from families with less literacy come to school less prepared to take advantage of good instruction. If they live in more distressed neighborhoods with more crime and violence, they come to school under stress that interferes with learning. When such students are concentrated in classrooms, even the best of teachers must spend more time on remediation and less on grade-level instruction. The Economic Policy Institute, together with the Haas Institute for a Fair and Inclusive Society at the University of California, have organized a large group of housing scholars—historians and other social scientists—to sign a friend-of-the-court brief urging that housing policies perpetuating segregation should be banned.

Here’s How Lack of Competition Can Hurt Consumers -  A new study of the mortgage market nicely highlights just how little it can take to undermine competition to the point that it starts costing customers.The paper is both a critique of a specific government initiative — a refinancing program created after the financial crisis — and a clever use of that program to examine what happens when an industry’s rule are suddenly changed.The Home Affordable Refinancing Program, or HARP, was started in 2009 to enable homeowners to refinance at lower rates even if they didn’t have enough equity in the home to meet the standards of lenders, a common predicament after the nationwide collapse of housing prices. The government instructed the mortgage finance companies Fannie Mae and Freddie Mac to guarantee loans that replaced loans they had previously guaranteed, even if the amount of the loan exceeded 80 percent of the value of the home. But in the new paper, Gene Amromin, an economist at the Federal Reserve Bank of Chicago, and Caitlin Kearns, a graduate student in economics at the University of California at Berkeley, highlight a wrinkle that proved consequential. Although, in theory, any lender can qualify for these guarantees, the rules of the program give a substantial advantage to the holder of the existing loan. If loans go bad, Fannie and Freddie can seek refunds. The HARP program grants lenders a measure of protection from this risk — but only if the company that refinanced the loan had also been the holder of the previous loan.Other lenders are still free to compete, but they don’t. The study quotes research finding that 90 percent of loans refinanced under HARP were handled by the original lender, compared with 60 percent of refinances outside HARP.

CoreLogic: "273,000 Residential Properties Regained Equity in Q3 2014" --From CoreLogic: CoreLogic Reports 273,000 Residential Properties Regained Equity in Q3 2014  CoreLogic ... today released new analysis showing nearly 273,000 U.S. homes returned to positive equity in the third quarter of 2014, bringing the total number of mortgaged residential properties with equity to approximately 44.6 million, or 90 percent of all mortgaged properties. Nationwide, borrower equity increased year over year by approximately $800 billion in Q3 2014. The CoreLogic analysis indicates that approximately 5.1 million homes, or 10.3 percent of all residential properties with a mortgage, were still in negative equity as of Q3 2014 compared to 5.4 million homes, or 10.9 percent, for Q2 2014. This compares to a negative equity share of 13.3 percent, or 6.5 million homes, in Q3 2013, representing a year-over-year decrease in the number of underwater homes by almost 1.5 million (1,433,296), or 3.0 percent. ... Of the 44.6 million residential properties with positive equity, approximately 9.4 million, or 19 percent, have less than 20-percent equity (referred to as “under-equitied”) and 1.3 million of those have less than 5-percent equity (referred to as near-negative equity). Borrowers who are “under-equitied” may have a more difficult time refinancing their existing homes or obtaining new financing to sell and buy another home due to underwriting constraints. Borrowers with near-negative equity are considered at risk of moving into negative equity if home prices fall. In contrast, if home prices rose by as little as 5 percent, an additional 1 million homeowners now in negative equity would regain equity. ...This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:  "Nevada had the highest percentage of mortgaged properties in negative equity at 25.4 percent, followed by Florida (23.8 percent), Arizona (19 percent), Rhode Island (14.8 percent) and Illinois (14.1 percent). These top five states together account for 33.1 percent of negative equity in the United States."

MBA: Mortgage Applications Decreased Over Two Week Period in Latest MBA Weekly Survey - From the MBA: Mortgage Applications Decreased Over Two Week Period in Latest MBA Weekly Survey Mortgage applications decreased 9.1 percent from two weeks earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 2, 2015. The most recent week’s results include an adjustment to account for the New Year’s Day holiday, while the previous week’s results were adjusted for the Christmas holiday.... The Refinance Index decreased 12 percent from two weeks ago. The seasonally adjusted Purchase Index decreased 5 percent from two weeks earlier ... The Purchase Index was 8 percent lower than the same week one year ago....The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.01 percent from 4.04 percent, with points decreasing to 0.28 from 0.35 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

30 Year Mortgage Rates fall to 3.68%, Down almost 100bps year-over-year - With the rally in the Ten Year today - yields declined to 1.89% mid-day and closed at 1.96% - the 30 year mortgage rate also declined, and is now down almost 100bps from a year ago. From Matthew Graham at Mortgage News Daily: Opportunity Knocks as Mortgage Rates Surge Lower Mortgage rates are on an absolute tear. In the past 2 days, they've rocketed a full eighth of a point lower. They're a full quarter point lower than the average rates available in 2nd half of December and .375% lower than December's highest rates. For anyone feeling like they missed out in May 2013 as the taper tantrum began, here's your opportunity. Today is officially the first day we can say that rate sheets are at least as good as May 21st, 2013, the day before Bernanke's congressional testimony unofficially kicked off the taper tantrum and sent mortgage rates quickly higher. At that time, the abrupt rise meant a move up to 3.75% from 3.625%. Today's gains restore 3.625% as the lowest widely-available rate for the best borrowers. Note: rates are still above the level required for a significant increase in refinance activity. Historically refinance activity picks up significantly when mortgage rates fall about 50 bps from a recent level.  Many borrowers who took out mortgages over the last 18 months can refinance now - but that is a small number of total borrowers. For a significant increase in refinance activity, rates would have to fall below the late 2012 lows (on a monthly basis, 30 year mortgage rates were at 3.35% in the PMMS in November and December 2012).  Based on the relationship between the 30 year mortgage rate and 10-year Treasury yields, the 10-year Treasury yield would probably have to decline to 1.5% or lower for a significant refinance boom (in the near future). With the 10-year yield currently at 1.96%, I don't expect a significant increase in refinance activity.

CoreLogic: House Prices up 5.5% Year-over-year in November. The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA).  From CoreLogic: CoreLogic Reports Home Prices Rose by 5.5 Percent Year Over Year in November 2014.  Home prices nationwide, including distressed sales, increased 5.5 percent in November 2014 compared to November 2013. This change represents 33 months of consecutive year-over-year increases in home prices nationally. On a month-over-month basis, home prices nationwide, including distressed sales, rose by 0.1 percent in November 2014 compared to October 2014...Excluding distressed sales, home prices nationally increased 5.3 percent in November 2014 compared to November 2013 and 0.3 percent month over month compared to October 2014. Also excluding distressed sales, all states and the District of Columbia showed year-over-year home price appreciation in November. Distressed sales include short sales and real estate owned (REO) transactions. ... “After decelerating for most of the year, home price growth has been holding firm between a 5-percent and 6-percent growth rate for the last four months,” said Sam Khater, deputy chief economist at CoreLogic. “However, pockets of weakness are clear in Baltimore and Washington D.C., and three of the top four states with the highest price appreciation are energy intensive and had been benefitting from the energy boom which is currently receding as oil prices trend downward. These states—Texas, Colorado and North Dakota, may see some downward pressure on prices in 2015.”

Trulia: "What Falling Oil Prices Mean for Home Prices" -- From Trulia chief economist Jed Kolko: What Falling Oil Prices Mean for Home Prices Nationwide, asking prices on for-sale homes were up 0.5% month-over-month in December, seasonally adjusted — a slowdown after larger increases in September, October, and November. Year-over-year, asking prices rose 7.7%, down from the 9.5% year-over-year increase in December 2013. Asking prices increased year-over-year in 97 of the 100 largest U.S. metros. . Among markets with the largest asking price increases, Houston stands out for having a large local oil industry, accounting for 5.6% of jobs there. Only Bakersfield and Baton Rouge have an even higher employment share in oil-related industries than Houston. Oklahoma City, Tulsa, New Orleans, and Fort Worth round out the seven large metros where oil-related industries account for at least 2% of employment. It’s not until you look at smaller metros that you find oil-related industries representing a larger employment share. In Williston, ND, and Midland, TX, they account for almost 30% of local jobs. [see graph of percent oil jobs at article] This history offers three lessons for today’s housing market. First, any negative impact of falling oil prices on home prices should be concentrated in oil-producing markets in Texas, Oklahoma, Louisiana, and other places with large oil-related industries. Second, in these markets, oil prices won’t tank home prices immediately. Rather, falling oil prices in the second half of 2014 might not have their biggest impact on home prices until late 2015 or in 2016. Third, falling oil prices will probably help local economies and home prices in markets that lack oil-related industries.

Las Vegas Real Estate in December: Lowest Sales in Years, Non-contingent Inventory up 18% YoY --This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities. The Greater Las Vegas Association of Realtors reported GLVAR reports local home prices stay up through holidays According to GLVAR, the total number of existing local homes, condominiums and townhomes sold in December was 2,734, up from 2,483 in November, but down from 2,915 one year ago. At the current sales pace, [GLVAR President Keith] Lynam said Southern Nevada continues to have less than a four-month supply of available homes. REALTORS® consider a six-month supply to be a balanced market. For all of 2014, GLVAR reported that 36,550 total properties were sold through its MLS. Lynam noted that was the lowest number of sales in at least six years, down from 47,685 sales in 2009; 44,045 in 2010; 48,798 in 2011; 45,698 in 2012; and 41,477 in 2013....GLVAR said 34.1 percent of all local properties sold in December were purchased with cash. That’s up from 31.9 percent in November, but well short of the February 2013 peak of 59.5 percent, suggesting that fewer investors have been buying homes in Southern Nevada....The total number of single-family homes listed for sale on GLVAR’s Multiple Listing Service in December was 12,377, down 7.8 percent from 13,421 in November and down 7.0 percent from one year ago. GLVAR tracked a total of 3,282 condos and townhomes listed for sale on its MLS in December, down 7.0 percent from 3,529 in November, but up 13.1 percent from December 2013.By the end of December, GLVAR reported 7,774 single-family homes listed without any sort of offer. That’s down 5.1 percent from 8,195 such homes listed in November, but up 18.0 percent from one year ago.

Update: Framing Lumber Prices down Year-over-year -- Here is another graph on framing lumber prices. Early in 2013 lumber prices came close to the housing bubble highs. The price increases in early 2013 were due to a surge in demand (more housing starts) and supply constraints (framing lumber suppliers were working to bring more capacity online).  Prices didn't increase as much early in 2014 (more supply, smaller "surge" in demand), however prices didn't fall as sharply either.

Why Apartment-Rent Gains Could Begin To Slow Down - It won’t come as a big surprise to renters that rents rose briskly last year. What they may not realize: It could get a touch harder in 2015 and 2016 for landlords to keep raising rents as aggressively. Rents have shot up over the past four years as apartment owners enjoyed stronger demand and, crucially, very little new supply. Now, that’s changing. Rents rose 3.6% last year, according to Reis Inc., a real-estate research firm, and the apartment vacancy rate ended the year at 4.2%, near its lowest level since 2001. But the number of new units added to the market also reached a 13-year high, and even more units are headed onto the market this year. So while demand is still strong for apartments, the days of excess demand “are likely over,” said Ryan Severino, senior economist at Reis, in written commentary. “This is the beginning of an up cycle in vacancy, and demand will struggle to keep pace with the significant amounts of new construction that should come online over the next few years.” One sign that the cycle may have neared a turn: The vacancy rate for U.S. apartments during the fourth quarter didn’t fall year-over-year for the first time in four years, ending a streak of 17 straight quarters in which vacancies edged down year-over-year. While an improving job market will give landlords enough leverage to keep increasing rents, “over time, this will be stymied by the sheer number of new units that are going to come online, increasing competition in the market,” Mr. Severino said.

Reis: Apartment Vacancy Rate unchanged in Q4 at 4.2% - Reis reported that the apartment vacancy rate was unchanged in Q4 at 4.2%, the same as in Q3. In Q4 2013 (a year ago), the vacancy rate was also at 4.2%, and the rate peaked at 8.0% at the end of 2009. Some comments from Reis Senior Economist Ryan Severino: The national vacancy rate was unchanged at 4.2% during the fourth quarter. This follows last quarter's slight 10 basispoint increase in vacancy which was the first increase since the fourth quarter of 2009. Although vacancy did not continue to increase this quarter, the unchanged vacancy rate shows that the days of excess demand are likely over. Additionally, the surge in construction that we have observed in recent periods eased a bit this quarter after increasing during each of the last two quarters. Some of this is due to seasonality ‐ the market tends to slow during the fourth and first quarters of calendar years. Meanwhile, demand had a surprising rebound during the fourth quarter to 45,027 units, the highest quarterly figure since the fourth quarter of 2013. This is an important point ‐ even as construction increases in 2015 and beyond, demand will remain robust due to the large number of young renters in the US. However, as we mentioned last quarter, this is the beginning of an up cycle in vacancy and demand will struggle to keep pace with the significant amounts of new construction that should come online over the next few years. While the market is still very tight at 4.2%, that level of vacancy is not going to be sustainable over the next few years. Supply will outpace demand and vacancy will slowly drift upward. While we still anticipate that the market will remain relatively tight, rising vacancy is likely to put downward pressure on NOI growth over the next few years, even as rents continue to grow.This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999). Note: Reis is just for large cities.

Reis: Office Vacancy Rate declined in Q4 to 16.7% - Reis released their Q4 2014 Office Vacancy survey this morning. Reis reported that the office vacancy rate declined in Q4 to 16.7% from 16.8% in Q3 2014. This is down from 16.9% in Q4 2013, and down from the cycle peak of 17.6%.  From Bloomberg: U.S. Office-Occupancy Gains Jump to a Seven-Year High Occupied office space increased by a net 10.97 million square feet (1 million square meters) during the last three months of the year, the most since the third quarter of 2007, according to property-research firm Reis Inc. The measure, known as net absorption, jumped 28 percent in 2014 to 32.5 million square feet, also a seven-year high...The nationwide vacancy rate at the end of the year was 16.7 percent, the lowest since the third quarter of 2009 and down from 16.9 percent in 2013. ...“As long as we don’t get a random shock to the economy, and labor growth continues, vacancies should fall and rents should rise faster in 2015,” [Ryan Severino, Reis senior economist] said. This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual). Reis reported the vacancy rate was at 16.7% in Q4, down from 16.9% in Q4 2014. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010, and Q1 2011. Office vacancy data courtesy of Reis. Net absorption is picking up, but there will not be a significant pickup in new construction until the vacancy rate falls much further.

Office Vacancy Rate and Office Investment - Yesterday I noted that Reis reported the office vacancy rate declined to 16.7% in Q4 from 16.8% in Q3. A key question is when will new office investment increase significantly. Investment has been increasing - and adding to GDP - but investment is still very low. The following graph shows the office vacancy rate and office investment as a percent of GDP. Note: Office investment also includes improvements. Here is Reis Senior Economist Ryan Severino's office forecast for 2015: "2014 ended with lots of good news and optimistic data, for both the macroeconomy and the office market. GDP growth, labor market growth, net absorption, and vacancy are all trending in the right direction and at a faster pace over time. Barring some idiosyncratic shock, there is no reason to believe that these trends will not persist in 2015 while construction should remain in check due to relatively weak fundamentals in many markets, even as speculative development slowly returns to the market in stronger metro areas. Therefore, we are not only forecasting stronger rent growth for 2015 than 2014, but vacancy compression should slowly begin to accelerate and the potential exists for the market to outperform our expectations if the economy is even stronger than currently forecast. This is the most sanguine that we have been about the economy and the office market since before the recession."

Reis: Strip Mall Vacancy Rate declined in Q4, Regional Mall Vacancy Rate Increased  - Reis reported that the vacancy rate for regional malls was increased to 8.0% in Q4 2014 from 7.9% in Q3. This is down from a cycle peak of 9.4% in Q3 2011.  For Neighborhood and Community malls (strip malls), the vacancy rate decreased to 10.2% in Q4, from 10.1% in Q3. For strip malls, the vacancy rate peaked at 11.1% in Q3 2011. Comments from Reis Senior Economist Ryan Severino:  [Strip Malls] The retail market recovery marched forward during the fourth quarter, but remained at a snail's pace. Net absorption once again exceeded the scant levels of construction in the market which pushed the vacancy rate for neighborhood and community centers down by 10 basis points to 10.2%. Asking and effective rent growth both accelerated slightly versus last quarter but the quarterly growth rates are so weak that any difference is marginal and insignificant. Vacancy remains far too elevated for rents to grow at a much faster pace than we have observed in recent quarters.  Regional: During the fourth quarter, regional mall vacancy increased by 10 basis points to 8.0%. This is the first quarterly increase in the mall vacancy rate since the third quarter of 2011. For 2014, the mall vacancy rate was also up 10 basis points. Although the mall recovery cycle is fairly mature at this juncture, the primary culprit for the increase in the vacancy rate was the closing of a number of Sears stores during the fourth quarter. However, the market recovery had been losing steam before this with the national vacancy rate flat for most of 2014. While there is no new construction in the mall subsector, demand should increase along with the recovery in the economy and labor markets in 2014.This graph shows the strip mall vacancy rate starting in 1980 (prior to 2000 the data is annual). The regional mall data starts in 2000. Back in the '80s, there was overbuilding in the mall sector even as the vacancy rate was rising. This was due to the very loose commercial lending that led to the S&L crisis.

The Economics (and Nostalgia) of Dead Malls - — Inside the gleaming mall here on the Sunday before Christmas, just one thing was missing: shoppers.The upbeat music of “Jingle Bell Rock” bounced off the tiles, and the smell of teriyaki chicken drifted from the food court, but only a handful of stores were open at the sprawling enclosed shopping center. A few visitors walked down the long hallways and peered through locked metal gates into vacant spaces once home to retailers like H&M, Wet Seal and Kay Jewelers. “This place used to be packed. And Christmas, the lines were out the door..”  The Owings Mills Mall is poised to join a growing number of what real estate professionals, architects, urban planners and Internet enthusiasts term “dead malls.” Since 2010, more than two dozen enclosed shopping malls have been closed, and an additional 60 are on the brink, according to Green Street Advisors, which tracks the mall industry. Premature obituaries for the shopping mall have been appearing since the late 1990s, but the reality today is more nuanced, reflecting broader trends remaking the American economy. With income inequality continuing to widen, high-end malls are thriving, even as stolid retail chains like Sears, Kmart and J. C. Penney falter, taking the middle- and working-class malls they anchored with them. At Owings Mills, J. C. Penney and Macy’s are hanging on, but other midtier emporiums like Sears, Lord & Taylor, and the regional department store chain Boscov’s have all come and gone as anchors. One factor many shoppers blame for the decline of malls — online shopping — is having only a small effect, experts say. Less than 10 percent of retail sales take place online, and those sales tend to hit big-box stores harder, rather than the fashion chains and other specialty retailers in enclosed malls.

"We Are Extremely Over-Retailed" Picturing The Death Of America's Malls -- Starting in the mid-1990s, "the mall genie was out of the bottle," says one mall analyst, "and it was never going to come back." While about 80% of the country’s 1,200 malls are considered healthy (vacancy rates of 10% or less), that compares with 94% in 2006; and more than 30 million square feet of malls are more than 40% empty, a threshold that signals the beginning of what one one analyst called "the death spiral." As The NY Times reports, like beached whales, dead malls draw fascination as well as dismay, "nobody ever thinks a mall is going to up and die," but as the following images show - dead or dying they are.

Credit-Card Balances Decline in November - U.S. consumers pared down outstanding credit-card debt in November, a possible sign Americans were cautious about overextending themselves during the holiday-shopping season. Total revolving credit, mainly reflecting credit-card balances, declined at a 1.3% seasonally adjusted annual pace in November, the Federal Reserve said Thursday. That was the biggest decrease in outstanding revolving balances in a year. The figure offers some clue about Americans willingness to take on debt in order to continue spending. The data, however, is often significantly revised. In October, revolving credit expanded at a 2% pace, an upward revision from the initially reported 1.3% advance. Other measures of consumer spending showed healthy growth in November. Retail sales climbed 0.7% in during November from a month earlier, the strongest gain in eight months, the Commerce Department said in an earlier report. Personal consumption expenditures, household outlays on all goods and services, advanced 0.6% on the month, an acceleration from October’s reading. Falling gasoline prices and an improving job market is generally seen as supporting stronger consumer spending. Thursday’s report showed total outstanding consumer credit, reflecting Americans’ debt outside of real-estate loans, expanded at a 5.2% rate to $3.3 trillion in November. October’s advance was revised up to a 5.9% increase from an earlier reported 4.9% advance. Total credit has steadily expanded for more than three years.  In November, nonrevolving credit–largely reflecting borrowing for cars and education–expanded at a 7.5% pace. That was a slight acceleration than the prior month’s 7.3% growth.

Credit Card Debt Tumbles Most In 1 Year As US Households Resume Deleveraging -- Once upon a time the health of the US consumer was gauged by one simple thing: how much credit card debt did US households take on in any given month. Which makes sense: American consumers would not go out and spend on credit unless they felt strongly about their future job, income and overall wealth prospects. In simple terms, rising credit card debt was synonymous with confidence and prosperity. In recent years, however, this metric has quietly fallen out of favor with the punditry, for one simple reason: that reason is shown on the chart below, which very likely also shows where the S&P would trade if it weren't for $11 trillion in central bank liquidity injections.

Why New Credit Cards May Fall Short on Fraud Control -- Big U.S. banks are steering clear of an advanced security measure used in credit cards around the world, opting for a system that is more convenient for shoppers but may leave them vulnerable to fraud.This year, firms ranging from J.P. Morgan Chase & Co. to Discover Financial Services Inc. are expected to roll out more than a half-billion new credit cards embedded with computer chips that create a unique code for each transaction, making counterfeiting much more difficult. In a retreat for the industry, however, the new cards don’t use some technology that could prevent fraud if a card is lost or stolen. Instead of requiring customers to put in a personal identification number, or PIN, the new cards need users to authenticate credit-card transactions the same way they often do now, with a signature. PINs are widely considered to be more secure than signatures, which can be easily copied. The more advanced “chip-and-PIN” technology has been adopted in Europe, Australia and Canada. The U.S. is one of the few developed countries not to embrace it. U.S. bank executives said they are choosing the signature version so customers won’t be burdened at the checkout line to remember a new four-digit code.

New Findings Point to Private Credit “Perfect Storm” Brewing in Your Financial Future -  Yves here. This is an important, accessible post that describes something we’ve discussed occasionally: that growth in private borrowings is a type of economic drug. While it appears salutary in the early stages, too much leads to financial instability and crises. This view is presented long-form in Richard Vague’s recent book, The Next Economic Disaster: Why It’s Coming and How to Avoid It, and we featured an excerpt from it.  This post gives a more rigorous look at the same issues and reached similar dire conclusions.  By Lynn Parramore: Alan Taylor, a professor and Director of the Center for the Evolution of the Global Economy at the University of California, Davis, has conducted, along with Moritz Schularick, ground-breaking research on the history and role of credit, partly funded by the Institute for New Economic Thinking. He finds that today’s advanced economies depend on private sector credit more than anything we have ever seen before. His work and that of his colleagues call into question the assumption that was commonplace before 2008, that private credit flows are primarily forces for stability and predictability in economies.If current trends continue, Taylor warns, our economic future could be very different from our recent past, when financial crises were relatively rare. Crises could become more commonplace, which will impact every stage of our financial lives, from cradle to retirement. Do we just fasten our seatbelts for a bumpy ride, or is there a way to smooth the path ahead? Taylor discusses his findings and thoughts about how to safeguard the financial system in the interview that follows.

Debt Buyer Faces Fine and Loss of Thousands of Court Judgments - In courtrooms across New York State, lawsuits poured in by the hundreds as if manufactured on an assembly line. Some included generic testimony, others relied on bogus affidavits, churned out so rapidly that they were seldom viewed for accuracy.  Sound familiar? The same problems that dogged the foreclosure of homes — and prompted public outcry and a multibillion-dollar settlement by some of the nation’s biggest banks — are increasingly showing up in the practices of large buyers of bad consumer debt.  The companies, which buy huge swaths of soured bills from lenders for pennies on the dollar, are deluging the courts with shoddy lawsuits, according to a review of debt collection lawsuits along with interviews with state judges and prosecutors.  As part of an effort to stamp out such practices, New York’s state attorney general, Eric T. Schneiderman, was expected to reach a settlement on Friday with a debt buyer, the Encore Capital Group, over concerns that the company filed thousands of flawed debt collection lawsuits against state residents, according to several people briefed on the matter who spoke on the condition of anonymity. The settlement, which requires Encore to pay a $675,000 penalty and vacate more than 4,500 court judgments against borrowers — is part of a broader push by state and federal authorities to root out questionable debt collection practices that can stymie vulnerable borrowers just as they are trying to dig out from the financial crisis.

Most Americans Don’t Have Savings to Pay Unexpected Bill - More than three in five Americans wouldn’t have money in their savings accounts to pay for an unexpected car repair or medical emergency, according to a survey released Wednesday. Only 38% of those polled said they could cover a $500 repair bill or a $1,000 emergency room visit with funds from their bank accounts, a new Bankrate report said. Most others would need to take on debt or cut back elsewhere. “A solid majority of Americans say they have a household budget,” said Bankrate banking analyst Claes Bell. “But too few have the ability to cover expenses outside their budget without going into debt or turning to family and friends for help.” The survey found that an unexpected bill would cause 26% to reduce spending elsewhere, while 16% would borrow from family or friends and 12% would put the expense on a credit card. The remainder didn’t know what they would do or would make other arrangements. The weak safety nets appear to stand in contrast to the survey’s finding that 82% of Americans keep a household budget.

3 In 5 Americans Don't Have Savings To Cover Unexpected Bills - While various CNBC anchors may be willing to say that the US is "growing gangbusters" yet again confusing the liquidity-oozing equity markets with the economy, there are a couple hundred million Americans who would bet to differ (which incidentally may also explain why the Comcast channel no longer wishes to have its viewership calculated by Nielsen): the reason is that according to the latest Bankrate survey released today, more than three in five Americans don't have money in their savings accounts to cover any unexpected bills such as a $500 car repair or a $1,000 emergency room visit. In fact, only 38% of respondents said they have enough funds in their bank accounts to cover even the most mundane of spending emergencies.. Most others would need to take on debt or cut back elsewhere.

Most Americans are one paycheck away from the street - Approximately 62% of Americans have no emergency savings for things such as a $1,000 emergency room visit or a $500 car repair, according to a new survey of 1,000 adults by personal finance website Bankrate.com. Faced with an emergency, they say they would raise the money by reducing spending elsewhere (26%), borrowing from family and/or friends (16%) or using credit cards (12%). “Emergency savings are not just critical for weathering an emergency, they’re also important for successful homeownership and retirement saving,” says Signe-Mary McKernan, senior fellow and economist at the Urban Institute, a nonprofit organization that focuses on social and economic policy. The findings are strikingly similar to a U.S. Federal Reserve survey of more than 4,000 adults released last year. “Savings are depleted for many households after the recession,” it found. Among those who had savings prior to 2008, 57% said they’d used up some or all of their savings in the Great Recession and its aftermath. What’s more, only 39% of respondents reported having a “rainy day” fund adequate to cover three months of expenses and only 48% of respondents said that they would completely cover a hypothetical emergency expense costing $400 without selling something or borrowing money.

American consumers are more upbeat - A crazy thing happened while you were recovering from your Christmas food coma: Americans finally started saying nice things about their economy. That’s according to Gallup’s daily economic confidence index, which for the first time since the recession showed consumer optimism edging out consumer pessimism. Gallup’s index is based on responses to two poll questions: one on Americans’ views of current economic conditions and another on whether they think the economy is getting better or worse. Gallup adds the net percentage of Americans rating today’s economic conditions positively (that is, the share saying things are “excellent” or “good,” minus the share saying they’re “poor”) to the net percentage saying the economy is improving (“getting better” minus “getting worse”); the result is then divided by two, to create an index value that falls somewhere between plus-100 and minus-100. A number less than zero suggests that more Americans have a negative than positive view of the economy; greater than zero suggests the forces of optimism are winning out instead.  In the week ending Dec. 28, the sun broke through the clouds. Gallup’s economic confidence index averaged a whopping plus-2. Yes, plus-2. While not exactly gangbusters, the score represents the first time since early 2008 — when Gallup began compiling these data, shortly after the recession began — that we got a reading above zero. Plus, in the days since (at least as of Jan. 3), the index has stayed in the black.

Happiness and Satisfaction are not Everything: Improving Wellbeing Indices by Yves Smith -Yves here. I’m using this post as an object lesson in what is right and wrong with a lot of economics research to help readers look at research reports and academic studies more critically. That often happens with post VoxEU articles; they have some, or even a lot, of interesting data and analysis, but there’s often some nails-on-the-chalkboard remarks or a bias in how the authors have approached the topic. Readers, needless to say, generally pounce on these shortcomings. Here, the authors take up a legitimate topic: are surveys on wellbeing asking the right questions? Personally, I find “wellbeing” to be such a nebulous concept that asking members of the public for how they rate their current standing to be a fraught exercise. The topic is becoming more important as some economists are trying to come up with better measures of prosperity than GDP. For instance, Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi have been working with the French government to devise improved metrics for economic performance and social progress.On the one hand, recognizing that current polls come up short and trying to devise new methods is a laudable goal. On the other, some aspects of how they went about the project are sadly typical. The ones that stood out for me was that they did what amounted to a literature search to come up with a long list of attributes.

U.S. Light Vehicle Sales decrease to 16.8 million annual rate in December - Based on a WardsAuto estimate, light vehicle sales were at a 16.75 million SAAR in December. That is up 8.8% from December 2013, and down 1.7% from the 17.09 million annual sales rate last month. This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for December (red, light vehicle sales of 16.75 million SAAR from WardsAuto). This was below the consensus forecast of 16.9 million SAAR (seasonally adjusted annual rate). The second graph shows light vehicle sales since the BEA started keeping data in 1967. Note: dashed line is current estimated sales rate. This was another strong month for vehicle sales - the eighth consecutive month with a sales rate over 16 million - and the best year since 2006.

Car Loans See Rise In Missed Payments - WSJ: Borrowers who took out auto loans over the past year are missing payments at the highest level since the recession, fueling concerns among regulators, analysts and some in the car industry that practices that helped boost 2014 light-vehicle sales to a near-decade high could backfire. “It’s clear that credit quality is eroding now, and pretty quickly,” said Mark Zandi, chief economist at Moody’s Analytics. More than 2.6% of car-loan borrowers who took out loans in the first quarter of last year had missed at least one monthly payment by November, the highest level of early loan trouble since 2008, when such delinquencies rose above 3%, according to an analysis of data performed for The Wall Street Journal by Moody’s Analytics. The uptick comes amid an increase in subprime auto loans, raising concerns that car buyers may have taken on more debt than they can handle. For that set of borrowers, defined as consumers with a credit score lower than 620, loan performance also is deteriorating. More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November, according to the Moody’s analysis of Equifax credit-reporting data. That was the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%. Car lenders say the concerns are overstated. “Auto loans continue to perform well, as they did during the recession,” said Bill Himpler, executive vice president of the American Financial Services Association, which represents auto lenders. “Concerns about a spike in delinquencies have not been substantiated by evidence.”

AAA Sees U.S. Drivers Saving $75 Billion on Gasoline -  The rout in crude oil prices may mean as much as $75 billion in gasoline savings for U.S. drivers in 2015, according to AAA. Americans saved $14 billion on the motor fuel last year compared with 2013, Heathrow, Florida-based AAA, the country’s largest motoring group, said by e-mail. Pump prices dropped a record 97 consecutive days to a national average of $2.26 a gallon yesterday, the lowest since May 12, 2009. A global glut of crude oil and a standoff between U.S. producers and the Organization of Petroleum Exporting Countries over market share has been a boon for consumers. U.S. production climbed in 2014 to the highest in three decades amid a surge in output from shale deposits. Oil capped its biggest annual decline since the 2008 financial crisis. “Next year promises to provide much bigger savings to consumers as long as crude oil remains relatively cheap,” Avery Ash, an AAA spokesman, said by e-mail yesterday. “It would not be surprising for U.S. consumers to save $50-$75 billion on gasoline in 2015 if prices remain low.”

More Good News at the Pump: Gas is Half a Buck Cheaper Than a Month Ago --The good news keeps coming for U.S. drivers, who are enjoying the cheapest gasoline in nearly six years. The national average price for a gallon of regular gas was $2.19 on Wednesday, according to auto club AAA. That’s down 7 cents from a week ago, 49 cents from a month ago and $1.12 from a year ago. It’s unusual to see such a sustained and sharp drop in gas prices, which this week reached their lowest level since May 2009.  The national average price fell by 51 cents between Dec. 1 and Dec. 29 and 50 cents between Dec. 8 and Monday, according to the U.S. Energy Information Administration. Since EIA records began in 1990, the only other time that prices posted four-week declines of 50 cents or more was in late 2008 as the economy was tumbling deeper into recession.The global plunge in oil prices is driving the decline, and prices don’t look like they’ll be headed up anytime soon. That may be bad news for U.S. companies and states that rely on energy production, such as Texas, but it frees up billions of dollars for consumers and should boost the economy broadly.

The bottom in gas prices is close  - There is good reason to believe that we are close to, if not at, the bottom in oil and gas prices. The main reason is inexorable seasonality.  Refiners start switching from winter to summer blend at some time by mid-February.  Gas prices start their usual seasonal climb towards summer at that time. Gas prices did sometimes fall during the first half of the year in the 1990's, and there with only one exception by less than 5%: They have only done so twice since 2000, both times towards the end of or in the immediate aftermath of recessions:  In short, the odds are very good that prices will start to rise with the regular seasonality starting at some point in the next month. In fact, it is possible they have already reached their bottom. Here's Gas Buddy's daily price graph for the last month:

Behold The "Cheap Gas" Spending Surge: $1 More Per Day -- For all the endless media buzz pitching the bullish spin of plunging gas prices, namely that while crude capex spending and energy company earnings are both crashing, high-paying shale jobs are about to suffer pervasive layoffs and energy HY bonds are entering mass default territory leading to who knows what unexpected downstream effects, the average US consumer will spend substantially more to offset all the adverse side-effects of the plunging oil price. Or rather, was supposed to spend more. Because as Gallup finds, this did not happen.  Here is what did happen: U.S. consumers' average daily spending in December was $98, matching the upper reaches on this measure since 2008. While strong relative to the recent recessionary period, it is similar to the $95 found in November, as well as the $96 in December 2013So crude tumbles in half, as does a gallon of gas, and US consumers spend a whopping $2 more in 2014 compared to a year ago, lifting their all in megaspend to an unprecedented $98?  Actually, make that precedented: Because of holiday shopping, December spending has usually been the highest of any month in Gallup's seven-year history of asking this question. That was not the case in 2014, given that December's $98 average matched the $98 from May, and was barely higher than November's average.  So what about the poorer part of US society, those making $90K or less: surely they spent like crazy in December rejoicing in the "tax cut" low gas prices afforded them? Well, no. Because as the next chart shows, the poorer US households spent $85 daily in December.   How does this compare to a year ago? $84. A whopping one dollar increase!

Americans Are Buying Less-Efficient Cars as Gasoline Prices Dive -  Americans are continuing to favor bigger cars and trucks as gasoline prices dive, undermining the federal government’s environmental goals. New passenger vehicles sold in the U.S. got an average 25.1 miles a gallon in December, down from 25.3 mpg in November and 25.8 mpg in August. That’s according to industry data compiled by the University of Michigan’s Transportation Research Institute. The decline reflects Americans increasingly buying bigger cars, SUVs and light trucks instead of more fuel-efficient compact cars and hybrids. December’s dip likely understates the shift, since manufacturers have rolled out model-year 2015 vehicles that on average get higher mileage than older models. Economists say gasoline prices are a major culprit. The average price at the pump has fallen nearly $1.50—or 40%—since late June to $2.214 this week, according to the U.S. Energy Information Administration. The consumer shift will make it tougher for auto makers to meet stringent new fuel-economy standards under a 2007 law and solidified by the Obama administration. The rules require the industry to achieve an average 34.1 mpg by model year 2016 and 54.5 mpg by 2025. Auto makers are still making gains in the broader picture as they invest in new technology across the fleet (even today’s SUVs are more fuel efficient than yesterday’s gas guzzlers). For all of 2014, new vehicles sold got an average 25.4 mpg, up from 24.8 in 2013, according to the Transportation Research Institute. Vehicle fuel mileage is up 5 mpg since October 2007.

In the US, one lesson from oil prices: rich people win, again - This year’s crude-oil price drop will help US economic growth, but there are limits to how much it can do. It can boost gross domestic product slightly if prices stay lower, and it can help industries that are heavily dependent on transportation costs. But considering crude oil prices are volatile and are unlikely to stay at this low level, the overall positive impact may only have a short- to medium-term impact, economists say. Jeff Rosen, chief economist at Briefing.com, said based on the Federal Reserve’s economic model, a $20-a-barrel drop in crude oil prices translates to a quarter percentage-point increase in GDP. “That’s why a lot of people say: ‘This is good, this is great, it makes everything hunky dory,’” Rosen said.The most visible economic impact is in gasoline prices, with regular pump prices down about 70 cents a gallon from year ago levels, according to AAA. Consumers across the board benefit from this by having a little more disposable income, but Harris said the impact on households is uneven. Rich people win, again. About 56% of the expense savings goes to households in the top two-fifths of the income distribution versus only 24% to families in the bottom two-fifths, Harris said. “This is a critical distinction, since lower-income families are more likely to spend all of their gasoline expense savings than comparatively higher-income families,” Harris said, and spend it immediately.

In Low Gasoline Prices, an Opening Emerges for Higher Taxes - The sharp drop in gasoline prices over the past few months is providing a rare political opening for state and federal officials who want to raise gasoline taxes to repair highways and boost construction jobs. In Iowa, Republican Gov. Terry Branstad is gauging lawmakers’ support for the first state gas-tax increase since 1989, among other options to raise transportation funds. In Michigan, the GOP-controlled legislature approved a plan last month for a ballot initiative to boost the gas tax for road repairs. In Utah, Republican leaders in the state House signaled this week they are moving to raise the gas tax to cover a transportation-funding shortfall. In the nation’s capital, several top Senate Republicans—supported by some Democrats—are signaling an openness to raising the federal levy from the 18.4 cents a gallon it’s been at since 1993. The backers include business groups and corporate leaders who want to see infrastructure improvements and jobs-minded unions.The emerging push is taking lawmakers into two issues that can spark a backlash from voters: gas prices and taxes. A 2013 poll by research firm Gallup—taken while gas costs were high—showed two-thirds of Americans oppose raising state gas taxes by up to 20 cents to fund infrastructure projects. But the sharp drop in gasoline prices—to less than $2 a gallon at more than a third of U.S. stations—is brightening consumers’ moods, potentially taking the edge off raising state taxes that total as much as 50 cents a gallon on top of the federal tax of 18.4 cents.

Gasoline-Tax Increase Finds Little Support - When gasoline topped $4 a gallon, opponents of an increase in the gas tax argued that prices were already too high.Now the average price of regular gas has dropped under $2.50 a gallon, but in the antitax environment that pervades Washington there is still scant support for increasing the gas tax to finance upkeep of the nation’s roadways and public transit systems.The no-win dynamic is frustrating to advocates who hoped falling gas prices might reinvigorate the idea of raising the gas tax, which they view as one of the simplest, fairest and most efficient ways to pay for transportation repairs and improvements.“If something like this is going to be done, now is the time to do it,” said Bob Corker, a Republican senator, who noted that gas prices in his home state of Tennessee fell below $2 a gallon this month. Senator Corker and Senator Chris Murphy, a Democrat from Connecticut, unveiled a proposal in June to raise the gas tax by 12 cents a gallon over the next two years and then index further increases to inflation.  The latest discussions about raising the gas tax come as the Energy Information Administration estimates that the average American household will spend at least $550 less on gasoline next year than it did in 2014, a result of lower prices and more fuel-efficient cars and trucks that can travel farther on fewer gallons. “Annual motor fuel expenditures are on track to fall to their lowest level in 11 years,” the agency reported.

No, we shouldn’t raise the federal gasoline tax. There are better ideas --Some Republicans are signaling they’re open to increasing the federal gasoline tax. As Senator John Thune said over the weekend, “The highway bill expires at the end of May and there’s about a $100 million shortfall over what it would take to fund the highway trust fund at the current level of operations. So obviously we’ve got stuff to deal with here.” Falling oil prices support the economic and political logic of a tax hike since higher taxes would be more than offset by cheaper gas. I totally get that. Average US prices have fallen to $2.20 a gallon from $3.50 in July, according to AAA. So consumers would still be way better off than they were less than a year ago, even with a hike. But in a morning note, Goldman Sachs analyst Alec Phillips expresses skepticism on the politics: First, cheaper gasoline undoubtedly raises the probability that the $0.18/gallon tax will be increased for the first time since 1993, though at this point the likelihood still appears to be fairly low.  And while lower gasoline prices create additional room in households’ transportation budgets with which to absorb a tax increase, the $0.12/gallon increase that would be needed to bring federal highway-related revenues into line with federal highway spending would still amount to a tax increase of about $16 billion per year. At this point, we don’t expect an increase in the federal gasoline tax to become law, but we do expect to hear much more about the issue ahead of May 2015, when the current extension of the highway program expires.

How Oil Prices Could Help a Dollar-Damaged U.S. Trade Deficit - The surging dollar threatens to eat into U.S. exports, juice imports and subsequently fuel the U.S. trade deficit. A couple of factors could mitigate the damage, however, and any impact could take a while to feed into the economy. As the greenback rises against a host of currencies around the globe, exchange rate mismatches make U.S. products less internationally competitive, eroding America’s export potential. Meanwhile, U.S. consumers get more bang for their buck in goods from overseas, boosting imports. The net effect is a potential increase in the country’s trade deficit, a drag on U.S. growth. Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics and a top trade official in the Carter administration, said it’s a lagged effect, however. The dollar’s surge won’t hit the U.S. economy until the middle of next year, he said. Weaker foreign buying and a bigger import tab “will slow the U.S. recovery, maybe knocking 500,000 jobs off the count in 2016,” Mr. Hufbauer said. Others, such as Bill Reinsch, president of the National Foreign Trade Council, say plummeting oil prices will offset the damaging effects of the dollar’s surge. The lower U.S. energy tab will “shrink the deficit and more than offset the decline in exports,” he said. Oil prices have halved in value in the last year. Oil imports are lower than they’ve been in a decade:

Trade Deficit declines in November to $39.0 Billion -- The Department of Commerce reported: The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that the goods and services deficit was $39.0 billion in November, down $3.2 billion from $42.2 billion in October, revised. November exports were $196.4 billion, $2.0 billion less than October exports. November imports were $235.4 billion, $5.2 billion less than October imports.  The trade deficit was smaller than the consensus forecast of $42.0 billion. The first graph shows the monthly U.S. exports and imports in dollars through November 2014. Both imports and exports decreased in November. Exports are 18% above the pre-recession peak and up 1% compared to November 2013; imports are 2% above the pre-recession peak, and up about 2% compared to November 2013. The second graph shows the U.S. trade deficit, with and without petroleum, through November. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil imports averaged $82.95 in November, down from $88.47 in October, and down from $94.69 in November 2013. The petroleum deficit has generally been declining and is the major reason the overall deficit has declined since early 2012. Note: There is a lag due to shipping and long term contracts, but oil prices will really decline over the next several months - and the oil deficit will get much smaller. The trade deficit with China increased to $29.9 billion in November, from $27.0 billion in November 2013. The deficit with China is a large portion of the overall deficit.

Trade Deficit Declines 7.7% on Crude Oil Imports - The U.S. November 2014 monthly trade deficit declined -7.7% from last month and now stands at -$39 billion.  America still runs a surplus in services, now at $19.3 billion, but the goods deficit is still massive and this month was -$58.3 billion.  This month's trade deficit reduction is due to less crude oil imports and lower oil prices.  The U.S. trade deficit hasn't been this low since December 2013. Graphed below are imports and exports graphed and by volume since 1995 and note the global trade collapse in 2009. Imports are in maroon and exports are shown in blue, both scaled to the left. Below are the goods import monthly changes, seasonally adjusted. On a Census basis, overall imports decreased by -$5.183 billion to $192.922 billion as crude oil imports plunged by -$2.202 billion. Crude oil imports are now $17.089 billion, a level not seen since 1994. Fuel oil imports also dropped by -$700 million. Cell phones and other related imports increased by $1.875 billion in a month, that's a record and imagine if those phones were manufactured in the United States.

  • Industrial supplies and materials:  -$4.609 billion
  • Capital goods:  -$0.796 billion
  • Foods, feeds, and beverages:  -$0.495 billion
  • Automotive vehicles, parts, and engines:  -$0.-745 billion
  • Consumer goods:  +$1.602 billion
  • Other goods: -$0.140 billion

Below is the list of good export monthly changes, seasonally adjusted, by end use and on a Census accounting basis, declined by -$1.9 billion to $135.789 billion.  Capital goods had a terrible month with a whopping -$2.299 billion monthly decrease.  In civilian aircraft alone, there was a -$1.103 billion monthly decline in exports.  On the other hand, the U.S. exported $583 million more in fuel oil for the month.  Soybeans had a good month as exports increased by $664 million.

  • Automotive vehicles, parts, and engines:  -$0.49 billion
  • Industrial supplies and materials:  +$0.708 billion
  • Foods, feeds, and beverages:  +$0.274 billion
  • Capital goods:  -$2.299 billion
  • Consumer goods:  -$0.453 billion
  • Other goods: +$0.345 billion

US Trade Deficit Drops To $39 Billion, Lowest Since December 2013 As Imports, Exports Decline -- Those waiting to see if the crude crash would lead to any sizable adverse impact on the US trade deficit in November, as lower production led to higher imports if only on paper, the answer is yes, but in the opposite direction: instead of increasing or dropping just marginally from October's $43.4 billion (to the $42 billion consensus estimate), the November trade deficit tumbled by 7.7% to $39 billion the lowest print since December 2013, as a result of a 2.2% drop in imports coupled with a 1% decline in exports. But it was shale crude once again that was the swing factor, which was massively produced as domestic producers scramble to offset declining prices with extra volume, because as the data showed, in November the US imported the smallest crude amount by notional since 1994, and the lowest cost crude since 2010.

US export economy fails to import jobs - FT.com: This month, brace yourself to hear plenty of rhetoric coming out of Washington about “exports” and “jobs”. As a new Republican-dominated Congress starts work, energy companies are lobbying to drop a decades-old ban on exports of crude oil, arguing that such sales will create thousands of American jobs. As pitches go, it is a powerful one. But there is another question about exports and jobs that Congress should be debating more urgently: the fact that US businesses are becoming so efficient that they require fewer workers than ever before to deliver growth, even — or especially — for exports. Take a look at some fascinating data compiled by the Commerce Department, and quietly released last year. This shows that in the past few years, the number of American jobs supported by exports has risen as overseas sales have grown. In 2009, exports created 9.7m jobs; by 2013 the tally was 11.3m. This is cheering. And since overseas sales rose further in 2014, amid a wider economic recovery, there is every reason to think that when the commerce department publishes the 2014 tally the number of export-linked jobs will have grown again. But there is a billion dollar catch. Look at how many jobs are being generated per dollar of sales and the graph steadily slopes down. Back in 2009, each billion dollar’s worth of exports was creating 6,763 jobs. In 2013, it was 5,590 jobs. That is a fall of 17 per cent — in just four years.

The Rustbelt Roars Back From the Dead - Urban America is often portrayed as a tale of two kinds of places, those that “have it” and those who do not. For the most part, the cities of the Midwest—with the exception of Chicago and Minneapolis—have been consigned to the second, and inferior, class. Cleveland, Buffalo, Detroit or a host of smaller cities are rarely assessed, except as objects of pity whose only hope is to find a way, through new urbanist alchemy, to mimic the urban patterns of “superstar cities” like New York, San Francisco, Boston, or Portland. Yet in reality, the rustbelt could well be on the verge of a major resurgence, one that should be welcomed not only locally but by the rest of the country. Two factors drive this change. One is the steady revival of America as a productive manufacturing country, driven in large part by new technology, rising wages abroad (notably in China), and the development of low-cost, abundant domestic energy, much of it now produced in states such as Ohio and in the western reaches of Pennsylvania. The second, and perhaps more surprising, is the wealth of human capital already existent in the region. After decades of decline, this is now expanding as younger educated workers move to the area in part to escape the soaring cost of living, high taxes, and regulations that now weigh so heavily on the super-star cities. . In fact, more educated workers now leave Manhattan and Brooklyn for places like Cuyahoga County and Erie County, where Cleveland and Buffalo are located, than the other way around.

US Factory Orders Drop Most YoY In 19 Months -- For the 4th month in a row, US Factory Orders have fallen MoM. November's 0.7% drop is worse than the 0.5% decline expected and leads to the biggest yearly drop since March 2013. Capital Goods New Orders tumbled 0.8% as did non-defense capital goods shipments (down 0.9%). Having risen for 3 months, November saw a 8.2% plunge in defense new orders but it was the across-the-board slide in consumer goods orders and shipments, IT new orders, and Computers & Electronics (despite the massive tax cut from low oil prices!!??) that weighed heavily.

Factory orders drops 0.7% in November, versus down 0.4% estimate: New orders for U.S. factory goods fell for a fourth straight month in November, pointing to a slowdown in manufacturing activity and overall economic growth. The Commerce Department said on Tuesday new orders for manufactured goods dropped 0.7 percent after an unrevised 0.7 percent fall in October. Economists polled by Reuters had forecast new orders received by factories falling 0.5 percent. Manufacturing is cooling after robust growth in the third quarter, in part because of a sluggish global economy. Slowing growth in China and the euro zone, as well as a recession in Japan are crimping demand for U.S. manufactured goods. Factory activity has also been hampered by a labor dispute at the nation's West Coast ports, which has hit deliveries and curbed inventory accumulation. A survey last Friday showed a manufacturing sector gauge hit a six-month low in December. But with domestic demand picking up, any slowdown in manufacturing is likely to be temporary. In November, factory orders excluding the volatile transportation category fell 0.6 percent as demand declined almost across the board. That followed a 1.5 percent drop in October. Inventories edged up 0.1 percent in November, while shipments fell 0.6 percent, likely reflecting delays moving goods at the West Coast ports. The inventories-to-shipments ratio was 1.32, unchanged from October. Unfilled orders at factories rose 0.4 percent. Order backlogs have increased in 19 of the last 20 months, showing underlying strength in manufacturing.

Economists Upbeat Despite 4th Consecutive Decline in Factory Orders; Auto Orders vs. Expectations -  Economists are among the most optimistic groups on the planet. Year in, year out they project improvements in growth. So today, despite 4th Consecutive Decline in Factory Orders, it's no surprise that economists remain optimistic. Orders to U.S. factories fell for a fourth straight month in November, with demand in a key category that signals business investment plans down for a third month. The Commerce Department said Tuesday factory orders dropped 0.7 percent in November after a similar 0.7 percent fall in October. The November weakness came from decreases in demand for primary metals, industrial machinery and military aircraft. A closely watched category that serves as a proxy for business investment spending dropped 0.5 percent in November, marking the longest stretch of weakness in this category since 2012. Economists, however, remain optimistic that the drop in orders is a temporary soft patch and a stronger economy with increased consumer spending will trigger a rebound in demand in 2015. The US Census Bureau Manufacturers’ Shipments, Inventories and Orders Report for November 2014 shows New orders for manufactured goods are down for four consecutive months. Overall Highlights:

  • November aggregate decline was 0.7%.
  • Excluding transportation, new orders decreased 0.6%
  • Excluding defense, new orders down 0.4%
  • Durable goods new orders down 0.9%
  • Nondurable goods down 0.5%
  • Shipments down three of last four months
  • Durable goods orders down three of last four months
  • October decline 0.7%.

December Jobs "Significantly Below 200,000", Q4 GDP Tumbles To 2%, Markit Warns - Markit's US Services PMI missed expectations of 53.7, priting at 53.3, its lowest since Feb 2014 (mid Polar Vortex). From record highs in June, PMI has plunged non-stop for six months leaving Markit noting Q4 growth is looking more like 2.0% than the 5.0% exuberance in Q3. US Services PMI plunges... and along with the tumble in manufacturing leaves the US Composite PMI at 14 month lows... It gets worse. From the report, via Chris Williamson, Chief Economist at Markit said: “The US economy lost significant growth momentum at the close of the year. Excluding the drop in activity caused by the October 2013 government shutdown, the manufacturing and service sector PMIs collectively signalled the weakest expansion since the end of 2012. This is also not just a one-month wobble: the pace of growth has now slowed for six consecutive months. “The PMI surveys act as good leading indicators of GDP data, and suggest that the pace of US economic growth will have slowed in the fourth quarter. According to the PMIs, fourth quarter growth is looking more like 2.0% rather than the 5.0% annualised rate of expansion enjoyed in the third quarter. “Job creation has waned alongside the slowdown, with the survey indicating that monthly payroll growth has slipped significantly below the 200,000 mark. Companies have become increasingly reluctant to take on staff due to the cloudier economic outlook, in turn linked to various factors ranging from global geopolitical concerns, worries about higher interest rates and uncertainty about rising staff healthcare costs.

ISM Non-Manufacturing Index decreased to 56.2% in December -- The December ISM Non-manufacturing index was at 56.2%, down from 59.3% in November. The employment index decreased in December to 56.0%, down from 56.7% in November. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: December 2014 Non-Manufacturing ISM Report On Business® "The NMI® registered 56.2 percent in December, 3.1 percentage points lower than the November reading of 59.3 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 57.2 percent, which is 7.2 percentage points lower than the November reading of 64.4 percent, reflecting growth for the 65th consecutive month at a slower rate. The New Orders Index registered 58.9 percent, 2.5 percentage points lower than the reading of 61.4 percent registered in November. The Employment Index decreased 0.7 percentage point to 56 percent from the November reading of 56.7 percent and indicates growth for the tenth consecutive month. The Prices Index decreased 4.9 percentage points from the November reading of 54.4 percent to 49.5 percent, indicating prices contracted in December when compared to November. According to the NMI®, 12 non-manufacturing industries reported growth in December. Comments from respondents are mostly positive about business conditions and the overall economy for year-end."  This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. This was below the consensus forecast of 58.2% and suggests slower expansion in December than in November.  Still a decent report.

Service ISM Tumbles To Lowest Since June, Biggest Miss Since 2013, Prices Crash To 2009 Level -- Following a disastrous Manufacturing ISM report last week, today it was the turn for its Service cousin to report. And while it wasn't quite the abysmal faceplant that some had expected the seasonally adjusted number to be, printing at 56.2, down from 59.3 and far below the 58.0 expected (but just above the lowest estimate of 56.0), it still was the biggest miss to expectations since September 2013, and the lowest print since June.  And while the details were just as atrocious, with every single ISM component declining in December - something that has not happened since the Great Financial Crisis - a report which literallyh said "Obamacare and wages are still the biggest enemies to profitability", all eyes are focused not so much on the tumble in Business Activity and New Orders, but on Prices, which at 49.5, posted their first contraction since September 2009.

Job Quality is about Policies, not Technology -  Nouriel Roubini posted an article titled “Where Will All the Workers Go?”... The worry here is that technology will replace certain jobs (particularly goods-producing jobs) and that there will literally be nothing for those people to do. They will presumably exit the labor market completely and possibly need permanent income support. Let’s quickly deal with the “lump of labor” fallacy sitting behind this. ... We’ve been creating new kinds of jobs for two hundred years. ... The economy is going to find something for these people to do. The question is what kind of jobs these will be. Will they be “bad jobs”? McJobs at retail outlets... We can worry about the quality of jobs, but the mistake here is to confound “good jobs” with manufacturing or goods-producing jobs. Manufacturing jobs are not inherently “good jobs”. There is nothing magic about repetitively assembling parts together. You think the people at Foxconn have good jobs? There is no greater dignity to manufacturing than to providing a service. Cops produce no goods. Nurses produce no goods. Teachers produce no goods.  Manufacturing jobs were historically “good jobs” because they came with benefits that were not found in other industries. Those benefits – job security, health care, regular raises – have nothing to do with the dignity of “real work” and lots to do with manufacturing being an industry that is conducive to unionization. The same scale economies that make gigantic factories productive also make them relatively easy places to organize. ... To beat home the point, consider that what we consider “good” service jobs – teacher, cop – are also heavily unionized. Public employees, no less.If you want people to get “good jobs” – particularly those displaced by technology – then work to reverse the loss of labor’s negotiating power relative to ownership. Raise minimum wages. Alleviate the difficulty in unionizing service workers.

Weekly Initial Unemployment Claims decreased to 294,000 -- The DOL reported: In the week ending January 3, the advance figure for seasonally adjusted initial claims was 294,000, a decrease of 4,000 from the previous week's unrevised level of 298,000. The 4-week moving average was 290,500, a decrease of 250 from the previous week's unrevised average of 290,750.   There were no special factors impacting this week's initial claims. The previous week was unrevised.  The following graph shows the 4-week moving average of weekly claims since January 2000.

U.S. Employers Laid Off the Fewest People in 17 Years in 2014 -- Job cuts announced by U.S.-based employers last year were 5% fewer than in 2013 and the lowest annual total since 1997, the latest indicator that the U.S. labor market is performing well. Overall, employers announced job cuts totaling 483,171 in 2014, down from 509,051 cuts announced the prior year, according to a report by global outplacement firm Challenger, Gray & Christmas.  “Layoffs aren’t simply at pre-recession levels; they are at pre-2001-recession levels,” said John A. Challenger, CEO of the firm. “This bodes well for job seekers, who will not only find more employment opportunities in 2015, but will enjoy increased job security once they are in those new positions.”  Challenger’s report pointed out that while the economy and employment has grown in 2014, no job is ever truly secure as the nation still averaged about 40,000 planned job cuts per month. That’s because companies restructure their operations, announce cost-cutting moves or cut jobs when mergers and acquisitions are completed.  Notably, the tech sector, a relatively strong performer in the economy, saw the heaviest downsizing last year. That sector announced 59,528 planned layoffs. Challenger said that was a 69% increase from a year ago. Much of that downsizing was due to plans announced by Hewlett-Packard and Microsoft to each cut thousands of jobs. With both of their traditional businesses heavily tied to the PC world, the companies are pivoting to compete as the tech market moves to mobile devices where other rivals are stronger.

Private Sector Adds More Than 2.5 Million Jobs in 2014 -- The U.S. private sector has added more than 2.5 million jobs last year, and some economists say that if the pace of hiring continues, the nation could return to full employment by this time next year.The rosy view can be attributed to the latest employment figures reported by payroll processor Automatic Data Processing and analysis provider Moody’s Analytics. Their report shows private-sector payrolls in the U.S. jumped by 241,000 in December, surpassing the 235,000 increase projected by economists. The U.S. private sector has now added more than 200,000 jobs for four consecutive months.“At the current pace of job growth, the economy will be back to full employment by this time next year,” said Mark Zandi, chief economist of Moody’s Analytics. Full employment is when all, or nearly all, people who are willing and able to work are able to do so.The gain in December was fueled by small businesses, which added 106,000 jobs last month. ADP defines small businesses as those that employ fewer than 49 people. Medium-sized businesses added 70,000 jobs last month, while large businesses (which employ 500 or more people) added 66,000.By sector, the professional/business services and the trade/transportation/utilities industries added the most jobs in December, the report showed. Construction, manufacturing and financial activities employers also added to their payrolls. The labor market had a stellar 2014, with gains in hiring across a range of sectors as U.S. economic growth encouraged many employers to add jobs. 2014 has been the best year for job gains this millennium.

ADP: Private Employment increased 241,000 in December - From ADP: Private sector employment increased by 241,000 jobs from November to December according to the December ADP National Employment Report®. ... The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. ..Goods-producing employment rose by 46,000 jobs in December, up from 40,000 jobs gained in November. The construction industry added 23,000 jobs, up from last month’s gain of 20,000. Meanwhile, manufacturing added 26,000 jobs in December, well above November’s 16,000 and the second highest monthly total of 2014 in that sector.  Service-providing employment rose by 194,000 jobs in December, up from 187,000 in November. ... Mark Zandi, chief economist of Moody’s Analytics, said, “The job market continues to power forward. Businesses across all industries and sizes are adding to payrolls. At the current pace of job growth, the economy will be back to full employment by this time next year.”  This was above the consensus forecast for 223,000 private sector jobs added in the ADP report. 

December Employment Report: 252,000 Jobs, 5.6% Unemployment Rate - From the BLSTotal nonfarm payroll employment rose by 252,000 in December, and the unemployment rate declined to 5.6 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, construction, food services and drinking places, health care, and manufacturing.... The change in total nonfarm payroll employment for October was revised from +243,000 to +261,000, and the change for November was revised from +321,000 to +353,000. With these revisions, employment gains in October and November were 50,000 higher than previously reported.The first graph shows the monthly change in payroll jobs, ex-Census (meaning the impact of the decennial Census temporary hires and layoffs is removed - mostly in 2010 - to show the underlying payroll changes). Eleven consecutive months over 200 thousand. Employment is now up 2.952 million year-over-year. Here is a table of the annual change in total nonfarm, private and public sector payrolls jobs since 1997. For total employment, 2014 was the best year since 1999. For private employment, 2014 was the best year since 1997.The second graph shows the employment population ratio and the participation rate. The Labor Force Participation Rate declined in December to 62.7%. This is the percentage of the working age population in the labor force. A large portion of the recent decline in the participation rate is due to demographics. The Employment-Population ratio was unchanged at 59.2% (black line).

December Jobs Report – The Numbers - WSJ: The U.S. economy added 252,000 jobs last month, while the unemployment rate fell to 5.6% from November’s 5.8%. Economists surveyed by The Wall Street Journal had predicted a payroll gain of 240,000 and a jobless rate of 5.7%. Here are highlights from the report.  Employers added an average 289,000 jobs over the final three months of 2014, a solid pickup from growth over the past year. In 2014, the economy added an average 246,000 jobs per month, far higher than the average 194,000 added in 2013.   Wage growth weakened last month, despite the drop in the unemployment rate. Private-sector employees saw their hourly wages increase only 1.7% in December from a year earlier, below the recent trend of about 2% growth. Wages last year rose only slightly higher than consumer prices. Before the recession wages were growing at above 3%. The share of Americans in the workforce fell back to a three-decade low of 62.7%, down from November’s 62.9%. The labor force shrank by 273,000 workers last month. The number of unemployed workers fell by 383,000, while the number of workers with jobs rose by 111,000. The participation rate stood at 66% just before the recession. Last month’s job growth was spread across industries. Construction jobs rose by a solid 48,000, a decent pickup from recent months and a possible sign of growing investment in the U.S. Health-care payrolls climbed 34,000. Jobs in professional and business services led the way with a payroll gain of 52,000 last month. Manufacturing payrolls rose a more modest 17,000.

Jobs day–first impressions: 2014 was a solid year for job growth, and less fiscal drag was a big factor. - US payrolls grew by 252,000 last month and by 2.95 million over 2014, making last year the strongest year for job since 1999 (that’s comparing Dec-over-Dec). Below, I offer some thoughts as to one reason why the 2014 job market outperformed earlier years in the recovery. Payroll growth was notably strong in this report. November’s big gain was revised up to 353,000, and as my monthly smoother shows, job gains have accelerated over the course of the year, up 289,000 on average over the past three months compared to 246,000 over the full year. However, there were two clouds in the December report. The labor force participation rate fell two-tenths of a point, fully explaining the decline in unemployment from 5.8% in November to 5.6% last month. Also, after an upside surprise in last month’s report, hourly wages disappointed on the downside in December, down five cents. Moreover, November’s 0.4% wage bump was revised down by half. Thus, in 2014, hourly wages were up 1.7%, a touch below 2013’s 1.9% gain. In other words, wage growth unquestionably remains a key missing piece from a job market recovery which on most other measures has finally taken hold. Take note, Federal Reserve: this economy clearly has no wage or price pressures that would point towards an early liftoff on interest rates. Two other relevant observations on the wage side are:

  • –because of the sharp decline in oil prices, inflation is growing slowly enough to turn even these tepid nominal gains into real gains. Most recently, prices were 1.3%, year-over-year, so even 2014’s 1.7% yields a slight real growth rate.
  • –the increase in jobs and hours means working households’ incomes can rise even with relatively flat real hourly wages. Weekly earnings, for example, were up 2.5% in 2014, around 1% ahead of inflation. To be clear, this implies that to the extent families are getting ahead, it’s through more work at stagnant real hourly wages.

Even with these caveats, 2014 was the most solid year for the labor market since the Great Recession hit in late 2007.

Nonfarm Payrolls +252K; Unemployment 5.6%; Employed +111,000 (Household Survey) - The big surprise in this month's report was a decline in average hourly earnings. Details below.  For the second straight month there has been a huge discrepancy between the household survey employment and the establishment jobs survey. Swings in household survey employment and the labor force have been wild lately.  Last month household survey employment rose by 4,000 while the payroll survey had job gains of 321,000 (revised up this month to 353,000). This month the household survey shows a modest gain in employment of 111,000 vs. a payroll survey of 252,000 jobs. The unemployment rate dropped this month primarily because 273,000 people dropped out of the labor force. Once again we are in a situation where the establishment survey and the household survey are at odds. Over time these fluctuations tend to smooth out. The question, as always, is "in which direction". BLS Jobs Statistics at a Glance:

  • Nonfarm Payroll: +252,000 - Establishment Survey
  • Employment: +111,000 - Household Survey
  • Unemployment: -383,000 - Household Survey
  • Involuntary Part-Time Work: -61,000 - Household Survey
  • Voluntary Part-Time Work: -241,000 - Household Survey
  • Baseline Unemployment Rate: -0.2 at 5.6% - Household Survey
  • U-6 unemployment: -0.2 to 11.2% - Household Survey
  • Civilian Non-institutional Population: +183,000
  • Civilian Labor Force: -273,000 - Household Survey
  • Not in Labor Force: +456,000 - Household Survey
  • Participation Rate: -0.2 at 62.7 - Household Survey

The December Jobs Report in 10 Charts - The U.S. economy added 252,000 jobs last month, and revisions showed 50,000 additional jobs were added in October and November than initially estimated, the Labor Department said Friday. That means the U.S. added more jobs last year—an average of 246,000 per month—than in any since 1999. It also means that over the last 12 months, the 2.9 million jobs added is the most for a 12-month stretch since the middle of 2000. The unemployment rate fell to 5.6% in December, down from 6.7% one year earlier. Alternative measures of labor underutilization are still elevated but have shown similar improvement. Including the share of those who are discouraged, or have stopped looking for work, the unemployment rate stands at 6%. Add in those who are “marginally attached” to the labor force because they would like to work but haven’t looked recently, and the unemployment rate stands at 6.9%. And including those who are part-time workers but would like full-time work, the unemployment rate stood at 11.2%, down from 13.1% one year earlier. This rate, known as “U-6,” peaked at 17.2% in early 2010. More educated workers are much less likely to be unemployed. While unemployment is 8.6% among those without a high school diploma, it’s only 5.3% among high school graduates, 4.9% among those with some college or an associate’s degree and 2.9% for college graduates. Friday’s report offered fewer signs of improvement on the wage front. Earnings growth weakened last month despite the drop in the unemployment rate. Private-sector employees saw their hourly wages rise 1.7% in December from a year earlier, below the recent trend of 2% wage growth. Average weekly earnings rose 2.5% from a year earlier as hours worked increased. Meanwhile, the labor force participation rate—defined as the percentage of the population either working or looking for work—declined in December, matching the lowest level since 1978. The employment-to-population ratio, defined as the share of civilians with jobs, was unchanged this month.

The December jobs report: Are workers partying like its 1999? Not really -- “December Employment Gain Caps Best Year for U.S. Since 1999″ is how Bloomberg sums up the new jobs data out today. And in one way — an important way, no doubt — that analysis is correct. An additional 2.95 million Americans found work in 2014 — including 252,000 last month — the most since 3.18 million jobs were created during that boom time 15 years ago. But a comparison between back then and now shows a striking difference between the modest economic acceleration of 2014 and go-g0 late 1990s. First, the jobless rate was a lot lower in December 1999, 4.0% vs. 5.6% last month. Second, a much bigger share of the adult population had jobs, 64.4% vs. 59.2% today. (And if you adjust for the bigger adult population today, the US economy would need to create nearly 4 million jobs to match 1999’s total.) Third, wage growth was far most robust in 1999, increasing by nearly 4% vs. 1.7% the past 12 months. Indeed, as Bloomberg notes, “Average hourly earnings for all employees dropped by 0.2 percent, the biggest since comparable records began in 2006, to $24.57 from the prior month.” That result led JPMorgan economist Michael Feroli to note, “The oddity in the report is the move down in average hourly earnings.” Some economists prefer a different BLS wage measure, average hourly earnings for production and nonsupervisory workers. But that was also weak, the bank Barclays points out, down 0.3% month over month and up just 1.6% year over year. This is not say the macro environment is the same today as in 1999, especially due to globalization and automation. To repeat: Job growth has accelerated markedly this year — to 2.1% vs. 1.7% 2011-2013 –which is really great. And they are full-time jobs, also great. But this is still a labor market that shows plenty of slack and plenty of room for improvement — most notably when it comes to wages. Also, the labor force participation rate fell last month and is below where it was a year ago.

As Unemployment Rate Hits a New Low, More Slack Remains in the Labor Market than Meets the Eye: The Bureau of Labor Statistics reported today that the unemployment rate dropped to 5.6 percent in December, a new low for the recovery. For the first time in years, the unemployment rate has fallen to the range of 5.25-5.75 percent that the Fed considers consistent with its mandate to maintain full employment. In the same release, the BLS reported that payroll jobs increased by a robust 252,000 in December. On top of that, it made upward adjustments totalling 50,000 to the already-strong job gains for October and November. That brought the 12-month gain in payroll jobs to 2,952,000, the best annual gain since 1999. These latest data raise a critical question: How much slack remains in the US labor market? Is it time to start tightening policy to forestall an outbreak of inflation, or is there room for employment to expand further without inflationary pressure? To answer these questions, we need to look beyond the headlines to some of the less familiar indicators of the employment situation. Involuntary part-time work as hidden labor-market slack One potential source of labor market slack consists of people who are working part-time “for economic reasons,” as BLS terminology describes them. That category, more often referred to as “involuntary” part-time work, includes those who can only find part-time jobs or whose employers have cut the hours offered for what would normally be a full-time job. In December, there were 6,790,000 involuntary part-time workers, or 4.3 percent of the labor force. The narrowest category, known as discouraged workers, are people who want to work and are available to take a job, but have not looked because they think it would be pointless to do so. They may think there are no jobs at all, that their skills are not suitable for jobs that are available, or that employers will find them too young, too old, or be prejudiced against them for some other reason. As the chart shows, this category is cyclically sensitive. People in this group have already begun returning to the labor force as the recovery and expansion have proceeded. However, the number of discouraged workers is not yet back to its pre-recession level.

Unemployment Rate Drops Due to Almost Half a Million More Not in Labor Force -- The December unemployment rate dropped on almost half a million more people considered not part of the labor force.  The official unemployment rate is now 5.6%, a -0.2 drop from last month.  The labor participation rate went back to 38 year record lows and is 62.7%.  From a year ago, the number of people considered not in the labor force has increased by 1.2 million those considered employed grew by 2.7 million.  Most in the press will proclaim this is a great employment report, yet the over quarter of a million monthly drop in the labor force size is most disconcerting.  This article overviews and graphs the statistics from the Employment report Household Survey also known as CPS, or current population survey.  The CPS survey tells us about people employed, not employed, looking for work and not counted at all.  The household survey has large swings on a monthly basis as well as a large margin of sampling error.  The CPS has severe limitations, yet, it is our only real insight into what the overall population are doing for work.  The ranks of the employed grew by 111,000 this month.  This is within the margin of error of the survey.  From a year ago, the employed has increased by 2.751 million.  This isn't really a large increase in annual employed if one takes increased population growth into consideration but is increasing beyond what is needed to keep up. Those unemployed decreased -383,000 to stand at 8,688,000. From a year ago the unemployed has decreased by -1.688 million. Below is the month change in unemployed and as we can see, this number normally swings wildly on a month to month basis. Those not in the labor force increased by 456,000 persons and to bet 92,898,000. The below graph is the monthly change of the not in the labor force ranks. Notice the increasing swells and wild monthly swings. Those not in the labor force has increased by 1,200,000 in the past year. The labor participation rate is at 62.7%, a -0.2 change from last month. Those aged 16 and over either working or looking for work is still at record lows, as shown in the below graph. The low labor participation rate is not all baby boomers and people entering into retirement. Below is a graph of the labor participation rate for those between the ages of 25 to 54. These are the prime working years, so once cannot blame retirement and college on the declining participation rate. The 25 to 54 age bracket labor participation rates have not been this low since the 1980's recession and the rate stands at a three month static 80.8%.

At an Average of 246,000 Jobs a Month in 2014, It Will Be the Summer of 2017 Before We Return to Pre-recession Labor Market Health - Dramatically falling employment in the Great Recession and its aftermath has left us with a jobs shortfall of 5.6 million—that’s the number of jobs needed to keep up with growth in the potential labor force since 2007. Each year, the population keeps growing, and along with it, the number of people who could be working. To get back to the same labor market we had before the recession, we need to not only make up the jobs we lost, but gain enough jobs to account for this growth. The chart below projects out the potential labor force into the future. In December, the economy added 252,000 jobs; average monthly job growth in 2014 was 246,000 jobs. This is a clear improvement over the last several years, but the reality is that if we add 246,000 jobs a month going forward, it will take until August 2017 to hit the employment level needed to return the economy to the labor market health that prevailed in 2007. Yes, job growth increased in 2014—in fact, job growth has gotten stronger each consecutive year in the recovery—and I’m optimistic that we will continue to see job growth that strong or stronger in the upcoming months. The high of the last year occurred in November, with today’s revisions bringing the number of jobs added in that month up to 353,000. If we were to create that number of jobs—the highest monthly number of the recovery—every month, we would return to pre-recession labor market health in August 2016. That’s awfully optimistic, and yet, still nearly 9 years since the recession began.

Wage Gains Tepid in 2014 Despite Best Year of Job Creation Since 1999 -- Employers last year created the most jobs since 1999. They did not deliver wage gains like they did 15 years ago. Average hourly earnings for private production and nonsupervisory employees, reflecting those most likely to be paid on an hourly basis, rose 2.3% last year from 2013, the Labor Department said Friday. By comparison, wages for those workers advanced 3.7% in 1999, after growing 4% in 1998. When considering all private-sector employees, average wages rose 2% last year from 2013—the third straight year wages advanced at that modest pace. Hourly earnings fell by five cents last month from November to $24.57—marking the largest monthly decrease since at least 2006, the year the government began tracking wages for all private employees. The latest drop nearly entirely offset November’s six-cent increase. The figures follow a familiar pattern during this expansion, when healthy jumps in earnings tend to fade quickly. Wage gains have been barely keeping ahead of mild inflation. If wage growth can’t outpace price increases, it could be difficult for consumers to drive an accelerating economic expansion, as they have in recent months. By another measure, last year’s wage gains were the weakest on records back to 1965. Due in part to a sharp drop last month, nonsupervisory wages rose 1.3% in December from a year earlier, on a non-seasonally adjusted basis. That was the weakest annual reading for the month, worse than December 2003’s 1.4% advance.

Was 2014 Really the Strongest Year of Job Growth Since 1999? --The U.S. economy added almost 3 million jobs last year, the most in a calendar year since 1999. But consider this: The American population is much bigger today than it was 15 years ago. The U.S. population has grown by more than 39 million since 1999, according to the Census Bureau. In that sense, 3 million jobs doesn’t have the same impact on the economy and labor market today as it did in the late 1990s. Another way to measure last year’s job growth is to look at the percent change in jobs. In that sense, 2014 still looks relatively good: Employment grew 1.9% compared with 2013. (Specifically, the average number of jobs in 2014 was 1.9% higher than the average in 2013, as calculated by the Labor Department’s Bureau of Labor Statistics.) But it’s the highest percentage change in a calendar year since 2000, when payrolls increased 2.2%, not 1999.

Non-Farm Payrolls Rise By More Than Expected 252K, But Hourly Earnings Plunge Most In At Least 8 Years -- On the surface, the December jobs report was good, with 252K jobs added, higher than the 240K expected, leading to a fresh cycle low unemployment rate of 5.6%, down from 5.8% and below the 5.7% expected, and with the November data revised to a whopping 353K from 321K, a net change of 50K including the October revision. However it was the average hourly earnings where the real details were hid, and it was here that Wall Street was expecting a 0.2% increase. Intead the BLS reported a whoppping 0.2% decline in average hourly earnings, with the last month's 0.4% jump revised lower by half to 0.2%.

Job Growth Looks Great; Wage Growth, Less So - The last few weeks have been a time of, dare we say it, buoyant optimism about the United States economy. The long winter slumber may be over, or so it has seemed after news of a 5 percent G.D.P. third-quarter growth rate and a November jobs report showing the strongest gains in years. The latest jobs numbers, released Friday, show that this basic story of a strengthening economy remains very much intact. The Labor Department reported that employers added 252,000 net positions in December, and revised the two earlier months up by an additonal 50,000. For good measure, the unemployment rate fell a couple of ticks, to 5.6 percent from 5.8 percent. This is all excellent news for the people holding one of the 2.95 million jobs that did not exist at the beginning of 2014 (the strongest year of job growth since 1999). And the numbers do nothing to throw cold water on the idea that the recovery has shifted into a higher gear in recent months. But forgive us for a moment of less than sunny optimism on this front.Photo Low-wage contract workers at the U.S. Capitol joined other federal contract employees demonstrating in November to call for higher wages. The big disappointment was on wages. In the November numbers, one of the brightest signs was an 0.4 percent rise in average hourly earnings, which was a hint that maybe, just maybe, a tighter job market was leading employers to raise wages after years of resisting.It turned out to be a false signal. In Friday’s revisions, November wages rose only 0.2 percent. And even worse, in December they fell 0.2 percent.

December Jobs Report: Good on jobs, but red flag on wages  - HEADLINES:

  • 252,000 jobs added to the economy
  • U3 unemployment rate down -.2% to 5.6%
  • Not in Labor Force, but Want a Job Now: down 111,000 from 6.556 million to 6.445
  • Part time for economic reasons: down 61,000 from  6.850 million to 6790 million
  • Employment/population ratio ages 25-54: up .1% to 77.0%
  • Average Weekly Earnings for Production and Nonsupervisory Personnel: down $.06 (or -0.3%) from $20.74 to $20.68, up 1.6%YoY

October was revised upward by 18,000 from 243,000 to 261,000. November was also revised upward by 32000 to 358,000. The net revision was 50,000. Since the economic expansion is well established, in recent months my focus has shifted to wages and the chronic heightened unemployment. The headline numbers for December continue to show strong jobs growth, with nearly 3 million jobs added for the year of 2014. Participation rates are barely budging. But the nasty surprise is the deterioration in wages. YoY wages in the last few months have actually started to trend lower. In real terms they are holding steady, but only due to lower inflation. Participation rates are barely budging. Those who want a job now, but weren't even counted in the workforce were 4.3 million at the height of the tech boom, and were at 7.0 million a couple of years ago. Since Congress cut off extended unemployment benefits at the end of last year, they have actually risen, and are still 700,000 higher than they were in November 2013. On the other hand, the participation rate in the prime working age group has made up over 40% of its loss from its pre-recession high.

The economy’s broken record: Lots of jobs, but no raises - WaPo - If you ever figured out what partying like it's 1999 means, go ahead and do that now. Because after the economy added 252,000 jobs in December and 50,000 more in revisions to previous months, 2014 was the best calendar year for job growth since then.  Not bad for the recovery formerly known as not much of one. There's plenty of good news, but plenty more that we still need. The economy, as you can see below, has added an average of 246,000 jobs a month the past year, up from 194,000 in 2013, and better than the best of the housing bubble. Remember, though, that now that the Baby Boomers are hitting their golden years, we don't need to create as many jobs as before to keep the unemployment rate from rising. Indeed, the Chicago Fed estimates that we only need 80,000 a month to do so nowadays. That, in large part, is why the unemployment rate has fallen so far the past two years, from 7.9 to 5.6 percent, the biggest 24-month drop since 1985 when you-know-who was beaming about Morning in America. But unemployment hasn't fallen just because some people are getting jobs, and other people are retiring. It's also fallen because some other people who we'd expect to be working have given up trying to. So-called "prime-age workers" between 25 and 54 years old—too old to be in school, for the most part, and too young to be retired—aren't working or even looking for work as much as they were before the Great Recession.

Employment Report Comments: First come the jobs, then comes the real wage growth - 2014 was the best year for total employment since 1999, and the best year for private employment since 1997.  Awesome news. Looking forward, hopefully 2015 will be about "wages".   My thinking is first come the jobs, then comes the real wage growth.  Overall this was a strong employment report with 252,000 jobs added, and job gains for October and November were revised up.  A few other positives: U-6 declined to 11.2% (an alternative measure for labor underutilization) and was at the lowest level since 2008, the number of part time workers for economic reasons declined  (lowest since October 2008), and the number of long term unemployed declined to the lowest level since January 2009.  Unfortunately there was disappointing news on wage growth, from the BLS: "In December, average hourly earnings for all employees on private nonfarm payrolls decreased by 5 cents to $24.57, following an increase of 6 cents in November. Over the year, average hourly earnings have risen by 1.7 percent."  But wages will hopefully be a 2015 story. With the unemployment rate at 5.6%, there is still little upward pressure on wages. Hopefully wage growth will pick up as the unemployment rate falls over the next couple of years.Total employment increased 252,000 from November to December and is now 2.0 million above the previous peak.  Total employment is up 10.7 million from the employment recession low. Private payroll employment increased 314,000 from October to November, and private employment is now 2.4 million above the previous peak. Private employment is up 11.2 million from the recession low.This graph shows the year-over-year change in total non-farm employment since 1968. In December, the year-over-year change was 2.95 million jobs, and it appears the pace of hiring is increasing. This was the highest year-over-year gain since the '90s. According to the BLS employment report, retailers hired seasonal workers at a solid pace in 2014. . Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year.  This suggests retailers were optimistic about the holiday season, and my guess is holiday retail sales were solid.

Labor Participation Rate Drops To Fresh 38 Year Low; Record 92.9 Million Americans Not In Labor Force - Another month, another attempt by the BLS to mask the collapse in the US labor force with a goalseeked seasonally-adjusted surge in waiter, bartender and other low-paying jobs. Case in point: after a modest rebound by 0.1% in November, the labor participation rate just slid once more, dropping to 62.7%, or the lowest print since December 1977. This happened because the number of Americans not in the labor forced soared by 451,000 in December, far outpacing the 111,000 jobs added according to the Household Survey, and is the primary reason why the number of uenmployed Americans dropped by 383,000.

Retail hiring in 2014 slightly less impressive than in 2013 -- For the third month in a row, Alphaville has dug into a small corner of the US jobs report to provide some insight into the state of the American consumer. In particular, the total number of jobs added in October, November, and December in the retail sector has been a pretty good predictor of how much Americans are going to shop during their holiday season.The strong gains in October were a weak indicator that real holiday spending might rise by as much as 10 per cent relative to 2013.Revisions to those earlier numbers, released today, reinforce our earlier view that October was the best month for retail hiring — not adjusted for seasonality — in well over two decades. However, subsequent growth in November was less impressive. Cumulatively, the number of extra seasonal workers in retail sales in the fourth quarter of 2014 was off to a slightly better start than 2013, but a slightly worse start than 2012. That would still be consistent with strong real growth in retail spending, but less than the initially strong number from October indicated. We now have data from December. While December hiring was strong relative to the 2007-2013 period, it was weaker than every year in 1994-2006 with the exception of 2001. Does that mean much? Probably not. The share of total holiday retail hiring occurring in December has shrunk from an average of about 32 per cent in 1994-2004 to about 23 per cent in 2005-2014 because people now like to buy their presents earlier than in the past. And as the chart below shows, the total number of jobs added in the fourth quarter of 2014 was only slightly lower than in 2013 despite the disappointing December figure:

Oil-Price Crash Is Slow to Hit U.S. Energy Jobs - The energy sector may be starting to strain under the steep drop in oil prices, but industry employment hasn’t taken a hit thus far. Jobs in oil and gas extraction actually rose last month, climbing by 400 positions to 216,100, Friday’s jobs report showed. Over the past year, oil and gas jobs rose nearly 12,000. Some energy firms are starting to lay off workers as the drop in global oil prices—tied to a buildup in supplies and weak world demand—hits profits. One possible explanation for why the overall industry continues to add jobs is that employers often delay cutting positions when business turns south. Job cuts can lag other signs pointing to an industry slowdown. Where cheap oil is taking its first cut seems to be on the employees who indirectly work in the oil and gas industry. According to Labor Department data that is lagged one month, employment that “supports activities for oil and gas operations” dropped by 2,000 slots in October and was unchanged in November.

The "Waiter And Bartender" Recovery: Most Food Service Jobs Added Since 2012 - For those wondering why average hourly earnings in December plunged by -0.2% on expectations of a 0.2% increase and why the November "Green shoot" surge in wages of 0.4%, which everyone took as a signal of imminent wage inflation was cut in half here is the answer: in December the number of workers employed in Food Service and Drinking Places, i.e., sub-minimum wage waiters and bartenders jumped by 43,600: the highest monthly increase since 2012.

The Labor Market Downturn and the Role of Consumer Credit –(see graphs) The labor market added 252,000 jobs in December according to the Employment Situation released today. In addition, there were substantial positive revisions to last two months: 243k to 261k in October and 321k to 353k in November. The unemployment rate declined to 5.6%, which marks the lowest it has been since mid 2008. While the number of unemployed workers hasn’t fallen to its pre-recession level, the remaining ‘slack’ left in the labor market is largely due to the longer-term unemployed or those with jobs but who are underutilized, like the part-time workers for economic reasons. The story in terms of how (and in which dimensions) the labor market is recovering remains the same: slow but continued progress after a historically deep recession. Our usual goal in these posts is to describe where the US is in its now 7-year recovery from the recent recession. However, we ask a different question in this post (one that has been the central focus of many economists since the crisis started): why was the downturn in the labor market so deep? Compared to past recessions, the increase in unemployment during the Great Recession was the worst since the Great Depression. The unemployment rate more than doubled from mid 2007 to late 2009. Even compared to recent recessions, this crisis was particularly severe. What factors led to such a severe recession? In my job market paper, “Consumer Credit, Unemployment, and Aggregate Labor Market Dynamics”,  I study the role of  households’ ability to access and use consumer credit when they become unemployed and ask if this relationship, at the household level, can help us explain the depth of the recent recession. The Great Recession was unique in many respects, but a feature that continually stands out has been the response of household debt and borrowing. The credit boom of the late 1990s led many households to increase their reliance on debt to finance consumption and investment. The ratio of debt-to-income increased from around 0.6 in the 1980s to nearly 1.2 at the peak of the boom in 2007. During the crash, both debt and borrowing fell at rates never seen before as the unemployment rate doubled. Debt-to-income currently stands around 0.95.

You Are Worth More Than The "Market" Says -- Even as more low paid workers take to the streets to demand an increase in the minimum wage, there are plenty of people ready to tell you that labor markets pay you what you are worth, so if you get $9.35 per hour for 30 random hours a week, that’s what you are worth. I hear this from lots of people who should know better, college-educated people holding well-paying jobs in the corporate world, even women who must know that on average women are paid less than men doing the same job. One reason people believe this obviously false idea must be the theory of marginal productivity of labor taught for decades in colleges and high schools.  I wrote about the theory of marginal productivity as an explanation for compensation here, based on the analysis of Thomas Piketty in Capital in the Twenty-First Century. Piketty’s focus is on the enormous compensation paid to top managers, which is so obviously unrelated to marginal productivity as to make that theory laughable, and my post looks at payments to the top dogs at PIMCO as an example of the giggles. Turning to compensation for the rest of us, here’s a short refresher. I have a copy of the 2005 edition of Economics by Paul Samuelson and William Nordhaus,. Chapter 12, titled How Markets Determine Incomes, is based on the theory of marginal productivity. The authors assert that labor is a factor of production, just like land and machines and plant and electricity. Wages are determined by the marginal product of labor, just like those other factors of production.  Then they define Marginal Revenue Product as the additional revenue produced by a unit of input of something (labor, steel, electricity, cash loans) while all other things are held constant. It is equal to the marginal revenue the firm gets from the sale of the additional output, if any, created by the additional unit. Hands are waved, and the authors tell us that the firm should add inputs of all kinds to the point that the marginal revenue product of the input is less than or equal to the cost of the input. Here’s a chart, Samuelson/Nordhaus at 238.

How Nonemployed Americans Spend Their Weekdays: Men vs. Women - Every year, the American Time Use Survey asks thousands of Americans to record a minute-by-minute account of one single day. For many “prime-age” adults, those between the ages of 25 and 54, a significant chunk of time on weekdays is taken up by work. But for the almost 30 million prime-age Americans who don’t work, a typical weekday looks far different. Nonworkers spend much more time doing housework. Men without jobs, in particular, spend more time watching television, while women without jobs spend more time taking care of others. And the nonemployed of both sexes spend more time sleeping than their employed counterparts. One way to see these patterns is to look at what the “average” nonemployed person does with his or her time. That’s the view you see in the charts above. But averages are by nature a simplification, one that can sometimes obscure reality. For example, in the chart above, you can see that from 10 a.m. to 6 p.m., about 10 percent of men are consistently spending time on education. That could mean that many men spend a small portion of their days — albeit at different times — on education, or it could mean that about 10 percent of men spend nearly all of their time on education. (The reality is much closer to the latter, as you’ll see below.) To get a different view of this data, we have also taken a closer look at a single day for each of the prime-age nonworking men and women who returned a complete survey. We have grouped them by the activity they spent the most time doing between 8 a.m. and 8 p.m.: searching for a job, for instance, or watching television. All of their circumstances are real; we’ve assigned pseudonyms to make it easier to follow the data. (And see here for a new look at employment rates of women and men in every census tract in the country.)

FRBSF Economic Letter: Why Is Wage Growth So Slow? - A prominent feature of the Great Recession and subsequent recovery has been the unusual behavior of wages. In standard economic models, unemployment and wage growth are tightly connected, moving at nearly the same time in opposite directions: As unemployment rises, wage growth slows, and vice versa. Since 2008 this relationship has slipped. During the recession, wage growth slowed much less than expected in response to the sharp increase in unemployment  Despite considerable improvement in the labor market, growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of pent-up wage cuts. This pattern is evident nationwide and explains the variation in wage growth across industries. Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery.

Why Is Wage Growth So Slow? The San Francisco Fed Has an Answer -- The reluctance of American companies to cut wages during the Great Recession goes a long way toward explaining why they’re not handing out meaty raises now that the economy is coming back to life. New research from the Federal Reserve Bank of San Francisco says the economy’s problem is that it is dealing with firms that are working  off “a stockpile of pent-up wage cuts” built up over the recession of 2007 and 2009 and its aftermath. Firms are doing this by way of not offering wage rises and by hiring more slowly than history suggests would be likely given the U.S. economy’s rate of growth. Until this plays out, many workers in the U.S. economy will struggle to find higher wages, in a process that is likely to continue “until labor markets have fully returned to normal,” bank economists Mary Daly and Bart Hobijn write in the note released Monday. At issue, the economists write, is the phenomenon of “nominal wage rigidity.” While it does not affect all industries equally, many types of companies are reluctant to trim wages when trouble arrives and workers resist pay cuts. With wages stuck, companies seeking to cut labor costs typically fire workers, put off hiring new ones, or do a bit of both. Normally, when the economy comes back to life, wages should begin to rise. That this has not really happened has puzzled economists. It has also called into question whether a sharp drop in the jobless rate seen over recent years is an accurate indicator of the health of the labor market. Wage pressures also matter to the debate about the inflation outlook. Price pressures have fallen short of the Fed’s 2% price target for more than two years. Many economists believe a pickup in wages would be a harbinger of a welcome rise in inflation. If wages remained stagnant, that could call into question widely held forecasts of rising inflation, which in turn could affect the current outlook for when the Fed starts raising short-term interest rates from near zero.

Does Immigration Harm Working Americans? - The job news is increasingly good: 321,000 jobs created in November. Yet the national economic mood remains grimly bleak. Many Americans feel a sharp distinction between what’s said about “the” economy and what they experience in “their” economy. At the top of the income distribution, wages are rising. In the middle and bottom, wages stagnate. Jobs are created, yes—but native-born Americans are not hired for them. Last month, the Center for Immigration Studies released its latest jobs study. CIS, a research organization that tends to favor tight immigration policies, found that even now, almost seven years after the collapse of Lehman Brothers, 1.5 million fewer native-born Americans are working than in November 2007, the peak of the prior economic cycle. Balancing the 1.5 million fewer native-born Americans at work, there are 2 million more immigrants—legal and illegal—working in the United States today than in November 2007. All the net new jobs created since November 2007 have gone to immigrants. Meanwhile, millions of native-born Americans, especially men, have abandoned the job market altogether. The percentage of men aged 25 to 54 who are working or looking for work has dropped to the lowest point in recorded history. It's said again and again that immigrants do not take jobs from natives. Here’s National Journal, reporting just last year, under the headline "Left and Right Agree: Immigrants Don't Take American Jobs":

More immigrants could mean slightly lower wages in blue-collar jobs -- With another contentious debate about immigration approaching for the new Congress, it's worth remembering that immigration doesn't benefit everyone equally. Immigrants are better off when they can come here freely, of course, and so are most people already in the country, who benefit from immigrants' skills and labor.Theoretically, though, immigration could make life harder for workers with less skill and education if immigration reform forced those born in the United States to compete  for jobs with other less-skilled workers from around the world. For these reasons, David Frum worries that advocates of immigration reform are relying on wishful thinking, ignoring "the real world" and "actual observed data" about the plight of less-skilled, native-born workers. In fact, there is abundant evidence from the real world about whether immigration changes wages for relatively uneducated native workers, or pushes them out of work. Yet while some research does find that immigration leaves native blue-collar workers worse off, the effects seem to be small."Most research does not find quantitatively important effects on native wage levels or the wage distribution," economists Francine D. Blau and Lawrence M. Kahn have written.

Cities Set to Take Minimum-Wage Stage - WSJ: The nation’s battle over raising the minimum wage is set to shift largely to cities like Los Angeles and New York over the coming year, pitting business groups against local governments weighing measures to address sluggish wage growth for the lowest-paid workers. Fourteen states raised their wage floors in 2014, though few are expected to act this year, because of a lack of statewide elections. Experts also say a shift in federal law appears unlikely after the Republican takeover of Congress. So cities—encouraged by the Obama administration—are gearing up for new debates after Seattle, Chicago and Louisville, Ky., all approved city-specific pay floors last year. More than a dozen large cities and counties now have their own standards, and the new wave of initiatives could widen the patchwork of minimum-wage laws that already has many states and cities above the national minimum of $7.25 an hour. “Voters and local governments have heeded the public’s demand for higher wages,” said Christine Owens, executive director of the National Employment Law Project, an organization that supports wage increases.Los Angeles and New York, among other cities, are considering moves to support workers in low-paying service jobs in areas of the country where the cost of living is elevated. Lawmakers in Portland, Maine, proposed an increase to $9.50 an hour from the state’s $7.50-an-hour level. The higher wage would bring the city closer to nearby Boston and Hartford, Conn., where the minimum wage is rising because of statewide increases. And in Tacoma, Wash., the minimum wage could increase to $15 an hour if supporters succeed in putting the question on the ballot in a coming city election.

Inequality damages marriage - Add marriage to the growing list of victims of government policies that favor the rich at the expense of everyone else. Marriage is becoming less common down the income ladder and more common and durable among the prosperous, analysis of marriage, divorce and other records shows. Social conservatives say marriage makes for economically sound families, but the empirical evidence shows that, on the contrary, steady incomes and jobs make for sound marriages. Job stability benefits both employers through greater productivity and families through more cohesion. Marriage inequality also affects children. Prosperous parents lavish investments of time and money for enrichment classes and social activities on their offspring, while poor parents struggle just to pay the rent at the expense of interacting with their children as budgets for preschoolers and child-development programs take hit after hit.  In their new book “Marriage Markets,” law professors June Carbone and Naomi Cahn look at how economics affects who marries, whose bonds endure and what this means for future generations of workers and parents. The authors demonstrate from official data and survey research that “the terms on which men and women find it worthwhile to forge lasting relationships” are changing “in ways that pushed the top and the bottom of the socioeconomic system in different directions.”

Poverty leads to death for more black Americans than whites - Being poor has an adverse effect on one’s health and poorer communities have a higher mortality rate. That’s no secret, admits Amani Nuru-Jeter, associate professor at University of California Berkeley.  What is less well known is how race plays into it. It appears that living in poverty takes a harsher toll on black Americans than white Americans, according to the conclusions from Nuru-Jeter’s research.Setting out to find out how income inequality affected communities, Nuru-Jeter and her colleagues found that living in poverty leads to higher death rates for black Americans. “When we did the statistical analysis, the databases showed us that for one unit increase in income inequality ... [there] were 400 to 500 fewer deaths among whites and 27 to 37 [more deaths] among African Americans,” Nuru-Jeter told the Guardian.  This means that living in poverty can lead to more deaths for blacks communities, but not white ones. Nuru-Jeter and her team spent eight months combining data from the US census bureau, the National Center for Health Statistics and the Lewis C Mumford Center for Comparative Urban and Regional Research for 107 metropolitan areas with a black population of at least 10%. The difference between mortality rates for black and white Americans was much greater than she expected. The team especially did not expect to see fewer deaths in white communities as income inequality went up. That, however, can be attributed to economic segregation, which is more prevalent in black neighborhoods, Nuru-Jeter theorized.

The rich think the poor have it easy - There is little empathy at the top. Most of America's richest think poor people have it easy in this country, according to a new report released by the Pew Research Center. The center surveyed a nationally representative group of people this past fall, and found that the majority of the country's most financially secure citizens (54 percent at the very top, and 57 percent just below) believe the "poor have it easy because they can get government benefits without doing anything in return." America's least financially secure, meanwhile, vehemently disagree — nearly 70 percent say the poor have hard lives because the benefits "don't go far enough." Nationally, the population is almost evenly split. Why the surprising lack of compassion? It's hard to say. At the very top, the sentiment is likely tied to conservatism, which traditionally bemoans government programs that redistribute wealth, calling them safety nets. Some 40 percent of the financially secure are politically conservative, according to Pew. And conservatives are even more likely to say the "poor have it easy" than the rich — a recent Pew survey found that more than three quarters of conservatives feel that way. More broadly, the prevalence of the view might reflect an inability to understand the plight of those who have no choice but to seek help from the government. A quarter of the country, after all, feels that the leading reason for inequality in America is that the poor don't work hard enough.

Tech Titans Promoting Basic Income Guarantee as a Way to Shrink Government, Kill Social Programs - Yves Smith  - Some readers are very enthusiastic about the idea of a basic income guarantee. Be careful what you wish for. An important article in Vice discuses why Silicon Valley’s elite, which is dominated by libertarian thinking, has become keen about providing a minimum level of income to everyone. The purported reason is to allow their favored class, “creatives,” have a greater ability to support themselves while they are coming up with the Next Big Thing. From the article: One might not expect such enthusiasm for no-strings-attached money in a room full of libertarian-leaning investors. But for entrepreneurial sorts like these, welfare doesn’t necessarily require a welfare state. One of the attendees at the Singularity meeting was HowStuffWorks.com founder Marshall Brain, who had outlined his vision for basic income in a novella published on his website called Manna. The book tells the story of a man who loses his fast-food job to software, only to find salvation in a basic-income utopia carved out of the Australian Outback by a visionary startup CEO. There, basic income means people have the free time to tinker with the kinds of projects that might be worthy of venture capital, creating the society of rogue entrepreneurs that tech culture has in mind. Waldman refers to basic income as “VC for the people.” In other words, the idea is to have the government act as a first-line incubator. Notice that the government does a lot of that already by funding health care and military research, as well as the national labs like Sandia.  And another big contributor to the risk of going out on your own is the weak labor market. It used to be that if you were a college graduate and took a year off to develop an idea, you could get a job again. You’d probably pay a cost for the career interruption but you wouldn’t be at risk of survival.

Will Oil Continue to Fuel the Jobs Market? - The U.S. energy boom has been an engine of growth through a lackluster economic recovery, creating thousands of jobs that pay above-average wages, spawning demand for a broad array of services and supporting local economic booms from North Dakota to Texas. But with oil prices dipping below $50 a barrel, exploration and production companies are slashing budgets and squeezing suppliers. Among recent examples: Houston-based Civeo Corp., a lodging company for oilfield workers, at the end of December said it reduced U.S. payrolls by 45% from the level at the beginning of 2014 in response to falling demand, prompting its largest stakeholder to bail out. The company had about 4,000 workers worldwide a year ago, with about 10% of its workforce based in the U.S. And Canada’s Ensign Energy Services Inc. notified California that it was laying off 700 people in Bakersfield as of Dec. 15. The company didn’t provide a reason and a person who answered the phone declined to comment. Such losses may sting. Within the narrow set of sectors most closely related to oil and gas extraction–including oil-field services, pipeline construction and equipment manufacturing–employment jumped by almost 50% to more than 779,000 jobs from the end of the recession through October, compared with a 7% gain across all job sectors, according to Labor Department data. Wages in such industries also saw a marked increase, the data showed. Average earnings for workers in oil and gas extraction, for example, climbed nearly 23% to more than $1,700 a week over that period, not adjusting for inflation. That compares with a 13% increase to $848 for all workers.

Plunging Oil Prices Test Texas’ Economic Boom - WSJ: The Lone Star State’s economy has been a national growth engine since the recession ended, expanding at a rate of 4.4% annually between 2009 and 2013, twice the pace of the U.S. as a whole. The downturn in energy prices now has triggered a debate over whether Texas simply got lucky in recent years, thanks to a hydraulic-fracturing oil-and-gas boom, or whether it hit on an economic playbook that other states, and the country as a whole, could emulate. One in seven jobs created nationally during the 50-month expansion has been created in Texas, where the unemployment rate, at 4.9%, is nearly a percentage point lower than the national average. But a big dose of the state’s good fortune comes from the oil-and-gas sector. Midland, which sits atop the oil-rich Permian Basin, had the fastest weekly wage growth in the country among large counties: 9% in the 12 months ending June 2014. Now that oil prices have plunged nearly 51% from their June peak to $52.69 a barrel, some Texans sobered by memories of past energy busts are bracing for a fall. The argument among economists and business leaders isn’t whether the state will be hurt, but how badly.

When a ‘miracle’ ends: How will Texas handle plunging oil prices? -- The WSJ wrote  today that oil prices have “plunged nearly 51% from their June peak to $52.69 a barrel,” which will pose a significant challenge to Texas. The Lone Star State is, as Jim Pethokoukis puts it, “responsible for 40% of all US oil production — vs. 25% five years ago — and all of the net US job growth since 2007.” So how will it fare? Pethokoukis thinks it might be “a minor key replay” of what occurred in Texas in 1986 when oil prices also collapsed. “The oil patch bust caused Texas unemployment to rise, housing prices to fall, and, eventually, a nasty banking crisis.” There is some positive news, Pethokoukis adds, as “natural gas prices have not fallen along with oil — unlike in 1986 — while the Texas  employment share from oil is less today than back then.” WSJ says some Texans predict “this won’t be a replay of the 1980s oil bust and banking crisis,” citing “a more cautious banking sector, a tax and regulatory environment favorable to business, and a state economy less dependent on energy and other resources.” Less optimistic, Michael Feroli, an economist at J.P. Morgan Chase & Co. quoted by both WSJ and Pethokoukis on this matter, comments: Financially, oil is a fair bit more important than gas for Texas, both now and in 1986, with a dollar value two to three times as large. Moreover, while energy employment may be somewhat smaller now, we are not talking about night and day: the current share is about 3/4ths what it was in 1986. (And given the higher capital intensity there are some reasons to think employment may be greater now in sectors outside the traditional oil and gas sectors, such as pipeline and heavy engineering construction).

Oil-Price Drop Chills Midwest Factory Towns - WSJ: The collapse of oil prices in the past six months is threatening to end a recent industrial revival in manufacturing centers like this town of 64,000 people on the banks of Lake Erie. The U.S. shale-drilling boom lifted Midwest manufacturing economies, enriched property owners with mineral rights and even brought back the fat blue-collar paychecks that once were harder to find.  But as drilling and exploration for new oil and gas slow with the drop in energy prices, cutbacks at heavy-industry companies are cropping up. The U.S. Steel Corp. plant here, which depends heavily on oil and gas companies to buy its steel pipe and tubes, warned on Monday it might have to idle the plant in March and lay off 614 of the plant’s 700 workers. The company also said it could temporarily end work at a plant in Houston, affecting 142 workers. The Pittsburgh-based steelmaker, the second-biggest employer in Lorain after Mercy Regional Medical Center, had recently invested $95 million in a plant upgrade. When energy prices were high and orders robust, workers received generous overtime, sometimes pushing annual salaries into six figures. “We thought this time the going was going to be good for a while,” said Chase Ritenauer, the town’s 30-year-old mayor. “But now Lorain is going to feel the impact of the global economy.”

Should America welcome its falling fertility rate? - Over at Brookings, Isabel Sawhill argues that declining fertility rates are no cause for economic worry. In fact, we should welcome the trend: In particular, if we want more upward mobility, perhaps low fertility is not such a bad thing. With fewer children to support, parents and society can both invest more in each child, helping them to climb the ladder and become productive citizens in their adult years. So why are so many rich countries worried about population decline? The concern, of course, stems from fears that there will be too few people to support us in our old age. The graying of the population could be addressed by reforming immigration laws to allow more immigrants to come to America: unfortunately, growing nativism may make that a politically unacceptable solution. America is a wealthy nation. If we want to spend more on kids, we can afford it — though right now the problem seems to be how inefficient current spending is. Maybe we should work on that first. Beyond the fiscal issues, I am also concerned that an older nation, as Nobel laureate economist Gary Becker thought, is less dynamic, creative, and entrepreneurial. Not that such concerns are really relevant to Sawhill’s thesis since she doesn’t believe natalist policies work. No remedy, no regard. She points, for instance, to Singapore  as an “instructive” case in how government efforts — from paid maternity leave to cash — have not improved its very low 1.2 births-per-woman fertility rate.

Home Schooling: More Pupils, Less Regulation - — Until recently, Pennsylvania had one of the strictest home-school laws in the nation.Families keeping their children out of traditional classrooms were required to register each year with their local school district, outlining study plans and certifying that adults in the home did not have a criminal record. At the end of the year, they submitted portfolios of student work to private evaluators for review. The portfolio and evaluator’s report then went to a school district superintendent to approve.But in October, after years of campaigning by home-schooling families in the state as well as the Home School Legal Defense Association, a national advocacy group, Pennsylvania relaxed some of its requirements. “We believe that because parents who make this commitment to teach their children at home are dedicated and self-motivated, there’s just not a real need for the state to be involved in overseeing education,”  Unlike so much of education in this country, teaching at home is broadly unregulated. Along with steady growth in home schooling has come a spirited debate and lobbying war over how much oversight such education requires. Eleven states do not require families to register with any school district or state agency that they are teaching their children at home, according to the Coalition for Responsible Home Education, a nonprofit group that is pushing for more accountability in home schooling. Fourteen states do not specify any subjects that families must teach, and only nine states require that parents have at least a high school diploma or equivalent in order to teach their children. In half the states, children who are taught at home never have to take a standardized test or be subject to any sort of formal outside assessment.

Declining expenditures for education - PGL at Econospeak points us to declining expenditures for education: …Bill McBride has been leading the discussion on state fiscal austerity including this from a few months ago: the public sector has declined significantly since Mr. Obama took office (down 657,000 jobs). These job losses have mostly been at the state and local level, but more recently at the Federal level … A big question is when the public sector layoffs will end. It appears the cutbacks are over at the state and local levels in the aggregate, but it appears cutbacks at the Federal level have slowed. If we look at real government purchases at the state and local level, they fell dramatically in the aggregate from 2009 to 2012 but showed a modest turnaround in 2013. But real spending on education continued to fall in 2013. Education is the largest component of state and local budgets followed by public order and transportation. Table 3.15.6 from the BEA provides Real Government Consumption Expenditures and Gross Investment by Function in 2009$. From 2009 to 2012, real purchases on education by state and local governments fell from $820 billion to $771.3 billion, while their combined spending on public order and on transportation from $532 billion to $505.1 billion. The good news is that the latter rose to $517.9 billion in 2013. But spending on education dropped further to $757.5 billion. I am not an expert on what is Constitutional in each state but I do get that cutting education spending is both bad short-run macroeconomics in a still weak economy and horrible for long-term growth.

Obama Plan Would Help Many Go to Community College Free - President Obama said Thursday that he would propose a government program to make community college tuition-free for millions of students, an ambitious plan that would expand educational opportunities across the United States.The initiative, which the president plans to officially announce Friday at a Tennessee community college, aims to transform publicly financed higher education in an effort to address growing income inequality.The plan would be funded by the federal government and participating states, but White House officials declined to discuss how much it would cost or how it would be financed. It is bound to be expensive and likely a tough sell to a Republican Congress not eager to spend money, especially on a proposal from the White House.“With no details or information on the cost, this seems more like a talking point than a plan,” said Cory Fritz, a spokesman for House Speaker John A. Boehner, Republican of Ohio. Mr. Obama’s advisers acknowledged Thursday that the program’s goals would not be achieved quickly. The president, however, was more upbeat. “It’s something that we can accomplish, and it’s something that will train our work force so that we can compete with anybody in the world,” Mr. Obama said in a video posted Thursday night by the White House.  The proposal would cover half-time and full-time students who maintain a 2.5 grade point average — about a C-plus — and who “make steady progress toward completing a program,” White House officials said. It would apply to colleges that offered credit toward a four-year degree or occupational-training programs that award degrees in high-demand fields. The federal government would cover three-quarters of the average cost of community college for those students, and states that choose to participate would cover the remainder. If all states participate, the administration estimates, the program could cover as many as nine million students, saving them each an average of $3,800 a year.

Obama’s Universal Community College Plan, Explained -- President Barack Obama made a stop at Pellissippi State Community College in Knoxville, Tenn., on Friday to announce the details of a new community college initiative that would make tuition free for most students.  Calling a college degree the “surest ticket to the middle class,” Mr. Obama was joined by Vice President Joe Biden and his wife Jill Biden to roll out the details of the plan, which is also expected to merit a prominent State of the Union mention. Mr. Obama is aiming making two years of community college as inexpensive and universal as a public high school education is today. Under the proposal, students would need to be enrolled as half-time students, maintain a 2.5 GPA, and be working toward completing their degree. According to Mr. Obama’s remarks on Friday, a high school education is simply no longer adequate in an information-based economy. “In a 21st century economy where your most valuable asset is your knowledge, the single most important way to get ahead is not just to get a high school education. You’ve got to get some higher education,” Mr. Obama said. He also framed the issue as a matter of basic economic fairness, saying that cost should not discourage talented Americans from pursing their ambitions as far as their talents can take them. Tennessee has a similar state-based version of what Mr. Obama is proposing at the federal level. Starting with the class of 2015, Tennessee students will be able to apply for a Tennessee Promise scholarship to cover the cost of community college or technical education in-state. There are about eight million students at U.S. community colleges, according to the American Association of Community Colleges. That number is expected to rise in the coming years. The White House estimates the America’s College Promise plan would cost the federal government about $60 billion over 10 years. States would be expected to kick in additional money. The White House has not released any details about how to pay for the plan, saying that information will be released in the coming weeks.

Obama, in Tennessee, Begins Selling His Community College Tuition Plan --In California, community college tuition and fees average less than $1,500 a year, the lowest in the nation, and with government grants, most students pay nothing. In Florida and Michigan, the cost is over $3,000, yet poorer students still attend free. But in Vermont and New Hampshire, prices are around $7,000, well over what government grants cover.That broad range means that President Obama’s proposal to make community college tuition-free nationwide — if Congress and the states were to embrace it — would benefit every student of the two-year colleges, but that far greater benefits would go to students in the states with the highest tuition. And while it would aid the economically hard-pressed, it would also effectively extend federal aid to millions of middle- and upper-income students who do not qualify for it currently. Introducing his proposal here on Friday, Mr. Obama vowed to make college affordable for all Americans by investing $60 billion over the next 10 years to provide free community college tuition to as many as nine million students a year across the country. If Congress and the states adopted his plan, the president said, “two years of college will become as free and universal as high school is today.” But even as Mr. Obama hosted three Republican lawmakers from Tennessee on Air Force One for the trip from Washington, his adversaries on Capitol Hill showed little interest in signing on to a new and costly initiative that extends the federal government’s reach into education policy, no matter that it is modeled partly on a program created by Tennessee’s Republican governor, Bill Haslam. Senator Bob Corker, Republican of Tennessee, who was in the audience after traveling with the president, praised Mr. Haslam for helping students pay for community college, but said he did not think a new federal program was the way to go.

Cash or Copyright or Real Creativity? -- Quelle surprise! Paying people money to be creative makes them less so.  Imagine you were asked to write a law that encouraged creativity. What would it look like? Whatever your answer, it’s pretty clear that it wouldn’t look like copyright. Which is weird, right? Because copyright is supposed to be the law that spurs creativity. The problem, it turns out, is that the central features of copyright are directly opposed to the things that support creativity. Creativity is a tricky thing to understand, and we have very little insight into what animates the creative spark and why some people are more creative than others. But one thing we do know about creativity is that a really good way to make people less creative, is to pay them. A series of studies by Edward Deci and Richard Ryan Teresa Amabile, and others, have shown that primary school kids don’t learn to read if they’re paid to, artists produce their worst work when they’re commissioned to produce it, and people get worse at solving puzzles if you reward them for successful solutions.The reason for this? Creativity is closely linked to motivation, and humans become creative when they’re internally motivated by curiosity or interest or desire. They get demotivated — and less creative – when you introduce money into the equation

Student Tuition Now Outweighs State Funding At Public Colleges - Driven by higher tuition fees and tighter state funds, America's public colleges now get more money from their students than from all state sources. That's according to a report by the Government Accountability Office, which says tuition revenue reached 25 percent of the colleges' total in 2012.  The numbers are stark, with the GAO saying that from fiscal years 2003-2012, "state funding decreased by 12 percent overall while median tuition rose 55 percent across all public colleges."  Over that period, funds from state sources fell from 32 percent of total revenue down to 23 percent.  Revenue from other sources was relatively steady, with the GAO saying that colleges' main funding category, which accounted for 27 percent of revenue in 2012, reflects "private gifts, grants and contracts; sales and services of educational activities," along with hospital revenues and other enterprises.  The rise in tuition came along with big gains in enrollment, with the addition of nearly 2 million students in the report's nine-year span building up to more than 11 million students in the 2011-2012 school year.  The agency's review of how much it costs to pursue a post-secondary degree included all types of public colleges, from two- and four-year schools to ones that require less than two years. As of the 2011-2012 school year, public colleges account for 67 percent of all college enrollment, the GAO says.  There's been a particularly steep rise in costs for students and their families in some states. As NPR's Claudio Sanchez has reported, college tuition rose more than 70 percent in the past five years in several states, including Washington, Georgia and Arizona.  You can follow how tuition has changed at specific schools using the Tuition Tracker, a tool developed by the Dallas Morning News and others.

Dartmouth Gives Students a Lesson -- Don’t Cheat in Ethics Class - Dartmouth College accused 64 students of cheating in a sports ethics class last semester, the latest in a string of cases of academic dishonesty involving athletes at elite U.S. colleges. Students used a hand-held device known as a clicker to answer questions for classmates who were absent, according to Randall Balmer, who teaches the class, “Sports, Ethics and Religion.” “I feel pretty burned by the whole thing,” Balmer, chairman of Dartmouth’s religion department, said in a telephone interview. “I’ve never faced anything on this scale before.” The class was designed in part to appeal to athletes at Dartmouth, Balmer said. He said he discovered 43 of the almost 300 students in the class were cheating and reported them to Dartmouth’s judicial board as a violation of the school’s honor code. Another 21 then came forward and turned themselves in to the school, he said. An appeal process is under way and should be finished by the end of this month to determine how many students will be suspended, said Diana Lawrence, a spokeswoman for the college in Hanover, New Hampshire. The disciplinary action was reported earlier by the local Valley News newspaper.

California colleges see surge in efforts to unionize adjunct faculty: A wave of union organizing at college campuses across California and the nation in recent months is being fueled by part-time faculty who are increasingly discontented over working conditions and a lack of job security. At nearly a dozen private colleges in California, adjunct professors are holding first-time contract negotiations or are campaigning to win the right to do so. Those instructors complain of working semester to semester without knowing whether they will be kept on, lacking health benefits and in some cases having to commute among several campuses to make a living. While union activists say they look forward to better working terms and a greater voice in how campuses are governed, many college administrators say they are worried that such union contracts could mean less flexibility in academic hiring and higher tuition costs. Service Employees International Union chapters in the Los Angeles area and in Northern California this week won faculty elections to represent part-time professors at Otis College of Art and Design in Westchester and Dominican University of California in San Rafael, and part-timers and non-permanent full-timers at St. Mary's College of California in Moraga. In recent months, the union succeeded in hard-fought votes among part-time faculty at Whittier College, Mills College and California College of the Arts in Oakland, San Francisco Art Institute and Laguna College of Art and Design. Andrea Bowers, who has taught one or two courses a semester at Otis for the last five years, said she typically is paid $3,000 for each class in public arts practice and other fine arts subjects plus $1,000 to mentor students' studio work. She also juggles a professional art career and teaching assignments elsewhere. Beyond any improvements in pay and more predictability in knowing whether teaching jobs will last beyond the academic year, she said a union contract would force schools to be more transparent about their budgets. If colleges and faculty work together to solve financial problems, "that would be wonderful," Bowers said.

Acceptance rates at US medical schools in 2014 reveal ongoing discrimination against Asian-Americans and whites -- The table above (click to enlarge) of US medical school acceptance rates is a revised and updated version of one I’ve posted several times before, here’s a link to the most recent CD post on this topic from July 2014. The series of posts on medical school acceptance rates by race/ethnic groups for various MCAT scores and GPAs has generated a lot of interest and comments in the past, so I’m posting on the topic again with new data for the 2014-2015 academic year that just recently became available from the Association of American Medical Colleges (AAMC).  Specifically, the table above displays: a) acceptance rates to US medical schools for Asians, whites, Hispanics and blacks with various combinations of MCAT scores and GPAs for the academic years 2013-2014 and 2014-2015 (aggregated for the two years), and b) average MCAT scores and average GPAs by race/ethnic group for matriculants to US medical schools in the fall of 2014. For 2014, the average GPA of all students applying to medical schools was 3.55 and the average MCAT score was 28.6 (see AAMC data, Table 19). The highlighted dark blue column in the middle of the table above displays the acceptance rates to US medical schools for applicants from four racial/ethnic groups for applicants with: a) GPAs that fall in the 3.40 to 3.59 range that includes the average GPA of 3.55 and b) MCAT scores in the range between 27 to 29 that includes the average score of 28.6. Acceptance rates for students with slightly higher and slightly lower than average GPAs and test scores are displayed in the other columns. In other words, the table above displays acceptance rates by race/ethnicity for students applying to US medical schools with average academic credentials, and just slightly above and slightly below average academic credentials.

Science at risk as young researchers increasingly denied research grants: America's youngest scientists, increasingly losing research dollars, are leaving the academic biomedical workforce, a brain drain that poses grave risks for the future of science, according to an article published this week by Johns Hopkins University President Ronald J. Daniels. The article, which appears in the online Early Edition of the journal Proceedings of the National Academy of Sciences, illustrates how for more than a generation, grants for young scientists have declined. The proportion of principal investigators with a leading National Institutes of Health grant who are 36 years old or younger dropped from 18 percent in 1983 to 3 percent in 2010. Meanwhile, the average age when a scientist with a medical degree gets her first of these grants has risen from just under 38 years old in 1980 to more than 45 in 2013. "The implications of these data for our young scientists are arresting," Daniels writes in the PNAS paper. "Without their own funding, young researchers are prevented from starting their own laboratories, pursuing their own research, and advancing their own careers in academic science. It is not surprising that many of our youngest minds are choosing to leave their positions."

Harvard Law School: Three Proposals to Curb Its Role as Hedge Fund and Corporate ShillYves Smith  - Yves here. This article about Harvard Law School’s endowment applies just as well to other well-heeled professional schools. And in many respects, the ways these endowments operate reveals what “professionalism” has come to mean in America: fealty to monied interests.  Originally published at The Harvard Law Record.  Harvard Law School is perhaps the most prestigious law school in the nation with countless (in)famous names attached to its faculty and alumni, an influence unmatched in the Obama regime, and a symbiotic relationship with the commanding heights of the corporate world. Harvard Law’s embrace of the growing business presence in higher education [1] parallels the emphasis the school places on corporate law and major firm recruiting; its current role is to produce the premiere legal guardians of international corporate control and state power. With an endowment of $1.7 billion, Harvard Law has been compensated handsomely for its role defending corporate capitalism; indeed considered as part of Harvard University’s sprawling $36.4 billion endowment empire [2] it might be seen more as a giant hedge fudge masquerading as a teaching institution rather than the reverse. The institution socializes its student body to choose big law over the public interest through crushing student debt loads, courses that focus almost exclusively on the legal problems of the wealthy, and its attachment to elite foundations and projects.

Fair Value Accounting: The obscure rule change that could make student loans more expensive - There are over $3 trillion in loans outstanding that the federal government has either made directly or guaranteed in partnership with private lenders. And there's a big fight afoot as to how to account for those loans in the federal budget. Critics — like Michael Grunwald in a recent Politico feature on credit programs — allege that "government accounting quirks still make credit programs look much cheaper than they really are," and they have an issue brief from the Congressional Budget Office on their side. But there's really nothing especially quirky about the accounting method the government uses. What it does is count up how much money is being loaned out, tries to estimate how much of that money is going to get paid back, and then estimates the cost of the program as the difference between the two. For most of these programs, the government estimates that a large enough share of loans will be repaid that the government — like a bank — will end up with more money than it started out with. In other words, it's a pretty banal system. But skeptics — including the House Republican caucus — want to move to something called Fair Value Accounting. FVA does a much better job of calculating the economic value of federal credit programs to its recipients, but at the cost of muddying the waters about the actual dollars and cents involved. It's an incredibly obscure-sounding issue, but it has massive implications for basic stuff like the interest rate on your student loan or how many people will be able to get an affordable mortgage.

Wealth, Homeownership Lag for Americans With Student Debt -- Americans who take on debt to fund their university studies tend to have less wealth and lower homeownership rates over long periods than those who don’t rely on loans, research from the Federal Reserve Bank of Boston finds.  U.S. student loans outstanding climbed past the $1 trillion mark in 2013 to become the second-largest type of consumer debt, after mortgages.  The Boston Fed paper says its findings aren’t sufficient to argue student debt accumulation causes lower wealth and homeownership.  “However, the data do indicate that there is at least a strong negative correlation in the cross section between student loan debt and total wealth accumulation (net of student loan liabilities) among homeowners,”  The gap was largest among households with a head 20-24 years old, where the homeownership rate differential for the two groups was about 9 percentage points. The research confirms previous Fed findings that student debt delays home purchases but may not rule them out entirely. The difference in homeownership rates between households with outstanding student debt and those without is just 1 percentage point for 35 to 39-year olds, the Fed paper says.

The Prison State Of America: More Jails Than Colleges -- As we recently noted, The Prison State of America is alive and well as our prison-industrial complex, which holds 2.3 million prisoners, or 25 percent of the world’s prison population, makes money by keeping prisons full. While the statistics are mind-boggling, we thought it particularly ironic that on the day when President Obama officially launched his "free community-college for all" plan, that we point out there are more jails than colleges in America... and here's where they live... As The Washington Post shows,It's often been remarked that our national incarceration rate of 707 adults per every 100,000 residents is the highest in the world, by a huge margin.  We tend to focus less on where we're putting all those people. But the 2010 Census tallied the location of every adult and juvenile prisoner in the United States. If we were to put them all on a map, this is what they would look like:

Funded Status of U.S. Corporate Pensions Falls to 87.3 Percent, According to BNY Mellon ISSG: -- The funded status of the typical U.S. corporate pension plan fell 2.6 percentage points to 87.3 percent in December as assets fell and liabilities increased, according to the BNY Mellon Investment Strategy and Solutions Group (ISSG). Public defined benefit plans, endowments and foundations also lost ground during the month, ISSG said. For the typical corporate plan in December, assets decreased 0.4 percent as liabilities increased 2.5, according to the BNY Mellon Institutional Scorecard. The funded status for the typical corporate plan finished 2014 down 7.9 percent from the December 2013 high of 95.2 percent, according to the scorecard. Falling international and emerging markets equities accounted for the decline in assets at U.S. corporate plans and public plans, while the declines in private equity and commodities led to negative returns for foundations and endowments, ISSG said. The higher liabilities for corporate plans in December resulted from the Aa corporate discount rate falling 14 basis points to 4.00 percent over the month. Plan liabilities are calculated using the yields of long-term investment grade bonds. Lower yields on these bonds result in higher liabilities. "The decline in interest rates, with the Aa corporate discount rate falling 93 basis points during the year, was the main driver for the fall in funded status during 2014," said Andrew D. Wozniak, head of fiduciary solutions, ISSG. "Asset gains simply could not keep up with the rise in liabilities. The falling rates of 2014 erased almost all of the gains in funded status in 2013 that resulted from rising interest rates during that year."

There Is No Retirement Crisis - You're probably going to be hearing a lot about a "retirement crisis" over the next few years. And Democrats think they know just what to do about it.  Some academics are convinced that Americans aren't saving enough, or being provided enough by the government, to sustain themselves in old age. Many Democrats think their party hasn't adequately addressed the economic anxieties of middle-class voters. Put the two concerns together, and you get a simple plan: Offer people more generous Social Security benefits. Senator Elizabeth Warren is already on board, enthusiastically throwing around the word "crisis."  The good news is that there is no retirement crisis, as my American Enterprise Institute colleague Andrew Biggs has been carefully explaining. Americans have among the highest retirement incomes in the world, both in terms of absolute buying power and relative to the incomes of the working-age population. The National Institute on Retirement Security came out with a scary, and influential, report last year saying that 84 percent of Americans aren't saving enough for retirement. But the report used dubious assumptions, targeting a retirement income higher than other analysts think reasonable and judging people against a rigid schedule of savings. Another source of alarmism is the Census Bureau's Current Population Survey, which suggests that Americans receive little income from individual retirement accounts and 401(k) plans and are increasingly dependent on Social Security. But the survey's measure of retirement income excludes the unscheduled, as-needed withdrawals from IRAs and 401(k)s that are the primary way Americans draw down their accounts. Thus the census figures omit most of the income from such saving methods, an error that becomes ever more important as an ever-larger percentage of Americans uses them.

Social Security  -- Via the LA Times and LA Times and Common Dreams comes information on the first day of the new Congress on Social Security. Old ideas re-emerge in the variety of coverage in media.  Here is an excerpt on the issue. According to:Nancy Altman and Eric Kingson, authors of the book Social Security Works! and members of the advocacy group of the same name, what would otherwise have been the “dry, mundane exercise” of adopting new rules in the House was “turned into a stealth attack on America’s working families.” Like previous “stealth attacks” on Social Security, write Altman and Kingson, the small rule change shows “the groundwork is being laid in advance” for a larger attack on the program as a whole and described the tactics of Republicans determined to destroy the program, regardless of the costs, as “hostage-taking.” In their analysis, the GOP ploy involves playing disparate groups within the system off one another with the ultimate goal of drastically reducing the program for everyone—current and future beneficiaries alike. They write: One of the strengths of Social Security is its universality.  It is based on the principle that we are stronger together.  It is an old tactic of the program’s opponents to seek to divide and conquer.  They seek to turn young against old by falsely claiming that too much is being spent on the old.  They seek to turn African Americans against whites with the preposterous claim that Social Security is unfair to blacks.  (We document and refute these and many other claims in our new book). This time they seek to drive a wedge between retired workers and disabled workers by claiming that reallocation helps the disabled at the expense of the old – another preposterous claim.  All of these divide-and-conquer strategies are intended to turn Americans against each other so that all of their benefits can be cut.

Doctors Face Big Cuts in Medicaid Pay - -- Andy Pasternak, a family doctor in Reno, saw more than 100 new Medicaid patients last year after the state expanded the insurance program for the poor under the Affordable Care Act. But he won't be taking any new ones this year. That's because the law's two-year pay raise for primary care doctors like him who see Medicaid patients expired Wednesday, resulting in fee reductions of 43% on average across the country, according to the non-partisan Urban Institute. "I don't want to do this," Pasternak said about his refusal to see additional Medicaid patients. But now that the temporary pay raise is gone, he and other Nevada doctors will see their fees drop from $75 on average to less than $50 for routine office visits. "We will lose money when they come to the office," he said. Experts fear that other doctors will respond as Pasternak did, making it harder for millions of enrollees to find doctors. The pay raise was intended to entice more physicians to treat patients as the program expanded in many states. In 2014, Medicaid enrollment grew by almost 10 million and now covers more than 68 million people nationwide. The challenge is to persuade physicians not just to continue accepting such patients but to take on more without getting paid what they're used to, said physician J. Mario Molina, CEO of Molina Healthcare, one of the nation's largest Medicaid insurers.

U.S. Healthcare Spending On Track To Hit $10,000 Per Person This Year - Forbes: There’s never a shortage of major healthcare policy events in any given calendar year ‒ and 2015 will be no exception. Here’s a short list of some that are pending and noteworthy ‒ with a few predictions. First up isn’t a prediction as much as a major milestone that’s reflective of escalating healthcare costs. According to CMS (here) our National Healthcare Expenditure (NHE) is projected to hit $3.207 trillion this year. The U.S. Population is currently hovering at around 320 million, so 2015 looks to be the first year healthcare spending will reach $10,000 per person. We may be “bending the cost growth curve,” but the per capita amount continues to grow. As evidenced by this chart, much of that cost is being shifted into high-deductible health plans. The effect of this, of course, is largely unknown. Proponents of CDHP’s argue that it’s a much needed shift to foster more consumer accountability for healthcare utilization. Opponents argue that we lack the scientific evidence (certainly at this early stage) to know what the real effect is on health and outcomes ‒ and there’s a significant risk associated with healthcare that’s delayed or avoided because of cost. This will continue to be hotly debated well into 2015 ‒ and beyond. There was a glimmer of hope in 2014 with what appeared to be a viable solution for the Sustainable Growth Rate (SGR), but that deteriorated quickly into yet another series of punts into 2015. Ultimately, there are only three options with the SGR.

Harvard Professors Advising Obama in "Uproar" After Learning Obamacare Applies to Them! --In what has to be the funniest as well as most ironic post to date on Obamacare, the New York Times reports Harvard Ideas on Health Care Hit Home, HardFor years, Harvard’s experts on health economics and policy have advised presidents and Congress on how to provide health benefits to the nation at a reasonable cost. But those remedies will now be applied to the Harvard faculty, and the professors are in an uproar.  Members of the Faculty of Arts and Sciences, the heart of the 378-year-old university, voted overwhelmingly in November to oppose changes that would require them and thousands of other Harvard employees to pay more for health care. The university says the increases are in part a result of the Obama administration’s Affordable Care Act, which many Harvard professors championed. Mary D. Lewis, a professor who specializes in the history of modern France and has led opposition to the benefit changes, said they were tantamount to a pay cut. “Moreover,” she said, “this pay cut will be timed to come at precisely the moment when you are sick, stressed or facing the challenges of being a new parent.” The university is adopting standard features of most employer-sponsored health plans: Employees will now pay deductibles and a share of the costs, known as coinsurance, for hospitalization, surgery and certain advanced diagnostic tests.  In addition, some ideas that looked good to academia in theory are now causing consternation. In 2009, while Congress was considering the health care legislation, Dr. Alan M. Garber — then a Stanford professor and now the provost of Harvard — led a group of economists who sent an open letter to Mr. Obama endorsing cost-control features of the bill. They praised the Cadillac tax as a way to rein in health costs and premiums.

Those Protesting Harvard Professors Have a Point -- It’s hard to see the Harvard University faculty’s fury over their health insurance as anything but comic. The school began the new year by requiring its employees to pick up a great percentage of their health care bill—a change the school partially attributed to the very Affordable Care Act many of its professors once argued for. Now those academics are pushing back, but for those of us living in the real world, the amount in dispute sounds ridiculous. From no deductible to $250 per person? This is worthy of a protest movement? When the New York Times reported on the dispute earlier this week, the Internet laughed. I did. You probably did too. We were wrong. L’affaire Harvard is a perfect demonstration of why continuing unhappiness with the Affordable Care Act almost certainly resides not just in Republican stonewalling and endless yammering about fictional death panels, but in our pocketbooks, too. Let me explain.

Half of Obamacare subsidy recipients may owe refunds to the IRS - As many as 3.4 million people who received Obamacare subsidies may owe refunds to the federal government, according to an estimate by a tax preparation firm.  H&R Block is estimating that as many as half of the 6.8 million people who received insurance premium subsidies under the Affordable Care Act benefited from subsidies that were too large, the Wall Street Journal reported Thursday.“The ACA is going to result in more confusion for existing clients, and many taxpayers may well be very disappointed by getting less money and possibly even owing money," the president of a tax preparation and education school told the Journal. While the Affordable Care Act fines those who don't have health insurance, it also provides subsidies for people making up to four times the federal poverty line ($46,680).  But the subsidies are based on past tax returns, so many people may be receiving too much, according to Vanderbilt University assistant professor John Graves, who projects the average subsidy is $208 too high, the Journal reports. Tax preparers, who frequently advertise their ability to deliver big refunds, have been working feverishly to avoid customer anger stemming from lower-than-expected refunds due to insurance premiums. They also are trying to make sure customers understand the potential fines for not having insurance.

Eliminating ACA subsidies would cause nearly 10 million to lose insurance, study finds - Eliminating government subsidies for low- and moderate-income people who purchase coverage through federally run health insurance marketplaces would sharply boost costs and reduce enrollment in the individual market by more than 9.6 million, according to a new RAND Corporation study. Modeling the likely effects of ending subsidies in 34 states where the federal government operates insurance marketplaces for individuals, researchers found that such a move would cause individual market enrollment to drop by 70 percent among people buying policies that comply with the federal Affordable Care Act. In addition, unsubsidized individual market premiums would rise by 47 percent in those states. The hike would correspond to a $1,610 annual increase for a 40-year-old nonsmoker who purchased a silver-level plan. "The disruption would cause significant instability and threaten the viability of the individual health insurance market in the states involved," said Christine Eibner, the study's senior author and a senior economist at RAND, a nonprofit research organization. "Our analysis confirms just how much the subsidies are an essential component to the functioning of the ACA-compliant individual market." The U.S. Supreme Court has agreed to hear a court case (King v. Burwell) that challenges the use of government subsidies to help low- and moderate-income people buy health insurance in marketplaces operated by the federal government.

Dilemma over deductibles: Costs crippling middle class: Regina LaVarry uses mustard and vinegar as home remedies to help manage her high blood pressure. She also takes half of the prescribed dosage of her diabetic medicine to stretch it. Sometimes, she won't take the medication for several days to make it last. Her reason for doing this is the $500 health insurance deductible — which she can't readily afford on an hourly wage of approximately $11 an hour. Add to that co-pays for medication and other out-of-pocket expenses she must pay for health care, LaVarry finds herself choosing between whether to buy medication or pay other bills. "I have to be cautious and make sure I don't go to the hospital," she said. "Because let's say I have to go see the doctor, I might not have the $25 co-pay so I have to treat myself at home." Physicians are witnessing a reversal of health care fortunes: Poor, long-uninsured patients are getting Medicaid through Obamacare and finally coming to his office for care. But middle-class workers are increasingly staying away.It's a deep and common concern across the United States, where employer plans cover 60 percent of working-age Americans, or about 150 million people. Coverage long considered the gold standard of health insurance now often requires workers to pay so much out-of-pocket that many feel they must skip doctor visits, put off medical procedures, avoid filling prescriptions and ration pills — much as the uninsured have done. In recent Commonwealth Fund survey found that four in 10 working-age adults skipped some kind of care because of the cost, and other surveys have found much the same. The portion of workers with annual deductibles — what consumers must pay before insurance kicks in — rose from 55 percent eight years ago to 80 percent today, according to research by the Kaiser Family Foundation. And a Mercer study showed that 2014 saw the largest one-year increase in enrollment in "high-deductible plans" — from 18 percent to 23 percent of all covered employees.

Survey Finds Doctors Concerned About Impacts Of Climate Change On Patient Health -– American medical professionals specializing in respiratory conditions and critical care are concerned about what climate change may mean for patient health, a new survey finds.  A survey of members of the American Thoracic Society, which represents 15,000 physicians and other medical professionals who work in the fields of respiratory disease, critical care and sleep disorder, finds that the majority of respondents said they were already seeing health effects in their patients that they believe are linked to climate change. Seventy-seven percent said they have seen an increase in chronic diseases related to air pollution, and 58 percent said they'd seen increased allergic reactions from plants or mold. Fifty-seven percent of participants said they'd also seen injuries related to severe weather.  An overwhelming majority -- 89 percent -- agreed that climate change is happening, and 65 percent said they thought climate change was relevant to direct patient care. Forty-four percent said they thought climate change was already affecting the health of their patients a "great deal" or a "moderate amount." Strong majorities of respondents also said that heat, vector-borne infections, air pollution and allergies would likely affect patients in the next 10 to 20 years.  Numerous scientific studies have found links between climate change and a variety of health problems.

Stop Subsidizing Big Pharma - The problem is that venture philanthropy is, essentially, another term for privatizing scientific research. Instead of decisions about the fate of scientific funding being made by publicly oriented institutions, those decisions are being put in the hands of anonymous philanthropists and ostensibly benevolent nonprofits.At the risk of oversimplification, biomedical research divides into two categories: private and public. The former is the constellation of big pharmaceutical companies and start-up labs. The latter comprises government agencies and the universities and philanthropies that rely on government support — directly, through grants, or indirectly, through tax policy. The former can charge whatever it wants for its products; the latter is limited by government rules and price controls.Venture philanthropy complicates this picture by introducing a tax-exempt loophole. An organization like the Cystic Fibrosis Foundation will take in tax-exempt donations to invest in a pharmaceutical company — in this case, Vertex Pharmaceuticals — to develop drugs based on publicly funded research. Venture philanthropies can then sell the results of that research to private industry to deliver drugs to the market.There is nothing to stop pharmaceutical companies from creating their own philanthropies, funding research with tax-exempt dollars and then selling themselves the rights to the intellectual property. Without price controls on the final product that come with public funding, the potential costs of the resulting medicines are limitless.

Study Debunks Notion of 'Healthy Obesity' -- The notion of potentially healthy obesity is a myth, with most obese people slipping into poor health and chronic illness over time, a new British study claims. The "obesity paradox" is a theory that argues obesity might improve some people's chances of survival over illnesses such as heart failure, said lead researcher Joshua Bell, a doctoral student in University College London's department of epidemiology and public health. But research tracking the health of more than 2,500 British men and women for two decades found that half the people initially considered "healthy obese" wound up sliding into poor health as years passed. "Healthy obesity is something that's a phase rather than something that's enduring over time," Bell said. "It's important to have a long-term view of healthy obesity, and to bear in mind the long-term tendencies. As long as obesity persists, health tends to decline. It does seem to be a high-risk state.

Scientific team sounds the alarm on sugar as a source of disease: Is sugar making us sick? A team of scientists at the University of California in San Francisco believes so, and they're doing something about it. They launched an initiative to bring information on food and drink and added sugar to the public by reviewing more than 8,000 scientific papers that show a strong link between the consumption of added sugar and chronic diseases. The common belief until now was that sugar just makes us fat, but it's become clear through research that it's making us sick. For example, there's the rise in fatty-liver disease, the emergence of Type 2 diabetes as an epidemic in children and the dramatic increase in metabolic disorders.  Added sugars, Schmidt said, are sugars that don't occur naturally in foods. They are found in 74 percent of all packaged foods, have 61 names and often are difficult to decipher on food labels. Although the U.S. Food and Drug Administration requires food companies to list ingredients on packaging, the suggested daily values of natural and added sugars can't be found.  The FDA is considering a proposal to require food manufacturers to list information on sugars in the same way they do for fats, cholesterol, sodium, carbohydrates and protein. But because so much added sugar is dumped into so many products, one average American breakfast of cereal would likely exceed a reasonable daily limit.

I lost weight by eating lots of bacon and cream. Here's a scientific explanation for why. - Vox: I recently gained 16 pounds of body fat and I felt terribly uncomfortable in my clothes. I wanted to slim down, so I decided to dramatically ramp up the fat in my diet. Every day for about a month, I slammed as much bacon or heavy whipping cream as I could stomach. I lost weight (about seven pounds). My cholesterol dropped 10 points. My afternoon drowsiness faded and, overall, I felt pretty good. To be sure, there was a purpose to my bacon vacation. I wanted to test the limits of a growing divide between nutritionists on the benefits of fatty foods. Since the 1960s, conventional diet lore has demonized cream and fat as the culprit in America's obesity epidemic. Yet in recent years, a counter-revolution in the top rungs of the medical establishment, including the Harvard School of Public Health, have begged Americans to return to the naturally fatty diets of our ancient ancestors, who did not suffer from modern heart disease. So, as Vox's eager health guinea pig, I decided to put it to the test in the most extreme way possible and get results just in time for the New Year's diet rush.

The naked, heady guile of medical style - sylvia kronstadt -  Perhaps having no clothes on is the real key to avoiding migraines. Doesn't the sexy ecstasy of this promotional photo make you wish you had migraines? If only you did, your insurance or Medicare would buy you this silvery, "tiara-like" fashion accessory, which is essentially a glorified TENS unit that is designed (elegantly) to reduce the incidence of "cluster headaches." It obtained FDA approval last March, after a "fast track" process that required no independent scrutiny or verification. Why would the FDA be so cavalier about a device that transmits electricity into patients' skulls? Why would it accept two limited, unimpressive studies as adequate proof of "safety and effectiveness"? How can we assume that such a device can target one specific nerve --the trigeminal -- leaving adjacent nerves and brain tissues unaffected? What might be the long-term effects of using such a device on the central nervous system? The Cefaly product is available by prescription only, the FDA said. Yet, astonishingly, this "newly approved" device has been available without a prescription at many retailers -- including Amazon.com -- for more than three years, which I learned inadvertently by doing a simple Google search. It gets only 2.7 stars in customer ratings.

Most types of cancer largely down to bad luck rather than lifestyle or genes - Most cases of cancer are largely the result of bad luck rather than unhealthy lifestyles, diet or inherited genes, new research suggests. Random mutations that occur in DNA when cells divide are largely responsible for two thirds of adult cancers across a wide range of tissues. The remaining third are linked to environmental factors or defective inherited genes. But the scientists warn that poor lifestyle can add to the “bad luck factor” involved in cancer. The researchers analysed published data on the number of divisions of self-renewing stem cells that occur in an average lifetime in 31 different tissues. These results were compared with the lifetime incidence of cancer in the same tissues. A strong correlation was seen between a particular tissue’s stem cell division rate and its likelihood of developing cancer. The more often cells divide, the more likely it is that letters of their genetic code will become jumbled, leading to an increased cancer risk. Overall, the study found that random mutations due to stem cell division could largely explain around 65% of cancer incidence.

Girl says she knows she'll die without chemo - - A 17-year-old girl being forced by state officials to undergo chemotherapy for her cancer said Thursday she understands she'll die if she stops treatment but it should be her decision. The state Supreme Court ruled earlier in the day state officials aren't violating the rights of the girl, Cassandra C., who has Hodgkin lymphoma. Cassandra told The Associated Press in an exclusive interview from her hospital it disgusts her to have "such toxic harmful drugs" in her body and she'd like to explore alternative treatments. She said by text she understands "death is the outcome of refusing chemo" but believes in "the quality of my life, not the quantity." "Being forced into the surgery and chemo has traumatized me," Cassandra wrote in her text. "I do believe I am mature enough to make the decision to refuse the chemo, but it shouldn't be about maturity, it should be a given human right to decide what you want and don't want for your own body." The court ruled Cassandra's lawyers had the opportunity to prove she's mature enough to make that decision during a Juvenile Court hearing in December and failed to do so. Cassandra will be free to make her own medical decisions when she turns 18 in September. She, with her mother, had fought against the six-month course of chemotherapy.

Researchers find exposure to nanoparticles may threaten heart health: Nanoparticles, extremely tiny particles measured in billionths of a meter, are increasingly everywhere, and especially in biomedical products. Their toxicity has been researched in general terms, but now a team of Israeli scientists has for the first time found that exposure nanoparticles (NPs) of silicon dioxide (SiO2) can play a major role in the development of cardiovascular diseases when the NP cross tissue and cellular barriers and also find their way into the circulatory system. Their study is published in the December 2014 issue of Environmental Toxicology. The research team was comprised of scientists from the Technion Rappaport Faculty of Medicine, Rambam Medical Center, and the Center of Excellence in Exposure Science and Environmental Health (TCEEH). "Environmental exposure to nanoparticles is becoming unavoidable due to the rapid expansion of nanotechnology," says the study's lead author, Prof. Michael Aviram, of the Technion Faculty of Medicine, "This exposure may be especially chronic for those employed in research laboratories and in high tech industry where workers handle, manufacture, use and dispose of nanoparticles. Products that use silica-based nanoparticles for biomedical uses, such as various chips, drug or gene delivery and tracking, imaging, ultrasound therapy, and diagnostics, may also pose an increased cardiovascular risk for consumers as well."

Diabetes drug found in Lake Michigan could harm fish, researchers say  - There is more than one way to measure prescription drug use.The most direct method is to count prescriptions filled by pharmacies. That would show, for example, that more than 180 million prescriptions for diabetes drugs were dispensed in 2013.Or you could test the treated water coming out of sewage-treatment plants.That approach reveals that in Lake Michigan waters outside one plant, the diabetes drug metformin was the most common personal-care product found by researchers with the School of Freshwater Sciences at the University of Wisconsin-Milwaukee.According to their latest research, the levels of metformin were so high that the drug could be disrupting the endocrine systems of fish.Metformin is a first-line treatment for type 2 diabetes and is the most commonly prescribed medicine for the condition. In 2013, about 70 million prescriptions were dispensed, according to IMS Health, a drug-market research firm.The drug can be found in water samples taken two miles off the shore of Lake Michigan."It was kind of a surprise," said Rebecca Klaper, a professor of freshwater science at UWM. "It was not even on our radar screen. I said, 'What is this drug?' "The drugs get into the sewage and eventually the lake because they are not broken down completely after they are consumed and then excreted.

23andMe’s New Formula: Patient Consent = $ - MIT Technology Review - Facebook generates about $8 a year in revenue from each of its users. But what if you offered a company not just your photos and updates, but your entire genome? Then you could be worth as much as $20,000. That’s my rough calculation for what Genentech could pay direct-to-consumer gene testing company 23andMe for the chance to trawl the DNA of each of several thousand of its customers for genetic clues to Parkinson’s disease. The deal between the two companies, announced today, provides some fascinating insights into the evolving DNA business and the commercial prospects for 23andMe, a high-flying company that’s had some problems in the U.S. with regulators. According to detailed coverage over at Forbes, Genentech will pay as much as $60 million for access to 3,000 Parkinson’s patients in 23andMe’s database. The backstory is that 23andMe pioneered direct-to-consumer genetic tests starting in 2006. It asked consumers to spit in a tube and send it in, and sent back a detailed summary of their risks for common diseases like macular degeneration. But then in 2013 the U.S. Food & Drug Administration banned the test out of concern that the information wasn’t accurate. That put a big crimp in 23andMe’s business, but it didn’t end it. As Forbes points out, the real business here is mining this data:

Despite the help of an experimental drug, Ebola-infected British nurse is in critical condition -- As recently as two days ago, Pauline Cafferkey was talking, reading and sitting up in bed, according to news reports. Now, the condition of the 39-year-old nurse battling Ebola at a British hospital has deteriorated significantly, according to an update Saturday from the hospital. Cafferkey, a Scottish public health nurse, arrived in Britain Sunday night from Sierra Leone and became ill the next morning, according to the Associated Press. Officials say she is the first patient diagnosed with Ebola on British soil, according to the AP. “The Royal Free London NHS Foundation Trust is sorry to announce that the condition of Pauline Cafferkey has gradually deteriorated over the past two days and is now critical,” a statement posted on the hospital Web site said.  Cafferkey’s condition has deteriorated despite catching the virus early and having world-class infectious disease experts working on her behalf, according to the Guardian. She is being treated in an isolation unit at the hospital, receiving survivors’ plasma containing “Ebola-fighting antibodies” and an experimental antiviral drug that “is not proven to work,” according to the Guardian. In recent days, doctors have been able to discuss treatment options with the patient because she is a nurse, according to the Daily Express.

Monarch butterfly eyed for possible U.S. endangered species protection - (Reuters) - Monarch butterflies may warrant U.S. Endangered Species Act protection because of farm-related habitat loss blamed for sharp declines in cross-country migrations of the orange-and-black insects, the U.S. Fish and Wildlife Service said on Monday. Monarch populations are estimated to have fallen by as much as 90 percent during the past two decades because of destruction of milkweed plants they depend on to lay their eggs and nourish hatching larvae, according to the Xerces Society for Invertebrate Conservation. The loss of the plant is tied to factors such as increased cultivation of crops genetically engineered to withstand herbicides that kill native vegetation, including milkweed, the conservation group says. Monarchs, unique among butterflies for the regularity and breadth of their annual migration, are also threatened by widespread pesticide use and logging of mountain forests in central Mexico and coastal California where some of them winter.

How Even Dairy Farmers Get Squeezed by Rigging in the $5.3 Trillion Currency Market - Bloomberg: Ed Gribble gets up at 5 every morning regardless of the weather to feed the 180 cows on his farm in Sussex, a rural idyll on the south coast of England, adjacent to where economist John Maynard Keynes once lived. Gribble, whose family has toiled on this land for three generations, works more than 13 hours a day and uses the highest-yielding breed and most up-to-date farming techniques. Still, he barely scrapes a profit as a glut in supply and slackening demand push the price of milk below his production cost. If it weren’t for the subsidy he gets from the European Union, he’d have to sell his Holstein Friesian cows. Gribble’s payout has to be exchanged into pounds, meaning what he gets is dictated by currency traders sitting behind computer screens 50 miles away in London’s financial district. Each year a bank wins the mandate to convert about 3.4 billion euros ($4.1 billion) of subsidies to sterling. The rate they use has less to do with free-market economics than self-interest, according to four traders and salespeople interviewed by Bloomberg News who said their goal was to make the most money they could for their firms to the detriment of their clients. “It’s despicable what these traders have been doing,” said Gribble, 60, drinking a cup of coffee in the kitchen of his farmhouse. “Those subsidy payments make the difference between us making money, or not. They are stealing money that’s essential to keeping food on the shelves of supermarkets across the U.K.”

Argentina: The Country that Monsanto Poisoned. Photo Essay -- American biotechnology has turned Argentina into the world’s third-largest soybean producer, but the chemicals powering the boom aren’t confined to soy and cotton and corn fields. They routinely contaminate homes and classrooms and drinking water. A growing chorus of doctors and scientists is warning that their uncontrolled use could be responsible for the increasing number of health problems turning up in hospitals across the South American nation. In the heart of Argentina’s soybean business, house-to-house surveys of 65,000 people in farming communities found cancer rates two to four times higher than the national average, as well as higher rates of hypothyroidism and chronic respiratory illnesses. Associated Press photographer Natacha Pisarenko spent months documenting the issue in farming communities across Argentina. Most provinces in Argentina forbid spraying pesticides and other agrochemicals next to homes and schools, with bans ranging in distance from 50 meters to as much as several kilometers from populated areas. The Associated Press found many cases of soybeans planted only a few feet from homes and schools, and of chemicals mixed and loaded onto tractors inside residential neighborhoods. In the last 20 years, agrochemical spraying has increased eightfold in Argentina- from 9 million gallons in 1990 to 84 million gallons today. Glyphosate, the key ingredient in Monsanto’s Round Up products, is used roughly eight to ten times more per acre than in the United States. Yet Argentina doesn’t apply national standards for farm chemicals, leaving rule-making to the provinces and enforcement to the municipalities. The result is a hodgepodge of widely ignored regulations that leave people dangerously exposed.

Agribusiness Reveals its Dislike of Deferred Action for Unauthorized Immigrants  - As I and others have written over the past month and half or so, President Obama’s new Deferred Action for Parental Accountability initiative (DAPA) will shield from deportation and provide work authorization to unauthorized immigrants who have a son or daughter who is a U.S. citizen or legal permanent resident, if they are not an enforcement priority and have been residing in the country for at least five years. DAPA will give the potentially four million who qualify the full spectrum of workplace rights provided under U.S. law. This means immigrant workers will be able to hold accountable employers who commit wage theft or violate workplace safety laws, without fearing threats of deportation that employers may lob at them to keep them from complaining. It’s easy to see how raising the floor for unauthorized immigrant workers in this way will benefit all workers, raise wages, and increase tax revenue. But nevertheless, not everyone is happy about it. I always suspected that the agricultural industry would not support deferred action or any DAPA-like program, but until now the industry had been relatively quiet about their position. My assumption was that—because unauthorized immigrants comprise such a large share of the workforce employed in agricultural occupations, and because ag employers directly benefit from having unauthorized immigrant employees who can’t complain about dangerous workplaces where pesticides are in the air and extreme, triple-digit temperatures are the norm—they would find objectionable anything that increased farmworkers’ bargaining power or that allowed them to move to better-paying jobs in other industries. Because unauthorized immigrants don’t have a lot of bargaining power and are mostly employed by bosses willing to violate the law, they can’t easily get a job anywhere else, which means they have to put up with the low wages that are on offer in ag.

Global Greenhouse Emissions from Agriculture Infographic – Big Picture Agriculture

Drought: California water use down 10%, still short of target - Wet weather at the end of last year helped Californians tame their insatiable demand for water, but consumption — particularly in Southern California — remains well above Gov. Jerry Brown’s target for the drought-stricken state. Figures released Tuesday by the State Water Resources Control Board show California residents used 9.8 percent less water in November than in the same month in 2013. That’s an improvement over October, when year-over-year use was down 6.8 percent, but still short of Brown’s goal of cutting back 20 percent. State water board officials warned this week — as Bay Area temperatures approached record highs, with clear skies forecast into the foreseeable future — that California could face yet another dry year, meaning efforts to conserve remain vital. In the latest monthly report on water use, the southern part of the state conserved the least, with residents in the Los Angeles and San Diego areas using 3.2 percent less when compared with the prior year. The rain and cooler temperatures that swept through Northern California were largely absent in the south and didn’t deter outdoor watering

2014 Was Hottest Year On Record Globally By Far, Reports Japan Meteorological Agency - The Japan Meteorological Agency (JMA) has announced that 2014 was the hottest year in more than 120 years of record-keeping — by far. NOAA is expected to make a similar call in a couple of weeks and so is NASA. As the JMA graph shows, there has been no “hiatus” or “pause” in warming. In fact, there has not even been a slowdown. Yes, in JMA’s ranking of hottest years, 1998 is in (a distant) second place — but 1998 was an outlier as the graph shows. In fact, 1998 was boosted above the trendline by an unusual super-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. What makes setting the record for hottest year in 2014 doubly impressive is that it occurred despite the fact we’re still waiting for the start of El Niño. But this is what happens when a species keeps spewing record amounts of heat-trapping carbon pollution into the air, driving CO2 to levels in the air not seen for millions of years, when the planet was far hotter and sea levels tens of feet higher. The JMA is a World Meteorological Organization (WMO) Regional Climate Center of excellence. The WMO had announced a month ago that 2014 was on track to be hottest year on record. Different climate-tracking groups around the world use different data sets, so they can show different results for 2014 depending on how warm December turns out to be.  But in mid-December, NOAA said it’s all but certain 2014 will be a record setter. It released this figure showing that all plausible scenarios for December still leave last year as the hottest ever (click to enlarge):

Baked Alaska: Climate Change in the Arctic -- If there’s been any “pause” in global warming, the Arctic  hasn’t seen it. The latest Arctic Report Card issued from the National Oceanic and Atmospheric Administration (NOAA) shows a continued acceleration of climate change in the region. This latest report shows that Arctic air temperatures continue to rise at more than twice the rate of global temperatures, a phenomenon scientists call “Arctic amplification,” causing a range of impacts. Among them are increasing air and sea surface temperatures, declining reflectivity (albedo) of Greenland’s ice sheet, diminishing spring snow cover on land and summer ice on the ocean, and the declining health and numbers of some polar bear numbers, including those in the Hudson Bay region. The Arctic is the climatic canary in a coal mine, impacting not only Arctic populations and ecosystems, but the global climate system as well. “Arctic warming is setting off changes that affect people and the environment in this fragile region, and has broader effects beyond the Arctic on global security, trade, and climate,” said Craig McLeon, acting assistant administrator for the NOAA Office of Oceanic and Atmospheric Research. “This year’s Arctic Report Card shows the importance of international collaboration on long-term observing programs that can provide vital information to inform decisions by citizens, policymakers and industry,”

Rapidly Warming Oceans Set to Release Heat into the Atmosphere - For every 10 joules of energy that our greenhouse gas pollution traps here on Earth, about 9 of them end up in an ocean. There, the effects of global warming bite into fisheries, ecosystems and ice. But those effects are largely imperceptible to humans—as invisible to a landlubber as an albatross chomping on a baited hook at the end of a long line. What scientists discovered in 2014 is that since the turn of the century, oceans have been absorbing more of global warming’s heat and energy than would normally be expected, helping to slow rates of warming on land. What they will be talking about in 2015, and beyond, is when that trend might come to an end—likely following a routine shift in Pacific Ocean trade winds. Much of that extra sunken heat will eventually be belched back into the atmosphere by the overheating seas. The effects of ocean warming might be imperceptible to most of us, but they are far-reaching. They are driving fishing fleets further out to sea, ushering tropical fish into polar waters, and worsening flood hazards for coastal communities. It can be difficult to probe the ocean, but it doesn’t help to look away. So scientists have been finding innovative new ways of peering beneath the swells, conscripting everything from seals to climate models to improve their grasp of marine temperature trends. Titanic international projects that are just kicking off, including the National Science Foundation-funded Ocean Observatories Initiative and Southern Ocean Carbon and Climate Observations and Modeling project, promise to pile on reams of new data and knowledge in the coming years—not all of it expected to be postcard pretty. Many of the discoveries from similar research during the past year were decidedly feverish.

Things I thought were obvious! -- I thought I might highlight some of those things that I thought were obvious, but that may not actually be obvious to others.

  • The destruction of ecosystems and the extinction of species is something we should be aiming to avoid or minimise. - I had assumed that the above was something that most would agree was relatively obvious. The natural world is both amazing and also a crucial part of our own survival on this planet. Unnecessarily risking damage to ecosystems on which we rely seems incredibly foolish and would seem to be something we should be avoiding. After discussions with Richard Tol on my previous post, it would seem that some (maybe even many) do not agree. It appears as though some think that we can adapt to virtually anything. I find it hard to believe that this is true, and I would really like to know if scientists who study the natural world agree.
  • The climate change issue is really about risk, not about certainty. Something else I had thought was self-evidently true, was that climate change is really about risks that we might face, not about showing that we will definitely do so. It is possible that we might warm less than we expect. It might even be possible that the changes will be beneficial, rather than damaging. However, this doesn’t change that we might warm even more than we expect and that the changes could be extremely damaging. Therefore, it seems obvious to me that the real discussion should be about what we might face through climate change and the risks/costs associated with minimising these climate change risks. However, it does appear that there are some who think that we need to show that climate change will definitely be detrimental before we should consider doing anything about it. Not only is this not how one does a risk assessment, it also sets a virtually impossible target. We cannot know with certainty what will happen in the future. The best we can do is consider what might happen under different possible scenarios and consider, given that, how we should proceed.

The Koch Brothers Launch A Surrogate War Against Pope Francis --  The Pope already drew the wrath of both evangelical and Catholic Republicans in Congress for criticizing the greed and income inequality championed by the GOP, but now he has the undivided attention of the Koch brothers, Exxon, and their dirty energy cohorts. The cause célèbre for the Koch-funded evangelical movement is the Pope’s recent announcement that it is beyond high time for the world, and “all Catholics” to join the fight to reduce the existential threat to human beings from anthropogenic climate change. Last October, the Pope harshly condemned “The monopolizing of lands, deforestation, the appropriation of water, inadequate agro-toxics that are some of the evils that tear man from the land of his birth. Climate change, the loss of biodiversity and deforestation are already showing their devastating effects in the great cataclysms we witness.” Those words, although accurate, were toxic to a Koch-funded evangelical Christian group made up of pastors and Christian leaders, the Cornwall Alliance, that considers the devastating effects and great cataclysms we witness from the effects of anthropogenic (manmade) climate change the will of almighty god and biblical. A godly will that no man, much less the Vicar of Christ, dares speak out against or attempt to change. In the view of evangelicals and their leaders, if man destroys the environment and threatens human existence, it is god’s will and they will fight to see climate change’s full effects to fruition; for god, the bible, and the mountains of cash from the Koch brothers dirty energy cabal. Besides, evangelicals could not care one iota less if Earth becomes uninhabitable because something about an absurd idea of being “raptured” away for a ring-side seat as those sinners “left behind” receive god’s almighty wrath in the war of Armageddon.

Let this be the year when we put a proper price on carbon - Larry Summers - The case for carbon taxes has long been compelling. With the recent steep fall in oil prices and associated declines in other energy prices it is overwhelming. There is room for debate about the size of the tax and about how the proceeds should be deployed. But there should be no doubt that starting from the current zero tax rate on carbon, increased taxation would be desirable. The core of the case for taxation is the recognition that those who use carbon-based fuels or products do not bear all the costs of their actions. Carbon emissions exacerbate the global climate change problem. In many cases they contribute to local pollution problems which immediately harm human health. Removing fossil fuels from the ground involves both accident risks and environmental challenges. And even with the substantial increases in US oil production we remain a net importer, so increases in consumption raise our dependence on Middle East producers. Some worry that taxing fossil fuels will hurt the competitiveness of US industry and encourage offshoring. In fact a well designed tax would be levied on the carbon content of all imports coming from countries that did not impose their own carbon levies. The US should insist that its tax is compatible with World Trade Organisation rules. It would have the virtue of encouraging countries who wished to avoid the US tax to impose carbon taxes of their own, thereby further supporting efforts to reduce global climate change. Progressives who are concerned about climate change should rally to a carbon tax as the most important step for mobilising against it. Conservatives who believe in the power of markets should favour carbon taxes on market principles. .... Now is the time.

Summers joins the call for a tax on carbon -  -- Larry Summers joins me–and too few others, IMHO–in recognizing this as a good time to introduce a tax on energy, in his case a broad carbon tax. Unlike the idea I and others have touted–a small, phased-in bump up in the federal gas tax that’s been stuck at $0.18 since 1993 that would then be devoted to shoring up the highway trust fund, which is scheduled to go bust by May–Larry goes broader, advocating a “$25-a-ton tax on carbon that would raise far more than $1 trillion over the next decade would lift gasoline prices by only about 25 cents.”  According to the NYT, neither of us are being realistic.  Is the Times right? I get Larry’s “in for a dime, in for a dollar” message, but it’s probably more realistic–or less unrealistic–given the makeup of the new Congress and where they are on taxes to think smaller and more targeted. So I’d push my idea over his. A gas tax is, of course, also a tax on carbon, but a few cents a gallon (say a nickel/gallon a year phased-in over three years) won’t be felt by drivers either now or even down the road when gas prices go back up. On the other hand, I fear we’re probably both wasting our breath, at least at the federal level. Yet here again, the action is sub-national, and some states have moved on this. As with all those state minimum wages, this creates a useful natural experiment wherein we can collect data on the impact of these state gas tax increases on their economies, budgets, and residents’ incomes. That way, if facts should once again matter, we’ll have some evidence as to the actual impact versus the ideologically inspired cartoon impact.

David Attenborough: Leaders are in denial about climate change -- Sir David Attenborough is calling on global leaders to step-up their actions to curb climate change, saying that they are in denial about the dangers it poses despite the overwhelming evidence about its risks. The TV naturalist said those who wield power need to use it: “Wherever you look there are huge risks. The awful thing is that people in authority and power deny that, when the evidence is overwhelming and they deny it because it’s easier to deny it – much easier to deny it’s a problem and say ‘we don’t care’,” Sir David said. In terms of climate change, “we won’t do enough and no one can do enough, because it’s a very major, serious problem facing humanity; but at the same time it would be silly to minimise the size of the problem,” he told Sky News. Later this year a crucial UN climate summit will be held, at which world leaders have pledged to agree to tough cuts in their carbon emissions, to ensure the increase in global warming does not exceed 2°C – beyond which its consequences become increasingly devastating.

Stable climate demands most fossil fuels stay in the ground, but whose? - In the abstract, moving away from fossil fuels sounds relatively straightforward. But the closer you look, the more complex the challenge appears. How quickly do we have to kick the fossil fuel habit? Should developing nations forego the artery-clogging feast of dirty energy that other nations used to fuel their development? And how much coal, oil, and gas will each nation have to leave in the ground—potential profits notwithstanding? In a new study, University College London researchers Christophe McGlade and Paul Ekins examine that last question. The latest Intergovernmental Panel on Climate Change report concluded that between 2011 and 2050, we can only emit around 1,000 gigatons of CO2 if we want to limit warming to 2°C above preindustrial temperatures, which governments have pledged to do. Current fossil fuel reserves—the known amount of fossil fuels that can be produced at a reasonable profit today—equal almost 3,000 gigatons of CO2. Adding in the fossil fuels that are not economically viable today but probably could be eventually brings that number up in the neighborhood of 11,000 gigatons. That means a whole lot of fossil fuels need to stay in the ground. The researchers ran simulations with economic models to find the mix of fossil fuels that maximizes the economic benefit to each country while still staying below 1,000 gigatons of CO2. They took into account the costs of producing various types of coal, natural gas, and oil as well as the cost of bringing it to market in each region. In the end, they produced estimates of how much of each region's reserves should be considered “unburnable” in this economically optimized scenario.

Michael Klare: How Big Oil Is Responding to the Anti-Carbon Movement -- Around the world, carbon-based fuels are under attack.  Increasingly grim economic pressures, growing popular resistance, and the efforts of government regulators have all shocked the energy industry.  Oil prices are falling, colleges and universities are divesting from their carbon stocks, voters are instituting curbs on hydro-fracking, and delegates at the U.N. climate conference in Peru have agreed to impose substantial restrictions on global carbon emissions at a conference in Paris later in the year.  All this has been accompanied by what might be viewed as a moral assault on the very act of extracting carbon-based fuels from the earth, in which the major oil, gas, and coal companies find themselves portrayed as the enemies of humankind.  Under such pressures, you might assume that Big Energy would react defensively, perhaps apologizing for its role in spurring climate change while assuming a leadership position in planning for the transition to a post-carbon economy.  But you would be wrong: instead of retreating, the major companies have gone on the offensive, extolling their contributions to human progress and minimizing the potential for renewables to replace fossil fuels in just about any imaginable future.That the big carbon outfits would seek to perpetuate their privileged market position in the global economy is, of course, hardly surprising.  After all, oil is the the most valuable commodity in international commerce and major producing firms like ExxonMobil, Chevron, and Shell regularly top lists of the world’s most profitable enterprises.  Still, these companies are not just employing conventional legal and corporate tactics to protect their position, they’re mounting a moral assault of their own, claiming that fossil fuels are an essential factor in eradicating poverty and achieving a decent life on this planet.

China Following Through On Early Emissions Promises - China has finished building the world’s largest plant designed to use excess methane gas, produced by mining coal, to generate electricity. The Lu’an Group, which built the plant in eastern Shanxi Province, also owns the nearby Gaohe Coal Mine. Lu’an announced Dec. 30 that it would soon fire up the generator, which has a capacity of 30 megawatts and can use up fully 99 percent of the methane emitted by mining the coal. Coal mining in China emits more than 10 billion cubic meters of low-concentration methane every year, the equivalent in greenhouse gases of 200 million metric tons of carbon dioxide. Methane, which is not poisonous but can asphyxiate, is a key greenhouse gas which many say contributes significantly to global climate change. It also is normally emitted in the process of underground mining. To deal with methane, mine operators often capture the gas and liquefy it into methyl alcohol if the methane content of the emission is greater than 30 percent. For concentrations between 10 and 20 percent, the gas is captured and used as fuel for some internal combustion engines.  But fully 81 percent of the emissions have methane concentrations below 10 percent, so low that it can’t be used for direct combustion. So Lu’an’s Methane Gas Research Institute developed a method by which the gas with low methane content can be broken down into carbon dioxide and water at temperatures of more than 1,700 degrees Fahrenheit, using the heat and steam to generate electricity.

California Governor Calls For 50 Percent Renewable Power -  On Monday, California Governor Jerry Brown gave the inaugural address for his unprecedented fourth term as governor of California. Brown used the speech as an opportunity to look back at how far the state has come since he was first elected 40 years ago, and to look ahead at the daunting tasks of the future. Along the way California has been a nationwide leader and energy and environmental initiatives, and Brown used the occasion to lay out some ambitious targets as part of the speech’s broader focus on the importance of the state’s green agenda. Brown listed three main goals to be accomplished within the next 15 years: First, to increase the amount of electricity the state derives from renewable sources from one-third to 50 percent. Second, to reduce petroleum use in cars and trucks by up to 50 percent. And the governor’s final goal is to double the efficiency of existing buildings and make heating fuels cleaner.While all three of these are ambitious, the one with real teeth is the push for more renewable electricity. California currently has a goal of getting one-third of its electricity from renewable sources by 2020. Brown just moved the conversation forward a decade. If this goal is adopted it could provide the kind of regulatory stability needed for clean energy sources to thrive and for investments to soar. Speaking at length about the importance of these actions, Brown said that “taking significant amounts of carbon out of our economy without harming its vibrancy is exactly the sort of challenge at which California excels.”He said he envisions a variety of initiatives in achieving these goals, including expanded rooftop solar, micro-grids, battery storage and “the full integration of information technology and electrical distribution and millions of electric and low-carbon vehicles.”  Brown also said reducing methane and black carbon emissions is important, and that improving land use and preservation of forests and wetlands is critical to storing carbon.

Coal Companies Are Selling Coal To Themselves To Get More Government Subsidies -  In what is being described as a fundamental shift in how the coal industry does business, over 40 percent of all coal produced in Wyoming is now being first sold not to a power plant or a utility, but to a subsidiary of the same company that mined the coal — a 17-fold increase since 2004 for the U.S.’s largest coal-producing state.  According to a new report by the Center for American Progress, these inside deals between coal companies and their own subsidiaries (known as “captive transactions”) are aimed, in part, at intentionally dodging federal and state royalty payments and maximizing taxpayer-funded subsidies from the U.S. Department of the Interior. The CAP review, released on Tuesday, found that five of the largest coal companies operating in the Powder River Basin in Wyoming and Montana have collectively created a network of 566 subsidiary companies through which they sell and market coal. Peabody Energy alone, which operates the country’s largest coal mine in Wyoming, boasts 242 domestic and foreign subsidiaries, with names like Coal Sales II, LLC.  Under current regulations, coal companies pay royalties on the first sale to another company after mining coal on federal land. The coal then can be bought and sold multiple times until it reaches a final destination and is sold to an end user, such as a power plant where it is burned for electricity. By building up hundreds of subsidiaries, coal companies have been able to sell to their own companies and partners, allegedly paying royalties based on an artificially low sale price. The CAP analysis presents evidence that captive transactions are common practice in the coal industry and regularly exploited to evade royalty payments and maximize subsidies.

Northwest Tribe Says Proposed Coal Terminal Would Be ‘Like Putting A Freeway Inside The Reservation’  -- A Pacific Northwest tribe with fishing rights dating to the mid-19th century has sharply escalated a battle over a proposed coal export terminal near its northwest Washington reservation, urging the federal Army Corps of Engineers to reject the facility as a threat to their longstanding treaty rights.  In a letter to the Corps, Lummi Nation Chairman Tim Ballew II said the proposed Gateway Pacific terminal planned for construction at Cherry Point, WA would harm fishing grounds that are a vital economic and cultural resource for the nearly 5,000 members of his tribe. “The Lummi people have harvested fish at this location for thousands of years,” Ballew said. “We have a sacred obligation to protect this location for its cultural and spiritual significance.”  The terminal, which would be constructed north of Bellingham, Washington, would have the capacity to ship up to 48 million tons of coal from the Powder River Basin in Wyoming and Montana to Asia. It is one of two coal export terminals proposed for Washington state that are currently undergoing environmental reviews.

One Year After West Virginia Chemical Spill, Study Finds Problems With Health Response -- As the one-year anniversary of the chemical spill that polluted the drinking water of 300,000 West Virginians approaches, a new study has identified oversights in the state government and Centers for Disease Control’s response to the disaster.  The study, published in the journal Environmental Science and Technology, looked at the health problems reported by residents immediately after the spill and found that the CDC didn’t consider the impacts exposure to the fumes of Crude MCHM — the coal-related chemical that spilled into West Virginia’s Elk River from a Freedom Industries chemical storage site on January 9 — could have on residents whose water was affected. The federal government said at the time that there wasn’t enough information on the chemical to draft an inhalation standard, and the Environmental Protection Agency didn’t create one until October.  The researchers also found that health effects occurred in people exposed to drinking water containing MCHM at concentrations “well below” the CDC’s recommended limit, meaning that that the limit wasn’t as effective as it should have been in keeping people safe.

Judge to weight conflict of interest in Freedom Industries case: A federal judge will take up whether the U.S. Attorney’s office can prosecute cases against former Freedom Industries executives or if a conflict of interest exists. U.S. District Judge Thomas Johnston is scheduled to hear disqualification requests from former Freedom President Gary Southern and former company executive Dennis Farrell in a 1:30 p.m. hearing today. Both Southern and Farrell have asked the federal judge to disqualify U.S. Attorney Booth Goodwin’s office from the case, saying there is a conflict of interest because the prosecutor’s employees were affected by last January’s chemical leak, which affected 300,000 people in nine counties.

A Nuclear Plant Leaked Oil Into Lake Michigan For Two Months Straight  -- A cooling system attached to a nuclear power plant in southwest Michigan was steadily spilling oil into Lake Michigan for about two months, the Detroit Free Press reported Saturday.  Approximately 2,000 gallons of oil from a cooling system at the Donald C. Cook Nuclear Plant leaked into the lake last year, according to an event notification posted on the Nuclear Regulatory Commission website. The leak started on October 25, and was isolated on December 20, the report said. Plant officials reportedly notified the State of Michigan of the leak on December 13.  Bill Schalk, communications manager for the Cook Nuclear Plant, assured the Detroit Free Press that there would be no impact on the lake. “One of the first things we did when we looked at the potential for a leak is examine the lake,” he said. “Oil floats on top of the water and you see a sheen, but we could find no evidence of oil in our reservoirs, in the lake or on the beach. It has been dispersed.” Others disagree that just because the oil is dispersed, there no threat to the lake and its ecosystems. Michael Keegan, director of the nonprofit Coalition for a Nuclear-Free Great Lakes, lamented that the oil would not be recoverable, and questioned whether plant officials truly knew how much oil had spilled into the lake, considering they didn’t know the leak had been happening for two months. “What’s concerning is they don’t really know the extent of the leak,” he said. “Nearly two months later is the first determination they make that they have an oil leak? It speaks to the quality assurance of all of their other systems.”

Ohio fracking well drives families out of homes - A natural gas fracking well began leaking on Dec. 13, 2014, driving 30 families from their homes. The leak prompted the evacuation of the well's field staff and residents within a 1.5-mile radius around the well near Sardis, Ohio. Sardis is a small community, located along the Ohio River about 160 miles east of Columbus and 40 miles south of Wheeling, West Virginia. The well is located at the Stalder 3UH location, operated by Triad Hunter, LLC outside of Sardis. Triad Hunter is a wholly-owned subsidiary of Magnum Hunter Resources Corporation. The leak from the well pad shot gas and vapors high into the air, prompting not only the evacuation of nearby residents but causing authorities to impose a 5,000 feet NO FLY ZONE above a three-mile radius around the leaking well. The evacuation and NO FLY restrictions were ordered until the well could be capped and repaired. Eventually, families were permitted limited access to their homes, Dec. 17, during the daytime - between 7:00 a.m. - 6:00 p.m. - with the assistance of the Sardis Volunteer Fire Department. Emergency accommodations had been provided for families and, on Dec. 17, a Family Assistance Center was set up in nearby Lee Township Building to provide a larger and more relaxed place for the evacuated residents. But some residents, according to other reports, have temporarily taken up quarters in hotels/motels as far south as Marietta, Ohio, which is over 40 miles away. Crews from as far away as Texas (such as, Wild Well Control) were brought in to contain and repair the spewing well. Representatives of the involved companies continued to meet daily with community and government agencies to discuss ongoing efforts to secure the well site, maintain safety of responders and residents through continuous air monitoring with with zero gas detection outside the well pad site. On Dec. 23, the residents who were hoping to be back in their homes learned that was not to be. They were told that they would have to wait another day. Rocky Roberts, senior vice president of Operations for Triad Hunter, said, "The well head is still blowing gas ... but it is blowing straight up into the air." Roberts went on to say that, when the well is capped, they will still have to do some air monitoring to make sure it is safe.

Fracking Led to Ohio Earthquakes - A hydraulic fracturing, or fracking, well in Ohio triggered scores of small earthquakes in March 2014, including one large enough to be felt in nearby towns, a new study confirms. The biggest quake, a magnitude 3, was one of the largest ever caused by fracking. State officials shut down the well two days after the earthquake hit. Fracking involves the high-pressure injection of water, sand and chemicals into rock to break it up and release trapped oil and gas. In Ohio, fracking triggered earthquakes on a hidden fault in ancient crystalline rock beneath a natural gas well in the Utica Shale, according to the study, published today (Jan. 5) in the Bulletin of the Seismological Society of America. No earthquakes were ever recorded in this region of Ohio before fracking started, and the shaking stopped after the well was shut down, said lead study author Robert Skoumal, a graduate student in seismology at Miami University in Ohio. Skoumal and other Miami University researchers identified 77 earthquakes with magnitudes ranging from 1 to 3 that occurred from March 4 to 12.

Fracking caused Ohio earthquake in 2014, say researchers - Fracking was responsible for an earthquake felt by Ohio residents in March 2014, a study has found. Hydaulic fracturing near the Poland Township activated a previously unknown fault in the earth, say scientists, who identified 77 earthquakes with magnitudes ranging from 1.0 to 3.0 between March 4 and 12.The strongest earthquake was unusual because it could be felt by people living in the area, revealed the research, published online in the Bulletin of the Seismological Society of America.“These earthquakes near Poland Township occurred in the Precambrian basement, a very old layer of rock where there are likely to be many pre-existing faults,” said Robert Skoumal, co-author of the study. “This activity did not create a new fault, rather it activated one that we didn’t know about prior to the seismic activity.”  In October 2014 another study in the same journal suggested 400 small earthquakes in Ohio were triggered by fracking in a three month period during 2013.

Fracking caused earthquakes in existing faults in Ohio, study says: A new scientific study has linked 77 minor earthquakes last March around Poland, Ohio, just across the Pennsylvania-Ohio state line, to hydraulic fracturing. The seismic sequence, including a rare “felt” quake of a magnitude 3.0 on the Richter Scale, was linked to active “fracking” by Hilcorp Energy Co. on a well pad about a half mile from the epicenter, according to research published online in the Bulletin of the Seismological Society of America. One of the study’s authors, Robert Skoumal, of Miami University of Ohio, said it is rare for deep fracking operations associated with shale gas extraction to cause earthquakes large enough to be felt by people on the surface. But seismic monitoring advances have found the number of “felt and unfelt” earthquakes associated with fracking have increased over the past 10 years. “These earthquakes near Poland Township occurred in the Precambrian basement, a very old layer of rock where there are likely to be many pre-existing faults,” Mr. Skoumal said in the news release about the findings. “This activity did not create a new fault, rather it activated one that we didn’t know about prior to the seismic activity.” The researchers, Mr. Skoumal, Michael Brudzinski and Brian Currie, used a technique called “template matching” to link fracking activity on certain dates to seismic data recorded by the Earthscope Transportable Array, a network of seismic stations. The study identified 77 deep earthquakes, with magnitudes from 1.0 to 3.0, to the fracking done around Poland, which is 15 miles west of New Castle, in Lawrence County. Only fracking on wells located in the northeast portion of Hilcorp’s shale gas operations were linked to the earthquakes, indicating where faults may be located.

Ohio earthquakes caused by fracking: Hydraulic fracturing triggered seismic activity - A series of earthquakes that hit Ohio last year were caused by fracking, experts have claimed.Published in the Bulletin of the Seismological Society of America, researchers looked at five earthquakes that hit Poland Township, Ohio, in March 2014. They discovered hydraulic fracturing had activated a previously unknown fault that triggered the seismic activity..Previous research has linked earthquakes with fracking. Last October, researchers connected 400 micro-earthquakes to fracking in Harrison County in Ohio between September and October 2013.In July, another study found fracking was responsible for hundreds of earthquakes across Oklahoma. It found the rate of earthquakes increased from about one per year before the 2008 oil and gas boom to about 240 small earthquakes less than five years later.Two earthquakes in the UK in 2011 were also found to have been caused by nearby fracking.Larger tremors caused by fracking remain very rare but advances in seismic monitoring and the growth of the fracking industry has led to an increase in earthquakes over the last 10 years. In the latest study, authors found earthquakes ranged from magnitude 2.1 to three and all occurred within 1km of a group of oil and gas wells run by Hilcorp Energy. The company was conducting fracking operations at the time.

Fracking in Ohio triggered an earthquake so big you could feel it -- Earthquakes never used to happen in Poland Township, Ohio — or, at least, they were never identified. But then the fracking started. In March of 2014, the township saw 77 earthquakes occur, says Robert Skoumal, a seismologist at Miami University. These earthquakes were so small that most went unnoticed by the area's 15,000 inhabitants. But when the hydraulic fracturing operations stopped, so did the earthquakes, Skoumal says — and "no earthquakes in this area have been observed since."  Skoumal is one of the researchers behind a new study that links a rare "felt" earthquake — an earthquake strong enough that humans can feel it — to hydraulic fracturing operations that took place in Poland Township in 2014. Hydraulic fracturing, or fracking, is the process by which sand, water, and various chemicals are injected into the ground to extract natural gas from shale rock deep underground. It very rarely leads to earthquakes, and "only a handful of fracking operations worldwide have induced felt earthquakes," Skoumal says. But in March of 2014, Poland Township experienced a series of earthquakes, including one — a magnitude 3 earthquake — that was "one the largest earthquakes ever induced by hydraulic fracturing in the United States."  In the study, which will be published tomorrow in the Bulletin of the Seismological Society of America, Skoumal and his team of researchers compared the timing of the Poland Township earthquakes to the fracking operations. They also compared the location of the earthquakes in relation to the fracking wells. This analysis helped them determine that a relatively small portion of the fracking operation — the northeast portion — was responsible for the earthquakes in Poland Township.

Yes, Fracking Can Be Directly Linked to Earthquakes - Forbes:  A study released Monday afternoon by the Seismological Society of America confirms — again — that hydraulic fracturing, or fracking, activity associated with natural gas drilling in the Ohio portion of the Marcellus Shale induced a “rare seismic sequence” last March. Put more simply: Fracking caused an earthquake. “It remains rare for hydraulic fracturing to cause larger earthquakes that are felt by humans,” the organization noted in a prepared statement. “However, due to seismic monitoring advances and the increasing popularity of hydraulic fracturing to recover hydrocarbons, the number of earthquakes – felt and unfelt – associated with hydraulic fracturing has increased in the past decade.” It makes some sense. Fracking, as its name implies, involves the explosive fracturing of shale rock formations deep underground, as a way of creating cracks and fissures from which trapped natural gas can escape up the well bore and to the surface. That this might now and then nudge a previously unknown fault to noticeably rumble or shift seems elementary, if uncommon. Low-level seismicity is actually detected during fracking operations all the time, but at magnitudes that are virtually imperceptible to most people.  And as noted by the industry-run site Energy in Depth, the findings published this week — which grew out of work by researchers at Miami University of Ohio — only reinforce what was already suspected by anyone paying attention. Indeed, the Ohio Department of Natural Resources only needed a month after last spring’s quakes, which registered as high as 3.0 in magnitude and in one case was felt throughout Poland Township, to toughen its regulations on drilling near known fault lines and other areas of potential seismic activity.

Fracking Confirmed as Cause of Ohio Earthquake » Ohio is now on a similar trajectory to Oklahoma, which saw a five-fold increase in earthquakes in 2014. A new study published in the Bulletin of the Seismological Society of America has confirmed that a fracking operation near Poland Township in Ohio activated a previously unknown fault in the Earth, causing 77 earthquakes with magnitudes ranging from 1.0 to 3.0 between March 4 and March 12 in 2014. The drilling company, Hilcorp Energy, was forced to halt operations by the Ohio Department of Natural Resources on March 10 after nearby residents felt the 3.0-magnitude earthquake.  Robert Skoumal, who co-authored the study, compared these earthquakes to well stimulation reports and found the earthquakes “coincided temporally and spatially with hydraulic fracturing at specific stages of the stimulation. The seismic activity outlined a roughly vertical, east-west oriented fault within one kilometer of the well.” Fracking at other nearby wells did not produce seismic activity, which suggests that the fault is limited in its scope. But, if Oklahoma’s major increase in earthquakes tells us anything, it’s that it could get worse for Ohio if fracking increases. From 1975 to 2008, Oklahoma averaged one to three earthquakes of magnitude 3 or greater a year. In 2009, that number jumped to 20. In 2011, the Sooner state experienced its largest recorded quake with a magnitude of 5.7. In 2014, there were 564 quakes with a magnitude of 3 or greater, compared to only 100 in 2013. And 19 of those earthquakes were magnitude 4 or greater, the strength at which experts say significant damage can occur.

Fracking Earthquakes Pile On To Gas Industry Woes - Way back in April we reported that seismologists were hot on the trail of a “smoking gun” that would link fracking to earthquakes on Ohio. At the time the experts were a bit cautious, but earlier this week the Seismological Society of America came out with a definitive statement: yes, fracking earthquakes are a thing. That’s a huge deal because until now, the only confirmed linkage between fracking and earthquakes has been due to the common practice of forcing spent fracking brine (wastewater from the drilling operation) into abandoned wells. We’re already seeing a lot of pushback from local communities against drilling and now that fracking earthquakes are a known known, you’re going to see a lot more of that stuff. Natural gas fracking is already fingered as the cause of depressed property values due to risks for water contamination, air pollution, and other disruptions related to introducing new industrial operations into formerly bucolic settings, and now the Environmental Protection Agency is coming down with new rules to keep closer tabs on fugitive methane emissions from fracking, so the earthquake thing is really piling on an industry that’s already feeling the pinch of downwardly spiraling prices.  Another reason why the new fracking earthquake study is such a big deal is that according to the Seismological Society, the drilling operation activated a previously undocumented fault. In other words, in addition to the known risks posed by documented faults and other geological features, you’re opening up a whole new can of worms for local communities to deal with.

Ohio appeals decision to revoke gas-drilling permit in North Royalton | cleveland.com: -- The Ohio Department of Natural Resources has appealed last month's decision to revoke an oil-and-gas-drilling permit in North Royalton. The notice of appeal was filed Friday in the Franklin County Court of Common Pleas by state Attorney General Michael DeWine. His office is representing the ODNR in this case. The Ohio Oil and Gas Commission in December revoked an ODNR drilling permit for Cutter Oil Co., a West Salem firm. The permit would have allowed Cutter to use parts of two North Royalton streets to drill a new well. The commission, which under state law hears appeals to state gas and oil decisions, said the ODNR failed to take into account the city's safety concerns over drilling when it when granted the permit in December 2013. "In a way, I'm not surprised (by the ODNR appeal), but to me it was pretty clear in the (commission's) ruling that safety should have some bearing in applying for a drilling permit," North Royalton Mayor Robert Stefanik said. Stefanik said the ODNR, by appealing the ruling, is saying that safety should not be considered when deciding whether to grant a drilling permit. "That's pretty bizarre,"

Low gas prices may slow fracking growth: The drop in fuel prices could slow fracking growth in Ohio, according to industry experts. Crude oil prices have been on a steady decline since July, dropping more than 50 percent. The decrease is good for consumers and even the economy in the short term because it boosts expendable income. But the hydraulic fracturing services market is bracing for a downturn in 2015, according to PacWest Consulting Partners, a consulting and marketing intelligence firm specializing in the energy, industrial and resources sectors. In December, PacWest revised 2015 expectations from a 6 percent increase in horizontal wells fracked across the nation to a 12 percent decrease. Although there's an anticipated overall decline, young shale formations such as the Utica Shale in Ohio are expected to continue to see growth because they're still ramping up production, just at a much slower rate, PacWest Senior Consultant Caldwell Bailey said. "Over the next couple years, we really anticipated Ohio to ramp up. We were anticipating about a 40 percent or greater jump in the number of horizontal wells fracked in the Utica formation," Bailey said. That projected growth has been adjusted to 5 to 10 percent, which is based off $65 a barrel oil — it's been sitting around $50 a barrel in the past few weeks. There's a wide range of how low the price can go before new drilling becomes uneconomical because every shale formation is different, Bailey said. "There is not one number people can say U.S. shale is going to shut down," he added. "From our research, what we've seen in the Utica, there's a pretty wide band for what price drilling completion is still economic, from $30 to $60 a barrel."

Sharp declines in well production typical in Ohio’s Utica Shale - In the world of shale gas in Ohio, the top-producing wells aren’t king of the hill for long. Take the Tippens 6HS well, for example. Located in Monroe County in southeastern Ohio, it produced more natural gas in the first quarter of 2014 than any other Utica Shale well in the state — some 1.117 billion cubic feet of the resource in 80 days, according to Ohio Department of Natural Resources records. That’s enough natural gas to fuel 12,000 houses for a year. But the well that gushed 13,972 thousand cubic feet of natural gas per day in the first three months of 2014 saw daily production drop 41 percent in the second quarter to 8,180 thousand cubic feet per day and another 26 percent in the third quarter to 6,015 thousand cubic feet per day. By autumn, the Tippens well was producing less than half the natural gas that it had during its peak output and slipped from No. 1 to No. 72. It went from being a stellar Ohio well to a good-producing well. Similar drops are showing up in nearly all of Ohio’s horizontally drilled natural gas wells. Such numbers are evidence of what drillers call “production decline curves” — drop-offs over time. It’s a common (and expected) occurrence for shale wells, even in wells expected to produce for 30 years or more. An analysis of Utica wells tapped in each of the first four quarters — from July 2013 through June 2014 — shows natural gas production had dropped 65 percent.  The bottom line: Shale wells produce the most in the first few years or, as evidenced in the sharply declining production rates in Ohio, their first few months.

West Virginia judge denies chemical company's second challenge to fracking operations: A West Virginia judge has rejected a second legal challenge from a chemical manufacturer saying that hydraulic fracturing operations near its facility in Marshall County would negatively affect its operations. In a Christmas Eve order, Marshall County Circuit Judge David Hummel denied the challenge from Eagle Natrium LLC, a New Martinsville-based subsidiary of Axiall Corp., a manufacturer of chlorovinyl and aromatic chemicals and formerly owned by PPG Industries. The lawsuit was the company’s second attempt — and second denial — to stop the fracking operations of Gastar Exploration, Inc., a Houston-based oil and gas company with operations in the Marcellus and Utica shale plays. Natrium has argued that natural gas and the fluids associated with hydraulic fracturing have the potential to permeate its saltwater wells, which the company uses for its salt mine operations. In a 2013 incident, Natrium’s lawyers blamed the high-pressure fracking fluids being used by another company, Triad Hunter, across the Ohio River for traveling under the river and damaging a brine well. A lawsuit filed in Pennsylvania trying to stop Gastar’s operations was thrown out in October by Allegheny County Common Pleas Court Judge Christine Ward, who ruled that the evidence presented to her indicated “a possibility of damage, but not a high probability, without assuming the presence of geological features that the data hinted at, but did not establish.” The second lawsuit, filed in Marshall County, followed on the heels of that ruling. It claimed additional precautions and monitoring ordered by the West Virginia Department of Environmental Protection were not adequate and that a more detailed evaluation was necessary.

State senator trying again with shale gas health advisory panel -- State Sen. Joe Scarnati is planning to have another go at forming a Marcellus Shale health advisory panel. Based on a co-sponsorship memorandum, the Jefferson County Republican is looking for support for a bill creating a nine-member panel that would consider research and offer advice. “The panel would be tasked with thoroughly investigating and studying advancements in science, technology and public health data in order to provide Pennsylvania elected officials, regulators and the general public with information, analysis and recommendations regarding the safe, efficient and environmentally responsible extraction and use of unconventional natural gas reserves in the Commonwealth,” Scarnati wrote in the memo.

Fracking’s biggest safety threat is on rural roads — One of the first things a firefighter or police officer must know when rushing to a heavy truck crash in the heart of Marcellus Shale country: Don’t believe what it says on side of the truck. “We’ve had accidents where it said ‘fresh water’ on the side of the truck,” said Craig Konkle, energy development emergency services coordinator for Lycoming County . “But when it started leaking black liquid, we knew we weren’t dealing with fresh water.” While environmental concerns dominate much of the debate about the impact of gas drilling in rural Pennsylvania , Konkle said the single greatest threat to public safety is on the roads. The fast expansion of drilling activity has created a surge in traffic. Trucks carry water — often polluted from the drilling process — to and from wells. They also haul sand, as well as solids extracted during drilling and chemicals used to force open gas reservoirs beneath the surface. Often truck cargo isn’t labeled. Much of the byproduct from drillers’ fracking process — including the briny, chemically-laced water — is classified as “residual waste.” Drilling waste has been exempt from federal hazardous waste rules since the 1980s, according to the U.S. Environmental Protection Agency. So there are rarely placards on the trucks.

Former pipeline safety chief: Better rules needed on gas gathering lines - Size matters. At least, it should when it comes to regulating more than 230,000 miles of pipelines that gather natural gas in drilling fields across the country, the former head of the federal Pipeline and Hazardous Materials Safety Administration said. Known as gathering lines, the lines largely transport natural gas to processing facilities. And, as a Tribune-Review investigation in late December revealed, they are almost entirely unregulated by federal or state governments. That wasn't a cause for much concern when the lines gathered natural gas from old, low-pressure wells. But in the era of hydraulic fracturing, when gas is extracted under enormous pressure, these unregulated pipes can be larger and operate at higher pressures than the interstate transmission lines that feed cities. “At some point, all lines become transmission lines,” said Brigham McCown, who was the first head of the federal pipeline agency when it was established in 2004. “I would consider looking at the feasibility of putting a maximum size and pressure on a gathering line,” rather than regulating them based on how many people live near them. Federal regulations for gathering lines don't take effect unless there are at least 10 homes along a mile of pipeline, regardless of the pipeline's size. “The way the rules are written, gathering lines — especially in rural areas — pretty much are not regulated,” McCown said. “They can pack a lot of punch.”

Propaganda by Proxy: The Payoffs - Opposition to fossil fuel drilling/fracking, construction of pipelines, midstream infrastructure and export facilities continue to grow. The industry, predictably, responds with the usual bag of tricks by throwing lots of lobbying and campaign contributions to legislators and candidates. In Pennsylvania along, according to MarcellusMoney.org:

  • Since 2007, the natural gas industry has spent $41 million lobbying Pennsylvania officials.
  • Since 2007, it has also contributed $8 million to Pennsylvania candidates and PACs.
  • Half that $8 million total has been donated by industry employees, while industry PACs contributed the remaining half.
  • Over $6.2 million of the total $8 million has been donated to candidates, while Party PACs received $1.4 million ($1.2 million to Republican Party PACs, $166,850 to Democratic Party PACs).
  • Pennsylvania Governor Tom Corbett is the top recipient of natural gas industry contributions. He has received $2,084,241 from the industry since 2007 – $1.55 million from industry employees and $526,652 from industry PACs. Governor-elect Tom Wolf received $53,500.
  • Top recipients #2-6 together received $1.3 million in contributions from 2007 – present.
  • The top 5 industry donors together gave $2 million since 2007. Drilling CEO Terrence Pegula, who also owns the Buffalo Bills and Sabres, is the top contributor with $667,000.

Enforcing the 'Will of the People,' Dozens of Pipeline Protesters Halt Operations in Pennsylvania -- Dozens of people in Pennsylvania's Lancaster County brought work towards a natural gas pipeline to a halt on Monday, charging that the project threatens a Native American cultural site and their rural way of life. The protesters, who include area residents and a local chapter of the American Indian Movement, gathered along the Conestoga River and encircled a rig which was drilling for core samples at the site of a proposed pipeline, according to a statement from the group. The drilling was for part of the Oklahoma-based Williams Partners' proposed $3 billion Atlantic Sunrise Project, a pipeline network that would pass through ten Pennsylvania counties, bringing gas from the Marcellus Shale to as far south as Georgia. It is slated to be in service in 2017. The project has met strong opposition from area communities, and Lancaster County resident Carlos Whitewolf of the American Indian Movement vowed in November: "We will stand in front of your bulldozers. We will show up in big numbers, and you will have a war on your hands." But the pipeline opponents were dealt a defeat last month, when a Community Bill of Rights Ordinance that would have blocked the pipeline from Conestoga Township failed. Monday's action, the protesters say, marks the first time they're using civil disobedience to disrupt Williams Partners' operations. But it might not be the last.

New York’s Ban on High-Volume Fracking Rocks the Foundations of ‘Shale Revolution’ - Emboldened by mounting scientific evidence and shifting poll data, Gov. Andrew Cuomo veered sharply away from America’s conventional wisdom about the wonders of high-volume hydraulic fracturing of shale formations when he banned the practice in New York State on Dec. 17. While the oil and gas titans hope to contain the uprising to one state, the environmental advocates who masterminded it are quietly optimistic that it represents a tipping point, signaling impending decline for fossil fuels’ decades-long hegemony. Polls already show Cuomo’s decision was a winner with the public. A recent Quinnipiac University poll found that New Yorkers favored the ban by a margin of 55 percent to 25 percent. Even the state’s Republicans, who have historically backed fracking, favored the ban 42-40. And while Americans once overwhelmingly embraced fracking, they seem to have flipped. A Pew Research poll in November found that 47 percent of Americans oppose fracking, while only 41 percent favor it. As recently as March 2013, Pew found Americans favored fracking by a 48-38 margin.  For now, the New York advocates say they’ll redouble their efforts to block pending fracking-related projects in the state while they try to coax the governor to take the logical next step: leading the nation towards renewable energy.

Demonstrators criticize Cuomo at pro-gas rally: "I've been back [from the Navy] 18 years, and all I've gotten is one headache right after another from the government in the state," said Stoddard, a member of Teamsters Local 317. "The taxes keep going up and the jobs keep going out." Stoddard was among more than 200 pro-drilling advocates who gathered Monday at the Holiday Inn Binghamton to protest the state's drilling ban. The rally, organized by the Joint Landowners Coalition of New York, drew speakers from labor unions, landowners and area politicians. They accused Gov. Andrew Cuomo's administration of ignoring the science and economic plight of upstate New York. Stoddard said he worked 14-hour days for three months on a directional drilling operation in Wysox, Pa., two years ago. On that job, he said, he saw businesses stay open 24 hours because of demand, and convenience stores staffed with eight or nine employees, even during off hours. The rally followed a Dec. 17 announcement by Cuomo administration officials that cited concerns over human health and questioned the economic benefits of the drilling technique used to release natural gas from underground shale formations. Rick Williams, of Deposit, said he was disappointed in New York's decision, as drilling would benefit families, like his, whose children have left for better opportunities elsewhere. His son works on pipelines in Pennsylvania, and he had hoped for a chance to work closer to home.

Crestwood: Protests haven't changed our plans - An ongoing civil disobedience campaign hasn’t deterred Crestwood Midstream’s plans to expand its natural gas storage facility on the west side of Seneca Lake - or build an LPG storage facility nearby, a company spokesman said Friday. Over the past month, 55 protesters have been arrested by Schuyler County sheriff’s deputies for blocking the gates of Houston-based Crestwood’s property along State Route 14 just north of Watkins Glen. A handful of the protesters have pleaded guilty, refused to pay their fines and were sent to Schuyler County Jail. Crestwood plans to expand its existing gas storage facility - located in salt caverns deep underground - from 1.5 billion cubic feet to 2 billion cubic feet, which is enough gas to heat an additional 20,000 homes for a winter, the company says. The gas comes in and out via pipelines and is bought by utilities such as NYSEG to supply regional customers. The Federal Energy Regulatory Commission has already approved the project. However, Crestwood hasn’t started construction yet, a Crestwood spokesman said Friday. Crestwood also plans to build a $40 million facility to store LPG - or propane and butane - using other salt caverns beneath the U.S. Salt plant, which the company owns. That project has been under review by the state Department of Environmental Conservation since 2009.

FERC Approves NY Methane Storage Project - Brushing aside warnings of dangerous geological risk, federal regulators say construction can start immediately on a methane gas storage project next to Seneca Lake that has galvanized opposition from wine and tourism businesses across the Finger Lakes in upstate New York. The Sept. 30 decision by the Federal Energy Regulatory Commission represents a major breakthrough for Houston-based Crestwood Midstream. The company has been waging a five-year campaign for permission to convert long-abandoned lakeside salt caverns into a regional storage hub for both methane gas and liquid petroleum gas, or LPG, from fracking operations in Pennsylvania. FERC has jurisdiction over the methane gas storage portion of the project, while the state Department of Environmental Conservation has the final say over the storage of LPG, mostly propane and butane. The company has been trying to persuade both agencies that the old caverns are ideal storage sites for highly-pressurized, volatile hydrocarbons. Scientists who are not paid by the company disagree and have warned of the caverns’ unstable geology. In May, after 14 months of review, FERC granted conditional approval of Crestwood’s request to expand its existing methane storage into a cavern that has a history of instability. Meanwhile, the DEC has been evaluating the LPG portion of the project since 2009. It announced in August plans to hold an “issues conference” to further weigh the evidence before ruling. Typically, methane gas is transported to the caverns by pipeline, while LPG storage would require truck and rail transport. If Crestwood wins DEC approval, it would store LPG in two other caverns less than a quarter mile away from the compressed methane. The company has asserted that the history of the storage caverns, including details of their flaws, is a trade secret. And state and federal regulators have complied with the company’s requests to keep most cavern information out of the public eye. But reports dating back decades by engineers employed by the caverns’ owners — tracked down in Internet searches — candidly spell out their defects.

Living the Lake - Jodi Dean - These days, I look from the blockade line at the gates of Crestwood Midstream on the south of Seneca Lake outside Watkins Glen, New York. Next to me, I see organized activists and committed people from all over the Finger Lakes. They are teaching me a lot about what matters in the current political struggles at the intersection of climate and capitalism and about what doesn't. Since We Are Seneca Lake began blockading the gates of Crestwood in October, there have been nearly 200 arrests.  At least half a dozen people have gone to jail. The arrested range in age from 19 to 90. They include students, retirees, former military, farmers, vintners, health care workers, scientists, musicians, teachers, moms, college professors and others. On the morning of my first arrest, right after we were processed at the local sheriff's office, a former elected county official (in her late seventies), said "okay, now let's get back on the line!" These people are dedicated, steadfast. Each time I hear the organizers describe the blockade in trainings for new recruits I am moved: "and then a large truck tries to pull into the gate and not a muscle twitches, not an eye blinks; nobody moves." The Defenders of Seneca Lake didn't emerge out of nowhere. I don't think any of them got their start in a dinner table conversation about the term "anthropocene" (although the ideas associated with the concept--as well as the debates over it, which morph into the "capitalocene" and the manthropocene--are interesting). Because their concern is focused on political organizing and not deflected into debates over gatekeeper terms like the "anthropocene," when these activists are around the dinner table, they try to figure out how many signatures they need to get in order to pressure their local townships to ban fracking and how long they should take to get them. The Seneca Lake Defenders came out of the convergence of different groups and efforts in the battle against the gas and oil industry. In New York state, this convergence ultimately resulted in a state-wide ban on fracking. The struggle is ongoing, now targetting the infrastructure of storage and pipelines that supports fracking elsewhere (like in Pennsylvania) and thereby enables the oil and gas industry to continue pouring greenhouse gases into the atmosphere.

Learning, liveliness, and expanding the world -  Jodi Dean - The anti-fracking movement in New York is remarkably organized and solitary. I've learned a lot as I've gotten involved in the effort to stop the storage of methane gas and liquid petroleum gas in salt caverns on Seneca Lake. Sometimes I feel like, as a political theorist, I don't have much to contribute. Since humility is not a known occupational hazard affecting political theorists, this doesn't bother me too much (just a little). Instead, it cultivates in me an appreciation for the knowledge, skills, and dedication of those around me. It is teaching me why planning and organization are so crucial in climate struggle (and of course why climate struggle is ultimately anti-capitalist): corporations rely on the fragmented and distributed regulatory environment to do their nefarious deeds. Engaged struggle brings to life the actuality of political multidimensionality as and through the generation of political power.  For example, that railroads and pipelines are private and that regulatory supervision has been dramatically cut over the last decades even as there has been a boom in oil and gas production in the US means that it is difficult to get accurate information about routes, track conditions, leakage, etc. That companies break themselves into different companies with different legal structures and then enter into various kinds of ventures and partnerships makes its hard to establish liability and responsibility.  Here's a list of some of the knowledge and skills important in the battle for Seneca Lake:

Town Court of Reading, NY: Leaving the People Out in the Cold » There's a wind chill advisory in the Finger Lakes today and tomorrow. Tonight the temperature is supposed to drop to four degrees. Arctic winds will make the wind chill around nineteen degrees below zero. 32 civil disobedients from We Are Seneca Lake will be arraigned this evening at the Town Court in Reading, NY. They were arrested for blockading the gates of Texas-based Crestwood-Midstream, a company that wants to store methane, propane, and butane in salt caverns next to the water supply of 100,000 people. These arraignments could take a while. If tonight is anything like December 17, a lot of us are going to be left out in the cold. On December 17, apparently under orders from the Sheriff, supporters and press were barred from the court room for the 5:00 hearing. After well-known activist Sandra Steingraber negotiated with police, the court was opened for the 7:00 hearing. Fire code was strictly enforced, so the total number of people in the court was limited to 49. Those allowed in were not allowed to bring in bags or cell-phones (even turned off). The rest of us were barred from the building, made to stand out in the cold rather than assemble in the large waiting area inside the building yet outside the courtoom.

Can Illinois Learn From New York’s Victory Against Fracking?  Illinois environmentalists are cheering the spectacular success of the movement to ban fracking in New York . The victory is justifiably spurring reflection on how it was done. What happened in New York that Illinois environmentalists can learn from?

  • Environmental and public health groups made an unambiguous, united push for a ban or moratorium, not regulation.
  • They kept constant, aggressive grassroots pressure on Governor Cuomo and other politicians, especially during election season.
  • State government conducted a thorough study on potential public health impacts before fracking began.
  • They took the fight to small towns and potentially impacted rural areas, not just New York City .
  • As Mark Ruffalo wrote, “The fact that we didn’t let the big greens come in and make back room deals was also important to note.”
  • They engaged in acts of nonviolent civil disobedience, including over 90 arrests near Seneca Lake since October.

Essentially, New York fractivists took the opposite approach of most big green groups active in the Illinois statehouse. Illinois greens started with a basic chemical disclosure bill several years ago rather than organizing the passionate grassroots desire for a ban. Although there were efforts to ask legislators to pass a moratorium, statehouse green groups remained focused on various regulatory bills. Some of them eventually won a seat at the negotiating table with industry lobbyists to write a regulatory law by ignoring the loud and frequent objection of environmentalists in impacted areas who said regulation cannot make fracking safe.

New York Frack Babies Want To ClusterFrack Themselves with Napalm  To try to get around the DEC regulations that defines a high volume horizontal frack as more than 300,000 gallons. They tried that before, when the Tioga Landowners made a deal with a company called Gasfrac, that uses gelled propane, ie. napalm, to frack wells. It is known in the trade as a Napalm Clusterfrack.  Other than the fact that such propane fracks are uneconomical and deadly – they have to be done robotically – I don’t think the DEC will buy it. Plus, by flagging this loophole, the disJointed Landowner’s have now given the DEC notice to close it. Thanks for the head’s up Frack Babies. Here’s the new plan from Shale Shyster Scott Krakoski:

5 Great Reasons to Support the Port Ambrose LNG Terminal

  • 1. It will raise the price of natural gas in your area –  The New York/ New Jersey area has some of the lowest gas prices in the country. Port Ambrose will correct that – foreigners will pay plenty to take the gas.  Make a sign for the hearing “Make My Gas Prices Higher Now Damnit” Write the governor: “Our gas prices are too damn low, greenlight Port Ambrose!”  Chant “We want higher gas price Now!”
  • 2. It will help get rid of America’s 20 year reserve of natural gas – Where better to ship our nation’s gas reserves than to Brazil ? What makes better sense than that ? You like their music and their beaches, let’s repay them by shipping them our gas supplies. It’s the American way!
  • Make a sign for the hearing: “Ship Our Supply of Gas Overseas Fast !” And chant “Ship it Baby Ship it”
  • 3. It will replace the new World Trade Center as the World’s Number One Terrorist Target – The movie Syriana explains how that’s done: strap an RPG to the front of a speed boat and aim that at a fully loaded LNG tanker. Kaboom. Paradise here I come ! I want my 72 virgins !
  • 4. It will make winters warmer –  No more shoveling snow ! It will be the most potent producer of greenhouse gases on the East Coast. Every aspect of LNG, from the fracked well to the final delivery – vents methane into the atmosphere. And what better way to cook the 3rd rock from the Sun than with odorless natural gas ?  Make a sign and a chant “Heat Baby Heat !” Turn New York into New Venice !
  • 5. It will provide good jobs for gas lobbyists, frackers, offshore billionaires, Wall Street, firemen, burn control centers, crooked politicians, salvage divers, funeral directors, tax haven bankers. Anybody but you.

Kinder Morgan gas pipeline draws fire, despite new Berkshire route - New signs of opposition have begun to pop up — in the Berkshires and beyond — to energy giant Kinder Morgan Energy Partners' revised natural gas pipeline route. A group called the Citizens of Lanesborough has scheduled a community meeting about the project for next week. And opposition is building just across the border in New York, where an activist group has expanded to include Rensselaer County communities along the new route. The Tennessee Gas Pipeline Co. project would transport gas collected through hydrofracturing, or fracking, in Pennsylvania through New York and Massachusetts, ending in Dracut. Kinder Morgan, parent company of Tennessee Gas, announced last month that it has shifted the proposed Northeast Energy Direct project northward to a new route along Western Massachusetts Electric Co.'s existing power line corridor, which enters Berkshire County in Hancock from Stephentown, N.Y. The route continues through portions of Lanesborough, Cheshire, Dalton, Hinsdale, Windsor and Peru, exiting the Berkshires into Plainfield in Hampshire County. Company representatives said the new route affects fewer property owners than the previous plan. It also avoids more wetlands and other environmentally sensitive areas protected by state law.

Proposed Gas Pipelines Would Emit More Greenhouse Gases Than Keystone XL - A large natural gas pipeline can have to equivalent greenhouse gas impact as Keystone XL. A large natural gas pipeline can enable the same GHG emissions (CO2 equivalent) as Keystone XL. Here’s how:  A large gas pipeline can require 300 new fracking wells annually just to fill it. If all 57 proposed Marcellus/Utica region pipelines and expansions are approved by FERC and built, they will:

  • Enable additional emissions equivalent to 15 Keystone pipelines
  • Require an additional 4,420 new fracking wells each year, and
  • Deplete proved Marcellus/Utica natural gas reserves in just 7 years

Details: (math for those conclusions follows)

Frackastrophe: Shale Gas Bust ! -- The Frackers themselves are getting royally fracked. Normally, gas prices spike in the winter. This winter they are getting hammered. I have been in the energy business long enough to remember when oil was less than $50 barrel and routinely dipped to $10 or $20. We would buy rigs when the price plunged and sell them when it peaked. Repeat.  Shale oil and gas is no different. The Bakken Shale Oil boom is already toast, oil futures closed below $50 barrel, which makes even the Eagle Ford wells uneconomic. So all the rig jobs and tax revenues associated with that lasted about how long ? In most places about 8 years. Then busted. Ghost town. This cycle has been repeated in Texas and elsewhere for over a hundred years. This was all predictable – and it was emphatically predicted. Friday in NE PA, the Leidy Hub was selling gas at $0.80 Mcf and Tennessee Zone Four was selling at $0.53 Mcf. None of the NE Marcellus wells are economic at that level, not even in the same county as economic. Not by a Texas mile. Sic Semper Gasholes.

Fracking’s Future in Doubt as Oil Price Plummets » There’s no doubt that U.S.-based fracking—the process through which oil and gas deposits are blasted from shale deposits deep underground—has caused a revolution in worldwide energy supplies. Yet now the alarm bells are ringing about the financial health of the fracking industry, with talk of a mighty monetary bubble bursting—leading to turmoil on the international markets similar to that in 2008. In many ways, it’s a straightforward case of supply and demand. Due to the U.S. fracking boom, world oil supply has increased. But with global economic growth now slowing—the drop in growth in China is particularly significant—there’s a lack of demand and a glut in supplies, leading to a fall in price of nearly 50 percent over the last six months. Fracking has become a victim of its own success. The industry in the U.S. has grown very fast. In 2008, U.S. oil production was running at five million barrels a day. Thanks to fracking, that figure has nearly doubled, with talk of U.S. energy self-sufficiency and the country becoming the world’s biggest oil producer—“the new Saudi Arabia”—in the near future. Fuelled by talk of the financial rewards to be gained from fracking, investors have piled into the business. The U.S. fracking industry now accounts for about 20 percent of the world’s total crude oil investment.

Fracking Revolution All Smoke & Mirrors  - “We have a supply of natural gas that can last America nearly 100 years,” said President Obama in his 2012 State of the Union address [1]. “Experts believe this will support more than 600 000 jobs by the end of the decade.” Obama was talking about shale gas – natural gas trapped in shale formations – obtained by ‘hydraulic fracturing’, or ‘fracking’ [2] (see Box), a process used to produce oil and methane gas from coal beds for decades, but relatively new to the shale gas production that inaugurated the recent ‘fracking boom’. Chief economist of the US Energy Information Administration (IEA) said in his 2013 annual outlook [3]: “By around 2020, the US is projected to become the largest global oil producer. The result is a continued fall in US oil import to the extent that North America becomes a net oil exporter around 2030.” Over the next two decades, hundreds of billions will be invested into new power plants run on natural gas, and billions more on constructing export facilities for shipping US liquefied natural gas to Europe, Asia, and South America [4]. The EIA forecasts are based on coarse-grained studies of major shale formations. When researchers began analyzing those formations in greater detail (at a resolution 20 times finer), they came up with much more conservative forecasts, which led to a news feature in a December 2014 issue of the Journal Nature entitled, “The fracking fallacy” [4]. The reason is that the major shale formations have relatively few ‘sweet spots’ where gas extraction will be profitable. The EIA’s model so far assumes that future wells will be at least as productive as past wells in the same country, thereby leading to forecasts that are far too optimistic.The results are “bad news”, says Tad Patzek, head of University of Texas at Austin’s department of petroleum and geosystems engineering, and a member of the research team conducting the detailed analyses, “we’re setting ourselves up for a major fiasco”.

Lawsuit challenges panel that made NC fracking rules - A lawsuit filed Monday by conservationists asks that rules on fracking in North Carolina be thrown out, arguing the panel that developed them was formed in violation of the state Constitution. Lawyers representing the Haw River Assembly argue the state Legislature violated provisions separating the branches of government when it formed the Mining and Energy Commission in 2012, according to the lawsuit in Wake County Superior Court. The lawsuit says the Legislature usurped the authority of the executive branch by forming the commission as an administrative agency and then appointing eight of its 13 members. The governor appoints the rest. The lawsuit asks the court to declare as unconstitutional the portion of the law forming the Mining and Energy Commission. It also asks the court to nullify the commission's actions, including fracking rules expected to be delivered this month to lawmakers who will have the final say on them. The measures cover issues including permitting, chemical disclosure, well shafts, water testing and buffer zones. The lawsuit contends the Republican-controlled General Assembly pushed the commission members it appointed to promote fracking and "get the rules passed as quickly as possible." It says the rules are inadequate to protect the state.

Nonprofit files suit against fracking rule-making panel -- The Southern Environmental Law Center, a Chapel Hill-based nonprofit, filed a lawsuit this week against the N.C. Mining and Energy Commission claiming that the commission contains many legislative appointees and is therefore unconstitutional. “It violates the separation of powers doctrine in North Carolina that holds that the legislative, executive and judicial branches all have to be separate and equal,” Mary Maclean Asbill, senior attorney for SELC, said of the lawsuit filed Monday. “We’ve seen trends over the past few years of boards and commissions being formed and reconstituted where the legislature gives itself more appointments than the executive branch.” The N.C. General Assembly appoints eight members to the MEC, and Gov. Pat McCrory appoints five. Among the MEC members listed as defendants in the lawsuit are Ray Covington, a partner at Sanford-based N.C. Oil and Gas LLC., Sanford City Councilman Charles Taylor and former Lee County Commissioner Jim Womack, all legislative appointments. “I don’t think it’ll go anywhere,” Womack said of the lawsuit. “We get challenges and lawsuits. That’s to be expected. It’s not unusual. As people are trying to stop oil and gas development in North Carolina, we expect those kind of things to happen.”

DOT: More than 1,600 trucks could be required for one NC fracking site - More than 1,600 trucks could haul sand, water and equipment for a single fracking operation in North Carolina, chewing up country roads and causing millions of dollars in damage to roads and bridges, according to the state Department of Transportation. The department is projecting nearly $11 million in maintenance and repairs in one example cited to the state legislature in an agency study of traffic impacts resulting from shale gas drilling. The DOT study, dated Dec. 31, requests changes in state law to make it easier to require private industry to repair public roads damaged during fracking operations. “The volume of traffic can and does cause significant damage to secondary roads over a relatively short period of time,” the report says. “The majority of this traffic occurs over a period of six weeks.” Fracking remains under moratorium in North Carolina, but the first drilling permits could be issued as early as April. Each drill site will require 1,290 to 1,650 trucks, DOT estimates, based on the experience with fracking in Bradford County, Pa.

New interest in state’s oil and gas -- Hydraulic fracturing, or “fracking” is an oil-drilling technique where sand, water and chemicals are injected deep into the ground under pressure in order to fracture the oil-bearing shale rock, allowing the oil and gas to be extracted. This technique causes earthquakes and is prone to leaking methane gases into the atmosphere. It also leaves toxic chemicals in the earth and in the aquifer. Fracking is normally done in shale rock, but in Florida, most of the oil and gas is found in loosely mineralized soils, requiring the need for “acid fracking,” or “acidizing,” employing the use of acids such as hydrofluoric acid or hydrochloric acids to dissolve limestone, dolomite and calcite cement. A recent study at Duke University found that 92 percent of water and drilling fluids remained deep underground. Are these substances that we want to inject into our groundwater or allow to be anywhere near our aquifer? There is no such thing as safe fracking. Some chemicals used in fracking are nontoxic, but a new study says that out of 81 common compounds, there’s very little known about the potential health risks of about one-third of them. But some indeed, are well known carcinogens: benzene, toluene, xylene, methanol, lead, hydrogen fluoride, naphthalene, sulfuric acid, formaldehyde, crystalline silica. Florida Department of Environmental Protection Chief of Mining Calvin Alvarez says that fracking is not a “factor” in south Florida, and Ed Garrett, DEP section administrator, says that we don’t frack in Florida. And Ed Pollister, owner of Century Oil, says that fracking is inevitable, and that if he doesn’t do it, somebody else will. But fracking has occurred in Florida and it is allowed by the FDEP. And the interest in this is recent: In the past five years there have been 37 drilling applications granted, and of these, 16 have been in the past year. This recent surge of new interest in Florida is due mostly to the new extraction technology which makes it possible and profitable to exploit previously inaccessible pools of oil and gas.

Fracking Ban Bill Introduced in Florida -- There may not be any actual fracking going on in Florida yet. But some legislators there are taking no chances, introducing bills to ban the process in the state, just as New York did in mid-December. Yesterday state representative Evan Jenne introduced HB 169 which “prohibits well stimulation treatments for exploration or production of oil or natural gas.” His bill enumerated the problems caused by fracking: use of carcinogenic chemicals, heavy use of fresh water when many communities are facing water scarcity, threats to protected wildlife species, the potential to damage the surrounding environment and the emission of climate change-driving greenhouse gases.  It follows on the heels of similar legislation, SB 166, filed by state Senators Darren Soto and Dwight Bullard last month. All the bills have been introduced for consideration in the upcoming legislative session.“Florida is home to scenic beaches, wonderful springs and the legendary Everglades,” said Soto. “This natural beauty in turn fosters a strong tourism industry, annually attracting many new residents to our shores. It must be preserved. We Floridians also get the vast majority of our water supply from ground water through the Floridan Aquifer. This critical water source must be protected from pollution to assure ample, clean water for future generations.”

Fracking Industry Still “Failing” on Transparency: — The oil and gas sector made little progress over the past year in publicizing more details about how companies are dealing with environmental, social and market risks in the fast-expanding hydraulic fracturing industry, according to new rankings. While a few companies made major gains, according to 35 disclosure metrics defined by a coalition of investor and environmental groups, the industry as a whole saw little change from the previous year. Of 30 major producers, no company scored more than 18 out of 35, prompting the researchers to again give the industry as a whole a “failing” mark on transparency. Some of the sector’s largest companies did the worst, including Chevron Corp. and Exxon Mobil Corp., according to a report on the findings released in mid-December. “Across the industry, companies are failing to provide investors and other key stakeholders with quantitative, play-by-play disclosure of operational impacts and best management practices,” the report states. “Existing company disclosures remain mostly qualitative and narrative, or focus anecdotally on just one or a few of their multiple [operations], making systematic comparisons across companies difficult.” The “benchmarking” report was jointly produced by two leading sustainable asset-management groups, Green Century Capital Management and Boston Common Asset Management, as well as two public interest groups, As You Sow and the Investor Environmental Health Network. The study is the second of its kind, with the first coming out last year.

Film documents environmental impacts of fracking | CCTV America: A new documentary on hydraulic fracturing examines the impact of the process executed by multi-national gas companies. South Africa has been exploring the option of fracking to meet its growing energy needs, but there been a public outcry over the environmental damage that it inflicts. Sumitra Nydoo reported this story from Johannesburg. Video Player by Kaltura ‘The High Cost of Cheap Gas’ is a documentary that highlights the environmental impact on areas where fracking has been done. While fracking comes with the promise of jobs and economic growth, communities are not always told about the negative effects it will have on the environment. “The dangers of fracking are much more profound than the dangers of creating say a very large coal mine because these projects stretch out over such a huge area and they have impacts on every aspect of the ecosystem,” Jeffery Barbee, producer of ‘The High Cost of Cheap Gas’ said. The movie has documented areas in New Mexico and Colorado where the fracking process has continued for 25 years. The film focuses on the premise that these areas have turned into environmental wastelands with water and air pollution affecting the health of people and animals that inhabit the region.

Oil industry has heavyweight response to local fracking bans - LONGMONT, Colo. — This northern Colorado city vaulted onto the front lines of the battle over oil and gas drilling two years ago, when residents voted to ban hydraulic fracturing from their grassy open spaces and a snow-fed reservoir where anglers catch smallmouth bass. But these days, Longmont has become a cautionary tale of what can happen when cities decide to confront the oil and gas industry. In an aggressive response to a wave of citizen-led drilling bans, state officials, energy companies and industry groups are taking Longmont and other municipalities to court, forcing local governments into what critics say are expensive, long-shot efforts to defend the measures.  While the details vary — some municipalities have voted for outright bans, and others for multiyear suspensions of fracking — energy companies in city after city argue that they have a right to extract underground minerals and that the drilling bans amount to voter-approved theft. They also say state agencies, not individual communities, are the ones with the power to set oil and gas rules. Because the cases are being fought one by one at the state level, they are not expected to set any immediate nationwide standard on whether homeowners and local leaders have the power to keep drilling rigs out of their towns. But they are being watched as legal litmus tests as more governments plunge into the acrimonious debate over fracking, the process of pumping huge amounts of water, sand and chemicals underground to release oil and gas buried in shale rock.

The impossible dream - The United States’ journey to becoming a global giant in the oil industry has not come without controversy, that is certain. Issues have arisen to some of those who have no association with the oil industry, but are bearing the brunt of some of its nasty side effects. On the other side of the coin, small towns—some of which we would have never heard of if it wasn’t for oil—are now the epicenter and the driving force of their respective state’s economy. Williston, North Dakota; Denton, Texas; Aurora, Colorado; St. Tammany Parish, Louisiana, just to name a few. While oil is a commonality between these cities, there is one other piece they have in common as well–fracking. Recently, the New York Times published an article talking about the city of Longmont, Colorado and the city’s struggle to fight off big oil companies. Two years ago, Longmont residents voted to ban fracking, and in July 2014, a Boulder District County Judge struck down the ban. The ban, however, would remain in effect as the city filed an appeal against the ruling. A month later, Colorado Gov. John Hickenlooper called on the Colorado Oil and Gas Conservation Commission to drop the lawsuit against Longmont. The mayor of Longmont, Brian Bagley said the dismissal of the lawsuit would “save us a lot of time, money and headaches,” and also said “that’s a distraction that’s now over and we’re thankful for that.” As a result of Hickenlooper’s decision to pull back the lawsuit, the Governor called for an 18-member task force–to be appointed by him–that would study the state’s current regulations and laws and discuss possible changes in regards to drilling. Also, four ballot initiatives, two considered pro-industry and two being put forth by Coloradans for Safe and Clean Energy, a group receiving financial backing from Polis, would be dropped from the 2014 ballot.Shortly thereafter, the Colorado Oil and Gas Conservation Commission (COGCC) unanimously agreed to drop its lawsuit against the city of Longmont but kept open the possibility that legal action against the city over its oil and gas regulations could be revived.

California Releases Fracking Regulations Six Months Before Studies Are Complete - Governor Jerry Brown continued to live up to his reputation as “Big Oil Brown” with his administration’s release of the finalized text of the state’s regulations for fracking and well stimulation on Tuesday, December 30.  Although Senate Bill 4, passed in September 2013, requires California’s Division of Oil, Gas and Geothermal Resources (DOGGR) to complete an environmental impact report and approve an independent scientific study, “neither one of those documents were ready in time to inform the final rules,” according to a news release from CAFrack Facts.“ California has essentially reversed the regulatory process when it comes to fracking,” said Jackie Pomeroy, spokesperson for CAFrackFacts. “State regulators have finalized California ‘s fracking rules a full six months before any of the mandated scientific studies have been completed. Given the long-term and potentially irreversible impacts of fracking and well stimulation, it is critical that we make policy decisions based on science—unfortunately, the current timeline makes this impossible.”  Pomeroy noted that in contrast to California , New York recently decided to continue its moratorium on fracking after concluding that the practice poses unknown risks to human health and safety.

Environmental groups, oil companies at odds over water safety -- Oil companies across Kern County are being forced to comply with the new restrictions on aquifer exemption request laid out in the SB4 document. "You can bring up 20 gallons of water with that one barrel of oil, so what are you supposed to do with that water? We want to re-inject it,” said Les Clark, from the Independent Oil Producers’ Agency. This is where advocacy groups, such as Clean Water Action, are putting their feet down. Environmental groups say that toxic liquid that comes up during oil production makes its way into the aquifers, because they believe oil companies are improperly disposing of them. "They need to have adequate plans for the disposal of fluids, and they need to be following what the regulation asks them to do,” said Rosanna Esparza, with the Clean Water Action group. Clark said that there is no contamination of these underground wells since there has been no proof. “We have been hydraulic fracturing for 40 to 50 years, and, as of yet, here in this area, no one's seen any evidence that we are contaminating anything,” said Clark. Esparaza said there has been documentation of the illegal dumping that the oil industries are ignoring. “Billions of gallons of oil-industry water have been illegally dumped into Central California aquifers, and it affects the farming and irrigation. It effects the water that people drink. It effects our aquifers, and we do know that nine injection disposal wells used by the oil industry can dispose and contaminate the water fracking fluids are a part of that,”

Idaho's Destructive Earthquake Saturday Has Some Looking at Fracking -- It’s another case of something happening where you would least expect: earthquakes in Idaho. But a major earthquake on Saturday suggests that they are getting worse and, once again, fracking is a prime suspect. © U.S. Department of the InteriorOklahoma's Massive Earthquake Increase Due to FrackingThe latest tremor measured a significant 4.9 on the Richter scale and happened on Saturday around the small town of Challis in the state’s central mountain region. It shook long and hard enough to be felt as far away as the state capital in Boise, about two hours away. The quake caused rock slides, some damage to homes (mostly cracks in the walls), and temporarily knocked out power to the region. There were no reports of injuries. The U.S. Geological Survey says Saturday’s quake was the latest in a string of tremors to hit the state, the previous one right before the new year on December 29 that measured 2.9 on the Richter scale. And it’s not just a handful: Idaho has been hit by hundreds of tremors in just the last ten months. Game Over for Fracking in New YorkThe tremors have been going on since March of last year, and scientists are trying to figure out if they are caused by a formerly dormant fault or a new fault they didn’t know about. Idaho is right in the middle of a seismic belt of thousands of faults that runs from Montana to southern Nevada. Scientists are also looking at the possibility that fracking may be causing the quakes.

EARTHQUAKES: Shaken more than 560 times, Okla. is top state for quakes in 2014 -- Monday, January 5, 2015 -- www.eenews.net: Oklahoma had a fivefold surge in earthquakes last year, making it by far the most seismically active state in the Lower 48. The Sooner State was shaken by 564 quakes of magnitude 3 and larger, compared with only 100 in 2013, according to an EnergyWire analysis of federal earthquake data. California, which is twice the size of Oklahoma, had fewer than half as many quakes. Researchers and many people in the state believe the quakes are linked to oil and gas activity, namely deep-underground disposal of drilling waste fluid. "Who'd have ever thought we'd start having so many earthquakes out here in the middle of the country?" asked Max Hess, a county commissioner in Grant County, which had 135 quakes last year. He also thinks the quakes are related to oil and gas, which has been an economic boon for the rural county northwest of Oklahoma City. "It's been good," Hess said of the drilling, "but it's got its drawbacks." But many in Oklahoma, where 1 out of every 6 jobs is linked to oil and gas, have been slow to embrace a connection, even as the pace of earthquakes has picked up and complaints have grown louder. "I think a lot of it has to do with the drought," said fellow Grant County Commissioner Cindy Bobbitt,

Texas City Hit With 11 Earthquakes In 24 Hours - In the 24 hours spanning Tuesday to Wednesday morning, the city of Irving, Texas, was hit with eleven earthquakes — and some are trying to figure out if nearby fracking operations are to blame.  The U.S. Geological Survey has confirmed 11 quakes ranging in magnitudes of 1.7 to 3.6, all occurring around the Irving and Dallas area, according to the Dallas Morning News. Many of the earthquakes could be felt by residents nearby, prompting Irving’s 911 operations to receive more than 300 calls inquiring what was happening, Dallas’ CBS affiliate reported.  The series of quakes comes just a few days after scientists from the University of Miami published research suggesting that the controversial process of fracking caused a similar series of 77 earthquakes in the Poland Township of Ohio. That research directly attributed the earthquakes to fracking — a process where companies inject high-pressure water, sand, and chemicals underground to crack shale rock and let gas flow out more easily. But some in Texas believe their increasing earthquakes are not caused by fracking itself, but by wastewater injection: a.k.a, taking the leftover water used to frack a well and disposing of it by injecting it back underground.

Series Of North Texas Earthquakes Trigger Speculation Over Role Of Fracking -- While the first earthquake was felt at 7.30 a.m. on Tuesday, the most recent one was felt at around 1 a.m. on Wednesday morning, according to media reports. The earthquakes were clustered around the Dallas suburb of Irving, which has reportedly experienced over 20 minor earthquakes since September last year. Jana Pursley, a geophysicist at the U.S. Geological Service (USGS), said that the latest quakes were “the largest since the earthquakes started happening there in the last year,” according to media reports. According to Reuters, several residents of the region have speculated that the increase in the frequency of earthquakes may be related to hydraulic fracturing, or fracking, activity, which involves exploding shale rocks to create fissures for the extraction of trapped natural gas.Irving is the headquarters of Exxon Mobil, which has helped pioneer hydraulic fracturing in the region. The city also has two gas wells that were fracked in 2010, according to media reports. “There is evidence that some central and eastern North America earthquakes have been triggered or caused by human activities that have altered the stress conditions in earth's crust sufficiently to induce faulting,” USGS said, in a statement. “Activities that have induced felt earthquakes in some geologic environments have included impoundment of water behind dams, injection of fluid into the earth's crust, extraction of fluid or gas, and removal of rock in mining or quarrying operations.”

26 Earthquakes Later, Fracking’s Smoking Gun Is in Texas - After 11 quakes in the last two days – with one registering at a 3.6 – Irving, Texas’ sudden onset tremor problem might be the fracking industry’s nightmare. There’s a monster lurking under Texas, beneath the sand and oil and cowboy bones, and it’s getting a little restless after a 15 million year nap. Shaking things up in the city of Irving, just slightly west of Dallas, where no less than ten earthquakes yesterday and today bring the total tremors to 26 since October in that town alone. Over 100 quakes have been registered in the North Texas region since 2008, a staggering uptick from just a single one prior that year. The Balcones Fault Zone divides the Lone Star State in half, loosely following the route of Interstate 35 and passing under Fort Worth, Waco, Austin, and San Antonio. And it’s not just a huge amount of human populations that sit on top of it. There are also thousands of fracking wells boring down in to the earth’s crust, pumping millions of gallons of water down with the direct intent of breaking apart what lay beneath. Irving itself has more than 2,000 of these sites nearby, and some of the more than 216,000 state wide “injection wells” responsible for disposing of fracking’s wastewater byproduct are in close proximity. Located thousands of feet below the ground, these wells hold millions of gallons of chemically tainted h2o, and science has proven that the pressure and liquid combination can combine to “lubricate” fault lines. And that may well be what is happening in the Barnett Shale region around, yes, Dallas and Irving.

Time-lapse of drilling & fracking a well -- MarathonOilCorp

Energy Crews Using Miles Of Temporary Water Hose For Fracking In Burleson County: Residents in Burleson County recently spotted something strange. Miles of temporary hose have been laid along F-M 1361 near Somerville, and across some private property lines. News 3 looks at how it's part of an oil and gas fracking operation. Miles of hose are being rolled out on F-M 1361 between Snook and Somerville in Burleson County. The reason? Crews with Fluid Delivery Solutions are making preparations for fracking a new oil well miles away. The process to drill for oil and gas uses millions of gallons of water. The water is being purchased from a ranch that has a pond. "Basically what we're doing is we're taking a body of water from one source to another. We send it down hill at a high rate of speed," said Dennis Hargrave with Fluid Delivery Solutions. He is one of about 19 workers laying out the hose which crosses underneath the highway and over more than 50 driveways, some needing temporary road crossings. These hoses go a full five miles that way and can push 110 barrels of water each minute per mile.

Waste injection site picking up momentum in the Bakken - October marked the opening of Citadel Energy’s first of nine saltwater disposal facilities planned for North Dakota, and disposal services have been climbing steadily, according to the Forum News Service. Citadel, a freshwater provider and oilfield waste management company operating in the Bakken, has begun handling the disposal of produced and flowback water at its site dubbed the Pembroke SWD No. 1. The location sits on a 10-acre plot off U.S. Highway 85 in McKenzie County and is allowed to inject up to 15,000 barrels of fluid per day. Kathleen J. Bryan for the Forum News Service reports that last month Citadel Energy Managing Partner Stanton Dodson said the facility has “slowly been ramping up” by injecting a few thousand barrels per day. Hydraulic fracturing requires millions of gallons of water mixed with chemicals to be pumped underground at high pressure to create fissures in the shale, releasing the trapped hydrocarbons. After the injected water mixture flows back up to the surface, it needs to be disposed of. Additionally, the fracturing process produces saltwater (or brine) as a byproduct, which must also be disposed of throughout the life of a well. These waste products are most commonly disposed of by injecting them back thousands of feet below the earth’s surface. The Penbroke well was drilled below any water tables at a depth of 6,200 feet, according to the company. The well has been strategically placed near hundreds of oil wells already in production, and Citadel anticipates the well to be fully operational by early 2015.

Enbridge oil facility in North Dakota catches fire, damage unclear – An Enbridge Inc crude oil storage and pipeline facility just south of Williston, N.D., has caught fire, eyewitnesses said. The facility serves as a key gathering and distribution hub for crude oil produced in North Dakota, the second-largest crude oil producer in the United States. It was not immediately clear if the blaze had been contained. It was also not clear if the fire was affecting crude oil storage tanks or other parts of the complex. An Enbridge spokeswoman was not available to comment. A representative from the Williston Fire Department said no information was available to distribute.

North Dakota's Landscape Energized [Photos] - Scientific American: At first this was not a boom – it took more than five years to develop just 10 wells in North Dakota's Bakken shale formation. There were only 1,000 by 2009. But the current boom, thanks to hydraulic fracturing, more than lives up to its name: The Bakken now has more than 6,600 wells, and the state is adding up to 200 each month. The Bakken's development has transformed the domestic energy debate. The field, the largest oil formation in the United States, produced over 908,000 barrels a day in November – more than double the rate just two years ago. Together with natural gas fracking in the East, the United States is closer to energy independence than any time in the past 40 years. Congress is considering lifting a ban on oil exports in place since the OPEC oil embargo of the 1970s. But with the rush came runaway population growth, severe housing and school shortages, crime and other disruptions in what had been mostly empty agricultural country. The social, labor and financial challenges for western North Dakota have been substantial. Also a challenge: Getting the product to refiners. The main route out of the Bakken is via rail tank cars, but concerns about the safety of rail transport abound, ignited by July's fatal tank car disaster in Lac-Megantic, Quebec, that killed 47 and by a December crash in North Dakota that forced almost 2,400 people from their homes. With the Bakken's growth have come increased protests over fossil fuel rail traffic across the West. I traveled through the Bakken in late fall last year with environmental scientist Joan Rothlein, for our ongoing series about energy and climate change in the West. We photographed and documented some of the scenes and issues in this fast changing region.

Oil patch hotels combating prostitution -- In an effort to combat the influx of human trafficking and prostitution in North Dakota’s oil patch, some hotel managers are taking the matter into their own hands by refusing service and making “Do Not Rent” lists. Garnet Finchum and her husband Dwight, managers of the Travel Inn located in Dickinson, say that both prostitutes and solicitors are frequent visitors, according to a report by the Forum News Service (FNS). As a result, Finchum as well as other managers in Western North Dakota are reluctant to rent rooms to a single woman. However, that rule may be ignored if the managers know the woman or her employer, or if the woman doesn’t fit the profile of a prostitute. One of the signs that may indicate a woman might be involved in prostitution is wanting to pay in cash. Other times, a hotel employee might browse sites like Backpage.com to try to match a face to the prospective renter. The Travel Inn currently has list of about 60 people that are banned, a quarter of which have been tied to prostitution activity. On a similar list at The Vegas Motel in Williston, about half of the roughly 400 names are women banned for prostitution activities. As reported by FNS, due to this increased criminal activity, The Vegas Motel now requires every person coming to a room register with the front desk.

Cheap oil is killing my job - Marcus Benson moved 1,500 miles from his home in Philadelphia to North Dakota for the shale boom.  He made the lengthy drive -- with no job and nowhere to live -- in April 2012 after hearing on the news that the state had the lowest unemployment rate in the country. "I felt like it was a good opportunity. I wasn't doing much," Benson, who had been working odd jobs after dropping out of college, told CNNMoney. He immediately landed good-paying work loading rail cars with sand used for fracking. "I went from doing odd jobs for $8 an hour to $25 an hour. I thought that was crazy," Benson said. It wasn't long before he was earning $30 an hour. Of course, back then oil brought in over $100 a barrel. This week oil plummeted below $50, squeezing high-cost oil producers like shale companies. The good times for Benson, 28, ended on New Year's Eve, when he lost his new job at Ames Water Solutions, which serves the fracking industry. "They said the main reason was the price of oil dropping," said Benson, who filed for unemployment this week. Now he's worried he won't find another job before getting kicked out of company-owned housing.

Oil Below $60 Tests Economics of U.S. Shale Boom -Oil’s biggest bust since the global recession was good for a few cases of whiplash.  Just two months ago, Continental Resources Inc. (CLR), the shale driller founded by billionaire Harold Hamm, budgeted for $80-a-barrel oil and planned to spend $4.6 billion in 2015. Six weeks later, with crude down 29 percent in the interim, Continental cut its 2015 budget to $2.7 billion. Halliburton Co. (HAL), the world’s biggest provider of fracking services to oil companies, announced Dec. 11 that it would dismiss 1,000 workers. Two months earlier, Chairman and Chief Executive Officer Dave Lesar said “our sector will be fine” if oil prices range between $80 and $100 a barrel.  The U.S. shale boom that’s brought the country closer to energy self-sufficiency than at any time since the 1980s will be challenged in 2015 as never before.  West Texas Intermediate reached a 2014 peak of $107.73 in June before dropping as low as $49.77 today on the New York Mercantile Exchange. The grade settled at $50.04 a barrel. That’s below the break-even price for 37 of 38 U.S. shale oilfields, according to Bloomberg New Energy Finance.  Some of the largest U.S. shale drillers, such as Irving, Texas-based Pioneer Natural Resources Co. (PXD), Continental and Chesapeake Energy Corp., both based in Oklahoma City, have been spending money faster than they make it, borrowing to pay for their expansion, according financial statements filed with the U.S. Securities and Exchange Commission.  Current oil prices are “not a sustainable long-term trend,” said Warren Henry, a spokesman for Continental. Halliburton is well positioned to handle any market environment, said Emily Mir, a company spokeswoman. Gordon Pennoyer, a spokesman for Chesapeake, declined to comment. Representatives from Pioneer didn’t return e-mails and phone calls seeking comment.

Fracking’s future is in doubt as oil price plummets - Fracking is an expensive business. Depending on site structure, companies need prices of between $60 and $100 per barrel of oil to break even. As prices drop to around $55 per barrel, investments in the sector look ever more vulnerable. Analysts say that while bigger fracking companies might be able to sustain losses in the short term, the outlook appears bleak for the thousands of smaller, less well-financed companies who rushed into the industry, tempted by big returns. The fracking industry’s troubles have been added to by the actions of the Organisation of Petroleum Exporting Countries (OPEC), which, despite the oversupply on the world market, has refused to lower production. The theory is that OPEC, led by powerful oil producers such as Saudi Arabia, is playing the long game – seeking to drive the fracking industry from boom to bust, stabilise prices well above their present level, and regain its place as the world’s pre-eminent source of oil. There are now fears that many fracking operations may default on an estimated $200 billion of borrowings, raised mainly through bonds issued on Wall Street and in the City of London. In turn, this could lead to a collapse in global financial markets similar to the 2008 crash.

Oilfield Writedowns Loom as Plummeting Prices Gut Drilling Values - Tumbling crude prices will trigger a flood of oilfield writedowns starting this month after industry returns slumped to a 16-year low, calling into question half a decade of exploration. With crude prices down more than 50 percent from their 2014 peak, fields as far-flung as Kazakhstan and Australia are no longer worth pumping, said a team of Citigroup Inc. (C) analysts led by Alastair Syme. Companies on the hook for risky, high-cost projects that don’t make sense in a $48-a-barrel market include international titans such as Royal Dutch Shell Plc (RDSA) and small wildcatters like Sanchez Energy Corp. (SN) The impending writedowns represent the latest blow to an industry rocked by a combination of faltering demand growth and booming supplies from North American shale fields. The downturn threatens to wipe out more than $1.6 trillion in earnings for producing companies and nations this year. Oil explorers already are canceling drilling plans and laying off crews to conserve cash needed to cover dividend checks to investors and pay back debts. All of the 43 U.S. oil and gas companies in the Standard & Poor’s energy index declined today as of 4:37 p.m. in New York, bringing the combined loss for the group to 23 percent since crude began its descent from last year’s intraday high of $107.73 a barrel on June 20. Oil dipped to $47.55 a barrel today in New York, the lowest since April 2009. The decline represents a $4.4 billion drop in daily revenue for oil producers, which equates to $1.6 trillion on an annualized basis, Citigroup researchers led by Edward Morse said in a Jan. 4 note to clients. The oil-market rout is exposing projects dating as far back as 2009 that were either poorly executed or bad ideas to begin with, Syme’s team said in a note to clients. Shell, Europe’s largest energy producer, may have as much as 5 percent of its capital tied up in money-losing projects. For U.K.-based BG Group, the figure could be as high as 8 percent, according to the Citi analysts.

Mounting Debt For Oil Drillers -- In recent years oil exploration companies have taken on more debt in order to finance their operations. The level of debt in the upstream sector – excluding integrated oil companies like ExxonMobil – hit $199 billion at the end of 2014, a 55 percent increase since 2010, according to the Wall Street Journal. Loading up on debt made sense when oil prices were high. Fracking new shale wells can be an expensive process, but when oil was averaging over $100 per barrel, the debt load for many firms didn’t seem so burdensome. Now with oil prices falling by more than half in the past six months, the most indebted firms are suddenly in crisis. As Warren Buffet once said, “you only find out who is swimming naked when the tide goes out.” With an ebbing oil tide, the huge financial problems with several oil firms are starting to become clear for all to see. The WSJ report finds that Quicksilver Resources has a net debt to EBITDA ratio of 12.6. This ratio measures debt to cash flows, with a resulting number that reflects the hypothetical number of years needed to pay back debt. Generally, anything above a 4 or 5 starts to raise red flags. In other words, it is looking pretty unlikely that Quicksilver will be able to emerge from its mountain of debt given the value of the oil and gas it is producing. Other notable companies in trouble include Antero Resources, with a debt/EBITDA ratio of 6.2.

Deep Debt Keeps Oil Firms Pumping - WSJ: American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion. Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June. But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment. Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” “There are too many ugly balance sheets.” The industry is also expecting a wave of asset sales and consolidations, though it may not gain momentum until the price of oil stabilizes and values become clearer. Bankers say companies are reluctant to get acquired with their stock prices under pressure, as they fear they could be selling low, and buyers don’t want to overpay if prices fall further. And mergers aren’t a panacea.  “To be a consolidator of a company that has a large cash-flow hole, you have to have the ability to fulfill that cash-flow need,” “You can’t expect two companies with big problems with their cash flows to come together and mitigate that problem.”

The First Shale Casualty: WBH Energy Files For Bankruptcy; Many More Coming "There are too many ugly balance sheets," warns one energy industry analyst, adding simply that "the group is not positioned for this downturn." While the mainstream media continues to chant the happy-clappy side of lower oil prices, spewing various 'statistics' about how the down-side of low oil prices is 'contained' and the huge colossal massive tax cut means 'everything is awesome' for America, the data - and now actions - do not bear this out. Macro data has done nothing but disappoint and now, we have the first casualty of the shale oil leverage debacle as WSJ reports, on Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money. There are many more to come... In December we illustrated the problem names (in the publicly traded markets) among the most-levered energy companies in America... (table)

How Bad Is It For Shale Companies: The Cost Of Resolute Energy's New Second-Lien Debt: 25%! - Over the weekend, we saw the first casualty of low oil prices as WBH Energy went into bankruptcy. Today, Bloomberg reports,Resolute Energy Corp. has been forced by low oil prices to borrow at distressed levels. The Denver-based company, which we previously highlighted as having a 4.5x Debt/EBITDA (there are a lot higher), managed to procure a new $150 million 2nd term loan from Highbridge Capital (mostly used to roll old debt). The cost of funding: 11% coupon plus 5% upfront all adding up for a . At that cost of funding, it is no wonder that Resolute's bonds remain, to borrow a Charlie Evans phrase, catastrophically priced. Current 5Y Resolute bond yields are hovering between 32% and 27%... As Bloomberg reports, Highbridge Capital Management funds committed to lend $142 million of the $150 million second-lien term loan.The same individual who signed the credit agreement on behalf of Highbridge also signed for the other two named lenders, indicating that Highbridge-managed funds may have underwritten the entire deal.  Highbridge is an alternative investment management firm owned by JP Morgan Asset Management.  Resolute Energy's $150 million second-lien term loan was priced to pay interest of Libor plus 10 percent, with a 1 percent Libor floor, ensuring that lenders would receive at least an 11 percent coupon in addition to a 5 percent upfront fee.

Energy Crash — 97% of Fracking Now Operating at a Loss at Current Oil Prices -- If the Saudis wanted to crush America's shale oil industry they are certainly doing a good job of it. West Texas Intermediate reached a 2014 peak of $107.73 in June before dropping as low as $49.77 today on the New York Mercantile Exchange. The grade settled at $50.04 a barrel. That’s below the break-even price for 37 of 38 U.S. shale oilfields, according to Bloomberg New Energy Finance.  Shale oil fracking and Canadian tar sand is some of the most expensive (and dirty) oil production on the planet, while conventional Persian Gulf oil is the cheapest to produce.Warren Henry, the spokesman for Continental, one of the frackers who have been spending money faster than they can make it, says that current oil prices are “not a sustainable long-term trend.”  However, Bob Tippee, Editor of Oil & Gas Journal, has a different take. "The Saudis have no incentive to lower supply to defend the price of crude oil, that is kind of a given right now, so the Saudis are not going to rescue the market," said Bob Tippee, Editor of Oil & Gas Journal.  It won't come from other major producers either. Both Russia and Iraq have boosted oil production to their highest levels in decades.   So it seems certain that low oil prices are here to stay. At least for now.  And that's bad for the oil patches of red states like Texas and North Dakota.    Some are projecting 100,000 layoffs in the energy sector. Texas is certain to take some lumps Texas pumps 37 percent of U.S. oil output, EIA data show. The oil and gas industry accounts for 11 percent of the state’s economy, according to Feroli. The effects may extend to housing and other businesses, he wrote. The majority of Texas energy production is still by conventional means. North Dakota, on the other hand, relies heavily on fracking, so they are looking at hard times.  Already oil rigs are being shut down at the fastest pace in six years.

New drilling affected by oil price fall - FT.com: Crude lost another 11 per cent this week amid continuing worries about a supply surplus as demand slows, with the Brent benchmark falling below $50 a barrel. ICE February Brent, the global benchmark, was trading at $50 a barrel at the end of the week while US crude fell 8 per cent to $48.37. Analysts said the fall in oil prices was filtering through to US shale ventures, with new drilling activity affected. Earlier this week, drilling company Helmerich & Payne told investors it would shut down 40 to 50 rigs over the next month amid softening crude prices. This followed the bankruptcy filing of a Texas-based drilling group last week. JBC, oil consultants in Vienna, said: “We would be of the opinion that several other companies will end up suffering the same fate.” The oil industry is now watching the reduction in output triggered by the fall in prices as the operations become unprofitable. Wood Mackenzie, the energy and mining consultancy, said a Brent price of $40 a barrel or below would see producers shutting-in production at a level where there was a significant reduction of global supply. US onshore ultra-low production volume wells, known as “stripper wells” could be first to be cut, said Robert Plummer, corporate research analyst for Wood Mackenzie.

U.S. Oil Producers Cut Rigs as Price Declines - — With oil prices plunging at an ever-quickening rate, producers are beginning to slash the number of drilling rigs around the country.The national rig count had remained surprisingly resilient over recent months even as oil prices dropped by more than 50 percent since June, and it still tops the count of a year ago as domestic production continues to surge.But an announcement on Wednesday by Helmerich & Payne, the giant contract rig company, that it planned to idle up to 50 rigs over the next month sent shudders through the industry. And that came on top of 11 rigs that it has already mothballed, meaning that in just a few weeks, its shale drilling activity will be reduced by about 20 percent.“Low oil prices are increasingly impacting the U.S. land drilling market,” the company said in a presentation to a Goldman Sachs energy conference.The announcement was an early indication that the oil industry, with its history of booms and busts, was in the early stages of its latest downturn. Energy companies drop rigs when drilling costs outpace the price they think they will attract, leading to lower production and higher prices. But until the effects ripple through the market, consumers and the broader economy will most likely enjoy the benefits of low gasoline and heating oil prices for at least the next six months, energy experts say.As for the industry, the signs of retraction are clear. The nation’s rig count, a barometer of oil exploration and production activity, fell by 26 in the week that ended Jan. 2, following a drop of 16 the week before, according to the Baker Hughes service company.The cuts could eventually be felt in areas where the local economy depends on oil. Each rig represents about 100 jobs, from roughneck field hands to maintenance workers, and the current rig count is down 85, or 5 percent, from a recent peak in late 2014.

A history lesson on the perils facing oil and gas investors --The investing public, including portfolio managers who think of themselves as highly sophisticated, are just starting their education in the documentation of oil and gas lending. Actually, they could have learnt about some of the problems that are now emerging if they had paid close attention during recent subprime mortgage securitisation cases. But they did not. So here we are again.   Much of the lending that supported the recent US unconventional resource (aka “shale”) boom long after the operating cash flow became inadequate was done by people who believed they were taking little risk. Institutional investors were not, for the most part, buying unlisted equity from inexperienced operators. Tens or even hundreds of billions of dollars of capital came from non-bank participations in leveraged loans to exploration and production companies.  As they would tell me or you, they knew that the underlying oil and gas assets were being developed by junk credits with negative cash flow from operations. There could be problems with the operator someday, yes. But because they had come in at the “bank” level, where there was a senior claim on the assets, they could get their capital returned even if there was a bankruptcy. And, of course, since these were floating rate loans, they, the investors, were not assuming the same interest rate risk as the buyers of fixed-rate junk bonds.  In addition to the comfort of having a more senior security interest in the underlying asset, the institutional investors believed the federal (and state) regulators of the banking system, and their armies of bank examiners, would be combing through loan books and aggressively using their authority to protect the banking system. Unlike the residential or commercial mortgage markets, there had not been a disaster in bank energy lending for many years.

Trains plus crude oil equals trouble along the tracks: — Every day, strings of black tank cars filled with crude oil roll slowly across a long wooden railroad bridge over the Black Warrior River. The 116-year-old bridge is a landmark in this city of 95,000 people, home to the University of Alabama. Residents have proposed and gotten married next to the bridge. Children play under it.  But with some timber pilings so badly rotted that you can stick your hand through them, and a combination of plywood, concrete and plastic pipe employed to patch up others, the bridge shows the limited ability of government and industry to manage the hidden risks of a sudden shift in energy production. And it shows why communities nationwide are in danger. “It may not happen today or tomorrow, but one day a town or a city is going to get wiped out,” said Larry Mann, who was the principal author of the Federal Railroad Safety Act. Almost overnight in 2010, trains began crisscrossing the country carrying an energy bounty that includes millions of gallons of crude oil and ethanol. Tens of thousands of tank cars and a 140,000-mile network of rail lines emerged as a practically way to move these commodities. But few thought to step back and take a hard look at the industry’s readiness for the job. Government and industry are playing catch-up with long-overdue safety improvements, like redesigning tank cars and rebuilding tracks and bridges.

Transporting tar sands oil is problematic -- A tug recently sank down river of Montreal, releasing almost 7,000 gallons of fuel that is still being cleaned up. Fault hasn’t been assigned, but is blame important when the fuel or the toxic cargo is already in the water and spreading?   There is a huge difference between a tug and a tanker carrying the equivalent of 300 to 600 rail cars or 1,000 to 2,500 trucks of tar sands oil. It is a difference that should concern everyone who shares the use of the St. Lawrence River. A spill of that magnitude of tar sands oil, a cargo the Coast Guard has admitted it is “not prepared to handle,” would quickly dwarf the capabilities of first responders, would devastate the river for almost any conceivable use, would lay waste to the environment of one of North America’s most significant rivers and devastate the economies of communities along its shores in two countries. Maybe lower oil prices will temporarily reduce the intense pressure, and thus the risk to our river, that has been building to get tar sands oil to market by whatever means possible. But maybe they won’t because producers will still seek the cheapest transportation alternative without regard to environmental impacts. The proposals for new pipelines and ship terminals are still around. History shows we frequently construct beyond our ability to mitigate. The river community needs to shape the debate about such shipments and demand that not one drop of heavy oil should be put on a ship or in a rail car on or near the St. Lawrence River until response plans have been developed and tested and the Coast Guard and local first responders have the equipment and training to effectively implement them.

Fracking Industry Shakes Up Northern BC with 231 Tremors -- British Columbia’s shale gas fracking industry triggered more than 231 earthquakes or ”seismic events” in northeastern British Columbia between Aug. 2013 and Oct. 2014. Some of the quakes were severe enough to ”experience a few seconds of shaking” on the ground in seven areas of the province on top of the large Montney shale gas basin. The events, many of which occurred in clusters or swarms, showed that the regulation of the industry still lags behind the pace of drilling activity in the region. ”Induced seismicity related to wastewater disposal and hydraulic fracturing within the Montney (a 29,850 square-kilometre underground siltstone formation) indicates a more uniform application of regulations is appropriate,” concluded a December report by the BC Oil and Gas Commission. The 32-page report states that 38 tremors were caused by the injection of wastewater produced by fracking operations and another 193 events were directly attributed to the hydraulic fracturing of hundreds of horizontal wells in the region. Hydraulic fracturing is a technology that pumps slurries of water, sand and chemicals at high pressure to crack shale rock as deep as 2,500 metres. Industry models can’t always predict how the rock will crack or where the cracks will travel. The Commission says that none of the recorded events resulted in well damage and that ”ground motions recorded to date are below the damage threshold.” Yet many of the tremors shook the ground under well sites near Fort St. John and Dawson Creek. The report appears to contradict its own finding, however, by noting that ”several instances of casing deformation have occurred with the horizontal portion of shale gas wellbores.”

FBI harassing fossil fuel activists in the Pacific northwest - A grassroots movement of eco-activists is achieving unprecedented success in challenging fossil fuel developments in the Cascadia region of the US’s Pacific northwest, writes Alexander Reid Ross. And that has attracted the wrong kind of attention – from local police, FBI and right-wing legislators determined to protect the corporate right to exploit and pollute.  We are organizing a level of civil disobedience not seen in decades to save our neighborhoods, our communities, our salmon, and our climate. And that scares the shit out of the powers that be. In August 2014, two activists with the environmentalist group Rising Tide spent a week riding the backwoods highways of Idaho monitoring a megaload. That’s big rig hauling equipment for processing tar sands oil that’s wide enough to take up two lanes of road, too high to fit under a freeway overpass, can be longer than a football field, and can weigh up to 1,000,000 pounds. They had no idea that they would soon be wrapped up in a Federal Bureau of Investigation probe that encompassed three states and several environmentalist groups.

Canada Heavy Oil Drops Below $35 As Rig Count Hits Record Low For January -- Think Texas and Pennsylvania have a problem with plunging oil prices, don't look North. West Canada Select (Heavy) crude oil prices have collapsed to below $35 per barrel (the lowest since Feb 2009). This is a 60% plunge in the last 6 months and has left the industry stunned. While US rig counts have fallen for the last few weeks as the lagged response to falling prices finally catches up to reality, the Canadian oil rig count has never been lower for the first week of January. Will the Canadian housing bubble be next? Charts: Bloomberg

Senate Republicans to push bill to approve Keystone XL pipeline: - The US Senate will hold a hearing next week on the controversial Keystone XL oil pipeline that has been fiercely opposed by environmentalists and some Democrats. The Senate Energy and Natural Resources Committee said it would hold the hearing on legislation to approve the pipeline project on January 7, after the chamber falls under Republican control. The $5.3 billion project would carry crude oil to Gulf Coast refineries from Canada’s tar sands. Republicans have long backed the plan, arguing it will boost US oil and gas production and create jobs. In November, the Senate — while still under Democratic control — rejected by a single vote a bill that would have approved construction of the 1,179-mile (1,900 kilometer) pipeline. Republicans immediately vowed to approve the bill as soon as they have control of the Senate. Environmentalists oppose the project and President Barack Obama says the pipeline would not necessarily reduce oil prices in the United States. But Republicans hope they will be able to pass a law authorizing the pipeline that bypasses Obama’s office. Alberta’s tar sands are considered to have “dirty” oil. Unlike traditional crude that gushes from a well, tar sand oil must be dug up and essentially melted with steaming hot water before it can be refined. This means more fossil fuels must be burned as part of the extraction process, further fueling climate change.

Democrats to Push Clean Energy, Export Limits in Keystone XL Pipeline Bill - Senate Democrats will introduce a series of amendments countering the GOP push to pass legislation approving the Keystone XL pipeline, Sen. Charles Schumer (D., N.Y.) said Sunday. The amendments are unlikely to change the ultimate outcome of the bill, which is expected to pass and face a potential veto from President Barack Obama. But the Democratic strategy will add more political tension to what’s expected to be a partisan showdown between Mr. Obama and Republicans pushing to approve the pipeline as their first item of business this upcoming Congress. Democrats will introduce at least three amendments that would make the Keystone measure “more of a jobs bill,”  The amendments will require the steel used in the pipeline to be made in the U.S., ban exports of oil shipped through the pipeline and add financial incentives for renewable energy, Mr. Schumer said. With Republicans now controlling 54 seats, these amendments are unlikely to pass. Mr. Schumer said he would still oppose the measure even if those amendments did pass. He also predicted Mr. Obama would veto the bill, a likely outcome given the president’s increasingly negative take on the project, which has been under review with his administration for more than six years. “I think there will be enough Democratic votes to sustain the president’s veto,” Mr. Schumer said. Speaking on Fox News Sunday, Sen. John Thune (R, S.D.), expressed cautious hope that the Senate could get the 67 votes needed to override a presidential veto depending on how much Democratic support there is. “We’re going to find out whether there are moderate Democrats in the Senate,” Mr. Thune said.

White House Says Obama Will Veto Keystone XL Pipeline Bill -- While Congress returned to session this week, Republican leadership made it clear the number one thing on their minds was passing approval of Keystone XL pipeline as quickly as possible. That they will do so with their newly enhanced majority is a slamdunk, meaning that the only thing that stood in the way of greenlighting the pipeline was President Obama’s potential veto. And until today it wasn’t entirely clear what he would do, although multiple statements made it seem like he was leaning toward blocking it. It’s clear now. Today his press secretary Josh Earnest said unequivocally that he will veto the measure. When he was asked about it at today’s press briefing—unsurprisingly given the swirl of comments by both congressional Republicans and Democrats in the last few days—Earnest said, “I can confirm that the president would not sign this bill.” “We indicated that the president would veto similar legislation considered by the previous congress and our position on this hasn’t changed,” said Earnest. “I would not anticipate that the president would sign this piece of legislation.”

Obama Will Veto Keystone XL Legislation - On Tuesday, the White House stated that President Obama would veto legislation approving construction of the Keystone XL pipeline.  “If this bill passes this Congress the president won’t sign it,” White House press secretary Josh Earnest said. Late last year Congress nearly passed a bill approving the Keystone XL pipeline, which would bring oil from the heavily polluting tar sands down to the Gulf Coast. Republicans, now in control of both chambers, have made passing such legislation a priority starting on Tuesday as Congress convened its new session.   On Tuesday the Senate Energy & Natural Resources Committee cancelled Wednesday’s planned hearing on the pipeline project as Democrats objected to procedural moves that had been used to set it up early.  Earnest said there is a “well-established” State Department review underway and that legislation would undermine that process. Earnest cited the ongoing litigation in Nebraska as the primary reason that Obama would not sign Keystone legislation. A decision from the Nebraska Supreme Court, which will determine whether or not Keystone XL’s current route through Nebraska is valid, is expected to come on a Friday in the coming weeks or months.

Obama And Congress Headed For First Confrontation Over Keystone XL Pipeline --As Republicans gear up for the beginning of the first time they’ve controlled both chambers of Congress since 2005, one legislative item at the top of the list will be an effort to push forward a bill to approve the Keystone XL Pipeline. Indeed, a bill to do just that was introduced in the House yesterday as House Resolution 3, and the White House has already made clear that the President will veto the bill if it makes it to his desk:  This isn’t the first legislative push we’ve seen for the Keystone pipeline, of course. Republicans made similar efforts several times after the 2010 elections but, because they only controlled the House up until yesterday, those efforts largely died in the Senate. In November, after it was clear that the Democrats had lost control of the Senate but while her own seat still remained in a precarious balance, former Louisiana Senator Mary Landrieu pushed a bill to authorize the pipeline in what was an obvious effort to save her own seat from near certain defeat in the December runoff. At that point, of course, Democrats still controlled the Senate and the bill was unable to get even the requisite 60 votes to get past a Cloture Motion. Nonetheless, it was noted at the time that the bill received the votes of 14 Democrats, including nine Democrats who returned to office in the 114th Congress. This suggests that there are at least 64 votes in favor of the pipeline in the new Senate. It’s also clear that the bill to authorize the pipeline will easily pass the House on Friday. The question, of course, is whether there would be sufficient support in either chamber to override the President’s veto.

Obama Keystone Veto Threat Spurs Democrat’s Plea for Deal - President Barack Obama would veto a Senate bill introduced today that would approve the Keystone XL oil pipeline, his spokesman said, as a top Democratic supporter urged the administration to seek a compromise. A bill to sidestep a federal agency review was the first legislation Republicans introduced as they took control of both the House and Senate for the first time since 2007. The measure has enough sponsors to pass but not enough to override a veto. “My office has reached out to the White House today,” Senator Joe Manchin, a West Virginia Democrat and a bill co-sponsor, told reporters Tuesday in Washington. “We’re looking at ways that we can work together to find out if there are some areas that they might, on content, object to that we can work with.” Given widespread public and industry support for the Keystone pipeline, Manchin said he was optimistic that Obama, who has expressed doubts about the project’s benefits, can be persuaded not to veto the measure.  “Fringe extremists in the president’s party are the only ones who oppose Keystone, but the president has chosen to side with them instead of the American people and the government’s own scientific evidence that this project is safe for the environment,” House Speaker John Boehner, an Ohio Republican, said in a statement.

Idiot America: The Keystone Pipeline "Controversy" -- As I've said here repeatedly, sometimes you really have to shake your head at the sheer idiotic depths this country has sunk to. Though it really isn't a big surprise, newly (re)installed Senate Majority Leader Mitch McConnell just announced that the new Republican Senate's VERY FIRST PRIORITY will be to pass a bill forcing approval to allow the TransCanada corporation to build the controversial Keystone Pipeline. That's right, with all the many problems facing America these days, many of our current elected "leaders" believe that enacting a law that will enrich a FOREIGN COMPANY is the most important thing that needs to be done. McConnell's announcement is supremely stupid on many levels. Let's start with the fact that the State Department is expected to render a final decision on Keystone later this year after a court case in Nebraska over the pipeline's proposed route is resolved. In other words, there is a chance--probably a very GOOD chance--that the pipeline will be approved in just a few months anyway. THEN there is the little matter of collapsing oil prices, which if they remain at or near their current levels for awhile will likely cause a shutdown of Canadian tar sands production--meaning there could very well be no oil to ship through the pipeline ANYWAY. Oh, and let's not forget that one of the supposed reasons to approve the pipeline--to help the U.S. become less reliant on Middle Eastern oil--totally contradicts all of the crowing in conservative circles about how our own domestic oil shale production is turning us into "Saudi America."  But let's put all of that aside for a moment and consider what it is that is really going on here--namely more sound and fury in the ongoing and sadly successful effort to convince American citizens consumers idiots that there really is a difference between the two parties and that American representative democracy is not in fact dead as a doornail. The biggest reason McConnell and company are making Keystone their top priority is that their troglodyte conservative base DESPISES environmentalists and right now this is the best way to very publicly score political points and stick it to the environmental movement. Forcing Obama to veto the bill (assuming he does) would allow the Republicans to demonstrate how they differ from blue tribe (Obama, of course, would no doubt prefer to sit back and allow the State Department to take the final decision out of his hands).

Experts Say That Battle on Keystone Pipeline Is Over Politics, Not Facts - In 2009, the Obama administration approved a 986-mile pipeline to bring 400,000 barrels of oil sands petroleum a day from western Canada to the United States. Almost no one paid attention. Construction on the pipeline, called the Alberta Clipper, was quietly completed last year. In that same period, the administration considered construction of a similar project, the Keystone XL. So far only in the blueprint stage, this pipeline has become an explosive political issue that Republicans are seizing as their first challenge to President Obama in the new Congress. Most energy and policy experts say the battle over Keystone overshadows the importance of the project as an environmental threat or an engine of the economy. The pipeline will have little effect, they say, on climate change, production of the Canadian oil sands, gasoline prices and the overall job market in the United States . At the same time, Mr. Obama’s promised veto will not necessarily kill the pipeline because the president will retain the authority to make a final decision about its fate. “The political fight about Keystone is vastly greater than the economic, environmental or energy impact of the pipeline itself,” said Robert N. Stavins, director of the environmental economics program at Harvard. “It doesn’t make a big difference in energy prices, employment, or climate change either way.”

BREAKING: Nebraska Supreme Court Ruling Upholds Keystone XL Pipeline Route - The Nebraska Supreme Court reversed a lower court’s decision that nullified the controversial Keystone XL pipeline route through Nebraska Friday, meaning that Keystone XL once again has a legal route through Nebraska.  Four out of the seven judges on the Nebraska Supreme Court agreed with a district court’s February 2014 decision that Nebraska’s LB1161 law was unconstitutional, but according to Nebraska’s constitution, the court needed the agreement of a super majority — five out of the seven judges — to officially label the law as unconstitutional.  Nebraska’s LB1161 made it possible for pipeline companies, like TransCanada, to chose whether to submit their pipeline plans to the state Department of Environmental Quality, which would then bring the plans to Nebraska’s governor for final approval or rejection, or the state’s Public Service Commission, which had a stricter permitting process in place and didn’t depend on the governor for final approval.  In 2012, three Nebraska landowners — Randy Thompson, Susan Luebbe and Susan Dunavan — sued to challenge the law, saying it was went against the state’s constitution. The district court sided with the landowners in February 2014, but the state Supreme Court’s ruling nullifies that decision. “This appeal is not about the wisdom or necessity of constructing an oil pipeline but instead is limited to the issues of great public concern raised here: which entity has constitutional authority to determine a pipeline carrier’s route and whether L.B. 1161 comports with the Nebraska Constitution’s provisions controlling this issue,” the Supreme Court judges write in the ruling. But since just four members of the court, not five, found the law unconstitutional, the Court writes that “the citizens cannot get a binding decision from this court,” and the district court’s decision is vacated.

House Votes To Approve Keystone XL Pipeline — For The 10th Time - The House of Representatives has voted 266-153 to pass legislation approving the Keystone XL tar sands pipeline, marking the 10th time the lower house has OK’d construction of the controversial project. Friday’s vote precedes an upcoming Senate vote which will also likely approve the controversial pipeline, eventually sending the bill to President Obama’s desk. The White House has already stated that Obama would veto the legislation.  The vote also comes just hours after Nebraska’s highest court effectively confirmed that the 1,700-mile pipeline has a legal route through the state — though the court left it open for the route to be challenged in court again. Though the bill to approve Keystone XL passed the House easily and with a large majority, it fell short of achieving enough votes for a possible override of Obama’s veto. To override, the House would have needed a two-thirds, or 66 percent, majority vote. The bill received only 63 percent.  The Republican-led House has long had the votes to pass legislation approving the pipeline, which would carry Canadian tar sands oil from Alberta, Canada to refineries on the Gulf Coast of the United States. But until the 114th Congress was sworn in on Tuesday, it didn’t much matter — the 113th Congress’ Senate was controlled by Democrats, and Senate Majority Leader Harry Reid was not keen to let the bill come to the floor for a vote. At the end of 2014, Reid did allow a vote on Keystone XL in the Senate, and it failed.

Canada: A Microcosm Of The Ultimate Effect Of Low Oil Prices? -- Canada’s economy, lately driven in large part by oil, is a classic example of the old see-saw axiom: Downward pressure in one place creates upward pressure in another.  In this case, the bad news of low oil prices for the provinces of Alberta, Newfoundland and Saskatchewan, which until recently were enjoying an oil boom, becomes good news for Manitoba, Ontario and Quebec.  Alberta is a good model for what’s begun to go wrong in Canada. Already, three huge oil companies have canceled oil sands projects there: Shell of Britain at Pierre River, Statoil of Norway at the Corner oil field and France’s Total at the Joslyn mine. And more cancellations are expected as what feels like a non-stop drop in oil prices drives even more energy companies to postpone or even cancel projects.  The reason is that Alberta, Newfoundland and Saskatchewan have been experiencing a boom not in oil, but in oil sands, sandstone impregnated with crude oil. While shale oil is expensive to extract, oil sands are expensive to clean. And at the current average price of crude, which is now just above $50 per barrel, both forms of oil are becoming less and less profitable. All this means hard times ahead for Alberta, and it’s becoming a recurring nightmare. Oil prices dropped fairly precipitously in the 1980s, but the province’s premier at the time, Don Getty, chose to keep his government’s spending static in hopes that oil would recover. Instead, energy revenues fell by $3 billion, creating a provincial deficit of $3.4 billion.

Majority Of U.S. Coal, Canadian Tar Sands Will Have To Stay In The Ground To Meet Climate Goals --Keeping the increase in global temperatures under 2°C will require vast amounts of fossil fuels to be kept in the ground, including 92 percent of U.S. coal, most of Canada’s tar sands, and all of the Arctic’s oil and gas, according to the first analysis of which of the world’s reserves should remain untapped. The study, published in the journal Nature, is a stark assessment of how resource-rich nations and regions will have to adjust to the reality that the battle against climate change means abandoning huge sources of their wealth. Limiting the increase in worldwide temperatures to 2°C (3.6°F) above pre-industrial levels is generally agreed to be what is necessary to prevent dangerous climate change. “Our results suggest that, globally, a third of oil reserves, half of gas reserves, and over 80 percent of current coal reserves should remain unused from 2010 to 2050 in order to meet the target of 2°C,” write authors Christophe McGlade and Paul Ekins of University College London.

Oil hits five and a half year low under $55 on supply glut (Reuters) - Oil prices slumped to new 5-1/2-year lows on Monday on worries about a surplus of global supplies and lackluster demand. Russia's oil output hit a post-Soviet high last year, averaging 10.58 million barrels per day (bpd), up 0.7 percent thanks to small non-state producers, Energy Ministry data showed. Iraq's oil exports were at their highest since 1980 in December, an oil ministry spokesman said, with record sales from the country's southern terminals. true But oil producer group OPEC has decided not to cut output, opting to let the market find its own level. The two crude oil benchmarks - Brent and U.S. light crude, also known as West Texas Intermediate - have now lost more than half of their value since mid-2014. Brent crude for February dropped as low as $54.02 a barrel, down $2.40 from Friday's close and its weakest since May 2009, before edging back to around $54.50 by 1420 GMT (0920 ET). U.S. crude slid to $50.55 a barrel on Monday, down $2.14 and also its lowest since May 2009. "The easiest path for oil is down," said Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt. "Almost all market news and the fundamental backdrop are negative and it is difficult to see much upside at the moment."

Oil Falls to 5 1/2-Year Low as Russia, Iraq Boost Output - Oil dropped to the lowest in more than five and a half years amid growing supply from Russia and Iraq and signs of manufacturing weakness in Europe and China. Futures capped a sixth weekly loss in New York and London. Oil output in Russia and Iraq surged to the highest levels in decades in December, according to data from both countries’ governments. Euro-area factory output expanded less than initially estimated in December. A manufacturing gauge in China, the world’s second-largest oil consumer, fell to the weakest level in 18 months, government data showed yesterday. Prices slumped 46 percent in New York in 2014, the steepest drop in six years and second-worst since trading began in 1983, as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share. OPEC pumped above its quota for a seventh month in December even as U.S. output expanded to the highest in more than three decades, according to data compiled by Bloomberg.

Oil Extends Drop Below $50 as U.S. Stockpiles Seen Rising - Oil extended losses below $50 a barrel amid speculation that U.S. inventories will expand, deepening a global supply glut that’s driven prices to a five-year low. Futures fell as much as 3.1 percent in New York, declining for a fourth day. Stockpiles in the world’s biggest oil consumer probably rose by 750,000 barrels last week, a Bloomberg News survey shows before a government report tomorrow. A gauge of the dollar held near a nine-year high, diminishing the investment appeal of commodities. Oil slumped almost 50 percent in 2014, the most since the 2008 financial crisis, after the Organization of Petroleum Exporting Countries resisted calls to cut output as it competes with U.S. producers. The market faces “more problems” this year, according to Morgan Stanley, with surging output in Russia and Iraq contributing to a surplus that Qatar estimates at 2 million barrels a day.“There is no bullish news. OPEC refuses to cut production and there is no evidence of falling production outside of OPEC.”  West Texas Intermediate for February delivery dropped 91 cents, or 1.8 percent, to $49.13 a barrel at 9:04 a.m. on the New York Mercantile Exchange after touching $48.47, the lowest since April 2009. The volume of all futures traded was about 60 percent above the 100-day average for the time of day.

Is Oil's Sell-Off Getting Overdone? - Over the last few months, oil's sell-off has been the story to talk about on Wall Street.  However, let's put this situation in perspective by looking at the long-term weekly chart:

  • 1.) The sell-off has been extreme.  Prices have moved sharply lower since the beginning of July.  When prices hit the EMAs, they move lower.  There were a few attempts at a rally in September, but since then the direction has been down.  This looks like panic selling, where a majority of asset holders receive news that the asset is fundamentally mis-priced, at which time everybody places sell orders.
  • 2.) Prices have moved convincingly through three long-term support levels -- prices at ~65, ~60 and the mid-50s. 
  • 3.) Prices are now approaching levels last seen in the "Great Recession."  Let's stop right here and ask a question: does that valuation make any sense?  During the GR the entire world was in the throes of the most extreme financial contraction of a generation (in fact, several generations).  Entire industries (banking and autos) were getting bailed out.  Central banks were contemplating QE programs; governments were engaging in fiscal stimulus. 

     Are we now in a similar situation?  Not yet.  China is slowing, but is still growing at a 7% rate.  Japan will probably come out of their recession in the next two quarters.  The EU is hovering at 0% growth, but they are not crashing through the floor.  The biggest problem is Russia, as the combination of cheap oil and economic sanctions will lead to a recession next year.  But they're a special situation.   And -- when was the last time oil was the leading indicator?  Never.  In fact, oil price spikes have been a primary cause of most post-WWII recessions as documented by professor James Hamilton, not the other way around.  But although we aren't in the middle of a financial crisis similar in depth and breadth to the previous recession, oil is pricing in such a condition.  I would argue that we should start to consider the possibility that oil's sell-off is getting overdone.

The Delicate Balance of Supply and Demand in the World's Oil Markets -  The most recent plunge in oil prices caught most of the world by surprise, however, given the short-term market supply and demand fundamentals, a price readjustment is really not all that shocking.   Let's look at a chart showing the price history for West Texas Intermediate, the North American benchmark crude:  As we can see, other than the price readjustment during the Great Recession, the dollar-value plunge in prices over the past month are the highest on record.  From what has happened to oil prices over the past month, one would expect that demand for oil is falling off the charts at the same time as supply is rising, also at rates that are off the charts.  That is not quite the case.  Here is a graph from the International Energy Agency (IEA) showing the world demand for oil from 2012 to the present and projected to the beginning of 2016:  Here is a table showing the data (in millions of barrels) and the quarter-over-quarter and year-over-year changes in demand (in percent): When we look at the year-over-year change in demand to remove the impact of seasonal cycles, we see that the increase in demand is anticipated to range between 0.87 and 0.98 million BOPD throughout each quarter of 2015. If these projections prove to be accurate (i.e. if the world economy doesn't falter over the next year), the year-over-year increase in oil demand of 0.87 million BOPD at the end of 2015 will be higher than the year-over-year increase of 0.8 million BOPD and 0.73 million BOPD at the end of both 2013 and 2014 respectively. If we look at the IEA's analysis for released in December 2014, they note that their analysis shows that the global oil demand growth for 2015 has fallen by 230,000 BOPD to 870,000 BOPD not that the demand has fallen by 203,000 BOPD. While this could be termed "weak demand", the fact is that, in general, on a year-over-year basis, oil demand has shown rather steady growth since 2012. On the demand side, it is critical that we look at China. Here is a graph showing China's level of oil products consumption since 2011:

SAR Commentary - The current favorite myth contends that the fall in the price of oil is due to the Saudis trying to punish Russia for supporting Assad and drive the frackers in the US out of business while also punishing the evil Shia controlling oil in Iran and Iraq. Drivel, starting with the simple observation that the Saudis are pumping about the same amount of oil they have for nearly a decade and OPEC as a whole is maybe 500,000 barrels a day over it's long set target. The US, on the other hand, is suddenly pumping out an extra 4 or 5 million barrels a day from fracking operations – if there is a country that has upset the apple cart, it is the US. Telling the Saudis they have to stop pumping oil because we want to continue is a reasonable example of how silly most of this discussion is.  Another comment fairytale involves the US, with Saudi help, torpedoing oil prices so as to “punish” Putin for getting in the way of US plans for Ukraine. Yes, the Russians did upset our neat plans for Kiev, and the low prices are hurting Russia, but even if Vladimir was to suddenly withdraw his support for ethnic Russians in Ukraine and give back Crimea, how would that change the global supply and demand problem with oil? Even those dwelling on the supply and demand equation mostly miss what's going on, the circular and long term nature of the situation. And the demand side is generally given the least discussion when it is the most important factor.   What has diminished is not the need, specifically, for diesel or gasoline; what has shrunk and continues to shrink is our ability to pay to transport stuff, because the more money we divert to pay to get the fuel,the less of the stuff we can afford - and thus the diminished need for transport fuel. Viola! Surplus unaffordable oil!   The price of oil tells us that economies around the world are slowing down and nearly at a stall. [Here's where the chorus starts chanting “Be afraid. Be afraid.”]

Shell Energy Scenarios To 2050 (download pdf)

The Real Cause Of Low Oil Prices: Interview With Arthur Berman - Yves here. This is a terrific interview that you need to read pronto if you have any interest in the outlook for oil prices, understanding fracking economics, and the real reason for the push for Keystone XL pipeline. Berman is colorful, direct, and provides lots of granular detail.  With all the conspiracy theories surrounding OPEC’s November decision not cut production, is it really not just a case of simple economics? The U.S. shale boom has seen huge hype but the numbers speak for themselves and such overflowing optimism may have been unwarranted. When discussing harsh truths in energy, no sector is in greater need of a reality check than renewable energy. In a third exclusive interview with James Stafford of Oilprice.com, energy expert Arthur Berman explores:

• How the oil price situation came about and what was really behind OPEC’s decision
• What the future really holds in store for U.S. shale
• Why the U.S. oil exports debate is nonsensical for many reasons
• What lessons can be learnt from the U.S. shale boom
• Why technology doesn’t have as much of an influence on oil prices as you might think
• How the global energy mix is likely to change but not in the way many might have hoped

Energy price declines not limited to oil -  (charts) With all the focus on falling crude oil prices (chart below) as well as sharp reductions in the cost of gasoline (including retail), jet fuel, and heating oil, it's easy to miss the fact that prices of other energy products have been hit quite hard as well. Here are a few examples:

  • 1. US natural gas price declines have been spectacular. March 2015 futures contract (source: barchart) Natural gas valuations are of course responding to the correction in oil. But other factors include strong US gas production and the normalization of gas inventories in storage after the harsh 2013-14 winter (chart below).
  • 2. Coal prices have fallen sharply as well, particularly for Appalachian coal (see chart). Coal traded in Asia (chart below) has also been under pressure. Source: barchart
  • 3. Price declines have not been limited to fossil fuels. Even uranium futures have been selling off in spite of rising Japanese demand as nuclear reactors go back online - see chart.
  • 4. Expectations of weakening profitability for alternative energy sources including wind and solar are showing up in significant underperformance (which started with declines in crude prices) against broader markets.
  • 5. With major sources for power generation becoming cheaper, electricity prices (chart below) have declined as well.
As discussed before (see post), this is quite positive for the US (and global) economy. However a number of industries involved with products discussed above will be severely disrupted in 2015, resulting in defaults, consolidation and some job losses.

LNG Another Casualty Of Low Oil Prices - The oil industry is facing rising debt from collapsing oil prices, but there could be another sector that becomes a casualty of the low oil price environment: liquefied natural gas (LNG). Much of the global LNG trade occurs in Asia, where buying and selling occurs according to long-term fixed contracts that are indexed to the price of oil. As a result, when oil prices were high, so were LNG prices. That is exactly why there has been a rush along the U.S. Gulf Coast to begin exporting cheap American natural gas to take advantage of high prices in Asia. The practice of indexing LNG contracts to the price of oil was something that Japan, the world’s largest consumer of LNG, had hoped to change. High oil prices were inflicting an economic toll on Japan, which had radically increased energy imports after shuttering its nuclear reactors. However, oil-indexed contracts cut both ways. Now with oil prices hovering around $50 per barrel – less than half of what they were last summer – spot cargoes for LNG have seen their prices collapse as well. Japan is in no hurry to see the industry undergo dramatic reforms. Not only are low oil prices pushing down LNG prices, but demand in Asia for LNG is much lower than anticipated. In fact, a new Wood Mackenzie analysis says that weak demand in China, Japan, and Korea helped push LNG prices below $10 per million Btu at the end of 2014, less than half of the $20/MMBtu spot cargoes were selling for earlier in the year. Adding to the sector’s problems is the fact that new supplies are starting to come online. A massive build out of LNG export capacity is still underway, with earlier projects now reaching completion. Just as the shale boom led to oversupply and crashing prices, LNG markets are showing early signs of a similar bust.

US rig count tumbles by 29 to 1,811  (AP) - Oilfield services company Baker Hughes Inc. says the number of rigs exploring for oil and natural gas in the U.S. plummeted by 29 last week to 1,811. The Houston firm said Monday in its weekly report that 1,482 rigs were exploring for oil and 328 for gas. One was listed as miscellaneous. A year ago 1,751 rigs were active. Of the major oil- and gas-producing states, none showed any gains. Texas plunged by 12, California dropped by six, Colorado fell by three, Louisiana declined two and Alaska, Arkansas, New Mexico, Ohio, Pennsylvania and Wyoming were down one apiece. Kansas, North Dakota, Oklahoma, Utah and West Virginia were unchanged. The U.S. rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999.

US Rig Count Continues To Plunge To 10-Month Lows -- Just as T.Boone Pickens warned, watching the US Rig Count is key to comprehending the looming crisis in oil. The last 4 weeks alone have seen a drop of over 100 rigs - the 2nd fastest slide since 2001 in percentage terms. This is the worst December to January since 2008/9. As Pickens noted, "demand is down" - "lower demand is the main driver" - "rig count is gonna fall - drop 500 rigs in next 6-9 months"Note that prices diverged lower as rig counts kept going before rolling over and then crashing... Charts: Bloomberg

Biggest Oil-Rig Drop Since 2009 Spells Tough Year Ahead - U.S. oil drillers laid down the most rigs in the fourth quarter since 2009. And things are about to get much worse. The rig count fell by 93 in the three months through Dec. 26, and lost another 17 last week, Baker Hughes Inc. (BHI) data show. About 200 more will be idled over the next quarter as U.S. oil explorers make good on their promises to curb spending, according to Moody’s Corp. Drillers are already running the fewest rigs in nine months after a 46 percent drop in U.S. benchmark West Texas Intermediate oil in 2014, the steepest decline in six years and the second-worst since the commodity began trading in 1983. The price slipped below $50 a barrel yesterday as U.S. producers and the Organization of Petroleum Exporting Countries remain in a standoff over market share. Meanwhile, production from Russia and Iraq last month reached the highest level in decades.

Oil Prices Again Buck Economists’ Expectations - Economists ended 2014 with expectations that the rout in the oil markets was pretty much over. When asked by The Wall Street Journal in early December where oil would trade on Dec. 31, 2014, the average forecast was $64.73 a barrel (up from just under $61 on Dec. 10). Instead, petroleum prices ended the year dropping to about $53 a barrel, and have continued to swoon in the very early days of 2015. Light, sweet oil for February delivery traded briefly below $50 a barrel on Monday, the first time that has happened since April 2009. The price erosion is an example of Economics 101: too much supply and not enough demand are moving prices lower and lower.  What’s worsening the situation, however, is that instead of cutting back production when prices decline, energy producers such as Russia and Iraq are pumping the most crude in decades in an effort to bring in needed foreign cash. In December, the panel of economists thought oil prices would move up to $69.32 by June 30, 2015, and end this year at $72.10. Certainly, a supply shock could change oil’s direction very rapidly. But right now it looks as if most economists will have to make serious changes to their forecasts of crude prices in 2015.

Here’s How Much Money Oil Companies Have Lost Due to Falling Prices - It has been a pretty rough six-month stretch for the energy industry. Crude oil prices have fallen about 55% since the middle of last summer, resulting in some of the world’s largest energy companies losing hundreds of billions of dollars in market value.The price of crude oil has been relatively flat over the past two days, but it still sits below $50 per barrel — the lowest point in about 5 and 1/2 years — thanks to a global supply glut exacerbated by the ongoing U.S. shale boom as well as decreased oil consumption in Asia and Europe.As oil prices have steadily declined, so too have the share prices of many large energy companies. Out of 24 oil, gas and coal producers in the Fortune 500, 22 saw their stock price decline between the beginning of July 2014 and Wednesday’s close. In total, the 24 companies lost more than $263 billion in market value combined, according to data from FactSet Research Systems. (A company’s market value is found by multiplying its share price by the number of its shares outstanding.)Exxon Mobil and Chevron, the two largest U.S. energy companies, accounted for more than $95 billion of that figure as the two have seen their respective market values decrease by 11.7% and 17.9% in just over six months.In terms of total lost market value, ConocoPhillips and Occidental Petroleum finished behind Exxon and Chevron, with more than $20 billion shaved off each of their respective market caps during the period — a 26% decline.

Saudi Arabia Raises Price of Main Oil Grade for Asian Buyers - Saudi Arabia raised the cost of its oil sales to Asia in February, prompting speculation the world’s biggest exporter is retreating from using record price discounts to defend market share. Saudi Arabian Oil Co. will sell its Arab Light grade for $1.40 a barrel less than a regional average next month, the company said yesterday in a statement. That’s a narrowing from January, when the discount was $2, the biggest in at least 14 years. It decreased 11 prices globally and increased six.  The state-owned producer, known as Saudi Aramco, raised prices for all its crudes in Asia and cut all of them for Europe and most in the U.S.  Brent oil fell 5.9 percent yesterday. Oil prices collapsed 32 percent since the Organization of Petroleum Exporting Countries decided to maintain its output target on Nov. 27, amid signs Saudi Arabia and other members are determined to let North American shale drillers and other producers share the burden of reducing an oversupply. When Aramco lowered prices for November it prompted speculation the nation was seeking to preserve market share.

The Crunch Continues: WTI Tumbles Under $49, 10Y Dips Below 2% -- Same slide, different day, as the crude crash continues, with both WTI and Brent tumbling to multi-year highs, below $49 and $52 respectively. This happened despite the news overnight that China is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year, suggesting that China will focus more on fiscal policy than monetary easing, which in turn led to much confusion in the SHCOMP, which fluctuated up and down for the day several times before finally closing unchanged. There was no confusion about the stops slamming USDJPY, and its Nikkei225 derivative which tumbled 3%, sending Japanese Treasury yields to fresh record lows. Record low yields were also seen in Germany, Austria, Belgium, Netherlands, Finland, France (and many other places), which in turn forced the US 10 Year to finally dip back under 2.00%. In fact, taken together, the average 10Y bond yield of the U.S., Japan and Germany has dropped below 1% for the first time ever, according to Citi.

Oil price implications - Gail Tverberg offers her view on possible ramifications of the severe drop in prices for oil and  debt financed growth: There are really two different problems that a person can be concerned about:

  1. Peak oil: the possibility that oil prices will rise, and because of this production will fall in a rounded curve. Substitutes that are possible because of high prices will perhaps take over.
  2. Debt related collapse: oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil “demand” (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.

In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse–in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently. There is of course insurance by the FDIC and the PBGC, but the actual funding for these two insurance programs is tiny in relationship to the kind of risk that would occur if there were widespread debt defaults and derivative defaults affecting many banks and many pension plans at once. While depositors and pension holders might try to collect this insurance, there wouldn’t be enough money to actually cover these demands. This problem would be similar to the issue that arose in Iceland in 2008. Insurance would seem to be available, but in practice, would not pay out much. I learned after writing this post that bail-ins were mandated for US banks by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. In the language of the summary, bank depositors are “unsecured creditors,” and are thus among those to whom the burden of loss is transferred. The FDIC is not allowed to borrow extra funds, beyond bank funds, to cover this loss.

How $50 Oil Changes Almost Everything - The biggest collapse in energy prices since the 2008 global recession is shifting wealth and power from autocratic petro-states to industrialized consumers, which could make the world safer, according to a Berenberg Bank AG report. Surging U.S. shale supply, weakening Asian and European demand and a stronger dollar are pushing oil past threshold after threshold to a five-and-half-year low, with a dip below $40 a barrel “not out of the question,” said Rob Haworth, a Seattle-based senior investment strategist at U.S. Bank Wealth Management, which oversees about $120 billion. “Oil prices are the big story for 2015,” said Kenneth Rogoff, a Harvard University economics professor. “They are a once-in-a-generation shock and will have huge reverberations.”Brent crude, the international benchmark, fell as low as $49.66 a barrel today, dropping below $50 for first time since 2009. Prices dropped 48 percent in 2014 after three years of the highest average prices in history. West Texas Intermediate, the U.S. benchmark, plunged to as low as $46.83 today, about a 56 percent decline from its June high.  If the price falls past $39 a barrel, we could see it go as low as $30 a barrel, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey, who projected the 2014 drop.  The biggest winner would be the Philippines, whose economic growth would accelerate to 7.6 percent on average over the next two years if oil fell to $40, while Russia would contract 2.5 percent over the same period, according to an Oxford Economics Ltd.’s December analysis of 45 national economies.

Despite Current Glut, Oil Producers Continue Game of Chicken -- When the world gives you too much oil, drill for more. That seems to be the motto of some of the most prolific oil producers today. Iraq, Russia, Latin America, West Africa, the United States, Canada – all may increase production this year, and by more than just balancing out the reduced production in war-torn Libya. On top of this, expect even more oil on the market if Iran comes to terms with the West over its nuclear program and is freed of the constraints of sanctions.  That’s the conclusion of Adam Longson, an oil analyst at Morgan Stanley writing in an e-mailed report on Jan. 5.  All this new oil is flooding a market already awash because OPEC has refused to cut its production cap below 30 million barrels a day – and is even exceeding that level – and the United States is pumping oil, mostly from shale, faster than it has in 30 years. This has caused the average price of oil to plunge more than 50 percent, from about $115 in June 2014 to just over $50 today. This is creating an unmitigated bear market for oil, according to Morgan Stanley. “With the global oil market just passing peak runs and Libyan supply already at low levels, it’s hard to see much improvement in oil fundamentals near term,” its report said. “A number of worrying signs have already emerged, lifting the probability of our ‘bear’ case.” One more sign is that Iraq’s production is at its highest level in more than three decades, now that Baghdad has finally reached agreement with Kurdistan to allow it to export oil through Turkey. And just before the New Year there were reports that Russian oil output has hit post-Soviet records without any sign of abating. “We already have an ample supply of oil, and on top of that we see this increase from Iraq and Russia,” Michael Hewson told The Wall Street Journal. “The momentum clearly continues to be bearish for oil.”

This Oil Thing Is The Real Deal - Ilargi - Well! WTI below $50 and Brent below $53 when I start writing this. Who knows where they’ll be by the time I’m finished?! The euro down below $1.20, US stocks flirting with -2%, major European ones off -3%, Italy and Greece over -5%. Welcome to the real world, baby! Didn’t think you’d see it again so soon, did you? Welcome to the world where the Kool-Aid recovery does not reign supreme. Not that you’re not going to hear that anymore, and 24/7 incessantly so, but there’s no recovery with these oil prices, no matter what anybody says. The damage must be gargantuan by now. Everybody’s invested in oil. Sure, lots of shorts and stuff by now, but that’s not going to do much good. Not for pensions funds, or for governments. This thing will not blow up or over softly. There’s not an oil major or minor or a producing country left that makes a profit at these prices, and there’s no sign anywhere to be seen that the drop will stop. If this keeps going, someday soon somebody’s going to go to war. Maybe domestically, maybe across a border, but it’ll happen. There are dozens of regimes out there for whom oil prices have become a huge threat to their powers, their status, their lives, and there are dozens of others waiting in the wings, eager to take over. The move is just too big not to lead to bloodshed.  Oil below $50 and falling is bigger than any other political or economic issue. Remember when they all said low oil prices would boost the economy through higher consumer spending? Heard anything much about that lately?

Oil Prices Slide as U.S. Gasoline Inventories Jump -- Prices at the gas pump are heading even lower. Gasoline futures fell to nearly a six-year low on Wednesday after U.S. government data showed oil and fuel supplies rising to a record high last week, the latest evidence of a petroleum glut that has rattled financial markets and raised questions about the strength of global economic growth. U.S. crude-oil prices rose modestly, but there was little indication that the market, which has plunged by 55% since late June, has hit a bottom. Weekly inventory data released by the federal Energy Information Administration reinforced the belief among many investors and traders that increasing oil output continues to overwhelm the growth in demand, a situation that is likely to further undercut prices across the board. U.S. stockpiles of crude oil, refined fuels and other types of petroleum rose 0.9% to 1.149 billion barrels in the week ended Jan. 2, according to the EIA. That is the highest level ever in weekly data dating back to 1990, and beats the previous high set in June 2013. The total doesn’t count the barrels held in the nation’s strategic petroleum reserve.

US export code adds to bearish oil outlook - FT.com: As excess supply chokes the world oil market, another serving of hydrocarbons is on the way. The US last week published guidelines governing oil exports, a move that will let Texas producers better compete against Middle East rivals by selling more output overseas. More companies will receive explicit authorisation to export condensate, a type of oil at the lightest end of the density spectrum, the Bureau of Industry and Security said. Just how much US petroleum leaves the docks at Houston and Corpus Christi has big implications for the oil market as it plumbs lows near $50 a barrel. The announcement could inject new volumes into a global market already looking at a surplus of more than 1m barrels a day. The US has banned almost all exports of crude oil since the mid-1970s. Last week’s announcement defines how much processing oil must undergo before it is no longer considered crude but a refined product, which is freely exportable. The text broadcasts criteria previously issued to just a handful of companies via private rulings. The statement applied to all types of crude, but in practice only ultralight condensate will be exported under the rules, experts say. US condensate output is nevertheless significant at about 640,000 barrels a day. RBN Energy, a consultancy, expects it will grow to 1.8m b/d by 2020. “Every step towards export liberalisation is another bearish factor in the global oil market,” says Ed Morse, head of commodities research at Citigroup. US refineries have a limited appetite for condensate, blending it with heavier oils to process into fuels. Several companies are also building simple plants called “splitters” that turn pure condensate into products such as naphtha, a petrochemical feedstock.

U.A.E. Energy Minister Says Oil Glut Could Run for Years - Oversupply in crude markets could take months or even years to fix depending on when producers outside OPEC cut their output, Abu Dhabi-based The National reported, citing comments by U.A.E. Energy Minister Suhail Al Mazrouei. “We are experiencing an obvious oversupply in the market that needs time to be absorbed,” the newspaper reported Mazrouei as saying in e-mailed comments. The United Arab Emirates supported the November decision by the Organization of Petroleum Exporting Countries to maintain production, The National reported Mazrouei as saying. Brent crude, a pricing benchmark for more than half of the world’s oil, tumbled 48 percent last year, the most since 2008. OPEC decided Nov. 27 to maintain production instead of cutting output to eliminate a surplus left by increased supplies from the U.S. to Russia. “Depending on the actual production growth from non-OPEC countries, this problem could take months or even years,” the U.A.E.’s Mazrouei was quoted as saying in The National, referring to oversupply. “If they act rationally, we can see positive corrections during 2015.” Saudi Arabia won’t cut its output, though producers outside the group are welcome to do so, Ali Al-Naimi, that country’s oil minister, said at a conference in Abu Dhabi Dec. 21. OPEC would find it “difficult, if not impossible” to give up part of its share in global oil markets by cutting output, he said Dec. 19.

Occam’s Oil -- The ongoing “struggle” to define what is driving crude oil prices lower is perhaps another instance of a past “cycle” being reborn. With oil prices now heading much closer to the $40’s than the $60’s, consistent commentary is increasingly swept aside. The move in crude these past six months is now nothing short of astounding. At about $52 current prices (which will probably move in either direction significantly by the time this is posted) the collapse from the recent peak now equals only past, significant global recessions under the oil regime that began in the mid-1980’s.  This was incorporated even into the International Energy Agency’s (IEA) estimates of oil inventories, as described shortly thereafter by certain incredulous oil observers:  As if that was not enough of a parallel, there was also the “Saudi connection” then as now. Many respected observers put forth the notion, as they have in recent months, that the Saudis were behind the price collapse, or were using it to their advantage, seeking to squeeze out new producers. Back in the mid-1990’s that meant more expensive areas in Africa and new production capacity of the North Sea. The Economist published that idea in a March 1999 article titled, Drowning in Oil:  And so today, the Saudis are supposedly up to the same tricks, now trying to drive US shale production out of business. The fact that all those increased marginal suppliers more than survived the Asia flu tells you everything you need to know about this wild assertion of “intentional” Saudi action. It is a convoluted rumor that survives solely because it is convenient to those economists and commentators that refuse to accept these more basic connections. That leaves us basically once more in the hands of Occam’s Razor, namely that oil prices are falling hard because demand is falling hard. The scale gives us insight into the nature of the slowing of the global economy, to which the US is a full part, meaning that comparisons only with past and serious downslopes is not a welcome development; nor should it be “unexpected.” Mainstream commentary seeks to reject this simple and basic argument because it cannot fathom, predicated on its penchant for nothing but parroting economic “authority”, that the world could fall so deeply into recession once more drowning not just in oil but also “stimulus.” Once you get past the idea that “stimulus” isn’t, logical sense is restored.

Of crude bottoms and Rins -- While WTI crude prices fell through $50 per barrel levels on Monday, and still remain there on Tuesday… (chart via LiveCharts): …Reuters’ John Kemp pointed out that we’re likely reaching the point where upside moves become more probable than downside moves because: Prices are now too low to provide the cash flow to sustain drilling programmes and nowhere near enough to provide the financial incentive to make equity or debt available. This is important because so-called decline curves for oil wells — particularly for shale wells — are very steep, says Kemp. Output falls to a half or even a third of its initial level by the end of the first 12 months. Consequently: Thousands of new wells must therefore be drilled each year simply to sustain output at its current level of more than 9 million barrels per day.  Now, whilst efficiencies can be made, Kemp says it’s hard to imagine the industry cutting costs and raising efficiency enough to offset fully a 40 per cent or more reduction in the number of rigs operating. That means in the not too distant future the supply glut we keep hearing about could very well become a bona fide shortage. And when that happens… well the market will have to correct. One thing not mentioned by Kemp, but also worth bearing in mind, is the likely effect of Renewable Identification Numbers (RINs) at this stage. You might remember RINs from when they blew out two years ago. Back then, the squeeze was caused by a combination of speculation, restrictive thresholds and oversight by industrial and intermediary players. This time round, RINs could provide the correcting force that fuels a wider price reversal.

The return of floating storage – a.k.a the sharks are back -- Good news for those looking out for crude bottoms! JBC Energy reports on Friday that the economics that make storing surplus oil in floating tankers profitable are finally in play. Contango, in other words, has returned sufficiently enough to the market to incentivize those intermediaries who have the physical means to store oil, to purchase it for storage purposes and delayed sales, thus helping to balance the surplus in the market. As the analysts report:  Floating storage appears to have kicked off this week with reports from Reuters and Bloomberg showing that at least five tankers have been booked for 1-year time charter arrangements by major oil traders. As we noted earlier this week, the widening Brent contango is making long-term storage plays viable. Though, offsetting that, the oversupply in the Atlantic Basin persists: Besides market structure, the looming oversupply in the Atlantic Basin can also be seen in the weakness of the West African crude market. The premium over Dated Brent of key grades Qua Iboe and Bonny Light have slipped to 5-year lows (see chart), amid a lack of buying interest with several January cargoes still available. A wider Brent/Dubai cash spread is making it more difficult to arb West African barrels into Asia, while supplies in the Atlantic Basin are high due to an increase in Iraqi crude out of Ceyhan as well as greater availability of BTC Blend with February loadings pencilled in at a multiyear high of 820,000 b/d. The only support on the supply side for the Atlantic Basin is coming from Libya, where crude loadings appear to have come to a halt not least since the bombing of a tanker loading at the port of Derna on the weekend. A return of Libyan exports in the current market environment would tip the scales further, leading to yet more storage plays. This is continuing to have a significant effect on the Dated Brent differential to Nigerian crudes:

US Rig Count Tumbles by 61 to 1,750 - ABC News: Oilfield services company Baker Hughes Inc. says the number of rigs exploring for oil and natural gas in the U.S. plummeted by 61 this week to 1,750. The Houston firm said Friday in its weekly report 1,421 rigs were exploring for oil and 329 for gas. A year ago 1,754 rigs were active. Of the major oil- and gas-producing states, Alaska and Arkansas each gained two rigs and Ohio gained one. Texas plunged by 30, North Dakota dropped by seven, New Mexico fell six, Utah and Wyoming each dropped by five, Kansas and Oklahoma each fell by three, Pennsylvania dropped two and Colorado and Louisiana each fell by one. California and West Virginia were unchanged. The U.S. rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999

US Rig Count Crashes At Fastest Pace Since 2009 To 14-Month Lows - Just as T.Boone Pickens warned, US Rig Counts are plunging. Down by 61 this week alone - the biggest weekly drop in over 5 years - at 1,750, this is now the lowest since November 2013 (and very close the lowest since 2010). The 10% or so plunge in the last 7 weeks is following the same trajectory as the 2008 collapse - which led to - just as Pickens suggested - a 50% crash in rig counts...

Oil rigs fall by most since 1991 -  Producers idled the most oil rigs in a single week since 1991, as a more than 50 percent fall in crude prices further impacted drilling. The number of rigs searching or drilling for oil fell by 61 to 1,421 while the number of rigs pursuing natural gas rose by one to 329, according to oil service company Baker Hughes’ weekly count. One miscellaneous rig was idled. The United States total rig count fell by 61 rigs to 1,750 from 1,811 in the prior week. The total rig count — a measure of both oil and gas rigs — declined by the largest amount since 2009. The first week of the new year hit Texas drillers the hardest. The state’s rig count fell by 30 rigs to 810, twice as much as the week prior. Texas has seen a 10 percent loss from the high of 905 rigs in late November and now has fewer rigs drilling than the 825 the state had for the same period last year. North Dakota lost seven rigs to a total of 162. Rig counts are widely expected to fall following a more than 50 percent crash in crude prices since this summer. Producers across the industry have pared back 2015 drilling budgets — and the number of rigs they expect to have under contract — in order to shore up finances as revenue from selling crude oil falls. Praveen Narra, an analyst with Raymond James, said that his firm expects as many 850 rigs to come off the market this year.

No chance of OPEC output cut, even after oil dips below $50: Gulf delegates (Reuters) - Saudi Arabia and its Gulf OPEC allies are showing no sign of considering cutting output to boost oil prices, even though they dipped below $50 a barrel this week. OPEC decided against limiting production at its last meeting on Nov 27, despite misgivings from non-Gulf members, after Saudi Oil Minister Ali al-Naimi said the group needed to defend market share against U.S. shale oil and other competing sources. Those misgivings have grown with a slide in oil prices to below half their level in June, hurting the economies of OPEC's smaller producers. Benchmark Brent dipped to $49.66 on Wednesday, its lowest since April 2009, before rising to $51 on Thursday. true OPEC has forecast an increasing surplus in 2015, citing rising supplies outside the group and lackluster growth in global demand. But the Gulf members, who account for more than half of OPEC output, are not wavering, arguing lower prices will slow competing supplies, spur economic growth and revive demand. One delegate from a Gulf OPEC member said there was "no chance" of a rethink while another referred to the view that non-OPEC producers were to blame for the glut. "Naimi made it clear: OPEC will not cut alone," the second delegate said. OPEC ministers and delegates have blamed non-OPEC producers such as Russia, Mexico and Kazakhstan, as well as U.S. shale and tight oil production, for the oversupply in the market.

Why OPEC keeps talking oil down, not up, even after prices halved: If there ever was doubt about the strategy of the Organisation of Petroleum Exporting Countries, its wealthiest members are putting that issue to rest. Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won't curb output to halt the biggest drop in crude since 2008. Qatar's estimate for the global oversupply is among the biggest of any producing country. These countries actually want - and are achieving - further price declines as part of an attempt to hasten cutbacks by US shale drillers, according to analysts at Barclays and Commerzbank. Crude fell 48 per cent last year and has declined 34 per cent since OPEC affirmed its output target on November 27. That decision, while squeezing revenues for OPEC members in 2015, aims at preserving their market share for years to come. "The faster you bring the price down, the quicker you will have a response from US production - that is the expectation and the hope," said Jamie Webster, an analyst at consultants IHS in Washington. I cannot recall a time when several members were actively pushing the price down in both word and deed."

Jeff Gundlach: "If Oil Drops To $40 The Geopolitical Consequences Could Be Terrifying" - In a recent interview with FuW, DoubleLine's Jeff Gundlach explained his concerns about the oil market not being "unequivocally good" for everyone... Question: The crash in the oil market is already causing jitters in the financial markets around the globe. What is your take on that?  Gundlach: Oil is incredibly important right now. If oil falls to around $40 a barrel then I think the yield on ten year treasury note is going to 1%. I hope it does not go to $40 because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be – to put it bluntly – terrifying. Large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the 'difference this time' is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.

How the World Bank Sees Cheap Oil Through 2016 Affecting the Global Economy - Oil prices have lost more than half their value in the last year, one of the biggest single factors reshaping the global economy. That’s why the World Bank has  examined the global impact of oil in one of its analytical chapters of its latest Global Economic Prospects report. What’s causing plummeting prices? It’s more supply glut than collapsing demand, according to the development bank. New technology is allowing the U.S. to ramp up its petroleum output, with new U.S. production more than offseting losses in Iran and Syria. Meanwhile, Europe continues to flirt with recession and growth in major oil consumers, notably China, is slowing. Both of those trends have been known for a while. The key change in the last six months is policy stance by the Organization of Petroleum Exporting Countries. Ali al-Naimi, oil minister of OPEC’s biggest exporter, Saudi Arabia, has said his government is trying to preserve market share. “You have a producer that is willing to supply at a lower price, which changed market dynamics quite dramatically,” said Ayhan Kose, a key author of the bank’s report. How long will soft prices last? “In all likelihood these oil prices are going to be here for this year and possibly next year,” Mr. Kose said. There are two trends will keep downward pressure on prices. First, worries about the resilience of the global economy and weak growth aren’t going to dissipate quickly. Growth in Europe is expected to remain weak for years, and the outlook for China is continued moderation in growth rates. Secondly, markets know that even if some supply is shut down, much of it can come back online at any time.

The Fed Is Worried About Plunging Oil Prices Hurting U.S. Trading Partners - Falling oil prices don’t appear to be changing the Federal Reserve’s plans for raising interest rates, according to the minutes released Wednesday. But central bank officials are increasingly concerned that plummeting crude oil prices could hurt some major U.S. trading partners, potentially weighing on U.S. growth ahead. Fed officials said the oil-price decline–more than 50% in the last year–could exacerbate deflationary pressures overseas. “Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient,” the Fed minutes said. Europe in particular is at risk from falling prices. Although lower energy costs give consumers more money to spend on restaurants, electronics and other goods, deflation could cause consumers and businesses to postpone spending if they expect prices to fall further. That raises the risk of the region entering a recession for the third time since the 2008 financial crisis. Deflation also makes government’s debt problems worse, a development that would push up the cost of borrowing even while growth prospects dim. European Central Bank officials have pointed to the deflationary effects from oil as one of the factors they’re taking into consideration in whether to juice the currency union with more monetary stimulus. Some Fed officials lowered their expectations for global economic growth, according to the minutes. But several said policy makers overseas were now more likely to expand support for their economies.

Oil Price Drop Starting To Impact Canada -- Several economic statistics released over the last few days have indicated the energy slowdown is negatively impacting Canada.  Let's start with exports, which decreased 3.5%.  However, the real story was the drop in energy related goods:  Exports of energy products fell 7.8% to $9.5 billion in November, the sixth consecutive monthly decrease. Crude oil and crude bitumen was the main contributor to the decline, down 9.9% to $6.9 billion, as prices fell 6.7% and volumes were down 3.4%. Exports of other energy products (-28.4%), mainly coal, also decreased. The accompanying table provides the granular detail: Not only did exports of energy products drop 7.8%, but so did the exports of other raw materials such as metal ores and mineral products. The sum effect is a very large, one-month hit to exports, as shown by the deep blue line in the graph below: And a drop in energy prices -- specifically gasoline (see chart below)-- led to a slower pace of increase in inflation, which increased 2% Y/Y: These two indicators are some of the first to show the impact of lower energy prices on the Canadian economy. Considering the sharp drop in exports and the continued drop in gas prices, this won't be the first time we hear of this effect.

The Two Tales of Falling Oil Prices in Australia —The fall in global oil prices is a double-edged sword for Australia. On the one side, consumers should have more money in their pockets to spend, stimulating demand amid a spell of flagging growth. On the other, a steep fall in oil prices could hit revenues from exports of liquefied natural gas, whose prices are linked to oil. Australia is set to become the world’s largest supplier of LNG by the end of the decade. Some economists are optimistic that a fall in oil prices will rev up spending, likening the sharp fall in gasoline prices to the equivalent of another 50 basis point interest rate cut. As motorists pay less at the pump, they’ll be more inclined to spend on other goods from apparel to home furnishings, some economists say.   Australia’s central bank would be “delighted” to see such knock-on effects after a year of frustratingly soft economic growth, in which record-low interest rates failed to spur activity, says Craig James, chief economist at Commsec.   Shane Oliver, the head of economics at AMP Capital, said gasoline prices are already falling quickly in Australia’s cities, a boost to consumer confidence and disposable incomes. Lower energy costs have also contained price increases, clearing a path for the central bank to lower interest rates further, he added. Australia is a net importer of oil, so there is ample scope for benefit. Rough estimates suggest the fall in the price of oil, if sustained, will boost Australia’s gross domestic product growth by 0.7%. That could be enough to chip away at unemployment, which is near decade highs.

Saudi Arabia and Its Oil Production Capability - An Insider's Viewpoint  --As most of us are aware, Saudi Arabia, the world's largest producer of oil for several decades along with having 16 percent of the worlds crude reserves, has functioned as OPEC's swing producer.  Thus far, the nation has been able to both ramp up and cut production when necessary to ensure that overall OPEC output remains close to its target levels.  This has been used in the past to either prop up prices when they fall or push prices down when they are too high to be sustainable as was the case in 2008.  That said, Saudi Arabia is particularly evasive when it comes to the actual size of its oil reserves and the state of its aging fleet of supergiant oil fields, some of which were discovered in the 1940s and 1950s like Ghawar, the world's largest oil field which accounts for more than half of Saudi Arabia'c cumulative oil production. Here is a map from the EIA showing Saudi Arabia's oil infrastructure:  All oil industry operations in Saudi Arabia are operated by the Saudi Arabian Oil Company better known as Saudi Aramco.  This national oil and natural gas company is based in Dhahran and has two distinctions; it has the world's largest proven oil reserves and the world's largest daily oil production.  Saudi Aramco has proven oil and condensate reserves totalling 260.2 billion barrels and the company's average daily crude production in 2013 was 9.4 million BOPD for a total of 3.4 billion barrels over the year or one in every eight barrels of the world's crude oil production.  Interestingly, according to the company's website, Aramco produced the most oil that it has ever produced in its 80 year history in 2013.  Now, let's get to the "meat" of this posting.  As we are all aware, back in 2011, WikiLeaks released a virtual treasure trove of United States Department of State cables.  Among them, was this cable which outlined a meeting that took place between the Consul General of the Embassy in Riyadh and Dr. Sadad al-Husseini, the former Executive Vice President for Exploration and Production at Saudi Aramco:

Rouhani threatens to hold referendum - FT.com: President Hassan Rouhani has threatened to hold an unprecedented referendum in Iran as he warned hardline opponents of a nuclear deal with the west that the country must end its international isolation. The Iranian leader said he was looking at the possibility of using his constitutional rights to give power to the people in comments that some analysts took as a warning that he may try to put any nuclear agreement to a public vote. “Our political experience shows that the country cannot have sustainable growth when it is isolated,” he told a conference on Iran’s economy in Tehran on Sunday. He added that this did not mean Iran’s negotiations with six world powers — the US, UK, France, China, Russia and Germany — were compromising the Islamic regime’s ideals of the 1979 revolution. Mr Rouhani is under pressure from Iran’s hardliners in the parliament and the elite Revolutionary Guards, who insist that nuclear negotiations, which have been extended until July 1, should only be secured if all sanctions are lifted. Many Iranian analysts say the condition sounds almost impossible to achieve, fuelling concerns in Tehran that a deal is out of reach.

Iran’s Supreme Leader Is Skeptical of Nuclear Talks With U.S. - — Iran’s supreme leader said on Wednesday that his country should find internal solutions for dealing with economic sanctions and that the United States could not be trusted to lift sanctions in the event that a nuclear agreement is reached.The leader, Ayatollah Ali Khamenei, reiterated in a speech published on his personal website that he did not oppose the current negotiations with the United States and other world powers over Iran’s nuclear program, but said that Iranians needed to rely on “bright and realistic glimmers of hope, and not on imaginary ones.”Those talks are scheduled to resume Jan. 18 in Geneva, Iran’s state Islamic Republic News Agency reported on Tuesday.In his first public criticism of the government of President Hassan Rouhani since his election in 2013, Mr. Khamenei said the government should “trust the people and domestic forces.” He also asked officials to refrain from “saying unnecessary words.” He expressed deep skepticism about the nuclear talks, warning the government that “efforts must be made to immunize Iran against the sanctions” so that “the people would not be hurt.” Photo Ayatollah Ali Khamenei, Iran’s supreme leader, speaking at his residence in Tehran on Wednesday. Credit Office of the Iranian Supreme Leader, via Associated Press The reason for his pessimism, he said, was that America could not be trusted.

Oil, Power and Psychopaths - Ilargi - Iran has a – very – long running dispute with the US about its nuclear technology. The US wants Assad (Bashar Al-Assad) out of Syria, while Iran and Russia support Assad (Russia’s sole proper base in the Middle East), who’s an Alawite (a Shi-ite branch), a people historically persecuted by Sunni’s. ISIS (or Daesh in the region) is Sunni. So are the Saudi’s. Iran is Shi’ite. Bahrain is ruled by Sunni but has a majority Shi’ite population. And I could go on for a while. A long while. All this plays into the oil game, the falling oil prices. Blaming OPEC for the recent price fall is seeing the world from a child’s perspective. OPEC and its major voteholder, Saudi Arabia, are no more to blame for the plunge than the US, Russia or other non-OPEC producers. Everybody produces as if there’s no tomorrow, and the Saudi’s have merely concluded that their only choice is to do the same. It’s a race to the bottom. The reason is the fast declining demand for oil; China is nowhere near as mighty as we seem to think, Europe is a basket case, emerging economies are being strangled as we speak by the surging dollar and the Fed taper, and we’re just getting started. It’s cute and all that nobody wonders how much virtual money has vanished into the great beyond as both oil itself and the companies that get it out of the earth have lost half of their ‘values’ in Q4 2014, let alone the countries that depend on oil for their very existence. But cute doesn’t cut it.  America is trying to control the world by throwing it into confusion, emboldened by poorly understood theories about military superiority, and creating conflicts all over the place that look like they will never be solved. Whereas all it would need to do is make sure it secures itself, its own territory, not control the entire planet.

Ilargi: Oil, Power and Psychopaths - Yves here. One minor caveat to a fine overview. Ilargi mentions at the end that Angela Merkel has said that it is prepared to let Greece leave the Eurozone if it bucks austerity. A regular reader of the German press who also read the report in Der Spiegel thinks this is a bluff to influence the Greek election. And there is a bigger question that goes unanswered: why so much US warmongering and destructive, and eventually self-destructive behavior (blowback, anyone?). As Karl Polanyi mentions in passing in his The Great Transformation (see our recent post) because it seems so obvious, a peace consensus had emerged among the Great Powers in the nineteenth century, largely because domestic and international commerce were now a major social organizing principle, and businessmen correctly saw war as bad for business. So why has the peace faction been successfully supplanted by a war faction? Is it that (so far) the US wars are not inflicted on parties we consider to be contemporary Great Powers?

Asia's top 4 oil users record slowest demand growth in 6 years - Combined oil demand by Asia's four biggest consumers -- China, Japan, India and South Korea -- inched up a meager 0.4% in the first 10 months of 2014, on course to register the slowest pace of full-year annual growth since 2008, according to data analyzed by Platts. Platts data shows China, Japan, India and South Korea consumed on average 18.16 million b/d of liquid fuels (excluding LPG) over January-October, a mere 80,000 b/d or 0.4% higher than the approximately 18.08 million b/d used in the corresponding period of 2013. The four countries represent about a fifth of global oil demand, estimated to come in at 92.4 million b/d for 2014 by the International Energy Agency. China and India for the past few years have been among the biggest contributors to incremental global consumption. Barring any surprises in the final two months of the year, the demand growth in these four countries for 2014 would be even worse than the last anemic annual increase of 0.8% seen in 2008 -- a tumultuous year of historic high oil prices followed by the global financial crisis.

A comment on current Chinese vs Second World War Iron Ore demand - China uses roughly 700 million tonnes of steel per year (or at least used that much before recent declines). Really good iron ore  62 percent iron - so there is at least 1.1 trillion tonnes of iron ore used per year.  My summer weekend reading is Winston Churchill's history series - and I am currently on his book on the lead up to and the early phase of the Second World War.  In it he is writing to the then Prime Minister about interdicting the shipping of iron ore from then neutral Norway to Nazi Germany. Churchill estimates that German industry needs 9.5 million [presumably imperial] tons of ore between 1 May and 15 December 1940.  During the armaments build-up phase of the Second World War Germany was using less than 20 million tonnes of iron ore per year or way less than 2 percent of current Chinese usage.  Gosh there is a lot of steel usage and capacity in China.

What Macau Just Said About China’s Economy - Wolf Richter - Few economic phenomena compare to the soaring gambling revenues in Macau since it opened up to foreign casino operators in 2001. In 2002, Macau blew past Las Vegas. It’s the only place in China where the Chinese can go and legally gamble away their money, and it’s one of the key places where they can go to siphon their wealth – however they’d obtained it – out of Mainland China and beyond the reach of the muscular arm of the government. Even during the financial-crisis years 2008 and 2009, Macau gaming revenues grew, despite a horrendous seven-month plunge. 2009 was the worst year on the books, with revenue growth of only 9.6%. The rest of the years, double-digit growth was the norm. During the first five months of 2014, revenues soared 15.8%. Nothing could stop Macau, or so it seemed. But in June, Macau’s world changed with the first year-over-year revenue decline since the financial crisis. The soccer World Cup was blamed. VIP revenues, which used to account for 66% of total revenues, dropped an estimated 20%, a hole that increased marketing to regular folks couldn’t fill. In July, the expected post-World Cup bounce failed to materialize. So they blamed the investigation of Zhou Yongkang, former head of state security, the most senior guy yet to be knocked down by the corruption crackdown that would go after “tigers and flies” alike.  Month after month, gambling revenues plunged, and new culprits were found each time: In December, revenues plunged 30.4% from a year earlier, according to the Gaming Inspection and Coordination Bureau (DICJ), the worst decline in the history of its data going back to 2002. Pundits had expected a decline but not this “shocker.” It was the seventh month in a row of declines, matching the financial crisis record. Even after the glorious first five months, revenues for the year dropped 2.6% to 351.5 billion Macau patacas ($44 billion), the first revenue drop in the history of the data.

China fourth-quarter GDP growth may slow to 7.2 percent, weakest since first quarter 2009   (Reuters) - China's annual economic growth likely slowed to 7.2 percent in the fourth quarter, the weakest since the depths of the global crisis, a Reuters poll showed, which would keep pressure on policymakers to head off a sharper slowdown this year. The expected slowdown in growth of the world's second-largest economy, from 7.3 percent in the June-September quarter, means full-year would undershoot the government's 7.5 percent target and mark the weakest expansion in 24 years. Growth of 7.2 pct in October-December would be the weakest since Q1 2009, when the economy grew 6.6 percent as the worst of the global crisis passed. true Fourth-quarter GDP data will be announced on Jan. 20. The poll of 31 economists showed bank lending, fixed-asset investment and factory output growth may have steadied in December, but factory price deflation likely worsened and consumer price inflation hovered near five-year lows. "We expect the upcoming December data to show a still frail economy, tepid production momentum, and mounting deflationary pressures," economists at UBS wrote in a note.

China Fast-Tracks $1 Trillion in Projects to Spur Growth - China is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year as policy makers seek to shore up growth that’s in danger of slipping below 7 percent. Premier Li Keqiang’s government approved the projects as part of a broader 400-venture, 10 trillion yuan plan to run from late 2014 through 2016, said people familiar with the matter who asked not to be identified as the decision wasn’t public. The National Development and Reform Commission, which will oversee the projects, didn’t respond to a faxed request for comment. The move illustrates concern among officials that China’s planned shift to a domestic-consumption driven economy has yet to produce enough growth momentum. The yuan rose, halting a two-day decline, and Australia’s dollar -- a proxy for China due to its shipments of iron ore and other commodities used in construction -- climbed after the news. “It’s part of China’s efforts to stabilize growth, and the news will help to boost market confidence,” said  “Infrastructure investment will continue to be a major driver for China’s economic growth.”

About that $1tn China ‘stimulus’ -- Said China of its own mooted plan on Thursday: “It’s not a stimulus program by expanding fiscal input, it’s about guiding social capital into investment projects,” Luo [an investment official with the National Development and Reform Commission] said. “It has nothing to do with the 4-trillion-yuan stimulus plan in 2008, and it is fundamentally different from that.” But wasn’t it already pretty clear it wasn’t a legit stimulus? RBS’s Louis Kuijs gave two good reasons just after the original Bloomberg story on the 6th about a possible “RMB 7tn infrastructure” package got everyone excited: However, while we do not really question the estimates about the overall amount of money involved, important caveats make the reality of this program much less exciting than it may appear – especially in terms of “stimulus”. This is not a package of new spending plans, over and above existing plans. Much of it is already in the pipeline, in the sense that this is in line with and follows earlier plans and projections on investment. A sizeable portion of this is not infrastructure spending by the government, but is normal corporate investment. Indeed, much of this is not meant to be financed by the government but by the corporate sector. Considering that the sum of infrastructure and corporate investment was around RMB 35tn in 2014, a sum of RMB 10tn spread out over a few years – and a major part of which is already in the baseline – becomes a less impressive number than the headlines suggest.

China PPI suffers biggest fall in 2 years - FT.com: Chinese factory gate prices recorded their biggest annual fall in more than two years in December, adding to fears that deflation beckons in the world’s second-largest economy. China’s producer price index, which measures wholesale prices, has fallen for 34 consecutive months. December’s 3.3 per cent year-on-year decline, reported by the National Bureau of Statistics on Friday morning, was the largest since September 2012. It was also far sharper than November’s 2.7 per cent fall.  Consumer prices, conversely, rose 1.5 per cent year on year in December, up slightly from 1.4 per cent in November. China’s central bank lowered interest rates for the first time in two years in November to counteract slowing economic growth. In October, China posted its lowest quarterly economic growth figure in five years, of 7.3 per cent in the third quarter. The NBS will publish the country’s full-year growth figure on January 20 and many analysts expect it to fall short of the government’s 7.5 per cent target. Since its November rate cut, however, the People’s Bank of China has defied expectations that it would take further easing measures by reducing the level of reserves that commercial banks are required to maintain. Market interest rates, meanwhile, have been climbing. Some analysts believe that the spectre of deflation gives the Chinese government an opportunity to implement long-delayed price reforms. In November 2013, the ruling Communist party pledged to let the market play a “decisive” role in setting prices, but has been slow to follow through on that promise.

Deflating China --Here’s what 33 months of negative Producer Price Index inflation in China look like:  Of course, we’re now at 34 months, following December’s print. This clocked a 3.3 per cent year on year fall in the index — the biggest annual fall in more than two years. Dramatic. But the question is, should we care? Not only is the print less than shocking considering the state of commodity prices at the moment, consumer prices actually rose 1.5 per cent year on year in December, up slightly from 1.4 per cent in November. Representing the “actually, calm down you mad lunatics” side are Capital Economics, Nomura and Goldman, who will merely point out that where PPI is concerned there is very little cause for concern. As Cap Econ say, “with the price of final consumption goods relatively stable, many firms actually stand to benefit from lower input costs” pushed down by global commod prices. And where CPI is concerned, the expectation is for it to only fall slightly over the coming year. To quote Cap Econ again, “with most households and firms set to benefit from the fall in inflation, we think concerns about deflation, at least in China’s case, are overplayed.” Chart from Nomura:

Bank of America warns of 'lethal' damage to China's financial system as deflation deepens - - China is at mounting risk of a financial crisis this year as growth sputters and deflationary pressures trigger a wave of defaults, Bank of America has warned. The US lender told clients that a confluence of forces are coming together that threaten to chill the speculative mania on the Shanghai stock exchange and to expose the underlying fragility of China’s $26 trillion edifice of debt. “A credit crunch is highly probable,” said the bank in a report entitled “Deflation, Devaluation, and Default”, written by David Cui and Tracy Tian. They said the country’s highly-leveraged companies cannot safely withstand President Xi Jinping’s drive to stamp out moral hazard and wean the country off excess credit, warning that the mix of slower growth and excess debt “could prove lethal for the financial system”. The report warned that it is rare for countries to escape either a financial crisis, or major bank failures, a currency upset, a sovereign crisis – or a mix of these – after letting credit grow at such vertiginous rates. “The most likely scenario is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking system, followed by a major recapitalisation of the banks,” said Mr Cui. The report said China spent 15pc of GDP to rescue lenders in the late 1990s but the scale of the problem is much greater today, and this time the government cannot resort to fresh stimulus so easily. Loans have jumped by roughly 100pc of GDP in the past five years under most estimates. This is twice the pace of growth in Japan over a comparable period before the Nikkei bubble burst in 1990, or in the US before the Lehman crisis in 2008.

Japan monetary base up 36.7% at Dec. end, tops BOJ goal amid easing- -- Japan's monetary base as of the end of December rose 36.7 percent from a year earlier to 275.87 trillion yen, outstripping the Bank of Japan's goal of 275 trillion yen set under its current ultra loose monetary policy, BOJ data showed Tuesday. The monetary base posted a record high for the fifth straight month partly as a result of the central bank raising the pace of supplying funds after it decided to take additional stimulus steps in late October to enhance its efforts to meet its goal of lifting the inflation rate to 2 percent. Under the latest easing measures, the BOJ aims to boost the monetary base at an annual pace of about 80 trillion yen, up from 60 trillion to 70 trillion yen in its previous policy. The current pace will bring the monetary base to about 355 trillion yen at the end of this year, though no target has been set for 2015 and following years. While the government looks to move Japan's economy out of deflation, its recovery has been slow since the consumption tax rate was raised to 8 percent from 5 percent in April. Sluggish domestic demand and a drop in oil prices have slowed the pace of price increases, crimping the BOJ's efforts to hit the inflation target. At the end of 2014, the balance of financial institutions' current account deposits at the BOJ, the biggest part of the monetary base, came to 178.14 trillion yen, up 66.4 percent from a year before.

Japan government OKs $26 billion extra budget to fund stimulus spending (Reuters) - The Japanese government on Friday approved a $26 billion extra budget for the current fiscal year to fund stimulus spending and help pull the economy out of recession. The 3.118 trillion yen extra budget for the stimulus, unveiled last month, includes funding for steps such as helping Japan's lagging regions and households with subsidies and shopping vouchers and rebuilding after natural disasters. The extra expenditure comes on top of the initial outlay of 95.9 trillion yen, bringing the total amount of this fiscal year's general-account budget spending to 99 trillion yen, highlighting Japan's struggle to fix dire public finances. "This budget is well-focused in terms of speedily responding to weak and fragile spots in the economy," Finance Minister Taro Aso told reporters after a cabinet meeting. "I think it meets the aim of reviving the economy and rebuilding public finances." In a show of commitment to fiscal reform, the government will not resort to fresh borrowing, while cutting new bond issuance by 757.1 billion yen from the initially planned 41.3 trillion yen for the current fiscal year ending in March. Tokyo will fund the package with unspent money from previous budgets and tax revenue that have exceeded budget forecasts. Corporate profits have been boosted by aggressive monetary and fiscal stimulus policies under Prime Minister Shinzo Abe, even as the broader economy has struggled.

Asia Factory Readings Disappoint at Close of 2014 -  Conditions on Asia’s factory floors continued to weaken in December as China’s slowing growth weighs on manufacturing activity. But moving into 2015, the benefits from cheaper crude oil and a strengthening U.S. economy should brighten the picture, economists say. A purchasing managers index for Taiwan, compiled by HSBC and research firm Markit and released Monday, fell in December to 50.0 from 51.4 in November. (A reading of under 50 signals contraction.) Taiwan’s technology-focused manufacturing sector performed well in 2014, in large part due to its role in the supply chain for Apple Inc.’s iPhone 6. The launch of that phone now over, there’s some fear over slack demand in Taiwan’s major export markets, especially China. The new export orders subindex fell for the first time in 16 months. Other PMI data released in recent days showed that China, Indonesia, and South Korea struggled through the end of 2014. India and Vietnam remained regional bright spots, but also face long-term hurdles. Some economists say these readings are likely to get better as 2015 progresses. Cheaper crude oil, which is trading at five-year lows, will reduce costs for companies and boost consumer spending, both in Western markets and closer to home. Still, there’s plenty of grim reading out there. Last week, two gauges of China’s factory activity showed its huge manufacturing sector hasn’t been able to buck softening demand. China’s official purchasing managers’ index fell to its lowest reading in a year and a half at 50.1 in December from 50.3 in November. The HSBC and Markit index also fell to 49.6 in December from 50.0 the previous month.

Rising Dollar Presses Asian Borrowers - WSJ: Asian companies that used cheap U.S. dollar loans to pile up heavy debts are facing a dual threat: the resurgent dollar and the likelihood of higher interest payments as the U.S. moves to raise rates. In recent years, when economic growth was strong and interest rates were low, banks doled out billions of dollars in loans to companies in Asia. Now, as China’s economy—Asia’s growth engine—weakens, those companies face a growing burden. Reduced economic growth is cutting into earnings, and more local currency is needed to make dollar-denominated interest payments. The burden is especially severe for borrowers in Southeast Asia, where currencies are falling the most, although any weakening of China’s currency would also pressure companies there. Already, there are signs of a pickup in souring loans. Thailand’s biggest four banks saw bad debts rise to 2.8% of outstanding loans during 2014 from 2.6% at the end of 2013. Indonesia’s central bank expects that nonperforming loans rose to 2.4% of the total at the end of 2014 from 1.8% the previous year. “A stronger U.S. dollar and higher U.S. rates would make it more difficult for corporate borrowers to service U.S. dollar bank debt from local revenues and to roll over maturing debt,” The current situation is reminiscent of the 1998 Asian financial crisis, when local currencies collapsed relative to the dollar, and banks came under pressure as companies that had borrowed in greenbacks found themselves unable to pay their debts. But analysts have played down the comparison, arguing that banks in the region are now better capitalized and governments have healthy reserves of foreign exchange, making sharp currency declines less likely.

Bill swap rate fixing is a scandal in waiting: If the Australian Securities and Investments Commission can establish that big banks have featured in the manipulation of the bank bill swap rate, it could well prove to be the largest corporate scandal of 2015. A clutch of large trading and investment banks are being investigated by the corporate regulator for colluding in order to tamper with this interest rate to generate profits estimated to be in the hundreds of millions. Details of those potentially involved are starting to dribble out into the public domain. It is probably the tip of the iceberg. Advertisement It doesn't generate mass public interest in the same way as bank financial adviser misbehaviour, because the superannuants and personal investors don't feel directly affected. But with any collusion there are victims – those who trade in the market and are counter-parties are the losers. A 10-strong team from the Australian Securities and Investments Commission has been on the case for more than a year and has taken three scalps – investment banks BNP Paribas, Royal Bank of Scotland and UBS, all of which have been fined more than $1 million. But the big Australian trading banks – the Commonwealth Bank of Australia, the National Australia Bank, Westpac and ANZ – would have to be in the firing line given they are the major players in the market.

The Trans-Pacific Trade (TPP) Agreement Must Be Defeated - Bernie Sanders - The Trans-Pacific Partnership is a disastrous trade agreement designed to protect the interests of the largest multi-national corporations at the expense of workers, consumers, the environment and the foundations of American democracy. It will also negatively impact some of the poorest people in the world. The TPP is a treaty that has been written behind closed doors by the corporate world. Incredibly, while Wall Street, the pharmaceutical industry and major media companies have full knowledge as to what is in this treaty, the American people and members of Congress do not. They have been locked out of the process. Further, all Americans, regardless of political ideology, should be opposed to the “fast track” process which would deny Congress the right to amend the treaty and represent their constituents’ interests. The TPP follows in the footsteps of other unfettered free trade agreements like NAFTA, CAFTA and the Permanent Normalized Trade Agreement with China (PNTR). These treaties have forced American workers to compete against desperate and low-wage labor around the world. The result has been massive job losses in the United States and the shutting down of tens of thousands of factories. These corporately backed trade agreements have significantly contributed to the race to the bottom, the collapse of the American middle class and increased wealth and income inequality. The TPP is more of the same, but even worse. During my 23 years in Congress, I helped lead the fight against NAFTA and PNTR with China. During the coming session of Congress, I will be working with organized labor, environmentalists, religious organizations, Democrats, and Republicans against the secretive TPP trade deal. Let’s be clear: the TPP is much more than a “free trade” agreement. It is part of a global race to the bottom to boost the profits of large corporations and Wall Street by outsourcing jobs; undercutting worker rights; dismantling labor, environmental, health, food safety and financial laws; and allowing corporations to challenge our laws in international tribunals rather than our own court system. If TPP was such a good deal for America, the administration should have the courage to show the American people exactly what is in this deal, instead of keeping the content of the TPP a secret.

Bill Black: Obama’s Vain Search for a TPP “Legacy”  - Yves here. This post confirms what readers know all to well, that Obama will use every opportunity to sell out the middle class to corporate interests. One thing to bear in mind is that opposition to the Trans-Pacific Partnership, and its ugly sister, the Transatlantic Trade and Investment Partnership, do not split on simply party lines. This fall, when Obama was unable to get enough votes to get "fast track" approval, which the Executive Branch uses to force an up-down vote on a final trade deal, denying Congress the opportunity to influence its contents, whip counts showed that nearly 40 Republicans in the House were prepared to join Democrats in opposing it. How the numbers would break now is an open question, but that means it is worth your time and effort to call your Congressman and let them know you are firmly opposed to these toxic trade deals.

How to Stop Currency Manipulation — IF the new Congress can agree on anything this year, it may well be the Trans-Pacific Partnership, a trade deal between the United States and 11 other countries throughout the Asia-Pacific region. Passions run high when it comes to trade deals these days, and the Obama administration is working hard to sell it to labor unions, which roundly oppose it. So far the pitch has been about what the deal, as written, will do to help the American economy — a pitch that hasn’t won over many, on either side of the partisan divide. But there’s one thing the administration can do that will both win over some opponents and address one of the biggest issues in global trade: add a chapter on currency manipulation. It is not unusual for countries to manage their exchange rate — the value of their currency relative to others — to make their exports cheap while making others’ exports to them more expensive. This method has been used extensively by, among others, China, Japan, Malaysia and Singapore — aside from China, all signatories to the partnership.The American dollar is a prime target for these currency managers. First, the dollar is the global trading system’s premier reserve currency, meaning dollars are freely traded and confidently accepted by international investors. And Americans are a highly acquisitive people — a nice way of saying we buy a lot of stuff. Consumer spending as a share of gross domestic product is about 70 percent here, 55 percent in Europe and 35 percent in China. We’re steady customers for export-led economies. There’s nothing wrong with that, until these exporters start buying dollars to raise the value of the dollar relative to their own currencies, thus subsidizing their exports and taxing their imports. In the United States, the result is persistent trade deficits that have been a drag on growth and jobs — better-than-average manufacturing jobs — for decades.

On This Day In History, The Baltic Dry Index Has Never Been Lower -- Must be over-supply too, right? Just like oil prices... The Baltic Dry Index - which apparently is only relevant when it is rising - has never been lower at this time of year. Perhaps GDP expectations, bond yields, crude oil prices, and credit risk are on to something about the global economy after all?

As World Linkages Grow, U.S. Economy Plays Smaller Role - It may seem counterintuitive in the era of globalization: The world is becoming less dependent on trade with the U.S. In 2002, the U.S. accounted for 32% of world GDP. Since 2002, the U.S. has seen a disappointing decade with a deep recession and slow recovery. Meanwhile, many emerging economies have grown rapidly, becoming larger trading partners with one another. The U.S. remains the world’s largest economy, but now it’s only 22% of world GDP, off nearly 10 percentage points. The U.S. is also the world’s largest importer, but it now accounts for 13% of global imports, down from 16% in 2005, according to the World Bank. The U.S. and the rest of the world can hardly ignore each other, but the world is growing less and less dependent on the U.S.

Demand side gains for the global economy in 2015 - After several years in which inadequate demand has seriously constrained activity in the global economy, causing repeated downgrades to growth forecasts, 2015 should see an improvement. Lower oil prices and a more demand friendly fiscal/monetary policy mix should result in faster growth in aggregate demand. And the depressing weakness in aggregate supply, which shows no sign of any improvement, is not yet a binding constraint on global growth. This will be a year in which excess capacity in the global economy will start to be absorbed. Certainly, the strength of domestic demand in the United States now seems to be well established. With the US fiscal tightening now over, an acceleration in the US recovery is no longer an unrequited forecast; it is now very apparent in the data. After a weather-affected Q1 last year, real GDP growth rebounded to average 4.8 per cent in Q2 and Q3. That will probably prove unsustainable, but it would be very surprising if the growth rate in 2015 does not exceed the CBO’s 1.7 per cent estimate for potential GDP by a wide margin. With lower oil prices adding at least 0.5 per cent to the growth rate next year, and private sector demand continuing to normalise, the US is enjoying a demand-led recovery, and the Federal Reserve seems happy to allow that to proceed with only a mild touch on the monetary brakes this year.

Deflation is a rising threat for markets - FT.com: Why did so many market pundits fail to foresee the decline in yields across the developed world in 2014? The short answer is that they were obsessed with the potential impact of the US Federal Reserve’s retreat from unconventional measures while neglecting the importance of global imbalances. In effect, the world has been prey to a growing problem of deficient demand, leading to disinflation, while the US has been growing too sedately to spark the inflationary pressures that would have called for much tighter monetary policy. There is a risk that forecasters will make the same mistake in 2015.  Consider the state of the world’s excess savers, starting with Japan. There Abenomics is having difficulty addressing deflation and raising economic growth. Weak demand resulting from adverse demographics and the recent consumption tax increase means the country is dependent on yet more bond buying and further yen devaluation to generate the cost-push pressure that would enable the Bank of Japan to meet its 2 per cent inflation target. China, meantime, is going through an awkward transition whereby its astonishingly high rate of investment is beginning to decline. Domestic demand growth has flagged. This has contributed to the fall in global commodity and energy prices. At the same time China faces a more competitive export environment as others, spurred by Japan, engage in competitive devaluations. As for the eurozone, it is being driven towards deflation by a moralistic drive for austerity which does nothing to arrest rising debt as a percentage of gross domestic product because the harder hit economies have shrunk. Disagreement on the governing council of the European Central Bank ensures a crabwise progression towards full scale government bond buying without which its inflation target will not be met.

Free Money in Bond Markets Shows Global Economy Still Struggling - The world’s richest nations are borrowing for free. Taken together, the average 10-year bond yield of the U.S., Japan and Germany has dropped below 1 percent for the first time ever, according to Steven Englander, global head of G-10 foreign-exchange strategy at Citigroup Inc. That’s not good news. The rock-bottom rates, which fall below zero when inflation is taken into account, show “that investors think we are going nowhere for a long time,” Englander wrote in a report yesterday. If the global economy was picking up, then bond yields would reflect expectations that inflation would accelerate and riskier assets would prove more attractive. Instead, inflation is on the slide. JPMorgan Chase & Co. forecasts a global rate as low as 1 percent if oil remains below $60 a barrel. Even during the Great Depression, governments in the U.S. and abroad paid more than now to borrow for a decade, Englander says. At the end of the crisis-roiled 2008, the so-called Group of Three’s rate was still above 2 percent. More broadly, bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.28 percent as of yesterday, the all-time low, based on data starting in 1996.

Thinking About International Bond Yields - Paul Krugman -- How can it be that interest rates on U.S. government bonds are so much higher than on European bonds — not just German bunds, but even Spanish and Italian bonds are now paying less than their U.S. counterparts. My correspondent asks, Is the U.S. government really a riskier bet than that of Spain? The answer is no, it isn’t. In fact, investors assign virtually no risk premium to holding U.S. government debt, and rightly so. I mean, even if you thought the US might default in the next 10 years, what, exactly, would you propose to hold instead? A world in which America defaults is one in which you might want to invest in guns and survival rations, not German bonds. In that case, however, what explains our relatively high interest rates? Well, let’s compare with Germany, also perceived as almost completely safe — but paying much lower interest. Why? The crucial point here is that German bonds are denominated in euros, while U.S. bonds are denominated in dollars. And what that means in turn is that higher U.S. rates don’t reflect fear of default; they reflect the expectation that the dollar will fall against the euro over the decade ahead.  So that’s what the Germany-US differential is about: higher US inflation (which is a good thing) plus the expectation that the dollar-euro rate, adjusted for inflation, will eventually revert to a normal level. Ultimately, it’s all about European weakness and relative US strength. Finally, Spain and Italy have higher rates than Germany because they really are perceived as risky. But the risk spreads are fairly small these days, so that at this point their rates are nonetheless lower than ours.

Fed Bond Purchases Had Larger Overseas Effects Than Rates, IMF Says -  The Federal Reserve‘s bond-buying programs have had a much larger impact on capital flows in and out of emerging markets than conventional interest-rate moves in the past, according to a new working paper from the International Monetary Fund. Fed Chairwoman Janet YellenGetty ImagesThe U.S. central bank brought interest rates to near zero in December 2008 and embarked on three rounds of asset purchases aimed at stabilizing markets during the financial crisis, combating the recession and spurring the recovery. The U.S. economy and labor market have improved, but inflation remains well below the central bank’s 2% target. “When the U.S. resorted to unconventional monetary policy, spillovers on asset prices and capital flows were significant, though remained smaller in countries with better fundamentals,” write economists Jiaqian Chen, etal.“This was not because monetary policy shocks changed (in size, sign or impact on stance). Instead, we find that larger spillovers stem more from structural factors, such as the use of new instruments (asset purchases),” they said. The Fed completed its third bond-buying program in October and is now debating when to start raising interest rates for the first time since 2006. Most Fed officials expect liftoff this year, and many investors are expecting it around midyear. Minutes from the central bank’s December meeting showed officials’ primary concerns regarding U.S. economic prospects emanating from overseas. The IMF paper emphasizes the importance of communicating policy shifts with enough lead time for markets to respond in an orderly way.

Can the U.S. Economy Save the World? Global Banking Group Chief Is Skeptical -   - WSJ: For Tim Adams, head of the world’s largest private financial-industry group and a former senior U.S. Treasury official, the global economic outlook is pretty dim. The U.S. economy is showing signs of strengthening, given an extra shot in the arm by plummeting oil prices. But the president of the Institute of International Finance–a group that represents the world’s largest banks, pension funds and insurance companies–says a host of problems both domestic and international will weigh on American and global growth this year. Falling oil and other key commodity prices, rising U.S. interest rates and currency mismatches around the world are sending shock waves through the global economy. “The question is, can a wealth effect in a liquidity-juiced U.S. economy provide the engine of growth” for the global economy, Mr. Adams said in an interview. “One could have a fairly pessimistic outlook on global growth if you take all these things into consideration.” Rather than a pessimist, however, Mr. Adams calls himself a realist. For example, the IIF chief says International Monetary Fund forecasts for U.S. growth at 3.1% this year, up from 2.2% in 2014, is far too optimistic. Even though U.S. exports represent only about 15% of gross domestic product, threats from abroad could slow growth, he said. Both Europe and Japan are struggling to avoid reentering recessions. Major emerging markets are slowing and are at risk from corporate-debt problems and capital outflows. The financial group estimates industrialized countries will have to roll over $400 billion to $500 billion in debt over the next two years.

Welcome to the Hunger Games, Brought to You by Mainstream Economics - By Lynn Parrramore, Senior Editor at INET. Originally published at INET. As a virulent strain of austerity capitalism takes over Europe, leaving shattered lives in its shadow, researchers Servaas Storm and C.W.M. Naastepad, Senior Lecturers in Economics at Delft University of Technology in The Netherlands, consider how things got so bad, what role economists and misguided policy-makers have played, and which models and ideas are needed to change course. In the following interview, they discuss how most are getting the story about Europe wrong. They explain how their research shows that when countries try to compete with each other by lowering wages and slashing the social safety net, the costs are high both economically and socially, and why co-operative and regulated capitalism is a far better path. (For more, see “Europe’s Hunger Games: Income Distribution, Cost Competitiveness and Crisis,” published in the Cambridge Journal of Economics, and “Crisis and Recovery in the German Economy: The Real Lessons,” part of the Institute for New Economic Thinking’s project on the “Political Economy of Distribution”).

Why Emerging-Market Debt Could Balloon in a Flash -- A perfect storm could be brewing for emerging-market sovereign debt, the World Bank says. A host of governments around the world don’t have enough income to buffer against growth risks and higher borrowing costs. “You might think that you have sustainable debt dynamics, but that can change dramatically,” said Ayhan Kose, a lead author of the bank’s latest Global Economic Prospects report. Part of the report was published late Wednesday. Weak balance sheets are limiting the ability of governments to use their budgets as potential buffers against weaker-than-expected growth or higher financing costs. In the immediate aftermath of the global financial crisis, emerging-market economies used government coffers to spend their way out of their problems. Their efforts–coordinated with major government and central bank stimulus in advanced economies–helped juice the global recovery. Strong growth in the lead up to the crisis meant many emerging markets had government budget surpluses. But growth has been slowing in many emerging-market nations as they strain their ability to expand without major overhauls to their economies. Now emerging-market balance sheets are largely in the red, with budget deficits expanding to levels not seen for a decade.

China’s courtship of Latin America tested - FT.com: Venezuelan President Nicolás Maduro has announced $20bn worth of investment from China. But left unsaid was whether he got what he came for: a financing lifeline from his largest creditor. The obfuscation speaks volumes about how China’s decelerating economy and crumbling commodity prices are testing its courtship of Latin America and underscores Beijing’s reluctance -— already signalled in Zimbabwe — to commit cash blindly even to its closest friends in resource-rich countries. That is bad news for Latin America. Over the past decade Beijing has disbursed more than $100bn of trade credits and investment to the region and this week some of its biggest clients are coming cap-in-hand, seeking fresh funds to tide them through lean times. While Chile, Brazil and Peru are all important trade and investment partners, it is in state-to-state deals with left-leaning governments in Venezuela, Ecuador and Argentina where China finds itself most exposed. Often locked out of western capital markets, these countries painted Chinese funds as a “south-south alternative” to private sector finance or multilateral loans from Washington-dominated lenders such as the International Monetary Fund. That strategy binds Beijing to some of the region’s wobbliest economies, and with the end of the commodity boom it must now decide how much fresh support to offer. Beijing this week hosts the first joint China summit with Celac, a regional Latin American grouping founded by Venezuela’s late president, Hugo Chávez, which pointedly excludes the US.

"Now There's Not Even Soap" Maduro Heads To China To 'Save' Socialist Utopia Venezuela -- Social media is awash with striking images of #EmptyShelvesInVenezuela (#AnaquelesVaciosEnVenezuela) as the evaporation of basic human staples such as toilet paper has now been hyperinflated to total chaos at warehouses and supermarkets. As President Maduro decries the loss of $100 oil "stability", vowing to return oil prices to their rightful places (and heads to China for help), lines reach for miles for milk and soap... and the people defy governmental bans on photographing empty market shelves... "We couldn't find shampoo, so we washed our hair with soap. Now there's not even soap."

Turkmenistan Devalues Currency By 18%, Armstrong Warns Of "Economic Collapse On A Global Scale" - The energy-rich former Soviet republic of Turkmenistan Thursday devalued its currency against the US dollar by 18%, as AFP notes, in the latest sign of contagion among Russia's neighbors from the plunging ruble (following Krgyzstan's 17% plunge in 2014 and Kazakhstan's 14% tumble). However, as Martin Armstrong warns, this is symptomatic of a deflationary contagion that "will contribute to now force the dollar higher... We are in a major economic collapse on a global scale. Most people do not understand that this is the real threat we face." As AFP reports, On Thursday, the website of Turkmenistan's central bank published the rate of 3.50 manats to the US dollar, from 2.85 manats, a depreciation of 18.6 percent. The devaluation came as the plunge in value of the Russian ruble, linked to Western sanctions over Ukraine and falling oil prices, sent shockwaves through former Soviet republics.

Ken Rogoff Warns Economic Sanctions Don't Work; Fears Violence, Not Bargaining - With Western economic sanctions against Russia, Iran, and Cuba in the news, Ken Rogoff thought it was a good time to take stock of the debate on just how well such measures work. The short answer is that economic sanctions usually have only modest effects at best. In a world where nuclear proliferation has rendered global conventional war unthinkable, economic sanctions and sabotage are likely to play a large role in twenty-first-century geopolitics. Rather than preventing conflict, Pericles’s sanctions in ancient Greece ultimately helped to trigger the Peloponnesian War. One can only hope that in this century, wiser heads will prevail, and that economic sanctions lead to bargaining, not violence.

Russia's "Startling" Proposal To Europe: Dump The US, Join The Eurasian Economic Union --  Slowly but surely Europe is figuring out that as a result of the western economic and financial blockade of Russian, it is Europe itself that is suffering the most. And while Germany was first to acknowledge this late in 2014 when its economy swooned and is now on the verge of a recession, now others are catching on. Case in point: the former head of the European Commission, and Italy’s former Prime Minister, Romano Prodi who told Messaggero newspaper that the "weaker Russian economy is extremely unprofitable for Italy." In other words, just as slowly, the world is starting to grasp the bottom line: it is not the financial exposure to Russia, or the threat of financial contagion should Russia suffer a major recession or worse: it is something far simpler that will lead to the biggest harm for Europe's countries. The lack of trade. Because while central banks can monetize everything, leading to an unprecedented asset bubble which if only for the time being boosts investor and consumer confidence, they can't print trade - that all important driver of growth in a globalized world long before central banks were set to monetize over $1 trillion in bonds each and every year to mask the fact that the world is deep in a global depression.  Which is why we read the following report written in yesterday's Deutsche Wirtschafts Nachrichten with great interest because it goes right to the bottom line. In it Russia has a not so modest proposal to Europe: dump trade with the US, whose call for Russian "costs" has cost you another year of declining economic growth, and instead join the Eurasian Economic  "Russia has presented a startling proposal to overcome the tensions with the EU: The EU should renounce the free trade agreement with the United States TTIP and enter into a partnership with the newly established Eurasian Economic Union instead. A free trade zone with the neighbors would make more sense than a deal with the US."

German Inflation Tumbles To Lowest Since October 2009 -- With regional CPIs cliff-diving in December relative to November, it is not entirely surprising that broad Consumer Price Inflation for Germany as a whole just printed at a mere +0.2% YoY (missing expectations of +0.3%) - the lowest since October 2009 and was unchanged MoM. The initial reaction in DAX was a modest rise as if the EU's strongest core economy is nearing outright deflation, markets will price-in even more likelihood to the ECB's sovereign QE any minute now. Of course, in the eyes of the Fed this is all transitory and energy-driven but stocks hope that Draghi ignores that.

Euro falls to nine year low; Greece and ECB in focus (Reuters) - The euro hit a near nine-year low on Monday as markets bet the prospect of inflation across the region turning negative and political uncertainty in Greece will force the European Central Bank to launch quantitative easing. European shares were under pressure after the Athens bourse slumped again and, amid yet another hefty slide in oil prices,  The euro fell as low $1.18605 EUR= overnight, its weakest level since March 2006, and was struggling at $1.1895 as U.S. trading began to gather momentum. Investors taking a punt that the ECB will open up a bond-buying program as the U.S., UK and Japanese central banks have done were emboldened by an interview with ECB president Mario Draghi in German paper Handelsblatt on Friday. He said the risk of the central bank not fulfilling its mandate of preserving price stability was higher now than half a year ago. German regional inflation figures saw more weakness in December, adding to the downward pressure on the euro and government bond yields before Wednesday's euro zone estimate. Economists forecast that euro zone consumer prices fell 0.1 percent in December, the first decline since 2009. That should fan expectations the ECB will ease at its first policy meeting of the year on Jan. 22.  Greek politics were also at the forefront of market thinking as the debate around the possibility of elections later this month resulting in the country leaving the euro zone picked up again.

Germany Believes Eurozone Could Cope With Greece Exit -- The German government believes that the euro zone would now be able to cope with a Greece exit if that proved to be necessary, Der Spiegel news magazine reported on Saturday. Both Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble believe the eurozone has implemented enough reforms since the height of the regional crisis in 2012 to make a potential Greece exit manageable.”The danger of contagion is limited because Portugal and Ireland are considered rehabilitated,” the magazine quoted one government source saying.  In addition, the European Stability Mechanism (ESM), the eurozone’s bailout fund, is an “effective” rescue mechanism and was now available, another source added. Major banks would be protected by the banking union. It is still unclear how a eurozone member country could leave the euro and still remain in the European Union, but Der Spiegel quoted a “high-ranking currency expert” as saying that “resourceful lawyers” would be able to clarify”. According to the report, the German government considers a Greece exit almost unavoidable if the leftwing Syriza opposition party led by Alexis Tsipras wins an election set for Jan. 25.

Competing Views: Grexit Would Be "Lehman Squared" vs. No Problem; Where to Point the Finger When it Blows - There's an amusing pair of headlines back-to-back today on what a Greek exit from the Eurozone might mean.  One view is catastrophic, the others is along the lines of no problem. Let's start with the catastrophe. Economic historian Barry Eichengreen says Greek Euro Exit Would be ‘Lehman Brothers SquaredA decision by a new Greek government to leave the eurozone would set off devastating turmoil in financial markets even worse than the collapse of Lehman Brothers in 2008, a leading international economist warned Saturday. A Greek exit would likely spark runs on Greek banks and the country’s stock market and end with the imposition of severe capital controls, said , an economic historian at the University of California at Berkeley. He spoke as part of a panel discussion on the euro crisis at the American Economic Association’s annual meeting. The exit would also spill into other countries as investors speculate about which might be next to leave the currency union, he said.  Yahoo!Finance reports Germany Believes Eurozone Could Cope with Greece Exit. The German government believes that the euro zone would now be able to cope with a Greece exit if that proved to be necessary, Der Spiegel news magazine reported on Saturday, citing unnamed government sources. Both Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble believe the euro zone has implemented enough reforms since the height of the regional crisis in 2012 to make a potential Greece exit manageable, Der Spiegel reported.

Tsipras says ECB cannot shut Greece out of stimulus: Greek leftwing opposition leader Alexis Tsipras said the European Central Bank (ECB) could not exclude Greece if it decides to move to a full «quantitative easing» programme to stimulate the euro zone's faltering economy. Speaking at a party congress on Saturday, three weeks before a Jan. 25 general election, Tsipras also said his Syriza party would ensure much of Greece's debt was written off as part of a renegotiation of its international bailout deal. The election takes place three days after a Jan. 22 policy meeting at which the ECB may decide to proceed with a quantitative easing (QE) programme to pump billions of euros into the euro zone economy by buying government bonds. Tsipras said he hoped ECB President Mario Draghi would decide to go ahead with the programme and said Greece could not be shut out, as some economists and politicians from countries including Germany have suggested. "Quantitative easing by the ECB with direct purchases of government bonds must include Greece,» Tsipras said. The comments underline the pressures facing Draghi ahead of the decision, with many in Germany opposed to full-scale QE which they fear will create asset bubbles and remove incentives for reform-shy governments to act. Syriza, which holds a slim opinion poll lead over Prime Minister Antonis Samaras' centre-right New Democracy party, has moderated its tone in recent months, pledging to keep Greece in the euro and not to unilaterally repudiate the bailout deal. But the prospect of a Syriza-led government has set financial markets on edge and caused alarm in Germany, where a succession of politicians and economists have argued the euro zone could cope with Greece's exit.

Samaras Warns of Euro Exit Risk as Greek Campaign Starts - -- Greece’s political parties embarked on a flash campaign for elections in less than three weeks that Prime Minister Antonis Samaras said will determine the fate of the country’s membership in the euro currency area.  Greece’s political parties embarked on a flash campaign for elections in less than three weeks that Prime Minister Antonis Samaras said will determine the fate of the country’s membership in the euro currency area. Samaras used a Jan. 2 speech to warn that victory for the main opposition Syriza party would cause default and Greece’s exit from the 19-member euro region, while Syriza leader Alexis Tsipras said his party would end German-led austerity. Der Spiegel magazine reported Chancellor Angela Merkel is ready to accept a Greek exit, a development Berlin sees as inevitable and manageable if Syriza wins, as polls suggest. The high-stakes run-up to the Jan. 25 vote returns Greece to the center of European policy makers’ attention as they strive to fend off a return of the debt crisis that wracked the region from late 2009, forcing international financial support for five EU countries. While Greek 10-year bond yields rose 16 basis points to 9.41 percent today from a post-crisis low of 5.57 percent in September, the relative improvement in yields from Italy to Ireland suggests that the contagion has been contained.

Germany ′prepared to let Greece leave eurozone′ if voters reject austerity - The German government is prepared to countenance a Greek exit from the eurozone, should it prove necessary, according to a report from German news magazine Der Spiegel. The magazine reported in its online edition on Saturday that Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble believe that such a development would now prove bearable for the rest of the currency bloc. The report cited progress made in the eurozone since 2012, when the eurozone sovereign debt crisis was said to have been at its worst, with fears diminishing that a "Grexit" could cause the currency union to disintegrate. "The danger of contagion is limited because Portugal and Ireland are considered rehabilitated," Der Spiegel quoted a government source as saying.In addition, the European Stability Mechanism (ESM), the eurozone's bailout fund, was now seen as an effective and available rescue mechanism. Major banks would be protected by the banking union. Any such policy shift has yet to be confirmed by the German government, with Berlin previously having been keen to keep Greece within the bloc.

More bark than bite: the ′Grexit′ debate - It all sounds familiar. In the run-up to Greece's parliamentary elections in 2012, the left-wing Syriza alliance, led by Alexis Tsipras, was predicted to win. Tsipras demanded an end to austerity policies, a stance that earned widespread approval among the Greek population. Spooked by this possible outcome, European politicians of widely varying denominations - such as German Christian Democrat Chancellor Angela Merkel, French Socialist President Francois Hollande and independent Italian Prime Minister Mario Monti - made a show of supporting conservative New Democracy candidate Antonis Samaras. They warned that a left-wing election victory could lead to Greece's ejection from the single-currency bloc. It is difficult to determine the extent to which this threat influenced the election result. Then and now, it could have had an impact - but it could also have triggered a defiant response from voters. In any case, the Syriza alliance could rejoice over a considerable rise in the number of votes in 2012, but only came in second. The task of building a new government fell to Samaras instead, and international backers' budget restrictions and reform requirements remained in place.  Today, fiscal consolidation policy is at issue once again. According to opinion polls, Syriza could well become the largest party in parliament in this month's election. But in contrast to 2012, the monetary union as a whole is no longer in danger.If Greece actually left the eurozone and returned to the drachma, a domino effect involving one debt-ridden state after another would now be unlikely. The EU has since taken precautions to prevent such a scenario, including a banking union.That is why politicians in Europe can discuss, in a fairly relaxed manner, the possibility of a Greek departure from the euro, whereas, at the height of the crisis in 2010, the German government saw no alternative to financial aid packages.

Greece vs Europe: who will blink first? - There is a whiff of 1914 to the latest Balkan showdown. Everybody thinks everybody else is bluffing, all of them betting that a calamitous chain reaction will be averted. In Germany, Der Spiegel reports that Angela Merkel thinks Greece can be ejected safely from the euro, if the rebel Syriza party wins the elections on January 25 and carries out its pledge to tear up Greece’s hated “memorandum” with the EU-IMF “Troika”. The German Chancellor’s team are blanketing the airwaves in what looks like a campaign to drive the threat home. “We are past the days when we still have to rescue Greece,” said Michael Fuchs, the parliamentary leader of Mrs Merkel’s Christian Democrats. “The situation has completely changed. It is entirely different from three years ago when we didn’t have the backstop defences in place. Greece is no longer 'systemically relevant’ for the euro.” He added wickedly that the single currency might actually be stronger without the Balkan troublemaker. It was revealed last week that Germany offered Greece a “friendly” return to the drachma in 2011. Months later, Mrs Merkel was prepared to eject Greece from EMU altogether. Tim Geithner, the former US Treasury Secretary, said the Europeans seemed determined to teach Greece a lesson: “They lied to us, and we’re going to crush them,” was the gist of it. Mrs Merkel retreated only after it became clear that Spain and Italy would be engulfed by contagion if Greece was thrown out.  This time, Berlin seems almost eager to finish the job. Yet Syriza’s ice-cool leader, Alexis Tsipras, is equally convinced that the EU elites will back down, knowing that they have invested too much political capital in Greece’s salvation to walk away. After all, the sums involved now are tiny compared to the €245 billion in loans already dispersed since the crisis erupted in May 2010. Surely, after having claimed so confidently that the crisis was essentially over, Mrs Merkel can hardly admit that her strategy has failed?

Greek Exit Could Bring a Euro Crisis - Bloomberg Editorial - German Chancellor Angela Merkel is said to view Greece's exiting the euro as a manageable risk that would pose no existential crisis for the common currency. That opinion, if she indeed holds it, is misguided at best and dangerous at worst.  It's true that Greece poses a less naked financial risk to the rest of the euro region than it did in 2009, when revelations about the true size of its deficit triggered the ongoing crisis. Today, only about a fifth of Greek government debts are owed to the private sector, thanks to the country's bailout by the European Union, the European Central Bank and the International Monetary Fund. And borrowing by Greek private companies accounts for less than 1 percent of loans made by Europe's biggest banks, according to JPMorgan.  So it's true that, if Greek elections later this month produce a new government prepared to default on its debts rather than continue with austerity, the financial repercussions will be limited. That says little, however, about the chaos that could accompany the country's departure from the euro. Contagion is never predictable.  Once inclusion in the euro is shown to be ephemeral -- despite the EU treaty's insistence that membership is "irrevocable" -- then other of the currency's weaker members will be vulnerable to speculation about their staying power. Investors may be driven to short the bonds of Italy, Portugal or Spain -- no matter how strong the economic or political arguments against their leaving the currency union -- driving their borrowing costs to levels they can't afford.

Who Will Be Hurt The Most If Greece Defaults - Who owns Greece's public debt? That's the 322 billion-euro question, according to the Finance Ministry's figures from the third quarter of last year. Most of the debt has changed hands since a bailout in 2010, a second in 2012 and a restructuring involving private creditors that same year. Private owners now hold only 17 percent. The secondary market has become very thin — bear that in mind when looking at 10-year bond yields. A default would have to be absorbed instead by official creditors, holding the remaining 83 percent of outstanding loans and bonds. These include euro-area governments (62 percent), the International Monetary Fund (10 percent) through its participation in the two bailouts, and the European Central Bank (8 percent), which purchased bonds in 2010 through its Securities Market Program. The remaining 3 percent are repurchase agreements and assets held by the Central Bank of Greece. It is unclear where losses on that portion would fall.

How to reduce the Greek debt burden? - The Greek debt reduction issue has been put back on the table as the 25 January 2015 parliamentary snap elections are approaching. Already in November 2012, Eurogroup conclusions stated that “Member states will consider further measures and assistance … if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme.” Since Greece achieved a primary surplus of 2.7 percent of GDP in 2014 (which is expected to increase further in 2015), and there are uncertainties related to the future debt trajectory of Greece, the Eurogroup could consider further measures, irrespective of which party will win the elections, as long as a comprehensive agreement on fiscal, structural and economic policies can be reached between the Troika and the new Greek government.  European lenders have already made several concessions to help Greece service its debt, such as lowering the interest rate that Greece has to pay, extending the maturities of loans, passing on to Greece the profits made by the ECB and national central banks on their Greek government bond holdings and deferring interest payments to the European Financial Stability Facility (EFSF) loans by 10 years. Contrary to many press commentaries claiming that European lenders have already made losses on their loans to Greece, this has not yet been the case: with the concessions, so far only the profits of euro-area partners have been reduced.  So what options could be considered to support public debt sustainability in Greece, which would not lead to a direct loss for European lenders? In this blog post we will try to answer this question and calculate the net present value gains for Greece.

Economists sceptical ECB bond-buying would revive eurozone - FT.com: Any effort by the European Central Bank to launch a massive quantitative easing programme this year would fail to revive the eurozone economy, according to economists polled in a Financial Times survey. The FT survey of 32 eurozone economists, mainly working in the financial sector, conducted in mid-December, found most expected the ECB to launch QE in 2015 — catching up with the world’s other main central banks that have all bought large quantities of sovereign debt since the last financial crisis. Twenty-six economists forecast the central bank would start purchasing government bonds this year, while five thought it would not. One did not respond to the question. A stuttering recovery and a worrying drop in inflation have raised fears of another financial crisis in the currency bloc and put pressure on policy makers to cast aside powerful opposition from Germany and begin purchasing sovereign debt. ECB president Mario Draghi last week gave his strongest signal yet that the central bank would extend its asset purchases to include sovereign debt in the next few months. A decision could come as early as the next governing council meeting on January 22. But most of the FT poll’s respondents expected growth and inflation to remain weak even with quantitative easing. “[QE] will help lift inflation expectations and reduce the euro, but [it’s] not a total game changer,” said Dario Perkins, economist at Lombard Street Research.

2015 will test the ECB's resolve and independence - In the Eurozone, manufacturing PMI reports last week were for the most part disappointing, as Italian manufacturing contraction unexpectedly accelerated (PMI < 50), while the French manufacturing sector has been in contraction mode for months now. With these poor manufacturing reports in the euro area, falling global commodity prices (see post), falling inflation expectations (see chart), and political uncertainty in Greece, German yields fell to new lows. On the first trading day of 2015, the 5-year Bund yield went negative for the first time.   And the 10-year yield fell below 50bp – also for the first time. In fact, here is how the German yield curve now compares to that of Japan. The markets now expects the ECB's policy to shift closer to what has been implemented by the Bank of Japan. Italian and Spanish bonds also welcomed the new year with a rally, as yields hit new lows. Source: Investing.com While these falling rates have become a daily occurrence, these market levels are unprecedented. That's why as 2015 opened, the euro fell to the lowest level since 2010. The ECB is now under pressure to act - without a decisive bond-buying program over the next few months the euro area markets could face a sharp increase in volatility. That's something the area's nations can ill afford. The programs announced by the central bank thus far have been inadequate and a much more aggressive effort will be required to ease monetary conditions in the Eurozone. Eurosystem (ECB) balance sheet (source: ECB) However, a number of prominent politicians, particularly in Germany, will be increasingly critical of such efforts by the central bank - especially as risks around Greece keep resurfacing.

Euro-Area Economy Menaced by Threat of Relapse  - A gauge of euro-area services and manufacturing signaled economic growth slowed in the final quarter of 2014, supporting calls for more stimulus by the European Central Bank. A Purchasing Managers’ Index for both industries rose to 51.4 from 51.1 in November, London-based Markit Economics said today. While that’s above the 50 mark that divides expansion from contraction, the reading falls short of a preliminary reading of 51.7 published on Dec. 16. The data suggest the euro-area economy expanded 0.1 percent in the fourth quarter, Markit said. “The euro zone will look upon 2014 as a year in which recession was avoided by the narrowest of margins, but the weakness of the survey data suggests there’s no guarantee that a renewed downturn will not be seen in 2015,” said Chris Williamson, chief economist at Markit. “The weakness of the PMI in December will add to calls for more aggressive central-bank stimulus.” ECB officials gathering in Frankfurt tomorrow may discuss proposals for quantitative easing and the institution’s response to Greek elections three days after a Jan. 22 monetary-policy meeting. President Mario Draghi has signaled support for large-scale government-bond purchases, while governors including Bundesbank President Jens Weidmann favor not acting at this time.

Eurozone drops into deflation as consumer prices fall -- The eurozone slipped into deflation as consumer prices fell into negative territory for the first time in over five years. Falling oil prices and weak demand keep weighing the currency union down. Consumer prices in the eurozone dropped by 0.2 percent in December, marking the first regression into negative territory since the 2009 financial crisis, data released by the EU's statistics agency (Eurostat) showed on Wednesday. The slide was fuelled by weak demand and plummeting oil prices, which are being passed on to consumers at the pump. The decline was bigger than expected and is the first sign of a much-feared deflation creeping into the 19-member currency union. However, barring energy prices, the inflation rate was the same as in November at 0.6 percent percent.  The figures are likely to increase calls for the European Central Bank to launch a much-debated stimulus program to pump new life into eurozone.

Eurozone officially falls into deflation, piling pressure on ECB - Telegraph: The eurozone has officially slipped into deflation, after latest figures showed prices in December were 0.2pc lower than a year earlier. The figure, far short of the European Central Bank's target of just under 2pc, is the latest pointer towards fresh intervention by the bank as it tries to prop up a sluggish economy. Energy prices slumped 6.3pc compared to a year ago, driven by falling oil prices. The cost of industrial goods and food was flat while services rose 1.2pc. This is the first time the euro area has experienced deflation since 2009. The ECB will meet on January 22 to consider whether to go beyond its existing stimulus measures and start buying sovereign bonds in a programme of quantitative easing. ECB president Mario Draghi has dropped numerous hints that he hopes to push cash through the eurozone economy in this way, despite grumblings in Germany that such measures are outside the central bank’s mandate.The euro, which reached a fresh nine-year low of $1.1842 before the figures were released, rose slightly after the announcement. The currency has dropped from a high of $1.39 in May as the economic recovery in the United States diverged from the torpid eurozone. The inflation figures follow German data on Monday showing that the currency bloc’s biggest member had experienced inflation of just 0.1pc in December, down from 0.5pc in the previous month and short of forecasts of 0.2pc.

ECB's Draghi says euro zone must 'complete' monetary union  (Reuters) - Euro zone countries must "complete" their monetary union by integrating economic policies further and working towards a capital markets union, European Central Bank President Mario Draghi said. In an article for Italian daily Il Sole 24 Ore on Wednesday, Draghi said structural reforms were needed to "ensure that each country is better off permanently belonging to the euro area". He said the lack of reforms "raises the threat of an exit (from the euro) whose consequences would ultimately hit all members", adding the ECB's monetary policy, whose goal is price stability, could not react to shocks in individual countries. true He said an economic union would make markets more confident about future growth prospects -- essential for reducing high debt levels -- and so less likely to react negatively to setbacks such as a temporary increase in budget deficits. "This means governing together, going from co-ordination to a common decisional process, from rules to institutions." Unifying capital markets to follow this year's banking union would also make the bloc more resilient. "How risks are shared is connected to the depth of capital markets, in particular stock markets. As a consequence, we must proceed swiftly towards a capital markets union,"

It is Not a Eurozone Crisis, but a European Union Crisis - The austerity policy dictated to the Eurozone by Germany has failed to generate a recovery. The news goes from bad to worse – and even worse. Nowhere is that more tangible than in Greece. Just to repeat the otherwise well known facts for the German readers of Naked Capitalism, who are withheld such facts in their own media: 1 million people have lost their jobs (approximately 25 percent of the working population); youth unemployment is well over 50 percent despite massive immigration; a third of business have closed, salaries have sunk almost 40 percent; pensions have been reduced almost by half; the economy has contracted by a quarter; there has been a 43 percent increase in child mortality and the health system has broken down; the Greek economy is in deflation; and, since the imposition of the austerity programme in 2010 the public debt has increased from 130 percent of GDP to 175 percent.  All these figures hide the most important fact: What is occurring in Greece is not so much an economic crisis as a humanitarian disaster. That the Greeks have raised the question of the appropriateness of austerity by precipitating elections is proof that democracy has survived these pernicious times and deserves our greatest respect. I sincerely do not believe that German democracy would have survived under similar conditions.  The democratic process in Greece is a threat for Germany and its allies, the political elites in Europe. They have a serious problem with democracy. When in 2011 the then prime minister of Greece, George Papandreou, announced a referendum to determine if the Greek people wished to adopt the imposed austerity programme, he was forced from office by the Germans and EU and replaced by a hand selected EU bureaucrat, a former vice-president of the European Central Bank. With the balance sheets of German and French banks in danger due to their extensive exposure to Greek bonds, that was no time to be consulting the Greek people.

A critical few weeks for the eurozone - The markets are waking up to the fact that the euro area faces a critical few weeks in which its economic path for 2015, and maybe for much longer, will be largely determined. Three inextricably linked events will dominate the economic landscape in January: the preliminary opinion of the Advocate General of the European Court of Justice (ECJ) on the legality of central bank bond purchases, due on January 14; the decision of the European Central Bank’s governing council on the size and type of “sovereign” quantitative easing (QE), due on January 22; and the Greek election on January 25. At the optimistic end of the spectrum, the euro area might emerge with a more complete monetary framework that for the first time enables it to pursue monetary policy effectively at the zero lower bound for interest rates, and with the sanctity of the currency area reinforced. At the pessimistic end, the ECB could become shackled with an ineffective version of QE just when the euro area is officially entering outright deflation, and the single currency itself might become incompatible with political realities in Greece. The outcome will also have much wider global implications. The markets have remained relatively relaxed about the likely exit of the Federal Reserve from its own zero interest rate policy in 2015, but only because the ECB and Bank of Japan are injecting more monetary stimulus. If large scale ECB action is removed from this equation, sentiment on global risk assets may darken considerably. The first potential stumbling block is the ECJ opinion on the legality of the ECB’s Outright Monetary Transactions (OMT) programme. The German Federal Constitutional Court (GFCC) expressed major concerns about the legality of the OMT last February, saying that it might breach EU primary law if pursued in the manner originally outlined by the ECB. The GFCC therefore asked the ECJ for a ruling on the OMT, and there will be a preliminary indication from the Advocate General on January 14.

ECB Considering Three QE Options; Reasons Why ECB's Plan Will Fail; Something Up Draghi's Sleeve? -- On January 22, Mario Draghi is expected to announce ECB action to stimulate Europe via a QE policy of purchasing government bonds. This was supposed to be hush-hush but the options are out of the bag in bright daylight.  Reuters reports ECB is Considering Three Options according to a Dutch paper.

  1. Buy government bonds in a quantity proportionate to the given member state's shareholding in the central bank.
  2. Buy triple-A rated government bonds, driving their yields down to zero or into negative territory. The hope is that this would push investors into buying riskier sovereign and corporate debt.
  3. Have national central banks do the buying, so that the risk would "in principle" remain with the country in question.
Every one of those options looks ridiculous. German bond yields are already negative out to 5 years and barely above zero out to 10 years. Yield on the 10-year Spanish bond is an amazing 1.64%. For comparison purposes, the 10-year US treasury note yields 1.96%. These bonds already are hugely overpriced given the risk of a messy eurozone breakup. Option three is the most ludicrous because the peripheral countries are already overloaded in their own bonds.

Europe's Trap - Paul Krugman - There are many risks in the world economy right now — a possible Chinese hard landing (local governments depend heavily on land sales for revenue? Oh, boy), a financial crisis in Russia and other oil exporters, etc.. But one thing is not a risk, because it has already happened: the euro area has entered a Japan-style deflationary trap. No, it’s not literally deflation at an EA-wide level, but that doesn’t matter — slightly positive and slightly negative inflation with interest rates already at the zero lower bound are essentially the same. Furthermore, southern Europe still needs substantial amounts of “internal devaluation” — that is, still needs to reduce costs and prices relative to Germany — so that a low overall euro area inflation rate means destructive deflation in much of the continent. And if you look at the implied market forecast, it’s truly disastrous. Right now, German 5-year bonds offer a yield of zero — an implicit firm forecast that Europe will be in a liquidity trap for the foreseeable future, while 5-year index bonds are yielding about -0.35 percent. That’s telling you two things: investors see so little in the way of profitable investment opportunities that they’re willing to pay the German government to protect their wealth, and they expect something like 0.3 percent inflation over the next five years, which is catastrophically below target.  How is this supposed to end? I like and admire Mario Draghi, and believe that he’s doing his best. But it’s really hard to see how the ECB could gain enough traction here to solve the problem even if it didn’t face internal dissent from the hard-money types. So don’t think of Europe as having a tough but workable economic strategy, endangered by Greek voters and such. Europe is at a dead end; if anything, Greece is doing the rest of Europe a favor by sounding a wake-up call.

European Bond Gains Send Yields to Record Amid Deflation Concern -  Euro-area government bonds rose, pushing yields down to records across the region, amid speculation the risk of deflation will prompt the European Central Bank to introduce further stimulus, including sovereign bond-buying. German 30-year (GDBR30) yields fell below 1.25 percent for the first time, while 10-year rates in Germany, as well as five other euro-area nations slid to all-time lows. A measure of the currency bloc’s inflation outlook headed for its lowest close on record before a report tomorrow economists said will show the annualized euro-region inflation rate dropped below zero last month for the first time since October 2009. Italian and Spanish bonds fell, reversing earlier gains. “Tomorrow we will probably see the euro zone was in deflation in December,” said . “Now it looks like people expect January” for the announcement of the ECB’s bond-buying program, he said. Germany (GDBR10)’s 10-year yield dropped seven basis points, or 0.07 percentage point, to 0.45 percent as of 4:51 p.m. London time, and touched 0.441 percent, the lowest since Bloomberg started tracking the data in 1989. The 1 percent bund due in August 2024 rose 0.66, or 6.60 euros per 1,000-euro ($1,193) face-amount, to 105.17. The nation’s 30-year yield fell 14 basis points, the steepest decline since August 2012, to 1.18 percent and touched 1.169 percent. That left the spread between German two- and 30-year yields at 128 basis points. That would be the lowest closing rate since December 2008.

Goldman Puts Europe's Upcoming QE In Perspective: The ECB Will Monetize Five Times All Net Issuance -- "Should the ECB announce EUR500bn in government bond purchases to be implemented over a one-year period, as our European Economics team expects, this programme would compare in size to the average monthly purchases of USTs by the Fed during QE3, but it would be significantly larger than the average monthly Fed purchases since the beginning of the global financial crisis. ... The ECB's stock of eligible Euro area government bonds is EUR7trn (by comparison, the stock of US government securities is about $12trn) and we estimate 2015 net government bond issuance to be around EUR90bn and gross issuance to stand at around EUR800bn (see Macro Rates Monitor, December 19, 2014). The ECB would, hence, buy about 62% of gross issuance of long-term bonds in the Euro area countries and more than five times as much as the net issuance."

Eurozone economy slows further: The eurozone economy saw anaemic growth in December and suffered its worst quarter for more than a year, a survey has indicated. The closely watched Markit/CIPS composite purchasing managers' index (PMI) for December fell to 51.4 from an earlier estimate of 51.7. But that was better than the previous month's reading of 51.1, which had marked a 16-month low. The eurozone economy has seen 18 months of continuous, albeit weak growth. Markit said its latest PMI survey, which combines the results of individual surveys of the construction, services and manufacturing industries, suggested the eurozone economy grew by just 0.1% in the last three months of 2014. Persistently low inflation since the start of last year has led consumers and business to hold off making purchases or making investments in the expectation that prices will continue to fall. The problem has been exacerbated since the summer by the falling price of oil. Brent crude has fallen by more than 50% since August to $51.54 per barrel. The fear of deflation led the European Central Bank (ECB) to lower interest rates to 0.05% and begin an asset purchase programme to inject cash into the economy in August.

Eurozone Retail PMI Sinks Again - Markit reports the Eurozone Retail PMI shows further drop in sales at year-end. Key Points:
Retail sales fall at faster rate in December
Rates of contraction accelerate in France and Italy , while growth eases in Germany
Wholesale price inflation remains close to November’s recent low
Summary:  Latest PMI® data from Markit showed deteriorating trends with in the eurozone retail sector in December. Sales decreased a cross the big-three euro area economies combined, reflective of further contractions in France and Italy , as well as a growth slowdown in Germany. Adjusted for seasonal factors, the headline PMI  dipped to 47.6 in December, from November’s 48.9, signalling a solid and accelerated decrease in overall sales. Trade was also down sharply compared with the corresponding month of 2013, with the year-on-year rate of decline faster than in November.

Now deflation. The news on the Eurozone just keeps getting worse -- A double dose of bad news for the already beleaguered eurozone economy: It suffered suffered deflation of 0.2% in December, and more Europeans are out of work. This from IHS Global Insight: December, therefore, finally saw prolonged very low Eurozone consumer price inflation morphing into deflation.  Furthermore, deflation of 0.2% in December marked a substantial downward move given that consumer price inflation had been 0.3% in November.  … The Eurozone last suffered deflation in 2009 when it lasted for five months (from June to October) with a maximum drop of 0.7%. This, of course, was when the Eurozone was suffering serious recession in line with global economic developments after the Lehman crash. … Eurozone unemployment rose by 34,000 in November after increases of 63,000 in October and 22,000 in September. This was the first time that Eurozone unemployment had risen for three consecutive months since the first half of 2013. Now, granted, the deflationary move was almost entirely driven by the big drop in energy prices, with likely more of that on the way. And that, by itself, is a good thing. But the worry here, according to IHS, is that the December deflation “will lead to a further significant weakening in inflation expectations that then feeds through to result in renewed drops in already worryingly low core inflation.” And if the ECB does respond with a bond-buying program, will be it large enough and persistent enough? A good point on Twitter from economist Miles Kimball: “The Eurozone has both seriously inadequate monetary stimulus and huge supply-side problems. Fix both, or else.”

The black hole theory of the Eurozone: Jean Pisani-Ferry tells the ECB to get a grip: On the face of it, the ECB has many reasons to launch QE. For two years, inflation has consistently failed to reach the 2% target. In November, the annual price growth was just 0.3%, while the recent collapse in oil prices will generate further downward pressure in the coming months. Even more important, inflation expectations have started to de-anchor: forecasters and investors expect the undershooting of the target to persist over the medium term. Low inflation is already a serious obstacle to economic recovery and rebalancing within the eurozone. Outright deflation would be an even more dangerous threat. So far, so good. Deflation risk is a legitimate reason for a central bank to loosen monetary policy. The ECB has already pushed funding rates close to zero and deposit rates into negative territory, as well as throwing money at banks and buying ABS and MBS in an attempt to get banks to lend. All this appears to have done is slow the rate at which M3 lending is falling (in a credit-money economy, I regard M3 lending as the best indicator of future NGDP growth). It's hard to argue that the ECB has done anything like enough to counter deflationary pressures and restore growth. But I'm really not sure about this. He seems to think that the ECB must do QE because it has already been priced in by markets:

Deflation: why worry? » Should we worry that the euro zone is in deflation (pdf)? Certainly, deflation is a symptom of a severe problem - that of weak demand which has resulted in almost one-in-four (pdf) young people being out of work. And the very fact that deflation is unfamiliar might create uncertainty which itself is bad for economic activity. Beyond this, however, I suspect that what we have to fear is not so much deflation as bad policy. For one thing - as Robert Peston points out - the fall in the CPI is entirely due to lower oil prices, which should raise real incomes and activity. (Note, though that even excluding energy inflation is only 0.6 per cent, which is well below the ECB's target of "below, but close to, 2%." In this sense, there has been a failure of economic policy.)  And for another thing, history tells us that deflation needn't lead to weaker growth. My chart plots GDP growth against inflation in the previous year for the UK before WWII - a period when deflation was common. You can see that, if anything, deflation led to faster growth than did inflation. Of course, there are many differences between 19th Century England and the euro zone today (though maybe not so many in Germany), but this historical evidence suffices to tell us that there is no necessary, inherent reason why deflation must lead to worse economic performance.All this said, there is a danger here. It lies in the dynamics of government debt. Remember the simple equation which tells us what primary budget balance governments must run to stabilize the debt-GDP ratio.

Panic, Fast and Slow - Paul Krugman -- Some people are suddenly panicking over the announcement that the euro area is officially in deflation. But sudden panic is the wrong reaction; you should have been gradually panicking over an extended period. Today’s news isn’t actually any worse than what we’ve been seeing for a while. The key is not to look at the headline number; you should keep your eyes on the core. Core inflation — like the Keynesian multiplier — is one of those much-ridiculed concepts (hey, you’re measuring inflation without the inflation!) that has in fact performed extremely well in recent years. Back in 2010-11, when rising gas prices were sending headline numbers up, I and many others received a lot of hostile comments for claiming that there wasn’t any real inflation bulge; but core inflation has indeed been a much more reliable guide than headline inflation, which fluctuates wildly. As the accompanying chart shows, this has been as true for Europe as it is for America. And core inflation is basically unchanged in the latest report. It has been on a long slide, and is far below the ECB’s target (which is itself too low). But no more bad news today, anyway. The same logic that made me ignore the inflation bulge when oil was going up says to ignore the dip from plunging oil. I won’t say not to panic — you should be panicking about Europe. But keep it steady, OK?

Why QE won’t resolve the eurozone’s fundamental money problem -- The likely advent of quantitative easing in the eurozone has reawakened old fears. Opponents argue that QE would breach the prohibition of monetary financing of governments in Article 123 of the Lisbon treaty. Adherents of the structural reform theory of economic growth claim that QE would discourage reform efforts. German savers worry that the returns on their savings, already tiny, will fall even further. And many doubt that QE would have much effect anyway.Expecting the European Central Bank to act on deflation in the eurozone is eminently reasonable. Inflation is far below target and the ECB is in danger of breaching its mandate. But in the absence of a coherent explanation of the reasons why money in the eurozone is “too tight to mention”, calls for QE seem to have more than a hint of the politician’s fallacy about them; “We need to do something. QE is something. Let’s do it”. Or, as the erstwhile blogger Pawel Morski said back in 2013, “because nobody’s got any better ideas”. Perhaps, if there was a better understanding of how the fiscal/monetary system really works, a better idea might be found. Though whether there would be the political will to implement it would, as always, be a different matter. Sovereign governments that issue their own fiat currencies create money when they spend. Or, more accurately, the commercial banks through which they make payments create money. As Toby Nangle explains, governments neutralise the effect of that money creation by issuing bonds: Unlike private debt (issued by non-financials to fund expenditure within a household budget constraint), monetary sovereigns issue debt to monetarily sterilise their fiscal expenditures. That is to say that they sell government debt not because they need the money to finance government expenditure but because they don’t want quite so much Outside Money with which they have paid civil servants, government contractors, benefit recipients etc, sloshing around the system, and so they effectively mop it up by selling government bonds.

ECB Weighs Bond Purchases Up to 500 Billion Euros to Juice Economy - European Central Bank staff presented policy makers with models for buying as much as 500 billion euros ($591 billion) of investment-grade assets, according to a person who attended a meeting of the Governing Council. Various quantitative-easing options focused on government bonds were shown to governors on Jan. 7 in Frankfurt, including buying only AAA-rated debt or bonds rated at least BBB minus, the euro-area central bank official said. Governors took no decision on the design or implementation of any package after the presentation, according to the person and another official who attended the meeting. The people asked not to be identified because the talks were private. A 500 billion-euro purchase program would take the ECB halfway toward its goal of boosting its balance sheet to avert a deflationary spiral in the euro area. The institution is also buying asset-backed securities and covered bonds, and government bond-buying would be part of fresh stimulus to be considered at the Governing Council’s Jan. 22 meeting. An ECB spokesman declined to comment on policy makers’ proceedings.

ECB Action Is ‘Just Going to be a Currency Play,’ Says Global Bank Group Chief - If the European Central Bank expands its easy-money policies in the coming weeks, it will do little to fix the currency union’s underlying problems. That’s the view of Tim Adams, president of the Institute of International Finance, an industry group representing more than 500 of the world’s largest banks, pension funds, insurance firms and other financial firms. “Will QE in Europe make a difference?” he asked, referring to bond-buying, also known as quantitative easing, to spur economic growth. “I don’t think so.”  “Will QE in Japan make much of a difference? I don’t think so,” Mr. Adams said in an interview. Europe and Japan are struggling to avoid re-entering recessions. Mr. Adams said their woes, along with a slowdown in emerging economies and a hollow U.S. recovery, will keep global growth muted.  Any gains from the ECB’s expected policy actionsactions will come by devaluing the euro, he said. “It’s just going to be a currency play” that will make European goods more competitive as the value of the euro falls against other currencies, notably the dollar. “The Europeans have been more willing to admit and use the exchange rate as a target and tool than we have in the U.S.,” he said.

Investors put €1.2tn into negative havens - FT.com: Investors looking for haven assets are increasingly having to pay up for the safety they provide as the volume of negative-yielding eurozone government debt has swollen to a record €1.2tn. The figure, equivalent to about a quarter of all outstanding eurozone sovereign debt, is an increase from €500bn in October, according to research by Bank of America Merrill Lynch. The total was zero last June before the European Central Bank imposed a penalty on bank deposits — charging banks to park their surplus cash there — in the hope of urging banks to instead put their money to work in the real economy. “The ECB wants people to move their money into riskier investments,” said Barnaby Martin, chief credit strategist at BoAML. The central bank has in effect created “a completely new asset class” of bonds with negative yields by cutting its deposit rate below zero, he said. Negative yielding bonds, which in effect charge investors who buy them, are concentrated among the short-dated debt of core eurozone countries. Among periphery countries, the yield on Ireland’s two-year bond slipped below zero briefly last September but has since moved back into positive territory. The equivalent bond yields for Spain and Italy stand at 0.4 per cent and 0.5 per cent, respectively.

German Unemployment Falls to Record Low on Economic Recovery - German unemployment fell for a third month in December to a record low, signaling that growth in Europe’s largest economy will accelerate in 2015. The number of people out of work fell a seasonally adjusted 27,000 to 2.841 million in December, the Federal Labor Agency in Nuremberg said today. Economists predicted a decline of 5,000, according to the median of 19 estimates in a Bloomberg News survey. The adjusted jobless rate dropped to 6.5 percent, the lowest level in records going back more than two decades. After Germany’s economy narrowly avoided a recession in the middle of 2014, recovering sentiment among entrepreneurs and investors supports forecasts that growth will accelerate this year. A slump in oil prices and a weaker euro could prove a boon for consumers and exporters, and the European Central Bank is weighing large-scale government-bond purchases as additional stimulus.

Italy unemployment rate at record high in November - Italy's unemployment rate rose again in November, reaching a new all-time high, as the government seeks to reform the labor market amid growing pressure for it to reduce the jobless in the country. The official jobless rate increased to 13.4% from 13.3% in October, national statistics institute Istat reported Wednesday, citing preliminary and seasonally adjusted data. It grew 0.9 percentage points from November 2013. The November reading is a record high since the statistical series began on a monthly basis in 2004 and on a quarterly basis in 1977, an Istat official said. The unemployment rate for those aged 15 to 24 rose to 43.9% in November. Youth unemployment is a politically sensitive subject for the 11-month-old government of premier Matteo Renzi, who is seeking to overhaul the country's rigid jobs market to help push Italy out of its most prolonged recession in decades. The November youth jobless rate was up 0.6 percentage points on the month and 2.4 percentage points on the year, Istat said.

Eurozone South is still not a place for young workers -- One rather obvious corollary of the European economic weakness is high unemployment. the unemployment rate for the Eurozone has grown from 7.5 percent in 2007 to 12 percent in 2013, and it does not show signs of significant decrease. But if total unemployment has increased, youth unemployment has literally skyrocketed. The unemployment rate among workers aged 25 years or less has increased from 15 percent to about 25 percent between 2007 and 2013. Figure 1 shows the Eurozone overall youth unemployment rate figure (black line) compared with the same indicator aggregated across three sub-groups. The impressive internal divergence within the Eurozone stands out clearly. After having increased slightly in 2009, the youth unemployment rate in Northern countries stands today at the same level it was in 2000. In the hypothetical Centre made of France and Belgium, youth unemployment has increased compared to pre-crisis levels, but it has not exploded, passing from slightly less than 20 percent, in 2007, to 25 percent in 2013. In the South, instead, the increase has been dramatic: the youth unemployment rate - which before the crisis was decreasing, although slowly - has jumped to 45% in 2013. And things are worse if, within the group, we look at the cases of single countries, where youth unemployment peaked in 2013 at rates of even 58 percent in Greece and 55 percent in Spain. 

WSJ Praises the “Triumph of Austerity” in Greece - NEP’s Bill Black appears on the Real News Network and questions the authenticity of the coverage in the NYT and WSJ about the impact of austerity measures in Greece. (WSJ Praises the "Triumph of Austerity" in Greece - YouTube) If you would like to view to video with a transcript, it can be seen here.

Europe's Largest Bank Stock Suspended, Admits Need For $8.9 Billion Capital Raise -- All is clearly not well below the surface. Europe's largest bank (by market value) has admitted in a regulatory filing that it needs to raise capital. As WSJ reports, Banco Santander SA said it would raise up to €7.5 billion ($8.88 billion) in a capital hike, a bid to address long-running concerns among investors and analysts that its financial cushion was weaker than peers. European banking stocks are up over 2% today as Italian banks surge limit up (BMPS +13%) on speculation that they will be purchased by Santander (who 'pumpers' believe are raising this capital to go on a spending spree) and 'old' Draghi headlines.

Hebdo Fallout: Greater Odds of Frexit as Marine Le Pen’s Star Rises - Yves Smith - The odds of France leaving the Eurozone, or Frexit, have just gone from a tail risk to plausible thanks to the boost the Hedbo shootings have given to the leader of France’s far right party, the National Front, and its leader, Marine Le Pen. Opinion polls indicate that that she would win the first round of a presidential ballot were elections held now.  As political scientists have found, a depression or prolonged depression tends to move political sympathies to the right. The murders in Paris playing straight into National Front themes: anti-immigration, anti-minorities, pro-law and order. But Marine Le Pen’s campaign has also gotten support from the far left for her anti-globalization, anti-fat-cat, anti-Eurozone stance, since the only way to get out of the austerity hairshirt appears to be to abandon the Eurozone entirely. If the French professional left, like our homegrown Vichy Left, took those issues seriously, they would not be seeing defections to Le Pen’s style of rancid populism. In the wake of the Paris killings, Marine Le Pen has called for a referendum to reinstate capital punishment, which was eliminated in 1981. This alone would put France on a collision course with the European Union, which forbids it. As Aljazeera noted, “A referendum on capital punishment, however, would amount to a stealth fast-track mechanism for achieving the party’s EU-phobic goal. That’s not a proposal Hollande is likely to entertain any time soon.”  Slate give a good overview of Le Pen’s strategy:

About That French Time Bomb, by Paul Krugman: ... It’s really amazing how much bad press France gets — and not just from goldbugs and the like. It was the Economist that declared, on its cover more than two years ago, that France was the time bomb at the heart of Europe. And of course the inflationistas were even more certain that France faced imminent doom; for example, John Mauldin proclaimed that France was in fact worse than Greece.  Now that time bomb — which has actually had better economic growth since 2007 than Britain — can borrow at an interest rate of only 0.8 percent. It seems obvious to me that the bad-mouthing of France was and is essentially political. Of course France has big problems; who doesn’t? But the real sin of the French body politic is its refusal to buy into the notion that the welfare state must be sharply downsized if not dismantled; hence the continuing warnings that France is doomed, doomed I tell you. And this in turn reflects the larger issue of what calls for austerity are really about. Can we imagine a clearer demonstration that they’re not really about appeasing bond vigilantes?

UK construction PMI falls to lowest since July 2013 - Markit/CIPS (Reuters) - Britain's construction sector grew at its slowest rate since July 2013 last month, industry data showed on Monday, though house building remained robust, with residential construction enjoying its strongest year since at least 1997. The Markit/CIPS construction purchasing managers' index fell to 57.6 in December from 59.4 in November, still comfortably above its long-run average but well below economists' forecasts of a slight decline to 59.0. Readings above 50 denote growth. The weakest sector was civil engineering, which reported an outright fall in output for the first time since May 2013, while the rapid rate of growth in house-building eased slightly to its lowest since June 2013. Britain's housing market has cooled since the middle of the year, with mortgage approvals falling to their lowest in more than a year and house price growth slowing. But Markit said 2014 still marked the best year for British house building since it started collecting records in 1997, news likely to cheer the government which has made boosting this a priority in the run-up to May's national election. "While new business growth moderated to its lowest for a year-and-a-half in December, UK construction firms are still highly upbeat about their prospects for output growth in 2015,"

BoE wonks on a limited QE hunt - We know instinctively that the Bank of England doesn’t like to be seen to be inflating stock market bubbles. That money printed for the purposes of quantitative easing might be flowing into the hands of existing equity holders (such as corporate executive management) would reinforce the wholly disagreeable notion that Britain’s central bank was actually fuelling the growth in wealth inequality. So we should not be surprised when two Bank economists, Michael Joyce and Zhuoshi Liu, together with a colleague from Bath University, Ian Tonks, publish a piece of research stating… Central banks in advanced economies implemented quantitative easing (QE) as a response to the Global Crisis. A key transmission mechanism of QE, emphasised by policymakers, has been the ‘portfolio balance’ channel. This column describes behaviour of insurance companies and pension funds using sectoral and micro-level data from the UK. The results show that investors shifted their portfolios away from government bonds towards corporate bonds. But portfolio rebalancing has been limited to corporate bonds and did not extend to equities. It’s a worthy enough write-up, looking at the raw data to see how investors’ portfolio allocations changed as the Bank pumped £375bn in the British gilt-edged market. The conclusion, in short, is that while traditional institutional investors — insurers and pension funds — reduced their holdings of gilts and loaded up with corporate bonds instead, on balance they haven’t increased their equity holdings while QE has been underway.

Bank of England Minutes Underscore Turbulence of Financial Crisis - — This just in: British regulators made missteps in the handling of the 2008 financial crisis. More than 500 pages of minutes of Bank of England meetings were released on Wednesday, and they showed that regulators drastically misjudged the magnitude of the crisis and were short of tools needed to address it. In September 2007, the chairman of the Financial Services Authority, Callum McCarthy, characterized problems in the market as “ones of liquidity, not of institutional insolvency,” the minutes say. He emphasized “that the U.K. banking system was sound and that there was scope for bringing back onto institutions’ balance sheets items that needed to be dealt with.” Mervyn King, governor of the Bank of England at the time, said that the crisis of confidence had shaken the “unusual serenity of recent years” but if managed properly — avoiding moral hazard and draconian measures — it “should not threaten our long-run economic stability.” Days later, Britain witnessed its first bank run since 1866 on the mortgage lender Northern Rock, which was nationalized later. The next year, the government spent 45 billion pounds to buy more than 80 percent of Royal Bank of Scotland and £20.5 billion bailing out Lloyds TSB Bank. Anger in Britain over these bailouts is still palpable.

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