week ending May 14

Fed Balance Sheet Grows To $2.749 Trillion‎ - --The U.S. Federal Reserve's balance sheet grew last week as the central bank keeps trying to stimulate the economy by buying Treasury securities.  The Fed's asset holdings in the week ended May 11 increased to $2.749 trillion, from $2.723 trillion a week earlier, it said in a weekly report released Thursday. Holdings of U.S. Treasury securities rose to $1.446 trillion on Wednesday from $1.442 trillion the previous week.  Thursday's report also showed total borrowing from the Fed's discount window slid to $15.33 billion Wednesday, from $16.28 billion a week earlier. Borrowing by commercial banks decreased to $3 million Wednesday, from $12 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts, meanwhile, rose to $3.460 trillion from $3.457 trillion.  U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.699 trillion from $2.694 trillion.  Holdings of agency securities fell to $761.40 billion from the previous week's $763.02 billion.

Fed balance sheet expands to record $2.748 trln‎ The Federal Reserve's balance sheet expanded to a record $2.748 trillion in the week ended May 11 from $2.723 trillion in the prior week, the central bank said on Thursday. The Fed continues to buy bonds to try to lower long-term interest rates, under its plan, dubbed quantitative easing or QE2, to purchase $600 billion of Treasurys by the end of June. Last month, Fed Chairman Ben Bernanke said the central bank planned to complete the asset purchases on schedule and then planned to freeze the balance sheet's size by reinvesting maturing securities. Bernanke said that shrinking the balance sheet would be a tightening of monetary policy. The report shows that the Fed's holdings of Treasurys rose to $1.467 trillion from $1.442 trillion in the previous week. The Fed's holdings of mortgage-backed securities held steady at $927 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 12, 2011

New Study Questions Justification For Quantitative Easing - John B. Taylor - Proponents of Quantitative Easing frequently cite—inappropriately in my view—the Taylor Rule as support, saying that the rule calls for a federal funds rate as low as minus 6 percent, well below the zero bound. But in various pieces over the past year, such as Taylor Rule Does Not Say Minus 6 Percent, I have argued the contrary. If you simply plug in current inflation and output (gap) you will find that the interest rate is above zero with the policy rule coefficients I originally derived. But QE II proponents change the coefficients. Frequently they use a higher coefficient on output (around 1.0) rather than the lower coefficient (0.5) which I originally recommended. The higher coefficient on output gives a much lower interest rate now and is thus used by proponents of quantitative easing. A new paper by Alex Nikolsko-Rzhevskyy and David Papell provides important evidence relevant to this debate. They show that, if history is any guide, the higher coefficient would lead to inferior economic performance compared with the original coefficient I recommended.

Plosser: Fed Needs A Plan To End Accommodative Policy - The U.S. Federal Reserve needs to create a credible plan to end its accommodative monetary policy, Federal Reserve Bank of Philadelphia President Charles Plosser said Thursday.  He said he personally favors a plan that would involve both raising interest rates and shrinking the Fed's balance sheet. But the point, he emphasized, is to have a plan that assures markets and the public that the Fed has an exit strategy. Plosser, who has a vote on the policy-setting Federal Open Market Committee and is known as an inflation hawk, said the Fed will continue to adjust its monetary policy to changing economic conditions.  In other comments, he said the Fed is "actively discussing" how best to sell assets and reduce its balance sheet.  "Different people have different ideas" on how that might work, he said. That's to be expected, he added, since "we've never done anything like this before."

Fed’s Lacker: Policy May Need to Tighten Even Amid High Unemployment - The U.S. Federal Reserve may need to start unwinding its easy-credit policies to prevent inflation from taking off even though unemployment remains high, a Fed official said Tuesday. Federal Reserve Bank of Richmond President Jeffrey Lacker said the end of the central bank’s $600 billion government bond purchases at the end of June should be the “high-water mark for monetary stimulus in this cycle, with the focus going forward on the timing and pace of stimulus withdrawal.” Lacker said in prepared remarks that to prevent inflation from rising too much, the Fed may have to “initiate policy tightening well before the unemployment rate has fallen to a rate we would expect to see over the long run.” The Fed official was speaking to business leaders of Northern Virginia. He’s not a voter on the Fed’s policy-setting panel this year, but will get a vote on the Federal Open Market Committee in 2012.

Fed Watch: Wild Week Leaves Fed Policy Intact - Last week was quite the rollercoaster – one I suspect Fed policymakers will find consistent with their general outlook. The better than expected gains in nonfarm payrolls supports their claim that first quarter weakness will prove to be temporary, while the commodity price rout will give them the breathing room on inflation they felt they needed. This combination should keep the Fed locked on their current policy trajectory. Consider last week’s data flow. It began with headline ISM manufacturing coming in 60.4, a tad below the previous month’s 61.2 but still respectable. The internals were arguable a bit weaker, although that should not be unexpected given such solid numbers in previous months – it is difficult to keep diffusion indexes moving upward at a certain point. All in all, another solid read on the manufacturing sector that showed no evidence of substantial slowing. That optimistic view, however, was quickly upended by the ISM’s service sector report, which revealed a staggering 11.4 percentage point decline in the new orders index. This appears to be an artifact of commodity-price induced uncertainty.

NY Fed: U.S. Committed $1 Billion to March Effort to Weaken Yen - U.S. government committed $1 billion to an effort in March to help arrest the appreciation of the Japanese yen in the wake of natural disaster that struck that nation.In a report Friday, the Federal Reserve Bank of New York said that it committed $500 billion from its System Open Market Account, while it acted as the agent for the Treasury Department‘s $500 billion contribution, which was drawn from the Exchange Stabilization Fund. The report said the intervention occurred only once.The New York Fed report said “the intervention was consistent with the G-7 statement” which had explained participating governments were aiming to counter “excess volatility and disorderly movements in exchange rates.” In the wake of the March 11 earthquake and its aftermath, the yen underwent a significant rise relative to other major currencies, and authorities worried the gains would complicate Japan’s economic recovery prospects.

Is the ECB Still in the Fed's Orbit of Influence? - One of the arguments I have made over the years on this blog is that the Fed is a monetary superpower.  It manages the world's main reserve currency and many emerging markets are formally or informally pegged to dollar. Thus, its monetary policy gets exported to much of the emerging world. This means that the other two monetary powers, the ECB and Japan, have to be mindful of U.S. monetary policy lest their currencies becomes too expensive relative to the dollar and all the other currencies pegged to the dollar.  Thus, we have seen these two countries move their policy rates in line with what the Fed does usually with a lag.  The recent interest rate hike by the ECB in the absence of a similar move by the Fed goes against this pattern.  Does it mean the ECB is finally breaking free of the Fed's orbit of influence?  It could be, but I doubt it.  The ECB raised its policy rate in April and was talking up further rate hikes throughout the year.  Last week, however, the ECB backtracked to some degree by avoiding a further rate hike.  It also has toned down its rate-hiking rhetoric.  I interpret these developments as the ECB facing up to reality of their proposed tightening cycle.

Progressive Economists Call for Rethinking Fed’s Role - Leading progressive economic thinkers continued their dialogue on challenges the Federal Reserve faces in light of fast-moving developments surrounding proposals to restructure it during a series of roundtable discussions co-hosted by the Roosevelt Institute and the New America Foundation. In opening the second of a two-part discussion on the Fed, Roosevelt Institute Fellow Mike Konczal said, “On the heels of the financial crisis and the resulting Great Recession, policymakers need to rethink the role the Fed plays in ensuring prosperity and supervising our financial system.” The event comes just days after Rep. Barney Frank (D-MA) introduced a bill to reform the Fed’s structure. It featured three panels that discussed how the Fed can tackle unemployment, ensure protection for consumers, and evolve to meet future demands in a democratic, transparent, and accountable way.

Fixing What’s Wrong with the Taylor Rule - I see four problems with the original Taylor rule:

1. It’s not really a rule at all. The Taylor rule depends on an estimate of potential output. In practice, most of the discretion that goes into central banking is in the estimate of potential output.
2. It doesn’t self-correct for missed inflation rates. Since the inflation rate in the Taylor rule is over the previous four quarters, the rule “forgets” any inflation that happened more than four quarters ago. This
3. It doesn’t allow for convexity in the short-run Philips curve. If the estimate of potential output is too low, for example, and the coefficient on output is sufficiently low, then, if the short-run Philips curve is convex, the central bank will allow output to persist below potential output for a long time before “realizing” that it has made an error.
4. It can prescribe a negative interest rate target, which is impossible to implement. This appears to have been the case for at least part of 2009 and 2010, although there is disagreement about the details.

Club for Growth to Target Peter Diamond’s Nomination - Late last year I noticed that the conservative infrastructure was being put in motion to go after the Federal Reserve and potential nominees to fill the vacant seats.  With seats vacant, voting power disproportionately goes to regional Presidents.  These are people that are elected by banks and are in general very conservative economic thinkers. Instead of shouting about a jobs crisis they have instead gone hoarse from shouting “Fire! Fire!” on Noah’s Ark this past year.(My favorite regional Fed moment is still Hoenig saying he’s worried about unemployment at 9.6% – worried it might come down too fast! But there’s a ton of them.) The conservative machine continues to spin up.  Here’s CNBC noting that the conservative group Club For Growth is opposing Peter Diamond’s nomination to the Federal Reserve, aggressively targeting members who might vote for him:

Send In The Cranks - Krugman - Matt Yglesias notes that another GOP senator, in addition to declaring that Peter Diamond, one of the world’s greatest economists, isn’t fit to be on the board of the Fed, has joined the ranks of monetary cranks: “We must be increasingly wary of the threat of inflation, yet the Fed continues to print money with reckless abandon,” Johanns said in a statement. I have to admit that the triumph of the hard-money/goldbug view among Republicans has surprised even me. And let’s also note that we’ve had a strong test of monetary doctrines these past three years, and the inflation worriers have been proved overwhelmingly wrong. Yes, they’ve seized on the rise in commodity prices since last summer; but they have yet to find any signs of domestic inflation, as opposed to movements in prices determined on world markets and strongly driven by China and other emerging markets. Look, very early on I tried to explain that “printing money” — what people who say that really mean is increases in the monetary base, which includes bank reserves as well as currency — doesn’t cause inflation, or even a rise in broader definitions of the money supply, when you’re in a liquidity trap. And I illustrated the point with historical examples.

Conservatives chasing bad ideas -- MIKE KONCZAL notes that the nomination of esteemed economist and Nobel prize winner Peter Diamond to the Federal Reserve's Board of Governors is almost certainly dead. The opposition of Republican Senator Richard Shelby had long been an obstacle, but Grover Norquist's Club for Growth is now getting involved. Mr Norquist's group, you may know, is known for its success in stoking radical anti-tax views among Republican legislators; essentially, Republicans that vote for anything that might possible be construed as a tax increase at any time for any reason—and this includes, we recently learned, efforts to end things like ethanol subsidies—will be ruthlessly targeted in the next election. Now, the scorecard that Mr Norquist will use to judge legislators will include a vote on Mr Diamond's nomination. Why? Because Mr Diamond "is an activist-Keynesian who believes in a much larger role for government involvement in the economy".

Kocherlakota Explains Fed Focus On Stock Market - As officials touted QE2′s successes, central bankers did so under terms that clashed with the old way of thinking. In February Bernanke noted that over the course of QE2 “equity prices have risen significantly” and “volatility in the equity market has fallen,” as signs the Fed policy was indeed aiding the economy.  It isn’t clear whether Bernanke’s shift in focus represents a change in how the Fed does business, or whether his comments represent an effort to justify a policy that hasn’t worked as planned, leaving the chairman to support it in whatever way he can. For Federal Reserve Bank of Minneapolis President Narayana Kocherlakota, the increased prominence of asset prices as a focus of monetary policy is not so much an enduring shift in how policy is made, as it is a recognition of what caused the huge economic and financial problems of recent years.  “This recession and the relatively slow recovery we’ve gone through, a lot of it can be traced back to net worth,”  . “The fall in net worth is what drove us into recession” and “in those circumstances you can see why asset values, both for land and for stocks, are really going to be a central ingredient in the recovery process,” he said.

Fed Watch: The Fed and Asset Prices -  Minneapolis Fed President Narayana Kocherlakota made some comments today explaining the role of equity markets in Fed policy. Michael Derby at the Wall Street Journal has the story: In gauging the success of the Federal Reserve Treasury bond buying program commonly known as QE2, officials like Chairman Ben Bernanke have pointed to a rising stock market as a sign of policy making success. Of course, stock market operators have always spoken of the a Fed “put,” in which the central bank will ease policy to arrest sustained stock market declines.It isn’t clear whether Bernanke’s shift in focus represents a change in how the Fed does business, or whether his comments represent an effort to justify a policy that hasn’t worked as planned, leaving the chairman to support it in whatever way he can…. To start, I will agree that there is an effort on the part of Federal Reserve officials to not appear as if they are targeting the stock market directly. And I understand that Bernanke’s comment incited those who already believed the Fed targets stock prices. But officials certainly recognized long ago that the interest rate channel is not the only policy channel.

The Fed's Communication Problem - Robin Hanson of the FT speaks to the Fed's communication problem:[E]ven if the press conferences do improve how the Fed communicates, and dampen the volatility of market responses, the real problem is what the Fed communicates. The Fed still does not communicate two things: (1) a clear numerical objective for policy; and (2) any idea of the monetary policy path it expects to use to get to its objective. Hanson notes that the reason for this lack of clarity is the Fed's dual mandate.  He cites research by Nicholas Herro and James Murray that shows the uncertainty created by this lack of clarity is costly to the economy.  If only there were a way to narrow the Fed's mandate that so that there would be increased clarity and improved macroeconomic stability.  Oh wait, there is a way.

Maintaining Price Stability in a Global Economy - FRBSF Economic Letter - Inflation has risen of late, reflecting higher prices for many commodities. The inflation rate is likely to peak around the middle of 2011 and then return to an annual level of about 1¼ to 1½%. A sustained period of high inflation is very unlikely and the Fed will act quickly and decisively to ensure price stability. The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to Town Hall Los Angeles on May 4

Fed’s Plosser Highlights Inflation Risks - The Federal Reserve continues to confront risks of rising inflation and must be ready to tighten monetary policy should conditions warrant it, a top Federal Reserve policy maker said Thursday. “While my expectation is that oil price increases will level off and that the currently elevated inflation measures will reverse, the risks to the inflation outlook are tilted to the upside,” Federal Reserve Bank of Philadelphia President Charles Plosser said in a speech prepared for delivery¹ before a meeting of the New Jersey Bankers Association in Aventura, Fla. Plosser, who is a voting member this year of the policy-setting Federal Open Market Committee, said “if the economy continues to make progress, then monetary policy will need to exit from its extraordinary accommodation in the not-too-distant future.”

Leaviss: QE3 Would Cause Dollar To Collapse - A third round of quantitative easing in the US would lead to the collapse of the dollar, M&G's Jim Leaviss has warned. Speaking at a Morningstar Investment Conference today, the firm’s head of retail fixed interest said with the likely end of QE2 in June, some policymakers will push for a third round of QE in the US, as many are still concerned about the high unemployment rate. "The Federal Reserve will not contract its balance sheet anytime soon. The dollar will collapse if we get a third round of quantitative easing, but this is not something that concerns the Fed in the slightest," he said. The manager also believes the US will inevitably see its credit rating downgraded and is at risk of default, making the economy look more like a ‘banana republic' than a Western nation.

Inflation - The Economist Debates - This house believes that a 2% inflation target is too low. JOIN THIS LIVE DEBATE

• Defending the motion Brad DeLong - We need the power to boost economy-wide aggregate demand when there is a private-sector scramble for liquidity or safety or duration putting downward pressure on total spending. A 2% per year inflation target gives us some such power; 3% or 4% would give us more.
• Against the motion Bennett McCallum What we are debating concerns the Fed's desired long-term average rate, not values during a crisis. Over the 21 Greenspan and Bernanke years ending in 2008, the CPI year-to-year inflation rate fell below 2% only twice, while values above (or equal to) 3 occurred ten times.

The Brad DeLong - Bennet McCallum Debate - Over at The Economist there is an interesting debate taking place between Brad DeLong and Bennet McCallum.  They are responding to the following statement: this house believes that a 2% inflation target is too low.  The idea behind this statement is that with a higher inflation rate the targeted short-term nominal interest rate would be higher and thus less likely to hit the 0% bound.  Brad DeLong endorses this view.  He sees the 0% bound as a real constraint on monetary policy and wants to avoid it.  Bennet McCallum challenges it.  He argues that monetary policy is not powerless at the 0% bound and there are real costs with going to a higher inflation target.  A key issue to resolving this debate  is how binding the 0% bound is for monetary policy.  My own view is that it is not truly a binding constraint, but only a self-imposed one because of the way monetary policy is normally conducted.  Conventional monetary policy targets a short-term nominal interest rate.  So when the 0% bound is reached monetary authorities have to switch over to their "unconventional" monetary policy bag of tricks.  But it doesn't have to be this way.

Is the 4% Club Re-gathering Steam? -- Delong: How can you minimize the chances that an economy gets caught at the zero nominal bound where short-term Treasury bonds and cash are perfect substitutes and conventional open-market operations have no effects? The obvious answer is to have a little bit of inflation in the system: not enough to derange the price mechanism, but enough to elevate nominal interest rates in normal times, so that monetary policy has plenty of elbow room to take the steps it needs to take to create macroeconomic stability when recession threatens. We want "creeping inflation." That strongly suggests to me that a 2% per year inflation target is too low. Two macroeconomic disasters in two decades is too many. Yglesias:I think Reagan had this right. Inflation that averages around four percent is consistent with robust growth and minimizes the risk that the nominal interest rate on short-term government debt will go to zero. Efforts to maintain a 2 percent ceiling on inflation have brought few concrete benefits and put policymakers in the unnecessarily difficult position of trying to conduct unorthodox monetary policy measures during a time of economic crisis when elites necessarily come under suspicion.

April CPI Data Leave Fed on Track for Easy Policy - Federal Reserve

officials likely greeted Friday’s release of the April consumer price index as consistent with what they see in the economy, and thus the data should do little to change the outlook for central bank policy for now. The government said that while the overall CPI for last month was up 3.2% compared to a year ago, so-called core prices, which strip out food and energy, rose by a more modest 1.3%, below the 1.5% to 2% range central bankers consider desirable. The upward pressure in the overall CPI was very much a story of energy. Versus a year ago, energy prices have jumped a remarkable 19%, led by a 33.1% increase in gasoline. No other category of goods tracked by the government posted similar gains, although the food component of the CPI was up 3.2% from a year ago.

The Inflation Monster Under the Bed - Krugman I’m glad to see Greg Mankiw agreeing with me on the absence of any inflation risk in the current environment. Here’s another way to think about the issue. As you can see above, wages have gone nowhere. Commodity prices, on the other hand, have gone up a lot lately (although they crashed last week). So here are a couple of questions. First, do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food? Second, do you any sign that employers are getting ready to make more generous wage offers? Third, have you heard anything about companies feeling that they have room to raise prices by substantially more than the rise in their raw material costs? The answer to all three questions is clearly no. So what we have is a rise in raw material prices, which will largely get passed on the consumers, but no hint that this is spreading into a wider rise in prices; and with labor costs flat, that means we get a one-time jump in consumer prices, but no persistent rise in inflation.

What is Inflation - Paul Krugman notes that wage growth has slowed and asks why are very serious people worried about inflation. I comment. Your effort to discuss inflation is doomed, because people don't agree on the meaning of the word "inflation." There's been some progress since 1923 when Reichsbank Presiident Rudolf Havenstein wrote the mortal book entitled (in translation) "There Has Been No Inflation In Germany," but not by much. Most people in the USA use "inflation" to refer to increased prices and assume that inflation does not cause increased nominal wages. They will not be surprised by the graph. That's what they imagine when they say inflation is a problem. Most US adults would not object of told "inflation reduces the amount of goods workers can buy with their salaries." They hate inflation (considering 10% inflation by far the biggest problem for the USA in the 70s) exactly because they assume that price increases don't cause wage increases even in the long run.

Three Economic Things That Do Not Exist - Brad DeLong - And the nonexistence of which makes the substantive case for a shift to more expansionary fiscal and monetary policies stronger than at any time in my life:

• 1) An inflationary wage-price spiral: Paul Krugman comments: The Inflation Monster Under the Bed:  Do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food? Do you any sign that employers are getting ready to make more generous wage offers? Have you heard anything about companies feeling that they have room to raise prices by substantially more than the rise in their raw material costs?
• 2) A recovering labor market:
• 3) Any loss of confidence in the long-term fiscal stability of the United States of America:

Fed’s Lockhart: Headline Inflation Should Recede - Headline consumer inflation, which has risen as food and oil prices have ticked higher, should recede, keeping broader measures of inflation well-anchored, a key Federal Reserve official said Wednesday. Federal Reserve Bank of Atlanta President Dennis Lockhart acknowledged the recent run-up in commodities, saying consumers were particularly pinched by higher gasoline prices. He also said, however, the Fed was confident in its ability to manage inflation expectations, which over the next two years should be well within the central bank’s typical target range. Still, Lockhart said risks to his forecast loomed, including a worsening of the euro zone’s sovereign-debt crisis or a spike higher in energy prices. Another key risk is if the already-stressed real-estate sector experienced more deterioration. The U.S. also must get its fiscal house in order, Lockhart said in response to a question from an audience member. Concern over U.S. debt could be restraining consumer and business activity, as people stand on the sidelines to wait and see what politicians will hammer out when it comes to reducing U.S. debt and deficits.

Is core inflation an artifact? - Headline inflation (total CPI inflation) has been above core inflation since last June. That's for Canada, but it's roughly the same in most other countries too. Most central banks, and most economists, pay more attention to core inflation than total inflation as an indicator of underlying inflationary pressures. Core inflation has inertia, and so is a better measure of the underlying trend because it is stripped of the more volatile components of the total CPI. Are they right? One month ago, Steve Williamson presented a simple 2-good model in which the prices of both goods were perfectly flexible. If the central bank targeted the price of apples, apple inflation would look like core inflation; but if the central bank targeted the price of bananas, banana inflation would look like core inflation. Core inflation is an artefact of monetary policy targeting core inflation, in other words. Nature copies art.

Chain, Chain, Chain, Chain CPI - Over at the Moment of Truth project (a continuation of the president’s fiscal commission), Adam Rosenberg and Marc Goldwein make a compelling case that the government should use a different inflation measure when calculating cost of living increases and indexing the tax code: Maintaining purchasing power in spending programs and indexing various parts of the tax code is an important policy goal. However, policymakers should ensure that the most accurate measure of inflation is being used. To correct the problem of over-indexation, many have proposed switching to the chained CPI [consumer price index] to provide a more accurate measure of inflation for indexed provisions in the federal budget.. An overwhelming majority of economists from both parties agree that the chained CPI is far more accurate measure of inflation than the CPI measurements currently in use.

U.S. wholesale prices climb 0.8% in April— U.S. wholesale prices rose a seasonally adjusted 0.8% in April, driven once again by surging fuel costs, the government reported Thursday. A sharp increase in oil over the past seven months has fueled a spike in wholesale prices. Wholesale costs have jumped an unadjusted 6.8% in the past year, the largest 12-month increase since September 2008. So far most companies have absorbed the extra costs instead of passing them onto consumers in the form of higher prices. As of March, consumer prices have risen a slower 2.7% over the past 12 months. If wholesale prices keep rising, companies eventually might have to pass along more of their costs to customers. Yet many commodity prices have receded over the past month, and if that trend continues, it would reduce pressure on companies to raise prices. The more closely followed core producer index rose 0.3% in April. The core index is usually viewed by investors and the Federal Reserve as a better gauge of inflationary pressure because it excludes the volatile food and energy categories.

The financing pyramid and margin debt - Here’s an interesting point from Cullen Roche at Pragmatic Capitalism on Monday. Margin debt — the amount that speculators borrow to buy stocks (or other assets for that matter) — is rising quickly. As Roche noted back in April — via a point raised by David Rosenberg at Gluskin Sheff — “current levels of margin debt are now consistent with the Nasdaq bubble and just shy of the levels seen before the credit crisis”. Here’s the chart from back then: Roche goes on to cite the CIO of a boutique investment firm on how all of this fits in with the quantitative easing and the equity rally — especially given the notable correlation between the start of QE1 and QE2 and rising margin debt levels overall. In that case, he argues, there is only really speculative non-bank ‘horizontal’ money sloshing around. Thus, whatever commodity inflation exists — just as Ben Bernanke says –  is indeed probably transitory because it relies on a type of permanent Ponzi condition, made up of leveraged commodity holdings which in turn depend on prices being higher to satisfy liabilities.

Two interesting inflation charts - THE Bureau of Labour Statistics has released its latest inflation figures, providing us with an opportunity to reflect on where the American macroeconomy is heading. The producer price and consumer price releases showed similar trends. Both core and headline inflation ticked up, but the core increase was much more subdued. Core producer prices rose 2.1% in the 12 months to April, up from 2.0% in March. Core consumer prices rose 1.3% in the 12 months to April, up from 1.2% in March. Both core CPI and core PCE (the Fed's preferred measure of inflation, taken from the GDP release) are signaling a healthy increase in inflation that remains within the Fed's comfort zone. (The annualised rate of inflation over the past three months is probably a little hot for the Fed's taste, but it also believes that as commodity prices level off upward pressure on prices will ease.) A dose of inflation is a good thing for an economy at this point in the business cycle. Have a look at the path of the real interest rate, as calculated by the Cleveland Fed:

Core Measures of Inflation increased in April - Earlier today the BLS reported:  The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.2 percent before seasonal adjustment. The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.8% annualized rate) in April. The 16% trimmed-mean Consumer Price Index increased 0.3% (3.3% annualized rate) during the month.  Over the last 12 months, core CPI has increased 1.3%, median CPI has increased 1.4%, and trimmed-mean CPI increased 1.7%.  Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation This graph shows these three measure of inflation on a year-over-year basis.  These measures all show that year-over-year inflation is still low, but increasing lately.  Note: You can see the median CPI details for April here.

Is Inflation Vastly Understated? - Krugman - One thing I see fairly often in comments, and which has been picked up by gullible pundits, is the notion that the true rate of inflation is vastly higher than the official statistics say. I could offer a defense of the BLS, which to my knowledge is quite scrupulous in its work. But let me also point out that independent measures are not very far from the official consumer price index. Specifically, the Billion Prices Project has been tracking online prices to get its own inflation measure, daily. The measure doesn’t correspond precisely to the CPI, since it doesn’t cover services — so it’s more like the goods-only CPI. And since we’ve been going through a run of rising commodity prices, you’d expect a good only measure to have shown more inflation than a measure that does include services. Even so, the difference isn’t that big: The BPP index does show somewhat higher inflation than the CPI, but not dramatically more. So unless you think the guys at MIT are also fudging their numbers, there’s really nothing there.

Recent Inflation History - Krugman - During the Bush years, I used to get triumphant letters from conservatives saying things like, “You say Bush’s policies are bad, but the economy added 110,000 jobs last month” — as if that was a big number; they had no idea what good job creation looks like. Now I get a lot of mail from people saying, “You say inflation is not a problem — but consumer prices rose 3.1 percent over the past year.” Again, it’s useful to have some perspective.  So, here’s consumer price inflation since 1985 — that is, after the Volcker disinflation, and after morning in America and all that: Do you remember a lot of hysteria about runaway inflation in, say, September 2005, when prices were 4.7 percent higher than they had been a year earlier? I don’t;

CME hikes oil, gasoline margin requirements-- U.S. exchange operator CME Group said Monday it is raising the margin requirements for trade in a wide range of oil products, effective Tuesday. The requirement for a new position in benchmark New York Mercantile Exchange crude contracts rises to $8,438 from $6,750 previously, with margins also higher for contracts in benchmark Brent crude, gasoline and other products. The hike was the first of its kind since March 4, according to TheStreet.com. June crude oil traded at $101.95 a barrel early in Tuesday's electronic session, down 56 cents, or 0.6%, from the close of floor trading Monday on the New York Mercantile Exchange

Inflation Expectations - Krugman - Just to follow up on something I’ve mentioned before: after the commodity correction, plus the fairly tame inflation report, market expectations of future inflation have fallen. Here’s the spread between 10-year Treasuries and inflation-protected versions of the same: The market doesn’t have to be right, of course; in fact, I’d say that this spread is much more volatile than it should be. But anyway, inflation fears seem to be subsiding everywhere except on one side of the aisle in Congress.

Inflation Expectations Retreat - Commodity prices have tumbled recently, and inflation expectations have been pared too, albeit only modestly. Is there a connection? Yes, or so it appears. But for the same reason that we should be cautious in reading too much into the inflation outlook based on a surge in prices of raw materials, the caveat applies when prices fall. Short-term commodity prices are too volatile to use as a lone source for gauging prospective inflation. Nonetheless, it's hard to overlook the recent shift in the Treasury market's forecast. After hitting the recent peak of 2.63%, the inflation outlook based on yield spread between the nominal and inflation-indexed 10-year Treasuries dropped to 2.43% as of yesterday. That's a modest retreat from 2.63% reached at one point last month. But let's not oversell this change. Based on the last several years of trading data, an upper range of comfort appears to be in the neighborhood of 2.5%. A convincing move above that level for a sustained period would be a warning sign of some significance. For the moment, however, the market is telling us that inflation's threat looks subdued.

Inflation, in Perspective -- Inflation rose again last month, roughly in line with economists’ expectations, to 3.1 percent over the last year. Core inflation — a measure that removes volatile and food and energy prices — also rose, with airfares, car prices and toy prices up. Core inflation is not a particularly good measure of how prices are affecting people’s lives, because food and energy prices obviously matter, but it does tend to be a better guide to where overall inflation is headed. Core inflation in the last year has been 1.3 percent. Given all the worries about runaway inflation, it’s important to remember just how low that is, in historical terms: Even if you look at core inflation only over the last three months, it’s well below its historical average: Unemployment, of course, remains far above its historical average, and it is not falling very fast. (Technically, it rose last month.) For anyone trying to decide whether unemployment or inflation is a bigger problem right now, these big-picture comparisons are worth keeping in mind.

Notes on the Commodity Plunge – Krugman - Commodity prices are down again today, undoing the mini-rally earlier in the week. Overall, we have still retraced only part of the big rise since last summer. Still, many people seem shocked to discover that commodity prices can go down as well as up.  A few thoughts:

• 1. Volatile prices are volatile. This is why you don’t want monetary policy to respond to commodity prices, or indeed to any price index strongly affected by commodity prices.
• 2. I haven’t seen this pointed out, but inflation expectations, at least as measured by spreads against inflation-protected bonds, have dropped sharply over the past few days.
• 3. No, it’s not because people are suddenly afraid of what will happen when quantitative easing ends. Long-term interest rates have also fallen, as the invisible bond vigilantes resume their invisible attack.
• 4. Will the inflationistas, who went wild over the rising price of commodities, change their tune if it turns out that the bull run is over? No

Looking For Demons In Consumer Price Inflation - Headline consumer price inflation (CPI) rose 0.4% last month on a seasonally adjusted basis, or slightly lower than March’s 0.5% increase, the Labor Department reports. That translates into a 3.1% rise over the past year. Inflationary pressures, at least by the government’s reckoning, remain modest. Ditto for the outlook on economic growth, which suggests that inflation isn't likely to be a major problem for the foreseeable future. The usual suspects will nonetheless scream otherwise, but it’s hard to make that case based on the Labor Department's numbers.  Arguing that inflation isn't an imminent threat looks even more persausive when we review core CPI data. Yes, the annual pace of core CPI inched higher last month to 1.3%, the highest rate since February 2010. But that’s still middling to low relative to the past decade. If core CPI rising by 1.3% is somehow viewed as dangerous, why were there so few cries of alarm in September 2006, when core CPI was advancing on the year at a much higher level: nearly 3% at the time?

Commodities and Inflation -- Krugman - One thing I’ve been meaning to post about for a while is a common misunderstanding of what monetary doves — not just me, but also Ben Bernanke, Bill Dudley at the NY Fed, and others — believe about commodity prices and broader inflation. Specifically, I often find people assuming or asserting that for the dovish view to be proved right, commodity prices have to go back down. But that’s not at all right; the dovish view relies only on the assertion that the rapid rate of rise in prices since last summer will not continue indefinitely. The idea is that even if the recent commodity price rise is permanent, as long as it levels off it will lead only to a temporary bulge in broader inflation. And the appropriate response of the Fed is to keep calm and carry on — to fend off the inflationistas until receding inflation makes it clear that there was never a reason to tighten monetary policy.

Inflation Speculation - When currencies do not serve as a long-term store of value, economic actors search for ways to preserve future purchasing power, which often mean purchasing commodities. But most commodities are not cheaply storable over long periods, so actors get forced into the few that do: gold, silver, etc. There is a problem here, stemming from dumb money. When dumb money shows up for purchase of generic “commodities” distortions follow: backwardation, large storage demand, and warped market incentives. Eventually overproduction catches up, but the volatility when it breaks can be huge and self-reinforcing, with c0unterparties raising margin to protect themselves.  Extreme volatility causes exchanges to raise margin requirements substantially, which reveals which side of the trade is inadequately financed, which typically is the side that was winning, which leads to a reversal in price action.  The dumb money is revealed. Now after a washout, the dumb money often assumes that powerful entrenched interests colluded against them to deny them their long-deserved free ride to prosperity through speculation.  The exchanges are in cahoots with the other side.  Well, no, the exchanges have two interests, which are solvency and transaction volume, which drives their profits.  Solvency is a more primary goal for an exchange, because the second goal can’t exist without it, and exchanges are not thickly capitalized.

Isn't Economics Fun (If You're an IBank) -The idiot taxpayers in this country will never know what hit them in this scam until rates begin to fly up and these bonds that the Fed is putting us on the hook for begin to be discounted towards zero.   When you wonder what kind if idiots would be buying 10-year notes at 3% when a gallon of gas was $1.40 ten years ago and now $4 - that idiot is you.  Originally, that idiot was a bank but banks aren't allowed to lose money in America - that's what taxpayers are for!  What the Fed does, on your behalf, is to buy all those notes from the Banksters at face value - because if they tried to sell them on the open market they'd never get it.   In exchange, the IBanks go out and buy more Government debt to make it look like there's actual interest and the little game of hot potato keeps going until the music stops and the Fed's $2.6Tn Balance sheet is transferred back to the taxpayers and added to our national debt. Isn't economics fun?

Link Between Weak Dollar, Inflation Is Eroding -- Currency weakness leading to higher import prices is a hallowed cause-effect connection for economists. But it’s a link that may be eroding. Exchange rates are a hot topic as the U.S. and China hold their third annual round of the Strategic and Economic Dialogue this week. The link between a weaker dollar and prices is also gaining in importance because the Federal Reserve is coming under fire about inflation pressures in light of rising commodity costs. The Fed says the effect of such cost increases are “transitory.” Businesses and consumers aren’t so sure. Certainly, import prices have increased as the dollar has weakened. Over the year ended April, the trade-weighted value of the dollar fell about 6%, while the prices of non-oil imports increased 4.3%. Much of the price gain, however, reflects higher costs for imported commodities and supplies. The prices of imported capital and consumer goods — items that feed more directly into broader U.S. inflation measures — are up only about 1% over the past year.

A recession is coming, but not just yet - There will be many dress rehearsals in commodity markets before the next global recession. An example is last week’s dramatic and broad-based sell off that took oil prices for over a $10/barrel tumble. And there is no doubt that despite the scarcity of the resource, the price of oil will crash the next time the global economy sewers. But is that time already upon us? If the monetary authorities in China and India continue to hike interest rates at the pace they have set recently, the next global recession may not be that far off. After all, these economies are today’s global economic growth engines. But when push comes to shove, the political masters of those central banks may soon temper their enthusiasm so they can battle inflation.  If the money-printing U.S. Federal Reserve Board doesn’t care about inflation why should the People’s Bank of China? Compare income per capita between the U.S. and China and it is not too difficult to figure out which one should be more desperate for economic growth and, as a result, more willing to seek trade-offs against inflation.

Fed’s Duke: Anecdotal Evidence Suggests Small-Business Conditions Improving - Federal Reservegovernor Elizabeth Duke said Tuesday that recent anecdotal evidence suggests conditions are improving for small businesses, on the same day a new survey showed another decline in optimism among small firms. “Although no definitive data source exists, the combination of a variety of recent survey results paints a picture of increasing optimism about future sales and business conditions and a corresponding easing of credit availability for small businesses,” she said, Duke said the Fed will continue to collaborate with its regional banks, other regulators and community financial institutions to better understand local economies and economic situations. “Because jobs and the needs of low- and moderate-income communities remain a priority for us, we will continue to foster collaborative efforts in hopes of additional innovative responses,” Duke said.

Those Whom the Gods Wish to Destroy They First Make Fed Governors = Many observers have likened financial systems to natural systems, i.e. an ecology in which complex interactions establish a dynamic harmony of ebbs and flows within a stable framework.  The current global ecology of finance is out of balance and intrinsically unstable. The Federal Reserve and the other central banks are playing the role of financial gods, if you will, intervening in the interactions of mere mortals to create the illusion of stability.  To this end, the Fed has created trillions of dollars behind its veil of secrecy, and used this money to prop up delusional asset values (high) and interest rates (low).  If we look at a decentralized financial system as a self-organizing ecology, we find that the strength of the system lies in the adaptability of the myriad organisms in its many micro-climates and meandering streams. The key strength of a decentralized financial ecology, i.e. one not organized as a top-down command economy, is the "genetic diversity" of its many participants.

Four Graphs Looking at Real Economic Growth - This post contains four graphs looking at real economic growth, three of which also contain some tax information. The first graph shows the five year annualized growth in real GDP for every five year period beginning the one ending in 1934. I took the liberty of adding in two lines free-style. The first is my attempt to trace the high points over time, leaving out WW2. The second traces the low points. Figure 2 is similar to Figure 1, but it strips out the two ad hoc lines and adds in the five year average top marginal individual income tax rate. Figure 3 is a scatter-plot version of the data in Figure 2.  Finally, Figure 4 is the same as Figure 3, but rescaled to leave out 1942-1945, which only makes the lack of a lower taxes = faster economic growth relationship more obvious.

Is housing holding back recovery? -  THIS morning, several news outlets are reporting on new home price data from Zillow which shows that prices fell 3%, quarter-on-quarter, in the first three months of the year. That's in line with Case-Shiller data and not particularly surprising. Interestingly, it seems as though Fannie and Freddie are unloading a lot of foreclosed properties, a development which is holding down prices. Obviously, this effect is concentrated in markets with lots and lots of foreclosures—largely those in the West, Florida, and other hotspots like Atlanta and Detroit. Kevin Drum reads the news and writes: Most analysts now expect that the housing market won't bottom out until sometime next year. Until that happens, it's unlikely that that the sluggish economic recovery we're seeing right now will improve much. I wish he'd explain that a little. What's the mechanism he has in mind? For new housing consumers—renters and buyers—falling prices are a good thing; they boost disposable income. Falling prices may delay a recovery in construction activity, but even during the housing boom years the most residential investment ever contributed to the real GDP growth rate was 1.04 percentage points

Is housing hurting the recovery? - Atlanta Fed's Macroblog - Though the week is only half over, I'm going to nominate Stan Humphries and Zillow as bearers of the week's most distressing economic news: "Home values fell three percent in the first quarter of this year, marking a pace of decline not seen since 2008 when the housing recession was at its worst. Home values fell one percent between February and March and 8.2 percent from March 2010." Calculated Risk provides a handy table of how prices have affected equity values in homes by locale, as the Zillow Real Estate Research blog predicts the price-decline end is not so near: "Previously, we anticipated a bottom in home values by the end of 2011. But with values falling by about 1 percent per month so far, it's unlikely that will happen. We now believe a bottom will come in 2012, at the earliest." At The Curious Capitalist, on the other hand, Stephen Gandel says he's not so sure: "To be sure, housing prices have fallen this year. But the Zillow numbers out today make the housing market look worse than it is.

What Recession? - Bill McBride of Calculated Risk, reminds us that Wall Street's "dirty little secret" is that Wall Street and corporate America like the unemployment rate to be a little high. Higher unemployment keeps wage growth down, and helps with margins and earnings - and higher unemployment also keeps the Fed funds flowing freely.  Corporations like to see SOME job growth, so people have enough confidence to spend (and they can have a few more customers) but they don't care if that job growth is in the US or China.  "A SLOWLY declining unemployment rate (even at 9%) with some job growth is considered OK," says McBride. Paul Krugman pointed out last week that "it wasn’t much of a recovery to start with. Employment has risen from its low point, but it has grown no faster than the adult population. And the plight of the unemployed continues to worsen: more than six million Americans have been out of work for six months or longer, and more than four million have been jobless for more than a year."  Krugman continues:  It would be nice if someone in Washington actually cared.

Capitalists Who Make vs. Capitalists Who Take - What’s the difference between productive wealth and destructive wealth?  What if Gross Domestic Product made a fundamental distinction between the two — between making money by producing real value for others, versus just making money by exploiting others?  What if GDP quantified the growth of productive capitalism, and separated that from the type of “wealth” created through extraction, manipulation and exploitation? We find ourselves at a point in the world where the main tool to measure economic success and progress — Gross Domestic Product, or GDP –  is outdated.  Do we need a new set of rules for our economy to effectively begin to measure real, productive growth?  Umair Haque, author of “The New Capitalist Manifesto” and director of the Havas Media Lab, believes it’s critical to the future of our country and our global economy.   Looking today at our economy, it’s difficult to see who is creating that higher level of value.   Companies pump up their near-term income by accounting tricks, pump up stock prices for shareholders, without creating real value, all of which has had a hugely negative effect on our global economy. Umair Haque, is at the forefront of pushing for a new way of looking at what, and how, we grow our economy.

Three Questions for America’s Financial Future - Greg Mankiw - AFTER more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers.  Now, if you follow economic commentary in the newspapers or the blogosphere, you have probably not run into many humble economists. By its nature, punditry craves attention, which is easier to attract with certainties than with equivocation.  But that certitude reflects bravado more often than true knowledge. So let me come clean and highlight three questions that perplex me. The answers to them may well shape the economy in the years to come. 

• How long will it take for the economy’s wounds to heal?
• How long will inflation expectations remain anchored?
• How long will the bond market trust the United States?

Gregory Mankiw's Pop Quiz on the Economy - In his weekly column in the NYT, Gregory Mankiw gave a three question quiz for economists. His questions are:

• 1) How long will it take for the economy’s wounds to heal?
• 2) How long will inflation expectations remain anchored?
• 3) How long will the bond market trust the United States?

Let's start with questions 2 and 3, because these are easier.  The answer to question number 2 seems obvious -- as long as there is no inflation. Why should people expect inflation when they are not seeing any.  This question is sort of like asking in the middle of a drought in the desert, when will people expect rain? Presumably when they see clouds on the horizon and not until then. The answer to question 3 largely follows the answer to question 2. After all, the real threat to those holding U.S. government bonds is inflation, not insolvency, unlike euro zone the countries that Mankiw refers to in his piece. The United States can always print more dollars to meet its obligations. Greece cannot do the same with euros.

Mark Zandi's "Reasons for Optimism and Caution" On The Economy  Moody's Analytics Chief Economist Mark Zandi offered four reasons for optimism on the economy and three for "nervousness" at lunch today before the National Economists Club. He expects 3% real GDP growth this year, like last year, and 4% next year. "There won't be a lot of progress on the unemployment rate this year [currently 9.0%] because of labor force growth from people returning to the job market." Four reasons for optimism:

• 1. U.S. business is in very good shape. Profits and balance sheets are strong. Earnings have driven the stock market higher.
• 2. Households are de-leveraging rapidly, righting the wrongs that got us into this downturn. 
• 3. Credit conditions are improving, a precondition for stronger growth. Underwriting standards are easing. Commercial and industrial lending to small business is starting to rise, a sure sign of economic strength.
• 4. Monetary and fiscal policy remains very supportive of the economy. "On net, QE2 has been a plus for the economy...although it has contributed to commodity price increases."

Three reasons for caution:

• 1. Oil price increases have exceed everyone's forecast. We've essentially "taken this year's 2% point payroll tax cut in put it in our gas tanks." "
• 2. "The [home] foreclosure crisis is not over." Zandi estimates housing prices will decline between 3% and 5% this year before they bottom.
• 3. The fiscal crisis must be dealt with. The FY11 deficit will be around $1.4 trillion or 9.0% of GDP. The structural deficit is about 5% of GDP, and policymakers need to reduce that to 2% of GDP 

Muddle Through, or Crisis? - Mauldin - There is an argument that the US should pursue a strong growth and jobs policy as its #1 goal and that growth, along with spending cuts and/or tax increases (depending on your views), will bring us out of the current doldrums and help us solve the budget deficit. I set the table in both the book and last week’s letter that the US is going to be growth challenged for years to come. Let me review a few items in brief and add a few more, then we will get to my predictions of what the next five years will look like. Don’t jump ahead. Without understanding the elements that are lining up to retard growth, the forecast will not make much sense. First, job #1 MUST be to reduce the deficit below the nominal growth rate of GDP. Period. The level of debt threatens to overwhelm everything else, and at some point can produce a crisis like those evolving in Europe and Japan. I have outlined the reasons for this in depth, so here I merely make the assertion.

On the Upside-Down World of MMT - I ran across a post by Robert Murphy over at the Mises Institute blog on Modern Monetary Theory. Since I have been pushing the idea at Credit Writedowns that the centrality of secular debt accumulation makes some ideas from MMT and Austrian Economics compatible, it was interesting to see a Mises scholar work over MMT. Murphy is sceptical about stressing the idea that government deficits are exactly one-for-one non-government sector surpluses. He calls it the upside down world of MMT. I, on the other hand, see the logic. This is something I covered in a post called Economics 101 on government budget deficits. But here’s what Murphy had to say: When I first encountered such a claim — that the government budget deficit was necessary to allow for even the mathematical possibility of net private-sector saving — I knew something was fishy. For example, in my introductory textbook I devote Chapter 4 to "Robinson Crusoe" economics.  As Murphy rightly says, "of course you don’t need the government in order to save." Here’s the problem, though. There are no transactions involved in Murphy’s example.

Hard Money Advocates are Their Own Worst Enemy - Hard money advocates have been taking a beating in the blogosphere over the past few days, complements of Matthew Yglesisas, Paul Krugman,  Mike Konczal, and Ryan Avent.  These critics make some good points about the hard money view.  Here is Avent's critique:  The hard money approach is atrocious economics. I don't think it's outlandish (or even particularly controversial) to say that the biggest difference in the outcome of the Great Recession and the Great Depression was the change in central bank approach to policy. An economic catastrophe was averted. What's more, hard money is a great force for illiberalism. Sour labour market conditions fuel anger at the institutions of capitalism and free markets. And when countries are denied the use of normal countercyclical policies, they quickly reach for illiberal alternatives like tariff barriers.These points are often overlooked by hard money supporters.  There is, however, an even bigger problem for them.  Most hard money advocates are in the GOP which also happens to be calling for fiscal policy restraint.  The belief is that hard money and sound government finances are necessary for a robust recovery to take hold.  The problem is that the hard money approach--which means tightening monetary policy--makes it next to impossible to stabilize government spending.  It also makes it likely the economy will further weaken. 

Monetarist Pathos - Krugman - I feel David Beckworth’s pain. Really, I do. Beckworth and a few others are trying to keep the spirit of monetarism alive. What I mean by that is that, like Friedman, they’re trying to reconcile a conservative view of government’s proper role with a bit of macroeconomic realism. They accept that a recession represents a huge market failure demanding policy action. But they want to keep that policy action narrowly technocratic, limited to open-market operations by the central bank. As I’ve argued before, this doctrine has failed the reality test: liquidity traps are real, and blithe assertions that central banks can easily pump up demand even in the face of zero short-term rates have not proved correct.  But what our modern monetarists are facing is a different problem: it turns out that they have no political home. The modern American conservative movement has no room for nuance, for the idea that some forms of government activism are a good idea. Ayn Rand, not Milton Friedman, is their patron saint; in fact, if Friedman were alive today, he’d be shunned as a dangerous radical with inflationary ideas.

Dollar In Graver Danger Than The Euro - Why does it surprise anyone that the latter, the eurozone, has a stronger currency than the former, the US? Because of peripheral countries’ debt refinancing issues? And the potential for contagion? These are real and serious issues, but in our assessment, they should be primarily priced into the spreads of eurozone bonds, not the euro itself. Think of it this way: in the US, Federal Reserve chairman Ben Bernanke has testified that going off the gold standard during the Great Depression helped the US recover faster than other countries. Fast-forward to today: we believe Bernanke embraces a weaker currency as a monetary policy tool to help address the current state of the US economy. What many overlook is that someone must be on the other side of that trade: today it is the eurozone, which is experiencing a strong currency, despite the many challenges in the 17-nation bloc

What Would Really Bring about a Dollar Dive? - One of the things about reading the op-eds and various articles in the blogosphere is the tendency to hype the possibility of the collapse in this, or the collapse in that. The most recent "bubble" in this type of writing involved hyper-inflation, commodities (silver, anyone?) and the dollar. Now I read things like QEIII would bring about a collapse in the dollar [1] (as if anybody really thought QEIII was politically likely, even if it were advisable on economic grounds); or easy monetary policy would be the culprit. Here's a choice quote from Jim Rogers: "I would expect to see some serious problems in the foreseeable future.... By 2011, 2012, 2013, 2013, I don't know when, we’re going to have an economic slowdown again," he said. "This time it’s going to be a real disaster because the US cannot quadruple its debt again. Dr Bernanke cannot print staggering amounts of money again."  "How much more can they print without a serious collapse of the US dollar?" he said.  I can't figure out where that cited "quadruple" comes from. Debt held by the public (in current dollars) has not even tripled since G.W. Bush came into office, and has not even doubled since Obama came into office (see FREDII if you don't believe me). As a share of GDP, it rose from 0.49 to 0.63 from 2009Q1 to 2010Q4. Oh, well. Time to drop the hyperbole, and look at some data.

Singapore wealth fund sees major crisis if US loses AAA status (Reuters) - The world could face another major financial and economic crisis if the United States loses its AAA sovereign rating, a top official at Singapore sovereign wealth fund GIC said on Monday.  Separately, Singapore Prime Minister Lee Hsien Loong said he did not expect U.S. President Barack Obama to tackle the country's huge deficit until after presidential elections in 2012, in a sign of growing global unease about the U.S. economy.  "We face the possibility of another major financial and economic crisis if the world's risk-free asset, hitherto U.S. bonds, loses its AAA credit rating in a disorderly manner," GIC Deputy Chairman Tony Tan said at a conference to mark the fund's 30th anniversary.  He did not elaborate.

Geithner Agrees to Increase U.S. Indebtedness to China In Exchange for Higher Profits for the Financial Industry – Dean Baker - This is what the Washington Post reported in an article on a set of agreements negotiated by Treasury Secretary Timothy Geithner and the Chinese government, although it did not explain this point to readers. The article told readers that: "The agreement included action on some long-standing issues — including initial moves by China toward opening its financial sector by allowing U.S. and other foreign firms to sell auto insurance, sell mutual funds and other investments, and underwrite corporate bonds." The United States has also been pushing for China to raise the value of its currency against the dollar.  The high value of the dollar makes imports cheap causing people in the United States to buy more imports from China. It also makes U.S. exports more expensive to people living in China, leading them to buy less of our exports. The resulting trade deficit is financed by borrowing from China. Many politicians have sought to appeal to racist sentiments by citing this borrowing from China in their push to reduce budget deficits. The Washington Post has also followed this path in both its news and opinion pages. As long as the dollar remains over-valued, the United States will continue to run large trade deficits and continue to borrow from abroad, whether or not it has a budget deficit.

IMF Official: U.S., Europe At Turning Points, Must Address Debt - The U.S. and Europe have reached turning points in economic policy, and their ability to address serious debt problems will have broad implications around the globe, the No. 2 official at the International Monetary Fund said in a speech released Monday. John Lipsky, first deputy managing director at the IMF, said during last week’s bilateral talks between the U.S. and France that he remains hopeful that the fiscal troubles on both sides of the Atlantic will be dealt with successfully. But he warned of dire consequences for the global economy if the efforts underway fall short. “Despite the potential difficulties, I see many reasons for optimism,” he said, according to the prepared remarks. Bringing the budget deficit and debt level under control is “the most daunting” task facing U.S. policymakers, with interest rates poised to rise by as much as a percentage point in the absence of serious reform, Lipsky said. That would likely push up global rates, increasing capital costs around the world and rattling currency markets, he said.

So Much For Pimco Buying Bonds: Duration Weighted Treasury Exposure Hits Whopping -23% Short, Cash Surges To Unprecedented $89 Billion - So much for all the conspiracy theories that Bill Gross was capitulating in his short position against US debt even as he continued to bash US fiscal and monetary policy. According to just released April data for the flagship Pimco $240 billion Total Return Fund (which saw a $4.2 billion increase in AUM in the month), Bill Gross actually added to his short position against US government debt, bringing total market value exposure to 4% of AUM or ($10) billion. More amazing is that on a Duration Weighted Exposure basis, the firm's Treasury short is 23%, read that again, 23%! So much for that change in outlook. Additionally, Gross also sold another $8.3 billion in mortgage securities, bringing the April total to a nominal $57.8 billion. Spring cleaning at casa de Bill continued across all fixed corporate income as well, dropping the firm's exposure to IG by $1.6 billion and to HY by $2.1 billion. The only two securities which saw a token increase was in Non-US developed markets and Emerging Markets, to $14.4 billion and $26.5 billion, respectively. Yet the biggest shocker of all, is that Gross has now brought his cash position to an all time unprecedented high of $89.1 billion! That's right, PIMCO is charging a substantial asset management fee when 37% of all assets are in cash. One would think the mattress would cost far less.

Bill Gross on Deficits and the Fed -- This month's column is about Bill Gross, who heads Pimco, the world's largest bond fund.  We spent a couple of hours talking about his portfolio, and why he's bearish on Treasury bonds.  When this news came out, a lot of commentators seemed to think that this meant that he was predicting a high likelihood of imminent default, but that isn't the case.  What he's worried about in the near term is the low yields, bred of Fed intervention and the global "flight to quality".  But over the longer term, of course, he's worried about the deficit.  But unlike many deficit hawks, he doesn't care how we close it.  I asked him specifically whether he though it mattered whether we closed the deficit using tax hikes or spending cuts, and though he said he personally thinks we ought to raise taxes on people like him, he professed himself basically indifferent between higher taxes or lower spending--he doesn't think that the economic effects of one are obviously worse than the other. Keep that in mind when you hear people arguing about austerity:  People like Bill Gross are the ones we ultimately need to convince, because they're the ones whose defection will precipitate a crisis. 

Treasuries Hold Loss Before Auctions; Gross Adds to Bearish Bet -- Treasuries held a loss from yesterday as the government prepared to begin three days of debt sales and Pacific Investment Management Co. increased its bet against U.S. government-related securities. Bonds interrupted a rally that sent yields to the lowest level this year before today's $32 billion three-year auction. The U.S. is also scheduled to sell $24 billion of 10-year notes tomorrow and $16 billion of 30-year bonds on May 12. The record $9.14 trillion in U.S. publicly traded debt is raising concern that yields will increase when the Federal Reserve ends its bond-purchase program next month. "Supply will gradually push the yield up when demand from the Fed ends,"  Daiwa SB Investments sold Treasuries last month, Katayama said.

Jim Rogers Says He Plans To Short Treasurys As Soon As This Afternoon - And so the Bill Gross juggernaut begins rolling. Reuters reports that 'Influential investment veteran Jim Rogers said on Tuesday he plans to short U.S. Treasuries as soon as this afternoon as he expects the end of quantitative easing to pressure government bonds.' Odd. Where have we written/heard that before. But of course, who listens to Bill Gross (the largest bond manager in the world) and Jim Rogers (the co-founder of Quantum) - surely they are no-nothing fools (who just happen to agree with our initial assessment that in the absence of QE2 all bets will be off). Reuters adds: 'Rogers said he expects the U.S. dollar to rally when the Federal Reserve's unconventional monetary measure ends in June. 'I'm not short bonds yet but I plan to short bonds - maybe this afternoon if I get around to it,' Rogers told Reuters Insider television.'

The PIMCO Mystery - There is an interesting article on Bill Gross and PIMCO in The Atlantic.  It highlights PIMCO's decision to dump and then bet against U.S. treasury bonds.  According to Tyler Durden, the amounts involved are significant.  Bill Gross' explanation for these decisions is that the bond market is being artificially propped up by QE2 and once it ends so will the bond prices. These decisions have me stumped.  First, Gross' view assumes that the flow of QE2 purchases is what matters to bond prices.  There are good reasons to think, however, that it is the stock of QE2 purchases that matter.  If so, there should be no bond market correction since the Fed is not planning to sell its newly-acquired assets anytime soon. Second, given the weak economic outlook the expected short-term interest rates going forward should remain low.  That in turn should translate into low long-term bond yields.  Finally, if PIMCO's view were correct would not the bond market be pricing it in already? The figure below gives no indication of the U.S. bond market bottoming out.  If anything, there is a downward trend in the long-term treasury yield since the start of the year.

The Battle for the Soul of the GOP - Robert Reich - Wall Street and big business fear Tea Partiers won’t allow House Republicans to raise the debt ceiling without major spending cuts – and without tax increases on the wealthy. Wall Street and big business know this would be unacceptable to the White House and congressional Democrats.The Street and big business want to tame the budget deficit but they don’t want to play games with the debt ceiling. Credit markets are fine at the moment, but if the debt ceiling isn’t not raised within the month – weeks before August 2, when the Treasury predicts the nation will run out of money to pay its creditors and its other bills – credit markets could go into free fall. The full faith and credit of the United States would be jeopardized. Interest rates would skyrocket. The dollar could plummet. The Tea Partiers don’t care about the debt ceiling. To them, it’s a giant bargaining chit to shrink government. Nor do they worry about credit markets. If the full faith and credit of the U.S. government is no longer honored, so much the better. You see, Tea Partiers hate government more than they hate the national debt. The Tea Partiers’ real aim is to shrink the government

John Boehner: Cut ‘trillions’ as debt limit nears - Speaker John Boehner¹ came here Monday to lend a peek to a worried Wall Street and a concerned Washington as to where he stands as the nation rapidly approaches its statutory debt ceiling.  What they heard was that he feels no urgency.  The Ohio Republican used a speech³ to the Economic Club of New York to unveil a staunchly conservative plan to offset a debt ceiling hike with spending cuts of a greater amount, putting House Republicans on a collision course with Democrats who want much more modest spending restrictions attached to the vote.  He also told a packed, well-dressed ballroom at the Hilton New York that the debt limit has no “hard date” — a sign he does not take seriously the Democrats’ dire warnings of default in a few months. And he reaffirmed that reforming the popular program Medicare⁴ is fully on the table⁵ in the negotiations, that tax hikes are a non-starter, and that defense spending deserves a look but vowed to not raise the debt ceiling without what he dubs “real action to solve our long-term economic problems.”

John Boehner's Premature Austerity - There are reports that John Boehner is planning to announce that the GOP will demand spending cuts that match or exceed any increase in the debt ceiling. However, the precise details are not known: But this statement from the NY Times gives an indication of the magnitude he has in mind: Trillions not billions. I don’t think the actual amount will be anywhere near that large, but to illustrate how to use “back of the envelope” calculations to estimate the economic impact for a change of any size, suppose there are $600 billion in cuts over two years. What would be the macroeconomic impact of such a change? Estimates of the multiplier vary, and the exact magnitude is controversial. Generally, the multiplier is thought to be larger than 1.0 in severe recessions, and much smaller, perhaps even zero, when the economy is near full employment. Assuming a multiplier of 1.0 — a value I think is, if anything, too small given the current state of the economy — a $600 billion reduction in government spending causes a $600 billion reduction in GDP.

Boehner demands trillions in spending cuts in exchange for lifting debt ceiling - House Speaker John A. Boehner defined the GOP’s terms for raising the legal limit on government borrowing Monday, saying he would agree to raise the nation’s debt ceiling by about $2 trillion in exchange for an equal amount in spending cuts. Delivering a sermon on fiscal austerity to a Wall Street crowd clamoring for compromise on the debt limit, Boehner (Ohio) firmly rejected any effort to raise taxes. He also called on Democrats to engage in “honest conversations about how best to preserve Medicare¹,” signaling that House Republicans remain committed to restructuring at least some portions of the program. And for the first time, he signaled that Republicans would come to the negotiating table with the expectation that the White House and Senate Democrats be prepared to discuss major reductions in federal spending — and enact them immediately. That’s a sharp shift from Republicans who just last week talked of finding “commonality” on less ambitious measures.

Wonkbook: Boehner's debt-limit demands would increase the deficit - Ezra Klein  John Boehner's new line on the deficit negotiations is that raising taxes -- by which he appears to also mean closing tax expenditures -- 'is off the table. But everything else is on the table.' This is a bit like telling your doctor, who's worried that you've gained weight and are out-of-shape, that exercise is off the table, but everything else is on the table. Well, it's nice that you're prepared to diet, but you need to exercise, too. Otherwise, you're not going to get where you need to go. And without revenue, we're not going to get where we need to go -- at least if you think where we need to go is towards a balanced budget. Over the past 10 years, the Bush tax cuts have increased the deficit by about $1.3 trillion. They're the single largest policy contributor to our recent deficits. Due to the growth of the economy and the creep of the alternative minimum tax, they'll cost the Treasury closer to $4 trillion over the next 10 years. They're the single largest policy contributor to our projected deficits.

McConnell demands spending cuts, Medicare overhaul for deal on debt limit - The top Senate Republican sought Thursday to clarify his party’s stance on Medicare heading into high-stakes talks with the White House, telling President Obama he wants “significant” changes to the program in exchange for lifting the legal limit on government borrowing. After the entire Senate Republican caucus met with Obama at the White House, Minority Leader Mitch McConnell (Ky.) said he would not insist on a controversial House GOP plan that would partly privatize the popular health program for the elderly. But with Medicare and Medicaid projected to be the major drivers of future borrowing, he said tighter eligibility requirements and reduced benefits must be part of any deal.

Kyl thinks big - House Speaker John Boehner (R-Ohio) wants $2 trillion in spending cuts or his caucus will destroy the economy. Senate Minority Whip Jon Kyl (R-Ariz.) is aiming even higher. Senate Minority Whip Jon Kyl (R-Ariz.) said Monday that Republicans will likely demand cuts to the budget worth $6 trillion over the next decade in exchange for voting to raise the national debt limit. […]  Asked about the GOP’s goal to cut spending, Kyl said he’d push for $6 trillion in cuts over the next decade — which is in line with Ryan’s plan, but more than the $4 trillion than what President Barack Obama laid out over the next 12 years. […]“The question is what is it going to take to get some House Republicans to vote to increase the debt ceiling?” Kyl said. “It’s a lot more than what you just said,” referring to statutory caps on spending. Keep in mind, Kyl wasn’t referring to the budget fight for the next fiscal year — he’s looking for $6 trillion in cuts just to raise the debt ceiling before the early-August deadline.

Treasury Auctions To Take US Over Debt Ceiling On Monday -(Dow Jones)- The Treasury Department auctioned $56 billion in new debt Tuesday and Wednesday, enough to take the U.S. over its federal debt ceiling when the three- and 10-year notes settle on Monday.Treasury officials last month flagged May 16 as the day the government would hit the $14.294 trillion debt limit.The U.S. is selling $72 billion in new debt over three days this week. The Treasury auctioned $32 billion in three-year notes Tuesday and $24 billion in 10-year notes Wednesday, and will sell $16 billion in 30-year bonds Thursday. All of the auctions will settle Monday. As of Tuesday, total debt subject to the limit was $14.274 trillion, according to the Treasury Department.

Bernanke: Risky to Use Debt Ceiling as Bargaining Chip - Federal Reserve Chairman Ben Bernanke warned lawmakers Thursday that using the U.S. debt ceiling as a political bargaining chip puts the economy at risk. “Using the debt limit as a bargaining chip is quite risky,” Bernanke told a Senate Banking Committee hearing on the implementation of the Dodd-Frank regulatory overhaul law approved a year ago following the financial crisis. House Speaker John Boehner (R., Ohio) said Monday that any increase in the government’s debt limit should be accompanied by trillions of dollars in spending cuts. GOP leaders and the White House are discussing a deal that would enact strict deficit targets and some spending cuts to win Republican votes for lifting the ceiling on how much the federal government can borrow.

Bernanke: System unstable if debt limit not lifted -- Federal Reserve Chairman Ben Bernanke said Thursday that if Congress doesn't agree to increase a fast approaching $14.3 trillion borrowing limit it would result in an increase in interest rates, a worsening deficit and a destabilized financial system. "The costs would be an increase in interest rates which would worsen our deficit and hurt all borrowers in the economy," Bernanke said at a Senate Banking Committee hearing on the financial system. "The worst outcome would be that the financial system would again destabilize, which would have extremely dire consequences for the economy."

On Raising The Debt Ceiling - We're all gonna die! IF, that is, Congress fails to raise the debt ceiling on Monday. The United States would default on its debt obligations, all hell would break loose in the global financial markets, and you'll never be able to borrow money again. The Daily Ticker's Henry Blodget and Aaron Task hash it out in the first video. It is beyond me why anyone would take Washington politics seriously anymore. If you create myths stating that politics still matters, that we live in a Democracy, that Republicans and Democrats are serious people, and so on, then I suppose you've got to live with those myths, no matter how absurd things get. Why does the debate on the debt ceiling put me in the mood to watch the second video?

It's a farce, it's a sideshow, it really shouldn't happen…On Friday I spoke to RT America about the mockery of a sham that is US public discourse on the debt ceiling issue. First of all, the US government creates dollars. They can always manufacture more if they so choose. It's a rubbish argument to suggest the US is going bankrupt because of its deficit spending. Second, If people want to reduce deficits, cut spending or increase tax revenue by creating jobs or raising tax rates. It's as simple as that. The debt ceiling issue is "a farce It's a sideshow. It really shouldn't happen." It is politics pure and simple –cynical and dangerous politics to be sure.  On the debt issue, the concept that the Chinese are going to dump dollars is ridiculous. They have pegged their currency to the U.S. dollar. Revalue the currency and the accumulation of dollar reserves goes away. It's as simple as that. The reason the Chinese are not revaluing more aggressively is because they know doing so would cause a massive disruption which would imperil their economy, already wracked by a massive capital investment bubble. Moreover, a massive revaluation is the path to mutual economic annihilation as surely as the old Soviet-US mutually assured destruction on the nuclear front was. Call it murder-suicide. It won't happen.

Debt limit debate likely to stretch to July (Reuters) - The United States is on track to exhaust its $14.3 trillion credit limit on May 16 but it could be July before President Barack Obama and Congress cut a deal increasing borrowing authority, congressional sources estimate. Global economies are intently watching the fight between Republicans and Democrats over the U.S. debt and related demands for spending cuts. Failure to raise the debt limit could lead to the first-ever default for the United States and higher interest rates that would be harmful to its fragile recovery. Treasury Secretary Timothy Geithner is preparing special funding maneuvers to avoid default and delay the hard deadline to August 2. For now, Wall Street is betting on a deal, although analysts told Reuters that lawmakers may not reach an agreement until the 11th hour. "We're no longer looking to settle it this work period," a Senate Democratic aide told Reuters. The Senate's current work period is scheduled to end May 27, when it breaks for weeklong Memorial Day holiday.

Incredible threats -- EZRA KLEIN quotes Speaker of the House John Boehner, in a speech on the debt limit: Without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase. And the cuts should be greater than the accompanying increase in debt authority the president is given. We should be talking about cuts of trillions, not just billions. Also, tax increases of any sort are off the table. How should Democrats respond? Well, no would be one option. No won't be the answer, because Democrats need to signal seriousness on fiscal issues and because most of them want to work some deficit-reduction plans into the deal to raise the limit, but no could be the option. Mr Boehner cannot actually allow the country to default, without going down as one of American history's greatest economic villains. He's said as much. Which makes his bargaining position here somewhat untenable. At the same time, I'm not sure what the equilibrium here is. My sense is that backward induction takes us to a world in which the adminstration gets the cuts it wants and no more.

Debt Ceiling May Come Crashing Down on Treasury - At the risk of belaboring the obvious, the federal budget deficit didn’t just suddenly arise solely because of actions taken by Democrats over the last two years. As a recent report from Pew makes clear, the bulk of it results from a recession that began in December 2007 and actions taken by Republicans when they were in power: huge tax cuts, two unfunded wars, and new spending programs such as Medicare Part D.  For the record, these are the deficits that House Republicans officially support (fiscal years): 2012: $995 billion; 2013: $698 billion; 2014: $489 billion; 2015: $431 billion; 2016: $478 billion; 2017: $407 billion; 2018: $378 billion; 2019: $415 billion; 2020: $405 billion; and 2021: $391 billion.To vote for $5 trillion in additional deficits – not to mention all of the legislation that got us to today’s deficit – and then oppose allowing the Treasury to borrow funds to cover the lost revenue from tax cuts and the spending Congress enacted into law is nothing but reckless grandstanding. It’s reckless because failure to raise the debt limit not only threatens a default that could potentially roil the entire world financial system, but would potentially deprive federal workers of their salaries, deny payments to businesses for goods and services sold to the federal government, renege on Social Security benefits to retirees,  and shortchange savers who depend on interest income.

Hitting the Ceiling - Paul Krugman - How bad will it be if we don’t manage to raise the debt ceiling? And what should Obama’s negotiating strategy be? A few thoughts. The direct effects of hitting the ceiling would be bad enough — sharp cutbacks in spending, which would undermine essential services, not to mention derail the economy. It’s not clear to me whether there would be some wiggle room through the accumulation of arrears — say, not actually paying workers and contractors but promising to make it up when sanity returns. But it would be ugly indeed. What might make it even worse would be indirect effects, of two kinds. First, US government debt plays a special role in the financial system: T-bills are the universal safe asset, the ultimate collateral. That’s why, during moments of financial stress, the interest rate on T-bills has actually gone negative. Make that safe asset suddenly unsafe, and it might cause vast disruption.  Second — and I don’t think this is getting enough attention — failure to raise the debt limit could act as a terrible signal about the US political system.

Chamber Urges Lawmakers to Raise Debt Limit ‘Expeditiously’ - The U.S. Chamber of Commerce waded into the fight over increasing the government’s borrowing limit on Friday by urging members of Congress to raise the debt ceiling “as expeditiously as possible.” The business community’s chief lobby in Washington made the case in a letter to lawmakers signed by Bruce Josten, the group’s head of government affairs, arguing that failure to pass legislation authorizing an increase in borrowing by Aug. 4 “would create uncertainty and fear, and threaten the credit rating of the United States.” As conservative critics of raising the debt-limit grow louder and louder, the White House and Republican congressional leaders need groups like the Chamber along with small banks and businesses in members’ districts, to persuade lawmakers that default would be a huge blow to credit markets, crippling the economy..

Factbox: Treasury's tools to delay hitting debt limit - (Reuters) - The U.S. Treasury is expected to start dipping into federal pension funds on May 16 to give Congress more time to raise the $14.3 trillion debt limit, which caps the amount the country is legally allowed to borrow.On Friday, Treasury Secretary Timothy Geithner was forced to start employing the first of the department's extraordinary measures to give the government room to borrow funds to meet its obligations. As of that date, the total U.S. public debt was just $23 billion below the ceiling.The Treasury has already drawn down a $200 billion Federal Reserve emergency lending account to $5 billion to free up borrowing capacity.The Treasury on May 6 suspended sales of State and Local Government Series securities -- known as "slugs" -- which are special low-interest Treasury securities offered to state and local governments to temporarily invest proceeds from municipal bond sales. Slugs, which count against the debt limit, have been suspended six times in the past 20 years to avoid hitting the debt ceiling.  So far in fiscal 2011, which began on October 1, the Treasury has sold $47.4 billion in slugs to muni bond issuers.

Congress & Media Need to Focus on Real Default Threat - Allowing the U.S. Treasury to default on its obligations because of a failure to increase the sovereign debt subject to limit would be a colossal blunder. Fortunately, that’s not what those advocating tough conditions in exchange for a debt limit increase are saying. The issue presented by many in the news media is whether Congress would elect to willingly torpedo the U.S. Treasury market – and, by extension, the global financial markets that rely on Treasuries as risk-free collateral – by refusing to increase the debt ceiling. Paul Krugman has advanced another popular narrative, namely that the “constant lectures about the need to reduce the budget deficit…represent distorted priorities, since our immediate concern should be job creation.” Achieving growth is certainly vital to securing the future, but policymakers need to stay focused on the real default issue: whether the terms of the debt limit increase this summer will be sufficiently tough to ensure that the nation’s debt-to-GDP ratio is stabilized and eventually sharply reduced. Ironically, the greater risk of default comes from an increase in the debt limit that fails to enact tough budget rules and substantial reductions in federal outlays.

House panel begins work on $553B defense budget - President Barack Obama's deficit-driven campaign to cut defense spending and the pace of withdrawal of U.S. forces from Afghanistan loom as divisive issues as a Republican-controlled House panel begins putting together the Pentagon's budget for next year. The House Armed Services Committee was to meet Wednesday to consider legislation that would provide $553 billion for the Defense Department, an increase over the $513 billion the Pentagon is getting this year. The proposed budget adds $118 billion for the wars in Iraq and Afghanistan.Obama envisions cuts of $400 billion in defense over the next 12 years as the nation faces a fast-growing deficit. Lawmakers on the committee are resisting some of the cuts while imposing tougher scrutiny on the Pentagon's bookkeeping.

Exclusive: Wall Street says cuts alone won't fix budget (Reuters) - A majority of top Wall Street bond dealers and money managers say spending cuts alone cannot solve the U.S. budget problems and tax increases must be part of the mix. In a Reuters survey conducted on Tuesday, 17 out of 29 fund managers and economists representing major Wall Street bond dealing firms said the Republicans' favored option of spending cuts alone would not a work. The good news for politicians is that big Treasury market players say they have a couple of months to hammer out a solution. Twelve out of 23 surveyed said the government had until the end of July before the bond market would start to worry. The bad news is any deal requires a compromise between anti-tax Republicans and Democrats, who support social spending programs known as entitlements -- positions that each side is holding onto dearly ahead of 2012 elections.

The Invisible Bond Vigilantes Have Resumed Their Invisible Attack - Krugman - It’s truly amazing that Washington debate is dominated by fear of the bond market. And it’s also truly amazing that nobody is suggesting that a government able to borrow long term at a real interest rate of 0.7 percent really should be taking advantage of those rates to finance some much-needed infrastructure investment. On a related issue, Real Time Economics suggests that it’s not the bond vigilantes we need to be worried about, it’s the “dollar vigilantes”, who push the dollar down on perceptions that American policy is too weak. Lots of things to criticize there, but let me just point out one crucial difference. If investors push up U.S. interest rates, that hurts our economic recovery. But if they push down the dollar, that helps our recovery, by making US goods more competitive on world markets. So if we really face dollar vigilantes (which I doubt), we should send them a thank-you note (maybe written in invisible ink?).

Waiting and the Deficit (Wonkish) - Krugman - Ezra Klein shows us a chart from a new report by Paul Posner on the deficit (pdf): Posner then says,These escalating gaps are partly a function of the growth of interest costs. As deficits and debt grow during years of no action, interest costs escalate in the budget, prompting even higher deficits and debt in a vicious cycle. In addition, higher deficits over longer periods of time gradually reduce economic growth and push up interest rates, again contributing to a vicious cycle where deficits and slow growth become mutually reinforcing.  Except if you look at the CBO report (pdf) on which this is based, that’s not at all what is going on. CBO says nothing at all about vicious cycles and all that; and interest costs are not, in fact, a major source of the numbers shown in the chart (especially given the fact that current rates remain very low in real terms).

Adult Conversation - Krugman - Erskine Bowles, co-chairman of President Obama’s debt commission: We have started an adult conversation that will dominate the debate until the elected leadership here in Washington does something real. Alan Simpson, the other co-chair: Alan Simpson’s cold relationship with AARP is no secret, but the former Republican Senator from Wyoming took it to a new level Friday. At an event hosted by the Investment Company Institute, Simpson delighted the finance industry audience members by aiming a rude gesture at the leading lobby for senior citizens. Actually, the rude gesture (more detail, please?) was the least of it. If you follow the link, you’ll find Simpson repeating a whole series of zombie lies about Social Security. He repeats the idea that nobody collected benefits in the beginning because life expectancy at birth was only 63 (life expectancy at age 65, which is what matters, was almost 80 for women and 78 for men). He claims that nobody saw the future burden of the baby boomers, when the Greenspan commission reforms in the 1980s were all about precisely that. And on and on.

Do Budget "Triggers" and Other Fiscal Constraints Work? - Free Exchange asks: As policymakers in Washington debate how best to address the nation's fiscal problems, it seems increasingly clear that "triggers" -- or automatic budget-cutting provisions which kick in at set deficit or debt levels -- will be a part of whatever legislative solution emerges. These policies appear to be designed to constrain lawmakers who might otherwise be unable to keep themselves from running large deficits. Other countries have taken more drastic actions; In 2009, for instance, Germany wrote a balanced-budget law into its national constitution.Are these measures useful in constraining borrowing? Do statutory fiscal constraints instill prudence or reflect it? In other words, are such policies likely to be successful over the long-term in places where fiscal discipline is not already a priority? Here's my answer: A change in "attitude" is needed in addition to fiscal rules by Mark Thoma; More responses (all answers):

• Design is important, but triggers can work by John Makin
• Triggers won't catch America's large, off-the-books obligations by Laurence Kotlikoff
• An intelligent fiscal rule can overcome time inconsistency by Beatrice Weder
• Fiscal rules are a dangerous response to a balance-sheet recession by Richard Koo
• Triggers may alter the outcome of a political stalemate by Tom Gallagher 
• Long-term, not short-term, fiscal stability should be the priority by Gilles Saint-Paul

Why Spending Must Rise - Krugman - Amazingly, proposals to cap federal spending at something like its recent historical average as a share of GDP still seem to be getting serious attention. The linked report, from the Center on Budget and Policy Priorities, explains carefully just how unrealistic this is. But I thought I could add a bit with a broad-brush approach. The key thing to remember, always, is what the federal government does: it is basically an insurance company for old people that also has an army. Look at a normal year, like 2007. What you’ll find is that about half of total spending was on programs for seniors: Social Security, Medicare, much of Medicaid, and other retirement and disability programs. Half the rest is defense. So why can’t this insurance company with an army make do with the same level of spending it had in 2007? First and most obviously, the baby boomers are retiring. Look at the old-age dependency ratio. For the past 20 years we’ve had about 21 Americans over 65 for every 100 Americans between 20 and 64. But by 2020 that number will rise to 27.5; by 2030 it will rise to 35. So half the budget now is devoted to programs that will have to serve a lot more people fairly soon. Add to this the rising cost of health care: even if we take strong steps to control costs (death panels!), costs will surely rise faster than GDP for some time to come.

Time for another “demography is destiny” lesson - There is an often-repeated claim that retiring baby boomers have a lot to do with future increases in federal spending, which is itself dominated by Medicare spending. There is something to it, but not as much as one would think. This graph, produced by Peter Orszag, shows it: About this graph, I once wrote, The bottom area shows how much Medicare spending would grow if health care costs stayed fixed. That is, it is only a function of population aging. This is the “demography is destiny” part. The top area is growth associated with health care cost inflation, fixing the population as it was in 2007. This is growth purely due to health care costs. The middle area is the cost growth associated with increasing health costs applied to newly entitled individuals, those added to Medicare rolls after 2007. One could argue whether this is attributable to population growth or health care cost growth. It’s both. But the fact is, if health costs per person didn’t grow this band would cease to exist.

Boehner’s Views on Economy Contradicted by Indicators, Studies - House Speaker John Boehner, giving Wall Street leaders his prescriptions for growing the U.S. economy and reducing the nation’s debt, built his case on several assertions that are contradicted by market indicators and government reports.  Boehner said in his May 9 speech to the Economic Club of New York that government borrowing was crowding out private investment, the 2009 economic-stimulus package hurt job creation, and a Republican plan to privatize Medicare will give future recipients the “same kinds of options” lawmakers have.  With Democrats and Republicans sparring over legislation to extend the government’s $14.29 trillion debt limit and trim budget deficits, negotiations are being complicated by disputes over basic economic facts.

Boehner’s functionally illiterate on economic policy - House Speaker John Boehner (R-Ohio) appears to have made a terrible error in his speech to the Economic Club of New York on Monday. His mistake was sharing with the audience his actual beliefs, which upon even cursory examination, are so conspicuously unintelligent, it’s rather alarming. Bloomberg News examined Boehner’s assessment of existing U.S. economic policies and found that the House Speaker “built his case on several assertions that are contradicted by market indicators and government reports.” Jonathan Chait took a closer look at Boehner’s remarks on tax policy and discovered they were “gibberish.” And the Washington Post’s Ruth Marcus scrutinized the speech and discovered that Boehner is relying on an “incoherent, impervious-to-facts economic philosophy.” The House Speaker is presenting an economic vision based on fantasy, confusion, and lies. The man simply has no idea what he’s talking about.

The Doctrine of Immaculate Crowding Out - Krugman - I’ve written before about the doctrine of immaculate transfer in international macroeconomics, which is a common fallacy but not, I’ve suggested, one that rises to zombie status. There is, however, a somewhat related doctrine — call it the doctrine of immaculate crowding out — which has now, I’d argued, achieved true zombiehood. That is, it keeps coming back no matter how many times you kill it. The most recent example came from John Boehner’s Wall Street talk, where, as Bloomberg puts it,  Boehner’s statement in his Wall Street speech that government spending “is crowding out private investment and threatening the availability of capital” runs counter to the behavior of credit markets.“Look at interest rates. Look at capital spending,” . “It’s very hard to come to a conclusion that there’s any kind of crowding out.”Well, yes.  But it’s now an article of faith on the right that government spending must crowd out private spending, no evidence is necessary. And one must say, alas, that this view has been promulgated by supposedly serious economists.

Spending Caps, Medicare Vouchers, and Magical Thinking - The House Republicans want to convert Medicare from an entitlement program into a direct government subsidy—sometimes described as a voucher or, in polite society, “premium support.”  Either way, instead of directly paying for the health care of seniors as it does today, Washington would cut a check for everyone 67 or older (the new age of eligibility in the GOP plan). Seniors would use the money to buy insurance on the private market. So what does all this have to do with spending caps? It is simple. If the Department of Health & Human Services cuts the checks, these vouchers would be considered spending and thus subject to a spending cap such as the one proposed by senators, But government doesn’t have to spend money directly to fund senior health care. Instead, could subsidize health insurance another way—through refundable tax credits.  And if that happens—if, in effect, the IRS writes the checks instead of HHS—a big chunk of the subsidy would morph into a tax cut. And, lo and behold, hundreds of billions of dollars in federal subsidies would be exempt from a spending cap.

Alice In Medicareland: One Voucher Makes You Larger... -- "If I had a world of my own," said Alice, "everything would be nonsense. Nothing would be what it is because everything would be what it isn't."  The rabbit hole's got nothing on this place."Let's save Social Security from a 25% cut in 27 years," they told Alice, "by cutting more than that, starting now." Paul Ryan's GOP plan doesn't "end Medicare," they said. It just, well, ends it. And vouchers aren't really vouchers. Then the "fact-checking" site Politifact chastised Democrats for saying Ryan's proposal would "change the essential nature of Medicare." It would just "end the aspect of Medicare that directly covers specific services, such as hospital coverage." If you thought that the "aspect of Medicare" that directly pays for hospital coverage was Medicare, then you are a very silly person. Politifact's 'expert' even denied the GOP voted to change Medicare. Calumnies and lies! The truth? "Republicans voted to hopefully change it one day, when they get a chance, but they would need a Republican-dominated Senate and a Republican president, neither of which they have."  A vote to end something isn't a vote to end something unless that something ends!  A vote's not a vote, a voucher's not a voucher, and for all we know Paul Ryan isn't really Paul Ryan.

Report: Up to 44M more uninsured under GOP budget - The House Republican budget would leave up to 44 million more low-income people uninsured as the federal government cuts states' Medicaid funding by about one-third over the next 10 years, nonpartisan groups said in a report issued Tuesday. The analysis by the Kaiser Family Foundation and the Urban Institute concluded that Medicaid's role as the nation's safety net health care program would be "significantly compromised ... with no obvious alternative to take its place," if the GOP budget is adopted. The plan passed by House Republicans last month on a party-line vote calls for sweeping health care changes, potentially even more significant than President Barack Obama's insurance overhaul. So far, most of the attention has gone to the Republican proposal to convert Medicare into a voucher-like system for future retirees. But Medicaid would also be transformed.

GOP Freshmen On Medicare Attacks: Let's Let Bygones Be Bygones - House Republican freshmen admit that their so-called 'MediScare' attacks on Democrats helped them win a big majority in 2010. Democrats had voted for the health care law, which included $500 billion in 'cuts' to Medicare -- primarily slashing overpayments to private insurers -- and Republican challengers never let them forget it. Now, they say, it's time to let bygones be bygones. Nearly a dozen House Republican freshmen held a press conference outside the Capitol Tuesday morning to 'wipe the slate clean,' and 'hit the reset button.' 'Yeah, I mean there's been -- again, this is a both-sides issue,' said Rep. Adam Kinzinger (R-IL) when asked if GOP candidates and the NRCC had engaged in 'MediScare' tactics last year. 'To say that one side is blameless in trying to use issues to win votes is just dishonest.' On Tuesday, Kinzinger and 41 of his colleagues sent a letter to President Obama, asking him to rein in Democratic attacks on GOP members who voted for the House budget, which includes a plan to privatize Medicare and cap spending on the program."

GOP chokes on own Medicare Kool-Aid - A funny thing happened along the Roadmap for America's Future. Ordinary citizens smoked out its actual impact on their lives while much of the Washington celebrity pundit class were still uttering hosannas to Rep. Paul Ryan's, R-Wis., alleged intellectual honesty and courage. As a result, congressional Republicans unceremoniously abandoned their crackpot scheme to privatize Medicare within three weeks of voting almost unanimously to endorse it. House Ways and Means Committee Chairman Dave Camp, R-Mich., explained that there was no point wasting time on a plan that had zero chance of passing in the Senate, and was certain to be vetoed by President Obama if it did. House Majority Leader Eric Cantor, breathing smoke and fire two weeks ago, lamented that Republicans seeking budgetary consensus would need to look elsewhere after President Obama "excoriated us" for suggesting that Medicare health insurance be replaced by a voucher plan requiring seniors to comparison shop for private health insurance. Poor babies. Here they've been so generous and cooperative, and Obama trashes them.

Seniors, Guns and Money, by Paul Krugman - This has to be one of the funniest political stories of recent weeks: On Tuesday, 42 freshmen Republican members of Congress sent a letter urging President Obama to stop Democrats from engaging in “Mediscare” tactics — that is, to stop saying that the Republican budget plan released early last month, which would end Medicare as we know it, is a plan to end Medicare as we know it.  Now, you may recall that the people who signed that letter got their current jobs largely by engaging in “Mediscare” tactics of their own. And bear in mind that what Democrats are saying now is entirely true, while what Republicans were saying last year was completely false. Death panels! Well, it’s time, said the signatories, to “wipe the slate clean.” How very convenient — and how very pathetic.

More on Seniors, Guns And Money - John Taylor - Paul Krugman returned to the debate with me about federal spending in his New York Times column yesterday. He says that federal spending cannot be brought back from its current high levels to the 19 to 20 percent range as a share of GDP, which we saw as recently as 2007. His argument consists of two points. He declares that military spending as a share of GDP cannot go down. Why? Because, he says, “Republicans, needless to say, oppose.” But as I wrote when he first made this point, defense spending as a share of GDP can come down. And it could come down by an especially large amount as the size of GDP increases with higher economic growth. Krugman is taking defense off the table, not me, and not Republicans who are part of the budget debate in Washington. Krugman also points out that the number of retirees is projected to grow at a more rapid rate than the number of workers paying taxes. This point should not come as a surprise to anyone. But the implication is not that we should tax working people more. Rather the implication is that we should insist that programs like Medicare be reformed to improve their efficiency and deliver improved outcomes for future retirees for each tax dollar spent.

Clarity Has A Well-Known Liberal Bias - Krugman - As Jonathan Chait and Jamelle Bouie note, today was another VSP day at the Washington Post, with both the editorial page and the fact-checker tut-tutting at Democrats who insist on describing the Republican plan to dismantle Medicare as a plan to dismantle Medicare.Because it is, you know, a plan to dismantle Medicare. When you transform a program that pays seniors’ medical bills into a program that gives them a voucher that almost certainly isn’t enough to buy adequate insurance, you can call the new scheme Medicare, but it isn’t the same program. What the Post fact-checker seems to want, nonetheless, is for Democrats to talk about what Republicans are proposing only in big words and complicated sentences, so that the public doesn’t understand what they’re saying. And the editorial page is still trying to claim that there’s something honest and important about the Ryan plan — even though it is completely clear to anyone paying attention that this plan offers nothing constructive in the way of solutions to the problem of rising health costs.

Macroeconomic Advisors, Supply-Side Suspicions and False Symmetry - Last week, Macroeconomic Advisors (MA) ran a blog post that expressed reservations about the estimate of the growth-impact of increased public investment that accompanied EPI’s analysis of the People’s Budget – a plan by the Congressional Progressive Caucus to reduce long-run budget deficits. The short-version of their criticism is that they examined the estimate of the growth-enhancing effect of public investment that we provided and then compared it to what would fall out of a back-of-the-envelope calculation that assumed the United States economy was well-characterized by a textbook production function. Doing this, they then decided that the implied rate of return identified in the estimates that we used was simply too high to be feasible. Below, we’ll walk through the reasons why their judgments should not be taken as definitive on this more-technical question. First, though, we’ll say a couple of words on the odd symmetry that MA tries to paint between EPI’s analysis of the People’s Budget and the Heritage Foundation’s estimate of the 2012 Republican budget resolution (aka the Ryan Plan).

What’s a Big Government? - One thing that all parties seem to be able to agree on is that big government is bad. But what is the size of government, anyway?* When a typical anti-government person thinks of government, she probably has in mind the EPA, the Consumer Financial Protection Bureau, the “jack-booted government thugs” at the the Bureau of Alcohol, Tobacco, and Firearms, OSHA, and all those government agencies that prevent businesses and individuals from getting on with their lives. The idea here is that government intervention in the free market makes the economy less efficient and therefore reduces aggregate societal welfare.  President Reagan, the patron saint of “small government,” wanted to roll back the regulatory state, but he very emphatically wanted more defense spending in order to “fight” the Cold War.  Then there are entitlement programs, which are mainly composed of Social Security and health care (primarily Medicare and Medicaid). Social Security is unequivocally a government program (so is Medicare, “keep your government hands off my Medicare” notwithstanding), but it isn’t government in the same sense as the EPA.  So where am I going with this? First of all, when you look at the data, it’s not even clear that government has been getting bigger at all.

Policymakers learn a new and alarming catchphrase - A few weeks ago, Carmen Reinhart produced a joint paper for the International Monetary Fund on the topic of “financial repression” in the west. And while this phrase is not yet mainstream news, it is starting to generate a buzz among the policy elite. The issue revolves around the question of where investors “choose” to put their money. During the past three decades, western savers have generally assumed they could put their money wherever they wanted, since financial markets were organized according to the mantra of globalization and free market capitalism. But as Ms Reinhart and Belen Sbrancia, her colleague, point out, this freedom was unusual, from the 1940s to the 1980s, western governments operated capital controls and interest rate caps that restricted financial flows, limiting investor choice.   One consequence of the controls was they created a captive domestic audience for those bonds. Better still, because these bonds paid a yield lower than inflation, ... they effectively paid a hidden subsidy to the government, enabling them to reduce the debt.

The quality of muddling -- Ezra Klein, Karl Smith, and Ryan Avent today debate the merits and demerits of muddling though vs “grand bargains” and bold solutions. Here’s Smith, insightful as always: The opportunity to muddle through is a gift. It allows one to make changes at the margin, to monitor their effects and to update accordingly. It allows us to avoid massive often useless sacrifice. It allows our knowledge, understanding and resources to race ahead opening up new ways to deal with our problems… We don’t always have that opportunity. Sometimes we are forced to deal with things in a big way. Indeed, this is much of what we mean by crisis. However, you don’t want to avoid an externally inflicted crisis by creating a self-inflicted one. If you have a chance to make your way with adjustments at the margin, take it. I think this is right, and important. But even true words can lead us astray if we are not careful. To say that muddling through is a gift because it permits certain advantages can mutate into a case for incrementalism where there are clear disadvantages.

What Warner Did in Virginia Could Point The Way in Washington - Sen. Mark Warner is best known at the moment for being one of the “gang of six” — the three Democrats and three Republicans who have been trying to come up with a bipartisan deficit reduction plan in the Senate. But long before the Virginia Democrat helped start the group, he was known as a fiscally conservative governor who received high marks for turning the state deficit that he inherited into a surplus. Warner once told me that he was able to make budget changes in the state because Virginians saw his efforts as serious attempts to make the government less costly. Some changes, such as greatly reducing hours at the Department of Motor Vehicles and requiring that many transactions be conducted online, got big headlines when they forced people to deal differently with the DMV. But voters respected the cuts when it became clear that they could still do what they needed and that the reductions were having the desired effect on the state’s bottom line. It also set the stage for less popular changes, such as revenue increases, because there was a general recognition that the cuts had gone far enough.

Why We Need the (Gentlemanly) Gang of Six - Some (bipartisan) members of the (nonpartisan) Concord Coalition’s Board of Directors recently issued this statement supporting the efforts and spirit of the Senate’s so-called “Gang of Six”–Senators.The group’s work is important for several reasons:

• It addresses a crucial need. There is no question that current fiscal policy is unsustainable and that legislative action is needed to avoid a crisis…
• It recognizes that there must be a comprehensive solution. The natural tendency in Washington is to begin deficit-reduction negotiations by taking things off the table.
• It is bipartisan. Neither party has a monopoly on good ideas, and even if one did, neither party has the votes nor the public trust to muscle through a one-sided solution…
• It is unique. Bipartisan cooperation on deficit reduction is in short supply.
• It could produce a plan for others to rally around.

Selling Government Assets -- In November of 2008 I wrote:The Federal Government owns more than half of Oregon, Utah, Nevada, Idaho and Alaska and it owns nearly half of California, Arizona, New Mexico and Wyoming. See the map (PDF) for more [N.B. the vast majority of this land is NOT parks, AT 2011]. It is time for a sale. Selling even some western land could raise hundreds of billions of dollars – perhaps trillions of dollars – for the Federal government at a time when the funds are badly needed and no one want to raise taxes. At the same time, a sale of western land would improve the efficiency of land allocation. The Obama administration is beginning to implement just such a proposal. Jonathan Easley of Salon summarizes: If Congress moves ahead on the White House’s recommendation, 60 percent of sale proceeds from properties the White House has deemed excess will go to paying down the deficit, with 40 percent to cover costs on other government-run facilities. In addition to the one-time cash from the sale, the government can begin generating tax revenues on land that was previously an expense.

The only real solution for budget deficits: growth – Dean Baker - The last time that the United States balanced its budget was just a decade ago. Even though this is not distant history, almost no one in a policymaking position or in the media seems able to remember how the United States managed to go from large deficits at the start of the decade to large surpluses at the end of the decade. There are two often-told tales about the budget surpluses of the late 1990s: a Democratic story and a Republican story. President Clinton is the hero of the Democratic story. In this account, his decision to raise taxes in 1993, along with restraint on spending, was the key to balancing the budget.  The hero in the Republican story is News Gingrich. In this story, the Republican Congress that took power in 1995 demanded serious spending constraints. These constraints were ultimately the main factor in balancing the budget.  Fortunately, we can go behind this "he said/she said" to find the real cause of the switch from large budget deficits to large surpluses. This one is actually easy.

Dean Baker: "The Only Real Solution for Budget Deficits: Growth" - Dean is right, of course. But does he have to be so smug about it? Historically it was economic growth that transformed a projected budget deficit in 2000 into a budget surplus. But it wasn't just generic "growth" that happened in the 1990s. It was dot.com bubble growth, which, following the stock market crash in March 2000, was leveraged into less robust and thus deficit-enhancing housing bubble growth. And we know how that turned out. Dean never tires of skewering those who couldn't foresee the housing bubble and its inevitable comeuppance. But history didn't start in 2001. The housing bubble and the dot.com bubble were joined at the hip. How does that deficit-slaying growth thing look if there was no post-bubble bubble? In a word, "unsustainable." Of course the point of Dean's argument is to show that the deficit and inflation hawks now hogging the Very Serious People discourse in D.C. are barking mad, which they are. And nuance won't even shine your shoes in the big boys' policy debates.

Long Term Budgeting for the US - Naturally I am warmed by Matt Yglesias joining me on the limb in saying that just perpetuating the status quo spending regime in the United States is utterly doable. I don’t think that preserving Medicare exactly as currently structured is a good idea. To me, simply allowing current CBO projections of Medicare spending to take place would represent an inefficient use of social resources. That’s why it’s a good thing that the Affordable Care Act contained a large number of small changes to Medicare, small changes that will hopefully provide a basis for further reforms. But to write, as The Washington Post editorial page does, that “simply preserving Medicare as we know it is not an option” is false. As I have said and Matt says, this is not a good idea, but it’s a doable idea. I harp on this because I find it both annoying and potentially dangerous when people start promulgating falsehoods. I know this is done either consciously or unconsciously as a noble lie. The status quo is so bad that its better to tell people its unsustainable than to have a straightforward conversation about the consequences of sustaining it.

The Unwisdom of Elites, by Paul Krugman - The past three years have been a disaster for most Western economies. The United States has mass long-term unemployment for the first time since the 1930s. Meanwhile, Europe’s single currency is coming apart at the seams. How did it all go so wrong?  Well, what I’ve been hearing with growing frequency from members of the policy elite — self-appointed wise men, officials, and pundits in good standing — is the claim that it’s mostly the public’s fault. The idea is that we got into this mess because voters wanted something for nothing, and weak-minded politicians catered to the electorate’s foolishness.  So this seems like a good time to point out that this blame-the-public view isn’t just self-serving, it’s dead wrong.  The fact is that what we’re experiencing right now is a top-down disaster. The policies that got us into this mess weren’t responses to public demand. They were, with few exceptions, policies championed by small groups of influential people — in many cases, the same people now lecturing the rest of us on the need to get serious. And by trying to shift the blame to the general populace, elites are ducking some much-needed reflection on their own catastrophic mistakes.

Bigwigs and Double-Domes - The intransigence in US politics today is remarkable – uncomfortable and dangerous. How will it resolve itself?  David Brooks, of The New York Times, wrote last week that Americans must “find ways to moderate solipsistic tribalism and come up with tax and welfare state reforms that balance economic dynamism and social cohesion.” Brooks pins his hopes on what he calls the republican virtues of checks and balances, as opposed to majority-rule principles of democracy – consensus-seeking among countervailing powers, self-restraint and civic virtue. He thinks that the breakthrough, “if there ever is one,” will come from Senate leaders “or some commission of Establishment bigwigs.” I think resolution more likely will come from a series of elections. Although we are all constantly telling stories on our own, and contributing to the stories of others, the most extensive and authoritative social narratives are produced by scholars – double-domes, in political parlance.

Economic Downturn and Bush Policies Continue to Drive Deficits - Some lawmakers, pundits, and others continue to say that President George W. Bush’s policies did not drive the projected federal deficits of the coming decade — that, instead, it was the policies of President Obama and Congress in 2009 and 2010. But, the fact remains: the economic downturn, President Bush’s tax cuts and the wars in Afghanistan and Iraq explain virtually the entire deficit over the next ten years (see Figure 1). The deficit for fiscal year 2009 — which began more than three months before President Obama’s inauguration — was $1.4 trillion and, at 10 percent of Gross Domestic Product (GDP), the largest deficit relative to the economy since the end of World War II. At $1.3 trillion and nearly 9 percent of GDP, the deficit in 2010 was only slightly lower. If current policies remain in place, deficits will likely resemble those figures in 2011 and hover near $1 trillion a year for the next decade. If not for the Bush tax cuts, the deficit-financed wars in Iraq and Afghanistan, and the effects of the worst recession since the Great Depression (including the cost of policymakers’ actions to combat it), we would not be facing these huge deficits in the near term. By themselves, in fact, the Bush tax cuts and the wars in Iraq and Afghanistan will account for almost half of the $20 trillion in debt that, under current policies, the nation will owe by 2019.

Ryan's $34 Trillion Tax Folly - Ryan is touting his plan to replace Medicare, the universal healthcare plan for older Americans, with a form of defined contribution plan. Ryan would replace universal care with a subsidy for older Americans to pay for health insurance in the private marketplace.  There is not a scintilla of evidence that the private insurance market is clamoring to enroll anyone over age 55 for full medical coverage, especially those with a preexisting condition. Yet Ryan would repeal the 2009 law sponsored by President Obama that requires insurers to take people with preexisting conditions.  Ryan's plan would save taxpayer dollars, no doubt about it. But it would not save money. In fact, it would add tremendously to total healthcare costs, which now run 18 cents of every dollar in the economy. That is twice what we spent in 1980. The problem is not, as Ryan posits, that taxpayers cannot afford Medicare. The problem is that we cannot afford our existing sick care model with its massive denial of services, loss of productive capacity by injured and sick individuals who get inadequate treatment, and billion-dollar fortunes for the few positioned to scoop up healthcare dollars by selling what should be utterly unnecessary services, like private health insurance.

What Do John Boehner and Jon Stewart Have In Common? - Thanks to Len Burman’s latest insight on his brand-new, awesome blog on Forbes.com, what was otherwise going to be a pretty ordinary complaint about a pretty dull yet aggravating speech by House Speaker John Boehner (which has already gotten lots of spot-on criticism, including this column by Ruth Marcus), is now a post where I get to point out a much more entertaining Jon Stewart video! Apparently, John Boehner and Jon Stewart have this in common:  they both don’t understand how special preferences in our tax code are just a different form of government spending, and hence how reducing such “tax expenditures” would reduce both the budget deficit and the size and scope of government. As Len explains in his “Dear Jon” letter: For 40 years, tax geeks like me have been trying to explain that there’s a boatload of spending programs masquerading as tax cuts, and they’re multiplying.  Their number increased by almost 60 percent between 1987 and 2007. The fact that pols can claim credit for “tax cuts” (good) rather than “spending” (bad) has made them irresistible to legislators of both parties. Never mind that the IRS doesn’t have the budget or expertise to effectively administer a couple hundred spending programs (sorry, tax cuts) or that many of them make no sense.  The tax code’s cluttered with this junk.

The Real Bipartisan Compromise: Cut Spending on the Rich - Bipartisan efforts at federal deficit reduction will face stronger headwinds as the 2012 election approaches. Public statements even of those pledging an immediate focus on fiscal repairs are already exhibiting the increasing influence of political considerations. The essential problem is that the two major parties are now seeking to distinguish themselves on politically sensitive tax and entitlement policies at precisely the time that bipartisan cooperation on such issues is becoming most necessary. And yet there is a clear path available for the two parties to cooperate to improve the fiscal outlook while still preserving the cores of their respective political messages: namely, by cutting the growth of federal spending on “the rich.

Federal Tax Chutzpah - Paul Krugman - Chutzpah, according to the traditional definition, is when you murder your mother and father, then plead for mercy from the court on the grounds that you’re an orphan. Something like that is now happening in the tax debate.As the CBO has documented, what we’ve seen over the past 30 years is a dramatic shift of income toward the top, with the richest Americans sharply increasing their share of pre-tax income. It’s highly likely that government policies, from financial deregulation to union-busting, have played an important role in that growing income concentration. At the same time, tax rates on top income have fallen, and by more than tax rates on lower incomes. But the rise in the top share has been so great that high-income Americans pay a larger share of total taxes than they used to despite tax policy that favors their interests. And the new cry from the hired hands of the rich is that it’s unfair that the wealthy should pay such a large share of taxes. Awesome.

Are Top U.S. Earners Over Taxed? - Are wealthy Americans paying more than their fare share of income taxes? That's a much harder question to answer than Washington might have you think. Republican lawmakers touted a statistic by the Join Committee on Taxation last week that found 51% of households owed no federal income tax in 2009, a number they're using to push back against President Obama's pitch to pay down deficits by increasing taxes for high-income earners. The Wall Street Journal also threw together a graphic to illustrate why the wealthiest 20% of Americans have been paying more than their share of the country's income in taxes, especially compared to Europe. The stats paint a pretty dreamy picture for the un-rich in America, but they're shoddy math for more than a few reasons. First off, the chart uses income tax rates that don't include the many tax breaks that go to mostly higher income earners.

The Wall Street Journal's Misleading Income Chart - The Wall Street Journal wrote an editorial last month making the point that there's no way to close our budget deficit by taxing only the rich. It's a point the Tax Foundation agrees strongly with, and the editorial's reasoning—that even if we confiscated 100% of the income of everyone in the top 1%, it still wouldn't be enough to close the deficit—makes sense. However, the editorial also includes a chart, which has been making the rounds on various blogs recently: Regardless of the broader merits of the editorial, this chart is a textbook example of how to lie with statistics.  It's unfortunate that the Wall Street Journal chose to undermine the rest of its editorial by including such a breathtakingly misleading image. It purports to show visually that the majority of taxable income in this country is made by those in the middle class—after all, the highest bar is for people making $100-$200K, which is in the middle of the graph! 

Fun With Charts: Making the Rich Look Poor - Jon Chait takes a closer look at a Wall Street Journal chart intended to suggest that the middle class has all the money: The chart has been making the conservative blog rounds, from Powerline to Hoosierpundit to Reihan Salam to (not really conservative) Andrew Sullivan, who reproduces it under the headline "Where the Money Is." The chart most certainly does not demonstrate the Journal's point. It instead relies upon an optical illusion. Democrats have been arguing that their tax increases should solely affect income over $250,00 a year. The Journal makes that pot of income appear small by divvying it up into seven different lines. See, the $100,000-$200,000 line is tall, and all the other lines to the right of it are short. That tall line must be where the money is! As a public service, I've redrawn the chart for the Journal. On the left is the original. On the right is the chart that shows the actual amount of money earned by the tiny handful of people making over $200,000. It's a lot.

Where the Taxable Income Is, Continued - Yesterday I wrote a post about a chart that appeared in a Wall Street Journal editorial last month. The chart was nonsense for a variety of reasons, but it got me thinking about possible ways to make a less misleading chart that makes the same point.The basic argument the Wall Street Journal makes is that it's not possible to put much of a dent in the deficit by raising taxes only on the rich. One of the main reasons for this is because the income tax is based on marginal rates. If, as President Obama proposes, you raise tax rates on income over $250,000, you're only increasing the tax on income above that amount.  A person who makes $260,000 only sees a tax increase on $10000 of that income. So while it's true that the a lot of the nationwide taxable income of this country is made by a relatively small proportion of well-off people, it's not the case that most of their taxable income would be subject to a tax increase that affects only them.To that end, I've made another chart illustrating this point, again using 2006 data.

Ending Tax Cuts for Wealthy for Deficit Reduction - A recent Jennifer Rubin column in the Washington Post cites an OECD report and some CBO data to make her case that:  “We can’t solve the debt problem by grabbing more money from the rich.” Of course no one source of deficit reduction will “solve” our debt problem.  A closer look at these same sources, however, underscores that reversing President Bush’s tax cuts for the highest income people would make an important contribution to deficit reduction. Take that OECD report.  It shows that the disparity in income in the United States is more pronounced than any other country (squeaking past Poland).  At the same time, U.S. tax and spending policy (i.e., the whole budget) does less to diminish this inequality than the policies in any other country in the OECD except South Korea:

The Very Rich Really Are Different - For proof, take a look at the annual IRS accounting of the income and taxes of the 400 taxpayers with the highest adjusted gross income (AGI). The latest report added 2008 to data for the previous 16 years.  One way the super-rich are different: Their effective income tax rates have plummeted since they peaked in 1995. In contrast, effective rates for the rest of us have barely changed. Here’s the story. To make the Fortunate 400 list in 2008, your AGI had to approach $110 million. Average income for the group topped $270 million. That’s more than 4,700 times the $58,000 average for all tax filers. The very rich not only made lots more money, they made it in a very different way. Nearly 60 percent of their 2008 AGI came in the form of capital gains, almost all of it taxed at 15 percent. These über-rich earned just 8 percent of their AGI in salary and wages. The rest of us? We got just 5 percent of our income from gains but 72 percent in salaries and wages.

Millionaires who owe no federal income tax - When it comes to taxes, do the rich pay their fair share? The answer, of course, is subjective since "fair" is not an absolute concept and tax data, depending how it's sliced, can tell different stories. Those who say the rich pay their fair share point to the fact that the top 1% of taxpayers end up paying almost as much in federal income tax (and some years even more) as the bottom 95% combined. Still, it's unlikely that even the most anti-tax, pro-wealth advocates would find this particularly fair: A very small number of millionaires end up owing no federal income tax at all. . Nearly half¹ of all U.S. households, or 69 million, are estimated to have owed no federal income taxes for 2010. The vast majority of them, however, are low income.  But 18,000 were households taking in more than $500,000 -- and of those, 4,000 made more than $1 million.

Taxes and work - In a paper published in 2004, Edward Prescott concluded that taxes are the principal cause of the cross-country variation in working time.The hypothesis is sensible. Taxes reduce the (direct) financial reward to paid work. This encourages people not to work at all or to work fewer hours. But how large is the effect? After all, some people will work more when taxes are higher, in order to reach their desired after-tax income. More important, lots of other things affect people’s calculations about whether and how much to work, including wage levels, employment and working time regulations, paid vacation time and holidays, availability and generosity of government income transfers, access to health insurance and retirement benefits, the cost of services such as child care, and preferences for work versus leisure. A good recent study of work hours among those who have a job concludes that taxes seem to have an effect for women but not for men, and that taxes account for a limited portion of the cross-country variation. In own my research (here and here), I’ve found pretty strong indication that the tax mix matters; heavy reliance on payroll taxes is associated with slower increase in the employment rate over the past three decades. But that doesn’t necessarily tell us anything about the impact of overall tax levels.

Roth IRAs: Safety in Numbers? - Last month, I discussed why I'm not as excited about Roth IRAs as many people who write about consumer finance: I don't believe that the government is ultimately going to be able to keep it's hands off a pretty big pot of money.  Getting a tax break now in your 401(k) or traditional IRA is guaranteed; getting a tax break in the future is not.  Jennifer Kowal, a law professor at Loyola, disagreed: Washington might be tempted to look for additional revenue in 401(k)s and IRAs, which make up 40% of the stock market's trillions in value, but it's extremely unlikely that Congress will go after Roth IRAs. This would obviously be unfair to those who made the choice to lock up their money under the promise that future earnings would be tax free. That something isn't fair is no guarantee that it won't happen. But Congress has bigger fish to fry than Roth IRAs. The wealthiest 1% of Americans own more than 40% of investment assets. The maximum Roth IRA contribution is $5,000 per year, and those making more than $122,000 per year are ineligible (not a particularly enticing target for even the most tax-happy politician).

End the Tax-Break Scam - With the budget debate firing up again this week, there’s just one serious way to cut our deficit—by focusing on tax expenditures, the tax loopholes and deductions that are bleeding federal coffers dry. The budget is likely to revert to Topic A in Washington this week, as Vice President Joe Biden’s bipartisan negotiations resume at Blair House and the Senate Gang of Six (maybe) finally releases its report. The key to making sense of this latest round of wrangling is to keep an ear out for the phrase “tax expenditures,” because how that issue is handled will largely determine whether we end up with a serious and equitable solution to our financial problems—or an ideological one that extracts flesh from the targets (poor people, domestic programs) that are running out of flesh to extract.

Capping Tax Expenditures: The Right Solution for the Wrong Reasons - Clive Crook likes this proposal from Martin Feldstein:  Raise Taxes, but Not Tax Rates -- from Martin Feldstein very timely. (The article draws on an NBER working paper by Feldstein, Daniel Feenberg, and Maya MacGuineas.) The idea is very simple: cap the aggregate tax savings granted to any taxpayer through tax expenditures to 2 per cent of that taxpayer's income. I think this is a pretty good proposal.  But it's also a depressing proposal, because ultimately what we're looking for is a way to pretend that we aren't raising taxes.  The end result of "cutting tax expenditures" is that taxpayers are going to be sending more money to Washington every year.  But apparently, we can't tell them this.  We have to dress it up as a spending cut, or a harmless tweak of deductions that won't affect very many people.  But this is going to be a major hit for a large number of taxpayers, many of whom will not be particularly rich.

Why does the GOP hate taxes so much? -The GOP doesn’t just hate taxes. They hate taxes so much that their stated position is they’d prefer no deficit reduction, and even a default on the debt ceiling, to even a dollar in new taxes. They hate taxes, in other words, more than they like balanced budgets, or fear a federal default. Hating taxes is the absolute, number-one core belief of the modern GOP. The question is, why? Disliking taxes, of course, is understandable. No one likes taxes, just like no one likes visiting the dentist or going to the DMV. The GOP’s argument, however, is that a federal default and a second financial crisis are preferable to even modest tax hikes. Which is why I spent much of yesterday asking right-leaning economists to walk me through two quotes that seemed to summarize the Republican Party’s argument against taxes. The first came from Boehner on the “Today” show. “The fact is you can’t tax the people we expect to invest in the economy and create jobs,” he said. The second came from Louis Woodhill, a member of the anti-tax Club for Growth’s leadership council. “To stimulate GDP growth, a tax cut has to cut the marginal tax rates upon which the decision-makers in the economy base their decisions to work and, above all, to invest.”

The U.S. needs an overhaul of the corporate tax system, not a temporary tax break - Today U.S. multinationals have more cash stashed overseas than ever before –according to several estimates, companies have more than $1 trillion in profits squirreled away in foreign subsidiaries. Many of the companies with the most money abroad – including powerhouses from Apple to Google to Pfizer – say they’d like to bring a large portion of it back to the U.S. This comes with a catch, however. The companies want a temporary tax holiday – nearly identical to the one passed in 2004, and the subject of my recent paper – that would allow them to repatriate profits attributed to their foreign operations at a 5.25 percent tax rate instead of the usual 35 percent. Most of the funds returned to the U.S. will likely be paid to shareholders rather than used for investment and new hiring (as the companies lobbying for the holiday claim). But the tax break would raise billions of dollars for the government and bring cash back to the U.S., which is arguably a good thing. (It’s no secret that the Obama administration has recently made overtures to reboot its relationship with the business community, and this is one way to do it.) But I worry. The U.S. desperately needs a much larger overhaul of the corporate tax system, and a temporary tax break on overseas profits is not the solution.

Would VAT Add Value for Corporations? - The challenge of a U.S. corporate tax overhaul only seems to grow. At a House Ways and Means hearing on Thursday, some business executives were even nodding to the possibility of a value-added tax to offset the budget impact of significantly lowering the U.S. corporate tax rate. “As you take a holistic view… the value-added tax is one of those things that needs to be on the table,” . In fact, there’s a surprising amount of interest in that idea on all sides. Many Democrats see a VAT as a way to pay for new infrastructure and shore up spending programs. Some Republicans – and corporate executives – see it as a way to pay for tax cuts that would spur investment, and make U.S. businesses more competitive. Much of the corporate-rate cutting that has gone on around the rest of the developed world in recent years has been paid for by increasing value-added taxes. Other countries view it as a necessary tradeoff to boost domestic manufacturing and exports.

ExxonMobil pays a lower effective tax rate than you* - Exxon Mobil Corp.’s robust balance sheets have become a poster child for what The New York Times dubs the “paradox of the United States tax code.” The company’s large 2010 profits allowed them to lead Fortune 500’s annual ranking of the nations’ most profitable firms for the eighth time in a row. But the oil giant’s average effective tax rates are roughly half the 35 percent tax rate that currently stands as the high-water mark for American corporations. Meanwhile, Exxon Mobil and other big oil companies continue to exploit tax loopholes for nearly $4 billion in subsidies each year. These subsidies include write-offs for drilling costs and a deduction for domestic production that was intended for manufacturers, not big oil producers.

How the oil industry saves $4.4B a year on taxes - Motorists are paying nearly $4 for a gallon of gasoline as the oil industry reaps pre-tax profits that could hit $200 billion this year. This makes another big number hard to take: $4.4 billion. That’s how much the industry saves every year through special tax breaks intended to promote domestic drilling. President Barack Obama is increasing pressure on Congress to eliminate these tax breaks — including one that is nearly a century old — at a time of record budget deficits. The President and congressional Democrats say eliminating the tax breaks will also lower gas prices by making alternative energy sources more competitive. Oil industry advocates, a group that includes most Republicans in Congress, argue just the opposite. They say oil companies reinvest tax breaks into exploration and production, which ultimately generates more tax dollars and increases the supply of oil. They say eliminating tax breaks will raise the cost of doing business and lead to higher gas prices.

Why Oil Tax Breaks Are So Special - The Senate Democrats' plan to roll back targeted tax breaks for oil companies is 100% the product of their desire to have to talk about in response to voter dismay at rising gasoline prices, and 0% the product of a sudden desire to reform the tax code. On the other hand, it's actually sensible tax policy: The break, adopted in 2004 to stimulate job growth by trimming tax rates for a range of manufacturers, gives oil companies and other manufacturers a top rate of about 32 percent instead of 35 percent. It is the biggest single budget item; its repeal would save $18 billion. Other oil company tax breaks are decades old. Congress in 2004 was forced by the World Trade Organization to repeal an export subsidy. Rather than devote the proceeds to reducing the deficit, or to lowering tax rates across the board, the GOP leadership instead decided to hand out a bouquet of targeted tax breaks. The result was one of the greatest lobbying free-for-alls in American history, with special tax breaks for nearly anybody that asked.

Landrieu suggests oil executives should “just shut off the spigots and go elsewhere and maybe America could run everything on solar power for the next decade or two and see what happens - I thought Entergy’s Hangover-laden presentation had the quotes of the week.  But Sen. Mary Landrieu (D-LA) just topped it. Politico has the amazing story: Sen. Mary Landrieu (D-La.) has thought of a novel way for oil industry executives to protest her party’s attacks on their federal subsidies: Pack up your things and go elsewhere. “I don’t think the oil executives would ever do this, but if I were one of them, I would be tempted to just shut off the spigots and go elsewhere and maybe America could run everything on solar power for the next decade or two and see what happens,” Landrieu told POLITICO.

Truth, Justice, and the American Way of Oil Subsidies - Paul Krugman - Even a hardened cynic like myself is often amazed at what people think they can get away with. First the Ma-he’s-looking-at-me-funny whining from Wall Street, now this:ConocoPhillips, one of the world’s largest and most profitable oil companies, yesterday said it’s “un-American” to take away taxpayer subsidies from the oil industry. This wasn’t a verbal slip; the comment was put in a press release. Of course, the only thing more amazing than what people think they can get with is how much they actually can get away with.

Will Big Oil Get A Bigger Tax Bill? - You can practically set your watch by it. As petroleum prices soar—and with them, oil company profits and pain at the gas pump—sooner or later members of Congress will haul Big Oil executives into a hearing and Demand That Something Be Done. It happened in 2008, the last time oil prices breached the $100 a barrel mark, and on Thursday morning it happened again, with five CEOs from the major oil companies called in for questioning before the Senate Committee on Finance. The hearings unfolded pretty much as you'd expect. The Democrats on the committee pointed to the $35 billion in earnings recorded by the big five oil companies in the first quarter of 2011 and wondered why they needed that extra $4 billion or so in taxpayer subsidies. The Republicans on the committee attacked the Democrats for attacking the oil companies, claiming that any reduction in subsidies amounted to a tax increase, which would mean even higher prices at the pump. And the oil company executives took a break from swimming in their money bin and absorbed the criticism for a few hours, confident in the knowledge that once the hearing were done, they'd go back to selling the one substance America has proven time and time again that it cannot live without, however much we complain.

Oil CEOs warn senators of downside to axing industry tax breaks…Soaring gasoline prices and trillion-plus federal deficits set the stage for a dramatic standoff Thursday between Senate Democrats and top oil company executives who vigorously defended billions in annual tax breaks for the oil industry. At issue is whether the Big Five oil companies – which together made more than $35 billion in profits in the first quarter of 2011 – need help from taxpayers, especially with oil selling for more than $100 a barrel.“Businesses should make a profit – that’s what drives our economy. But do these very profitable companies actually need taxpayer subsidies?” said Sen. Max Baucus² (D) of Montana³, chairman of the Finance Committee, in his opening statement. “We can put this money to better use.”

Whatever Happened to the Stiglitz Commission? -At the onset of the financial crisis the United Nations put together an all-star group of global economists and economic policy-makers, chaired by Nobel Laureate Joseph Stiglitz, to assess the causes and consequences of the financial crisis and to make a set of recommendations to make sure such a crisis never happens again. The commission’s report was published with great fanfare and fed into a 2009 UN conference on the financial crisis that was met with little fanfare outside the UN system.  After the conference the UN focused primarily on the global climate crisis and the Copenhagen meetings in 2010.  The UN is only now beginning to pick up where it left off on global finance.  This summer the UN is to decide whether it should implement one of the Stiglitz’ Commission’s core recommendations: form a panel of experts modeled after the Inter-governmental Panel on Climate Change (IPCC). It should.

Don’t Let Go of the Anger -- One of the most frustrating facts of the recently abated financial crisis is that those who might have been partly responsible for it have got off scot-free. The only two people prosecuted criminally — the Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin — were found not guilty by a jury in Brooklyn. Other potential culprits — Angelo Mozilo, chief executive of Countrywide Financial, Joseph Cassano, chief executive of AIG Financial Products, and Dick Fuld, the chief executive of Lehman Brothers — were either slapped with a small civil penalty, in the case of Mozilo, or the Justice Department made the decision not to prosecute after months of investigation. What’s worse, not only did bankers escape with no penalty, they walked off with millions of dollars in their pockets while American taxpayers got left holding the bag. Since the crisis was caused by greedy decisions made by one leader after another at various Wall Street firms and at other businesses, like mortgage originators and credit ratings agencies, that attached themselves to Wall Street like pilot fish on a shark, the dearth of prosecutions, or even attempted prosecutions, seems especially unconscionable. The least the Justice Department could do, in declining to prosecute, would be to make available the reams of documents on which it based its decisions, so that the American public can understand why prosecutors let these people walk. Without seeing what the prosecutors have seen, we are left with a sense of frustration and injustice.

Senate Democrats: Still Making the Case for Dodd-Frank - Senate Democrats and top regulators will try to highlight the importance of Dodd-Frank during a Senate Banking Committee hearing. Specifically, expect Democrats to focus on the new council of regulators, known as the Financial Stability Oversight Council, which includes the Federal Reserve, Treasury and others and is charged with monitoring risks to the financial system, and identifying firms and banks that could pose a threat to financial stability. The other is the so-called resolution authority, which gave regulators the power to supersede traditional bankruptcy proceedings and  dismantle large, troubled financial firms whose failure would hurt financial stability. Both new tools were needed and would have helped regulators prevent the 2008 financial crisis, the aides said.

Leadership Uncertainty Strains Financial Reform Efforts - When federal financial regulators next gather to compare notes and coordinate plans, one of the requirements of a banking law intended to prevent the next financial crisis, 5 of the 10 seats at the table will most likely be empty or filled by caretakers. The Obama administration has not announced nominees for several positions that Congress created last summer, nor has it nominated new heads for three agencies, including for an imminent vacancy at the Federal Deposit Insurance Corporation.  As a result, temporary leaders tapped by the president increasingly are responsible for the vast overhaul of financial regulations, raising concerns that their decisions will prove more vulnerable to political pressure than permanent leaders insulated by Senate confirmation to a fixed term.  The vacancies have accumulated in part because Senate Republicans have blocked votes on nominees for a wide range of positions. The White House, in turn, has not rushed to add names to the list. In one case, it has temporarily circumvented the Senate by giving the Harvard professor Elizabeth Warren acting responsibility for a new agency focused on consumer financial protection.

Has Elizabeth Warren Won Over the Banks? - On her first day running the new Consumer Financial Protection Bureau (CFPB), Elizabeth Warren met with a group of bankers from her home state, Oklahoma. Going into that meeting, Roger Beverage, president of the Oklahoma Bankers Association, feared the havoc Warren, who had developed a reputation as a fierce consumer champion, would soon wreak upon his state's banks. He and his colleagues in the banking industry, he recalls, "had this vision that she was akin to the Antichrist." Today, Beverage considers himself a Warren convert. He openly praises Warren—who was appointed by the White House to get the bureau up and running but has not been nominated to head it—saying she is "far and away" the most qualified person to become the bureau's permanent director. "Ms. Warren has demonstrated that she is willing to work as hard as possible for the benefit of consumers, consumers' families, and community banks," Beverage says. Beverage's reversal reflects a noticeable thaw in relations between Warren and parts of the banking industry.

The Republicans fight against consumer protection -- Forty-four Republican senators, in a letter² to President Obama, threatened to hold up the nomination of anyone selected to head the new consumer bureau, regardless of party affiliation, unless certain changes on how the agency is structured are made. The Consumer Financial Protection Bureau was created last year under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most sweeping overhaul of financial regulations in decades. The bureau is supposed to promote financial education and enforce federal consumer financial protection laws, and it was given rulemaking powers that would head off unfair, deceptive and abusive financial practices and products. We the people — the people who don’t have the money to hire lobbyists — need a strong Consumer Financial Protection Bureau¹. But if we the people don’t take action, the watchdog agency, which hasn’t had a chance to really fight for us, will be stripped of much of its power by a group of Republican legislators trying to weaken it.We must object. We must jump into this fight. Write,  e-mail or call your congressional representatives and tell them to let the bureau be.

Banks are not reserve constrained - Edward Harrison - Banking is problematic because it creates an inherent financial instability due to a potential mismatch between a financial institutions’ liabilities and its assets. Many financial institutions have fewer liquid assets than short-term liabilities and demand deposits. Moreover, if a financial institution gets into trouble from reckless lending or investing, it could sell its assets in order to cover its liabilities; but this would result in fire-sale prices. So even if the bank had enough assets to cover its liabilities, a run on the institution could render it insolvent, cascading its problem down the line to its own lenders. Leading up to the credit crisis, the Federal Reserve under Alan Greenspan relaxed the investment banking net capital rule, effectively allowing them to increase their leverage tremendously. This was an extreme act of reckless anti-regulation by the Greenspan Fed which had disastrous results when the investment banks’ investments went pear-shaped in 2007 and 2008, resulting in a run in the wholesale lending market. Yet, the relaxed anti-regulatory stance remains in effect today. That means another major asset downturn would create the preconditions for similar runs and insolvencies. Anyone who wants greater economic stability understands this is a problem. Some people like Simon Johnson have argued we need much more capital for these banks, as much as 30%. But capital is not reserves. Capital is capital. Reserves are another matter.

The Myth that the Banks are Solvent - Banks will likely have too much cash by 2019 as a result of the Basel III global banking rules, UBS AG Chief Executive Oswald Grübel said Thursday. The CEO has said that investment banking could shift to the U.S. and Asia if stricter capital requirements are enforced in the U.K. and Switzerland.  This is consistent with the fallacy that the banks are basically solvent and able and ready to extend credit if only these darn regulators would get out of the way. As James Galbraith has argued, the problem is said to be no more serious than some clogged plumbing. A bit of Drano in the form of government handouts and guarantees should be sufficient to get credit flowing again. Most major banks are not insolvent, this story goes, but rather have a temporary liquidity problem induced by malfunctioning financial markets. Time will allow market mechanisms to restore the true, higher value of “legacy” assets. Once the banks are healthy, the economy will recover. Nonsense. Private debt loads remain too high, income and employment continue to fall, and delinquencies and foreclosures continue to rise. Assets are overvalued even at current depressed prices. Many financial institutions (probably including most of the big ones) are hopelessly insolvent, holding mountains of toxic waste that will never be worth anything.

Big Bank Backlash: From Coast to Coast People are Moving their Money - As the economy continues to stutter and new unemployment claims surge to an eight month high, it hasn't escaped the notice of people on Main Street that the folks on Wall Street are back in the black.     According to FORTUNE magazine, profits of the 500 largest U.S. corporations have surged 81 percent this past year. FORTUNE editors write, "We've rarely seen such a stark gulf between the fortunes of the 500 and those of ordinary Americans." As the United States splinters further into two worlds, the American people have not forgotten who got us into this mess in the first place. They know who inflated the housing bubble and played both sides with credit default swaps, and it wasn't teachers, firefighters or snowplow drivers. From San Francisco to Wall Street people are taking to the streets reminding governors and their friends on Wall Street and that they remember very well who tanked the global economy putting more than 8 million Americans out of work and creating a revenue crisis for many states. Hundreds protested inside and outside the Wells Fargo shareholder's meeting in San Francisco this week, and the big bank backlash is gaining steam.

Small Banks and Debit-Card Reform - It’s not hard to understand why large banks oppose any attempt to overhaul the financial arrangements currently surrounding credit cards and debit cards. In the duopoly run through Visa and MasterCard, big banks earn fees that far exceed their costs.  The excess profit for debit cards would be substantially reduced by a proposed Federal Reserve regulation now on the table that would implement the Durbin Amendment from the Dodd-Frank 2010 financial reform act. That amendment, sponsored by Senator Dick Durbin, a Democrat from Illinois, required the Fed to place a cap on the fees that banks may charge on debit-card transactions.  It’s much harder to understand why Independent Community Bankers of America, the trade group for small banks, is pushing so hard for the Tester bill (and effectively shielding big banks from political pressure), because community banks are explicitly exempted from having to lower their fees, and individual executives from at least some small banks publicly support the Durbin Amendment (see, for example, Senator Durbin’s letter to the I.C.B.A. last year).

SEC staffs revolving door prompts concerns about agency…Until two weeks ago, Kayla Gillan was deputy chief of staff at the Securities and Exchange Commission, an agency whose duties include policing and regulating the accounting firms that audit public companies. Last week, PricewaterhouseCoopers announced that Gillan was taking a leadership role at the big accounting firm to work on regulatory issues. Gillan, 52, is just the latest high-profile example of officials moving from the SEC to businesses regulated by it, or to law firms that defend clients in SEC investigations. From Capitol Hill to academia and the SEC inspector general’s office, observers of the agency have voiced concern that the revolving door can make the SEC a more docile protector of the public interest. A study to be released Friday by the Project on Government Oversight ¹(POGO), based on hundreds of SEC documents obtained through the Freedom of Information Act², sheds new light on the relationship between the regulators and the regulated.

Seeking Business, States Loosen Insurance Rules - Vermont, and a handful of other states including Utah, South Carolina, Delaware and Hawaii, are aggressively remaking themselves as destinations of choice for the kind of complex private insurance transactions once done almost exclusively offshore. Roughly 30 states have passed some type of law to allow companies to set up special insurance subsidiaries called captives, which can conduct Bermuda-style financial wizardry right in a policyholder’s own backyard.  Captives provide insurance to their parent companies, and the term originally referred to subsidiaries set up by any large company to insure the company’s own risks. Oil companies, for example, used them for years to gird for environmental claims related to infrequent but potentially high-cost events. They did so in overseas locations that offered light regulation amid little concern since the parent company was the only one at risk.  Now some states make it just as easy. And they have broadened the definition of captives so that even insurance companies can create them. This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims. Critics say this is much like the shadow banking system that contributed to the financial crisis.

Why commodities crashed -- If you want to see market reporting done right, I can recommend the 2,000-word Reuters special report on Thursday’s commodities crash. It doesn’t just pick a random news event or gesture vaguely at “worries about economic growth” while saying what prices did: it looks at the mechanisms behind the market moves and what might have caused them. It’s worth underlining that Thursday’s percentage declines in commodities like silver and oil would count as a full-on disaster if they occurred in the stock market. Commodities markets are rowdier places than stock markets, however, and the only people who really got hurt are sophisticated investors who can take their medicine. The move was certainly accelerated by the rise of algorithms and high-frequency traders, who have moved quite aggressively from stocks into commodities of late. These black boxes can go from being very long to very short in an alarmingly short space of time, and I suspect that many of them made money, rather than lost it, in the volatility.

Oil prices and trading mechanics - A report from Reuters (hat tip: Felix Salmon) attributes the wild commodity price moves last week to algorithmic stop-loss trading. Jim Brown offered these details on the oil trading:Those funds interviewed said the massive amount of stop losses that were triggered was beyond comprehension.... When the crash finally came the number of positions liquidated was staggering. As each technical level was broken it triggered more stop losses and more short selling to capture the drop....Credit Suisse analysts said the high frequency and algorithmic trading accounted for about half of all the volume in the oil markets. Every day, futures prices can and do move in response to how many people want to buy or sell the contracts. As I explained in a recent study in Brookings Papers on Economic Activity, inventory arbitrage forces the spot price to move along with the futures price. But as I also explained there, this does not mean that sentiment or speculation alone can put the price of oil at any arbitrary value. Ultimately, the critical question is whether the spot price is one at which the physical quantity produced is equal to the physical quantity consumed. Whether today's price indeed accomplishes this was the focus of my discussion of these events last weekend.

Podcast: Insider Trading, Robo-Signing and Food Claims - The Galleon hedge fund trial was perhaps the most prominent insider-trading case in a generation — and the conviction of Raj Rajaratnam, the hedge fund’s co-founder, has been portrayed both as a great victory for the prosecution and as a chilling warning that lawbreaking, even by the very rich, will be harshly punished.  But will the case have broader implications for Wall Street and for law enforcement?  Peter Lattman, who covered the trial for The Times, addresses these questions in the new Weekend Business podcast. In a separate conversation, Gretchen Morgenson focuses on evidence of widespread robo-signing and other shady practices by mortgage servicers who helped to force troubled borrowers out of their homes. Some of those firms have offered to pay $5 billion to settle allegations brought by state attorneys general, who have apparently demanded much more. Evidence of extensive and abusive servicing practices, meanwhile, has been amassed by the United States Trustee, the Justice Department unit that monitors the bankruptcy system. Ms. Morgenson writes about these issues in her column in Sunday Business.

Galleon Conviction Is Expected to Embolden Prosecutors -- Raj Rajaratnam, the billionaire investor who once ran one of the world’s largest hedge funds, was found guilty on Wednesday of fraud and conspiracy by a federal jury in Manhattan, giving the government its biggest victory yet in a widening investigation of insider trading. The verdict is expected to embolden prosecutors in their campaign to ferret out criminal activity on Wall Street trading floors. By using wiretaps — a tactic normally reserved for Mafia and drug trafficking cases — to secretly record the phones of Mr. Rajaratnam and others, the government now has a new weapon against white-collar crime.Just as the insider trading cases of the 1980s focused on the major Wall Street figures of that era — risk arbitragers like Ivan Boesky and junk-bond financiers like Michael R. Milken — the recent wave of prosecutions home in on some of the most influential players in today’s markets: hedge funds. As the investment firms have grown in clout and prominence, now managing more than $2 trillion and minting dozens of billionaires, the industry has attracted more scrutiny.

The People vs. Goldman Sachs - Taibbi - They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn't leave much doubt: Goldman Sachs should stand trial.

In this antitrust slugfest, consumers always lose - Before Google could buy DoubleClick and AdMob, the Internet giant needed to get antitrust approval from the Federal Trade Commission. But when Google wanted to buy ITA, a leading maker of travel software, the review was conducted by a different agency: the antitrust division of the Justice Department. It was also Justice that earlier nixed the idea of a merger with Yahoo. Now both agencies appear to be quietly, and separately, laying the groundwork for a much broader investigation to determine whether Google is using anti-competitive practices to protect its dominance in the Internet search business. The leaders of both agencies would like nothing more than to bring a high-profile case that would take its place in history along with the government’s landmark challenges of Standard Oil, IBM, AT&T, Microsoft and Intel. Gee, I thought the idea of the antitrust laws was to encourage competition between businesses, not regulators.

Exiting AIG - Serena Ng has been keeping an eye on AIG’s share price, which is far below where it was trading at the beginning of the year — and below even where it was in October, when Treasury’s Jim Millstein told me that Treasury was going to make a profit of roughly $13 billion on the money it used to bail out AIG. That’s looking increasingly unlikely: Treasury’s break-even price on its AIG stake is about $28.70 per share, and at current prices it’s going to have to accept less than that if it wants to sell $20 billion of stock into the market. There are three issues at stake here. First, should Treasury have converted its AIG debt into equity just so that it could exit its position more quickly? Second, will Treasury manage to disentangle itself from AIG at a profit? And third, does that matter? Governments care very much about the 0% return level on their investments in private companies. If they make more than that, the investment/bailout is considered a success; if they make less, it’s a failure. That’s a bit silly, but the psychology is at least easy to understand.

AIG Stock Offering Smaller Than Expected - American International Group Inc. and the Treasury decided to move ahead with a stock offering this month for about $9 billion, far less than what officials had once hoped to fetch, people familiar with the decision said. At a meeting Tuesday, the insurer's board debated whether to postpone the long-planned offering due to recent weakness in AIG's stock price, one of the people said. It decided to proceed with plans for an offering near the low end of a range envisioned by people familiar with the plan of $7 billion to $25 billion, depending on investor demand and market conditions.

Uncle Sam’s 12% Exit from AIG - For tax payers who want to yank their money out of bailed out insurer AIG, you’ve got a long way to go. AIG today detailed plans for a stock offering that is the first step for the government to flee its 92.1% ownership in the company.As our Deal Journal colleagues had reported, the stock sale is likely to fetch far less money that what government officials had expected. According to a regulatory filing today, the AIG sale totals 300 million shares. And while AIG didn’t set an expected per-share price for its stock, the 300 million shares are valued at about $8.9 billion based on AIG’s closing stock price Tuesday of $29.62. The government needs a per-share price of about $28.70 a share to break even on its stake in AIG. (The offering price is likely to be at a discount to the market price.) The U.S. government plans to sell just 200 million of its 1.66 billion shares of AIG — or just 12% of taxpayers’ holdings in AIG

No news about governments good news - Don’t expect to see a lot of newspapers and Web sites with this headline: “Big Government Bailout Worked.” But it would be entirely accurate. The actual headlines make the point. “Demand for fuel-efficient cars helps GM to $3.2 billion profit,” declared The Post¹. “GM Reports Earnings Tripled in First Quarter, as Revenue Jumped 15%²,” reported the New York Times. Far too little attention has been paid to the success of the government’s rescue of the Detroit-based auto companies, and almost no attention has been paid to how completely and utterly wrong bailout opponents were when they insisted it was doomed to failure.

US explores easing of rules on capital-raising - Washington regulators are looking at relaxing rules around companies raising capital after criticism that tough regulations are hindering the growth of start-ups and eroding the appeal of US public stock markets. Mary Schapiro, chairwoman of the US Securities and Exchange Commission, called for a review of restrictions on communications in initial public offerings, the ban on marketing non-registered securities and the cap on the number of shareholders a private company can have before facing tougher disclosure requirements. “I instructed our staff to take a fresh look at some of our offering rules to develop ideas for the commission to consider that would reduce the regulatory burdens on small business ­capital formation in a manner consistent with investor protection,” she said in testimony to a US House of Representatives committee on government oversight and reform on Tuesday. The SEC has come under criticism by some lawmakers and market participants who fear that the shrinking number of US IPOs, which in recent years have lagged far behind their peak levels in the 1990s, harms job creation. However, Ms Schapiro defended some of the SEC’s rules, including the ban on what is known as “general solicitation”, the marketing and advertising of unregistered securities to unsophisticated investors.

How GE and Jeff Immelt Are Failing to Reinvigorate the U.S. Economy - Driven by stock-based compensation and the belief that corporations should be run to "maximize shareholder value," exorbitant executive pay has been with us since the 1980s. There are three forces that drive listed stock prices, and hence the stock-based compensation of executives. The first is innovation: a company's stock price rises because it actually has been successful in generating higher quality, lower cost products. The second is speculation: gamblers enter the stock market, betting on the strength and length of the upward momentum of stock prices before the bubble bursts. The third is manipulation: corporate insiders allocate corporate resources to boost stock prices. Unfortunately, over the past decade, manipulation has become a prime driver of stock-price increases, with large-scale stock repurchases as the favorite tool. From 2000 through 2009, S&P 500 companies — which account for about 75% of the market capitalization of all U.S. publicly listed corporations — spent more than $2.5 trillion on stock buybacks. Stunningly, that amount is equal to 58% of their net income. The average buybacks per company more than quadrupled from less than $300 million in 2003 to over $1.2 billion in 2007.

CEO Pay in 2010 Jumped 11% - Chief executives at the biggest U.S. companies saw their pay jump sharply in 2010, as boards rewarded them for strong profit and share-price growth with bigger bonuses and stock grants.  The median value of salaries, bonuses and long-term incentive awards for CEOs of 350 major companies surged 11% to $9.3 million, according to a study of proxy statements conducted for The Wall Street Journal by management consultancy Hay Group.  The rise followed a year in which pay for the top boss was flat at these companies. Viacom¹ Inc. CEO Philippe P. Dauman topped the list. He received compensation valued at $84.3 million, more than double his 2009 pay, thanks largely to equity awards in a renewed contract.  The Journal measured CEO pay by total direct compensation, which includes salary, bonuses and the granted value of stock, stock options and other long-term incentives given for service in fiscal 2010. That figure excludes the value of exercised stock options and the vesting of restricted stock. Click on image to see CEO Pay at the biggest 350 U.S. public companies

Unofficial Problem Bank list at 983 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for May 13, 2011. Changes and comments from surferdude808:  Only two changes were made to the Unofficial Problem Bank List as the FDIC kept its liquidation squad home this weekend and the OCC did not release its actions through mid-April 2011. Moreover, the OTS has not updated its enforcement website page since May 5th and it may be a casualty given their on-going integration into the OCC. That is too bad as the OTS has been more prompt than its merger partner in publishing enforcement actions.

On Dubious Defenses of the FDIC’s Lehman Resolution Plan -  Yves Smith  - Economics of Contempt has written a rejoinder to our post on FDIC’s paper on how it would have wound up Lehman with its new Dodd Frank powers. Since it’s a mix of smears and broken-backed arguments, it is nowhere near the standards he can attain when he is behaving himself. But as a tell about the officialdom’s propaganda preoccupations and methods, it isn’t entirely devoid of interest. Before turning to the meat of his post, such as it is, I wanted to point out the biggest slur in the piece: his repeated assertion that Satyajit Das and I did not read the FDIC paper in full. That’s false, and brazenly so: somehow the fact that Das and I can crank out an analysis, quickly, gets twisted into anchoring a more general effort to discredit this site. Regular readers, including EoC, have no doubt seen other occasions where we’ve produced detailed and on target assessments before most of our peers. And Das is in Australia, giving him the ability to respond to evening releases in the US during his business day (in this case, one with specific page references). EoC’s entire post fails when you look at its and the FDIC’s three central, obtuse misconstructions:

FDIC’s Bair Will Leave July 8 After ‘Living-Will’ Rule - Federal Deposit Insurance Corp. Chairman Sheila Bair will leave her post July 8, a week after the official expiration of her term, the agency announced.  Bair, whose term officially ends June 30, plans to stay the extra days to finish work on the rule requiring systemically risky firms to outline how they can be unwound in the event of a collapse, a person briefed on the matter said.  The final rule on the so-called living wills is to be voted on during an FDIC board meeting in the first week of July, said the person, who spoke on condition of anonymity because the plan isn’t public.  The FDIC rule will require financial companies with at least $50 billion in assets to provide information on their debt, funding, capital and cash flows. The plan is designed to mitigate some of the risks that exacerbated the credit crisis after Lehman Brothers Holdings Inc. (LEHMQ) collapsed in 2008.

FDIC Filed Suit Against Lender Processing Services for $154 Million - Ooh, this is getting fun. Peter W found this tidbit in the May 10 Lender Processing Services 8K: The Federal Deposit Insurance Corporation, in its capacity as Receiver for Washington Mutual Bank, filed a complaint on May 9, in the U.S. District Court for the Central District of California to recover alleged losses of approximately $154,519,000. The FDIC contends these losses were a direct and proximate result of the defendants’ alleged breach of contract with WAMU and alleged gross negligence of the defendants with respect to the provision of certain services by LPS’s subsidiary LSI Appraisal, an appraisal management company.  However, for more than 75% of the appraisals identified by the FDIC, LSI was contracted only to provide reviews of appraisals, not to conduct the initial, full appraisals. For these properties, the full appraisals were provided by other entities, unrelated to LSI.  Let us state the obvious: LPS is not set up to do anything on a one-off basis. If the FDIC’s case pans out with WaMu, you can rest assured that other parties have grounds for similar litigation

Fannie Mae to Feel Impact of Falling Home Prices - As home prices continue to decline, Fannie Mae expects to be negatively effected, its chief executive told CNBC on Tuesday. “We expect that home prices will continue to deteriorate though the balance of the third quarter, then stabilize when we start to see a gentle recovery in the beginning of next year," said Michael Williams, CEO and president of Fannie Mae.   "That’s a longer period of time than we originally anticipated and a little deeper decline than we thought.”  For the first quarter, U.S. home values experienced the biggest drop since late 2008, according to real estate data firm Zillow. The mortgage giant recently said in its first quarter results that it has requested $8.5 billion from the government to stay afloat by eliminating its deficit. 

Fannie Mae requests additional 8.5 billion dollars in government aid (Xinhua) -- Fannie Mae, the leading house mortgage lender in the United States, requested the government Friday for an additional 8.5 billion U.S. dollars in aid after seeing huge loss in the first quarter of 2011. Fannie Mae saw a net loss of 6.5 billion dollars in the first three months of 2011, compared to net income of 73 million dollars in the fourth quarter last year, and a net loss of 11.5 billion dollars in the same period of 2010, the company said in a financial report. The loss in the first quarter of 2011 from net income in the fourth quarter was due to an increase in credit-related expenses, primarily driven by a decline in home prices during the quarter, said the company. Home prices on a national basis declined by 1.8 percent in the first quarter this year, which had directly led to more foreclosures and to homeowners abandoning houses that were worthless than they owed on their mortgages, said Fannie Mae.

Banks Want Pieces of Fannie and Freddie’s Business - As the Obama administration prepares a report on the future of Fannie Mae¹ and Freddie Mac², some of the nation’s largest banks are offering a few suggestions.  Wells Fargo³ and some other large banks would like private companies, perhaps even themselves, to become the new housing finance giants helping to bundle individual mortgages into securities — that would be stamped with a government guarantee.  The banks have presented their ideas publicly through trade groups. Housing industry consultants and people familiar with recent meetings at the Treasury Department⁴ say these banks view the government’s overhaul of the mortgage market as a potential profit opportunity. Treasury officials have met with executives from several institutions, including Wells Fargo, Morgan Stanley⁵, Goldman Sachs⁶ and Credit Suisse⁷, according to a public listing of the meetings⁸.  The administration’s report, to be released later this month, is expected to be sweeping and could address basic questions like whether a government guarantee is needed at all for middle-class homeowners

Fannie Mae Pumps and Dumps - The government is preparing to lower the amount of mortgage loan that it will guarantee, after raising the limits in the wake of the financial crisis.  This seems like absolutely the right thing to do (though I would say that, since I don't think the government should have gotten into the securitization business in the first place.)  But it's going to make things even tougher in expensive markets: Sellers worry that the pool of potential buyers will shrink. "I'm glad to see they're trying to rein in Fannie Mae, but I think I'm being disproportionately penalized," said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.Of course if we stop pumping money into the system, there will be even more temporary pain.  But trying to slow the pain down hasn't worked well so far.

Half of Fannie Mae mortgages registered in MERS name -  Roughly half of the mortgages owned or guaranteed by Fannie Mae are registered in the Mortgage Electronic Registration Systems name, according to a filing by the government-sponsored enterprise last week. Fannie's guaranty book of business totaled $2.9 trillion at the end of the first quarter, meaning about $1.45 trillion of loans are registered in MERS' name. The connection, Fannie said, poses a significant risk.Privately held MERS, which was built by the GSEs and the nation's major lenders in the 1990s, is an electronic registry that tracks servicing rights and ownership of loans from origination through securitization. MERS serves as a nominee for the owner of a mortgage and therefore becomes the mortgagee of record for the loan in local land records. Several legal challenges emerged during the foreclosure crisis, finding holes in the system that includes mishandled securitization transfers and foreclosure affidavits. Fannie, Freddie Mac and a few other lenders prohibited its servicers from initiating foreclosures in MERS' name, guidance MERS also issued to its members.

Fannie Mae SEC 10-Q Report “MERS System could pose counterparty, operational, reputational and legal risks for us.” - MERSCORP, Inc. is a privately held company that maintains an electronic registry (the “MERS System”) that tracks servicing rights and ownership of loans in the United States. Mortgage Electronic Registration Systems, Inc. (“MERS”), a wholly owned subsidiary of MERSCORP, Inc., can serve as a nominee for the owner of a mortgage loan and, in that role, become the mortgagee of record for the loan in local land records. Fannie Mae seller/servicers may choose to use MERS as a nominee; however, we have prohibited servicers from initiating foreclosures on Fannie Mae loans in MERS’s name. Approximately half of the loans we own or guarantee are registered in MERS’s name and the related servicing rights are tracked in the MERS System. The MERS System is widely used by participants in the mortgage finance industry. Along with a number of other organizations in the mortgage finance industry, we are a shareholder of MERSCORP, Inc. Several legal challenges have been made disputing MERS’s legal standing to initiate foreclosures and/or act as nominee in local land records. These challenges have focused public attention on MERS and on how loans are recorded in local land records. As a result, these challenges could negatively affect MERS’s ability to serve as the mortgagee of record in some jurisdictions. In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and other legal documents in connection with foreclosure proceedings. As a result, investigations by governmental authorities and others into the servicer foreclosure process deficiencies discussed above may impact MERS. On April 13, 2011, federal banking regulators and FHFA announced that they were taking enforcement action against MERS to address significant weaknesses in, among other things, oversight, management supervision and corporate governance at MERS that were uncovered as part of the regulators’ review of mortgage servicers’ foreclosure processing. Failures by MERS to apply prudent and effective process controls and to comply with legal and other requirements could pose counterparty, operational, reputational and legal risks for us. If investigations or new regulation or legislation restricts servicers’ use of MERS, our counterparties may be required to record all mortgage transfers in land records, incurring additional costs and time in the recordation process. At this time, we cannot predict the ultimate outcome of these legal challenges to MERS or the impact on our business, results of operations and financial condition

Merscorp Electronic Mortgage Registry Is Sued Over Michigan Foreclosures - Mortgage Electronic Registration Systems Inc. “illegally prosecuted” non-judicial foreclosures in Michigan and owes more than $100 million to people who lost their homes, lawyers for three homeowners said in a lawsuit. The homeowners said Merscorp Inc.’s MERS, which runs an electronic registry of mortgages, used Michigan’s so-called foreclosure by advertisement process illegally and “misappropriated” their homes. Any foreclosures by MERS using this process in Michigan should be voided, they said in their complaint filed in federal court in Detroit. Michigan is one of 27 states where banks don’t have to get a court’s permission to seize a property, meaning homeowners have to bring their own lawsuit to halt a foreclosure. Michigan law lets mortgage lenders or servicers foreclose after advertising a default in a newspaper for four consecutive weeks. MERS “lacked the authority to foreclose by advertisement” because it didn’t own or have any interest in the underlying debt and “was not the servicing agent of the mortgage,”  MERS “knowingly, fraudulently and illegally” foreclosed on homes for years using a law it “had no authority or right to utilize,” they claim.

A race to the bottom: Understanding the US housing boom - Earlier this year the US Financial Crisis Inquiry Commission released its report. With no small amount of irony, a crisis emerged in its inquiry. The majority of the commissioners attributed the credit boom and bust to greedy but incompetent bankers and lazy but ideological regulators. The dissenting commissioners, meanwhile, focused more on poorly designed housing subsidies. Yet while the two groups reached largely polarised views, consensus should have in fact been easy to reach.  At the centre of the global financial crisis was a housing boom and bust. A New York University team has produced an excellent book on design flaws in the US housing finance sector that opened the door for the mayhem that followed. This column, the first of a series of two, describes the race to the bottom that occurred among Fannie Mae, Freddie Mac, and the too-big-to-fail private financial institutions.

'Flopping' - A New Type Of Scam In The Housing Market - Here's how it works: A real estate agent or broker identifies properties with severely depressed values. These could be properties with mortgages that exceed the present values or they could be short sales or foreclosures. A property is valued using a "broker price opinion." The broker's "opinion" is a low-ball price, because his intention is to profit from a quick resale for a higher price. A lender, believing the broker's assessment is legitimate and unaware of any scheming, agrees to the lower sales price. The broker buys it at the greatly reduced price, arranges for a "straw buyer" to purchase it, then flips it for a higher price than negotiated with the lender. The broker pockets the profits. The broker pays off any of the participants that enabled the scheme, and then moves to the next target property.

In Fine Print, Banks Require Struggling Homeowners to Waive Rights - Like millions of others, Cortez was facing foreclosure. But there was a catch buried in the fine print. Cortez had to waive any possibility of ever suing the bank for anything relating to the loan.  Cortez isn't alone. While regulators have banned the practice, some banks and others who handle mortgages have still been forcing homeowners into a corner: You want a chance at saving your home? Then you'll have to waive your rights. "It puts borrowers in a very vulnerable situation."  We identified eight banks and other mortgage servicers who offer help that limits homeowners' ability to sue or fight foreclosure. When we contacted them, they offered a variety of responses. Some said the inclusion of the waivers had been a mistake and would stop. Some argued that language that seemed to waive the homeowner's rights didn't actually do so. One argued that a loophole in a rule barring the practice meant their inclusion in certain agreements was proper.  Homeowners face a tough choice with these offers. Despite the overwhelming need², it remains a struggle for borrowers to get help.

Foreclosures: Are Bank Regulators Messing Up the Housing Recovery? - Foreclosures are down. Time to celebrate? Not really. Realtytrac, which monitors foreclosures, says the number of people losing their homes is dropping not because people are having fewer financial problems but because banks are taking longer to process foreclosures. And that's not because they are modifying loans and helping people stay in their houses for good. Pace of modifications is falling as well. Do regulators need to do more? One regulator thinks so: Sheila Bair, who heads the Federal Deposit Insurance Corp. She says the fact that regulators haven't done more to resolve the problem banks are having with foreclosures is one reason why the housing market is not recovering. Worse, it may show that even after the passage of Dodd-Frank banks still don't have the tools to police banks.

I-Team: The Secret Truth About Foreclosures - 86-year old Collis McDuffie chokes back tears when he thinks about losing the home that he bought back in 1963, to foreclosure. “At my age, where am I going to go?” His daughter Zella is blunt. “And this is where the banks are making money. They’re making money off of people. It doesn’t matter. Who cares if you’re living on the streets,” said Zella McDuffie-Smith. Making money off of people? Big banks profiting from foreclosures? That news stunned many South Floridians who responded to questions from the CBS4 I-Team.“I think it’s wrong,” said one man.“Well, appalled of course,” was a woman’s reaction.Another woman told us, “I think it’s disgraceful. That’s what I think.”This shopper in South Dade was very pointed, “That’s criminal.” In fact, it just might be criminal. Fifty state attorneys general are currently investigating the foreclosure fiasco.

A New Zombie Lumbers On: The Mortgage Settlement Negotiations - Yves Smith - The kindest thing that can be said about the 50 state attorneys’ general negotiations over foreclosure abuses is that it is increasingly obvious that there will not be a deal. The leader of the effort, Iowa’s Tom Miller, has completely botched the effort. There was no way to have any negotiating leverage with intransigent banks in the absence of investigations. Miller has changed his story enough times on this and other fronts so as to have no credibility left. But whether there were no investigations (as other AGs maintain) or whether they did some (as Miller, contrary to a staffer’s remarks, now insists), they were clearly inadequate.  We’ve found the rumor, that Miller was angling to head the Consumer Financial Protection Bureau, credible. It would explain his unduly cozy relationship with Federal banking regulators, as well as his efforts to wrap up negotiations quickly, which reduced what little bargaining power he had (time pressure means a party that drags its feet can extract concessions). But like so many zombies that inhabit the financial landscape, the mortgage settlement negotiations refuse to die.

Quelle Surprise! 50 State Attorneys General Settlement Talks Beating a Retreat -- Yves Smith - As readers know, we’ve been very critical of the 50 state attorneys general mortgage “settlement” talks. The reason has been very simple. The leader of the negotiations, Tom Miller of Iowa, early on cast his lot with the Administration’s banking regulators, who are at best cognitively captured and at worst corrupt, rather than siding with the rule of law or the interests of the nation’s citizens. He took their lead and pushed for a quick resolution, when any “settlement” by definition depends on the prosecutors having a real case with decent odds of serious damages as a cudgel to bring the perps to the table and extract real concessions from them. In the absence of doing investigations to develop a case, all the banks have to “settle” is robosigning abuses, which since they are sorta cleaning those up anyhow, does not add up to any kind of threat. Thus all the banks have to do is the obvious: call Miller’s bluff. This update from American Banker (hat tip Mike Konczal) shows the Miller-led effort retreating from the only meaningful concessions, that of serious fines and/or principal mods (note we had not been a fan of this approach to principal mods; any bank funded mods would be too shallow to make any real difference):

Report: $5 Billion Mortgage Servicer Settlement being Discussed - So much for the $20 billion settlement, and it still isn't clear what would happen with the money ... From the WSJ: Banks Float $5 Billion Deal to End Foreclosure Probe The nation's biggest banks are willing to pay as much as $5 billion to settle claims by federal and state officials of improper mortgage-servicing practices, according to people familiar with the situation. Such an offer is considerably less than the amounts sought by state and federal officials, some of whom are asking for more than $20 billion in penalties.... The banks intend to propose that as much as $5 billion be used to compensate any borrowers previously wronged in the foreclosure process and provide transition assistance for borrowers who are ousted from their homes, according to people familiar with the matter. One idea is that foreclosed borrowers could receive several months of free rent once they find new housing, one of these people said. Didn't the banks say no one was "wronged" in the foreclosure process?

Banks Float $5 Billion Deal to End Foreclosure Probe - The nation's biggest banks are willing to pay as much as $5 billion to settle claims by federal and state officials of improper mortgage-servicing practices, according to people familiar with the situation. Such an offer is considerably less than the amounts sought by state and federal officials, some of whom are asking for more than $20 billion in penalties. The banks' figure comes as mortgage companies and state and federal officials continue their efforts to strike a settlement of investigations sparked by allegations of "robo-signing" and other questionable foreclosure practices that came to light last fall. Bank representatives met Tuesday with state and federal officials in the latest round of negotiations. On Friday, banks received revised term sheets from government negotiators. One sheet revised proposed changes in mortgage-servicing practices. The second term sheet governs how penalties would be allocated; among other things, it details how they would have to reduce loan balances for certain borrowers.

BofA May Pay as Much as $3.7 Billion to Resolve Mortgage Probe…- Bank of America Corp. (BAC), the largest U.S. mortgage servicer, may pay as much as $3.69 billion or as little as $890 million to settle a probe of its practices, Nomura Securities International Inc. analysts estimated. The upper estimate is based on the 14 biggest servicers agreeing to a $10 billion penalty in a deal tied to the number of loans in foreclosure,  The Charlotte, North Carolina-based bank may pay the lesser amount in a $3 billion group settlement based on the size of servicing portfolios, they wrote.  State and federal officials investigating mortgage practices had offered revised terms during settlement talks in Washington, including a proposal for banks to fund principal writedowns for homeowners. The five largest banks proposed paying $5 billion to settle the probe, two people familiar with the matter said yesterday. “An amount in that range would be viewed as a positive for the banks, given larger numbers have been referenced previously,” the analysts wrote. Regulators had previously suggested a $20 billion penalty.  Bank of America would pay the most among the 14 largest servicers under both settlement scenarios, the analysts wrote.

The Servicing Fraud Settlement: the Real Game - This is a long blog post. But if you follow mortgage servicing, I think you’ll find it worth reading. Despite lots and lots of media coverage of the servicing fraud settlement, nobody seems to understand the real story that's going on. I think that this post will explain a lot. Let's start by recapping what we know.  Back in March we started hearing media reports of a proposed penalty for servicers in the $20-$30B range.  Then the American Banker published a 27-page term sheet from the AGs for servicing standards. Next, Huffington Post published a 7-page CFPB powerpoint presentation. Then came the draft C&D orders and then in April, the final C&D orders (which eliminated the ridiculous "single point of contact which need not be a single person" and replaced it with "single point of contact as hereinafter defined" and then failed—quite deliberately—to define it anywhere in the document).

Feds Reviewed Only 100 Foreclosure Files in Servicer Whitewash -  Yves Smith  - Not only are the authorities engaged in a coverup of servicer abuses, they aren’t even bothering to pretend that the effort is serious. A post on Housing Wire offers some choice tidbits: When mortgage servicers signed consent orders with the Office of the Comptroller of the Currency and the Federal Reserve, these companies were required to hire outside firms to conduct “look back” evaluations of questionable foreclosure practices. But these reviews will not be made public, according to an OCC spokesman. So there will be no check of whether this process is any good, either in the independence of the party chosen, the scope and nature of the investigation, and the findings. We saw this coming, as did Adam Levitin: By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review “certain” foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that’s all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance. They’re going to find firms that signal loud and clear that if they get the job, they won’t find anything wrong. It’s just recreating the auditor selection problem, but without even the possibility of liability for a crony audit.

FDIC’s Bair Says Millions of Mortgages May Be “Infected,” Criticizes Consent Orders - Yves Smith - We’ve said repeatedly that findings of the multi-agency Foreclosure Task Force review late last fall, which looked at 2,800 mortgages from 14 servicers, was a worse than stress test type review, with a deliberately narrow focus designed to find very little wrong.  One of its remarkable findings was that that banks were on solid grounds in foreclosing, both in the borrower owing the money (which would inevitably be the finding given the failure to investigate servicer-driven foreclosures) and that banks were able to find the borrowers’ notes, which was taken to be tantamount to them having the legal authority to foreclose. Anyone who has been following this issue here or on specialist legal blogs knows that mere possession of the note is often a not sufficient threshold for successful action if the foreclosure is challenged.  In a gratifying show of candor and independence (or perhaps because she recognizes that the facts on the grounds make the Administration/banking industry party line untenable) Bair took exception to the “nothing to see here” stance of the officialdom and took exception to the findings of the Foreclosure Task Force in Congressional testimony earlier today.

North Carolina Appellate Decision Raises New Chain of Title Issue -- Yves Smith  - A potentially important North Carolina appeals court case, In re Gilbert, has not gotten the attention it warrants.  In very short form, the borrowers, who were unable to obtain a loan modification, tried to halt a foreclosure by arguing that the lenders had failed to make required disclosures under the Truth in Lending Act (which they hoped would allow for recission of the loan, and that the party seeking to foreclose had not proved that it was the holder of the Note with the right to foreclose under the instrument. The judges nixed the TILA argument, affirming lower court decisions, but reversed the superior court on the question of the standing of the petitioner. In Re Gilbert May 3, 2011 North Carolina Appeals Court Decision

Judge Dismisses Sanctions Motion by Lender Processing Services Against Attorney Suing It - Yves Smith  - A few weeks ago, we discussed a motion Lender Processing Services agains Nick Wooten, an attorney who has sued LPS in several jurisdictions for impermissible legal fee sharing. We not only indicated that the suit was spurious, but we also questioned why Housing Wire was trumpeting a desperate and not likely to succeed effort by its largest advertiser. That goes beyond being credibly comprehensive in coverage to being simply crass.The judge dispatched the LPS gambit in short order: May 11, 2011 Order Denying LPS Motion for Sanctions. One thing that struck me as odd: LPS asked for the transcript of the hearing on the sanctions motion to be sealed. What is THAT about? Something smells a bit rotten in Denmark.

In RE Phillips | They May Have a Problem – Was the Loan Duel Pledged? - Not quite sure if we are 100% correct on this, so we are going to just put it out there and get some feedback… We have been working behind the scenes on a little project that, we think, proves loans have been multiple pledged in trusts. We have found enough evidence to confirm our theories enough to publish this little report. Mind you, we are not securization expects, but we do love digging through records and have become quite adept. Earlier today, we published IN RE PHILLIPS, US Bankruptcy Court, S.D. Alabama | AURORA LOAN SERVICES Motion to Dismiss GRANTED, Except for Fraud on the Court. Now, being that Nick Wooten has been in the spotlight on all these cases in Alabama with LPS and Housingwire, we decided to check out the loan that was part of the bankruptcy case above, U.S. BANK, AS TRUSTEE FOR STRUCTURED ADJUSTABLE RATE MORTGAGE LOAN TRUST MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2007-10. So what we did was pull every investor report that we could get our hands on, and came up with what appears to be the jackpot.The loan, that was included in the bankruptcy case above, appears to be DOUBLE PLEDGED in the trust.

Mortgage Whistleblowers Say Servicers Foreclosed Rather Than Modify, HAMP Program Designed to Help Banks, Not Borrowers - Yves Smith  - A report at the Dylan Ratigan show confirms what we’ve argued for some time is happening: that banks are not making mods to viable borrowers because servicing is more profitable. In addition, an insider on the HAMP program says that the pressure to make trial mods to make the program look good wound up hurting people. As we have described in older posts, people who were give trial mods under HAMP got reduced payments for a while (in theory three months, in practice often a lot longer). If they failed ot qualify, not only were they asked immediately to pay back the payment reductions, but also penalties. Not only did the servicers not prepare the borrowers for this possibility, some encouraged homeowners to use their savings to pay down other debt, thus pretty much assuring they’d lose their home if they did not get the permanent mod. Be sure to watch to the end to see how Goldman threatened one of the whistleblowers:

Deutsche Bank Sues Foreclosure Fraud Expert’s Son With No Financial Interest In Her Case -- Deutsche Bank appears to have retaliated against a high-profile foreclosure fraud expert, whose years-long battle against her own foreclosure helped reveal a wave of apparent malfeasance, by suing her son.The expert, Lynn Szymoniak, an attorney who specializes in white-collar crime, is widely considered on Capitol Hill to be one of the nation's top experts on foreclosure law. When Deutsche Bank attempted to jack up the interest rate on the mortgage for her Palm Beach Gardens, Fla., home in May 2008, she contested the move, setting off an investigation which unveiled mountains of forged signatures and fraudulent bank paperwork associated with the foreclosure process. Szymoniak alerted other attorneys, neighborhood advocates, lawmakers and the media about the apparent rampant fraud. She appeared on "60 Minutes" in April to discuss the broader foreclosure scandal [video appended below].

Home Market Takes a Tumble - Home values posted the largest decline in the first quarter since late 2008, prompting many economists to push back their estimates of when the housing market will hit a bottom. Home values fell 3% in the first quarter from the previous quarter and 1.1% in March from the previous month, pushed down by an abundance of foreclosed homes on the market, according to data to be released Monday by real-estate website Zillow.com. Prices have now fallen for 57 consecutive months, according to Zillow. Zillow's chief economist now believes prices won't hit bottom before next year and expects they will fall by another 7% to 9%. Prices are decelerating in large part because the many foreclosed properties that often sell at a discount force other sellers to lower their prices.

Home values see biggest drop since 2008 in first quarter, Zillow says - U.S. home values fell in the first quarter at the fastest rate since late 2008, real estate data firm Zillow Inc said Monday, suggesting that a bottom will not be seen until 2012 at the earliest.  Zillow said its home value index fell 3 percent in the first three months of the year from the previous quarter, and was down 8.2 percent year-over-year. The number of homeowners under water -- or, those who owe more on the mortgage than their house is currently worth -- amounted to 28.4 percent of single-family homeowners, representing a peak since Zillow began calculating the data in 2009. That was up from 27 percent in the fourth quarter of last year. Foreclosures also rose, following the moratoriums that had been in place in late 2010. In March, one out of every 1,000 homes was in foreclosure.

US Housing Has Worst Quarter Since 2008 - A new survey from Zillow shows that the US just had its worst quarter for home sales since 2008. Some key datapoints:

• Nearly 75% of homes in the US lost value from Q1 2010 to Q1 2011. That's up from 69% the quarter before.
• Negative equity hit a brand new high of 28.4%.
• Foreclosure re-sales hit a brand new high, representing 23.7%.
• Meanwhile, the supply of distressed home continues to be massive. 2 million homes are in the foreclosure process, with another 1.5 million seriously delinquent.

Here are a couple of charts from the report:

Housing Prices Still in Steep Decline - According to data from Zillow.com, home prices fell 3% in the first quarter of 2011.  This is the largest decline since 2008, and, says the Wall Street Journal, is causing some economists to take a more pessimistic view of how far we are from the market's bottom.  Four years on, why is the housing market still falling?  The obvious culprit is the homebuyer's tax credit.  Even as it was enacted, a lot of people were complaining that gimmicks like this (and the Cash for Clunkers program) weren't providing useful stimulus; instead, they were distorting the market by pulling demand forward from future years.That seems to be even truer than most people expected.  In DC, this actually caused an uptick in prices, because the buyers were concentrated into a pretty short time frame.  A lot of the properties coming on to the market were short sales and foreclosures, which take a very long time to close.  That meant that a lot of people were getting into bidding wars over the relatively small number of properties available.  The bidding war was frantic enough to cost them money--but not to clear the short sales, which were often more than $100,000 underwater. 

Will Home Prices Continue to Fall? - The news today is that the value of your most valuable asset is in trouble again. A report from website Zillow, which lets you look up what your house is worth, says that home prices in the US fell 3% in the first quarter. Worse, Zillow says housing prices could fall as much as 9% more by the end of 2011. And this was the year that real estate market was supposed to rebound. Instead, it looks like we are at the start of housing bust, part deux. Not quite. Houses are more affordable than they have been in decades. That's what has lead many to call the bottom in housing earlier than they should have. Indeed, the emphasis on affordability might be slightly misplaced. If you can't get a loan, it doesn't matter how cheap houses get. You still can't buy. But that's changing. And factors that do matter a lot to the housing market, like jobs, are improving. So while housing bulls were perhaps too earlier, the recent resurgence of housing bears are probably arriving too late.

CoreLogic: House Prices declined 1.5% in March, Prices now 4.6% below 2009 Lows - Notes: Case-Shiller is the most followed house price index, but CoreLogic is used by the Federal Reserve and is followed by many analysts. CoreLogic reports the year-over-year change each month, and the headline for this post is for the change from February to March 2011. The CoreLogic HPI is a three month weighted average of January, February and March, and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® Home Price Index Shows Year-Over-Year Decline for 8th Straight Month This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is down 7.5% over the last year, and off 34.8% from the peak. This is the eight straight month of year-over-year declines, and the ninth straight month of month-to-month declines. The index is now 4.6% below the previous post-bubble low set in March 2009, and I expect to see further new post-bubble lows for this index over the next few months.

Real CoreLogic House Price Index, and Price-to-Rent Ratio, back to 1999 Levels - By request, here is an update to a few graphs including the CoreLogic HPI released this morning (the March report is an average of January, February and March prices). The first graph shows the quarterly Case-Shiller National Index (through Q4 2010), and the monthly Case-Shiller Composite 20 (through February release) and CoreLogic House Price Indexes (through March release) in nominal terms (as reported). In nominal terms, the National index is back to Q1 2003 levels, the Composite 20 index is slightly above the May 2009 lows (and close to June 2003 levels), and the CoreLogic index is back to January 2003.  The second graph shows the same three indexes in real terms. In real terms, the National index is back to Q1 2000 levels, the Composite 20 index is back to December 2000, and the CoreLogic index back to December 1999.  This graph shows the price to rent ratio (January 1998 = 1.0).

More Housing Market Blues - There's more bad news out about housing today. The prices of homes fell in more than 75% of U.S. cities in the first quarter, according to the National Association of Realtors. The data is stoking a new wave of bearishness on when the housing market will bottom. But as Stephen Gandell points out in yesterday's blog, odds of a turnaround in housing are actually looking up. Mortgage rates are the lowest they've been all year, and credit is loosening up. It's just that people aren't buying yet. Why? As Steve notes, buyers haven't been demanding loans because of the dowdy jobs market and pessimism about when housing prices will start to head up. But with the jobs market perking up, housing may soon follow. Of course, some bears think housing prices are still falling because the homebuyer's tax credit inflated housing demand last year. See this graphic on Barry Ritholtz's blog:

Zillow on Negative Equity: 28.4% of all single-family homes with mortgages are "underwater" - From Zillow: Negative equity reached a new high with 28.4 percent of all single-family homes with mortgages underwater Negative equity reached a new high mark with 28.4 percent of single-family homeowners with mortgages underwater at the end of the first quarter, up from 27 percent in the fourth quarter of 2010. A homeowner is in negative equity when they owe more on their mortgage than their home is worth....With substantial home value declines, as well as increasing negative equity and foreclosures, Zillow forecasts show it is unlikely that home values will reach a bottom in 2011. First quarter data has prompted Zillow to revise its forecast, now predicting a bottom in 2012, at the earliest.The following table from Zillow shows negative equity percentages for the 25 largests MSAs. In a number of MSAs, more than half of single-family homes with mortgages have negative equity: Phoneix, Tampa, Atlanta, Riverside (CA), and Sacramento. Chicago, Minneapolis and Miami are all close. Las Vegas isn't included on this list, but according to CoreLogic, Nevada has the highest percentage of homes with negative equity.

Falling Home Prices More Than Erase $8,000 Tax Credit for Many Buyers - If you missed out on the $8,000 tax credit for first-time homebuyers that expired just over a year ago, you might be better off for it. Numbers released Monday suggest typical recipients have lost twice as much to falling house prices as they gained from the incentive. The Zillow Home Value Index fell to $170,000 in March, down $15,000 from a year earlier and down $20,000 from two years earlier, according to Zillow.com. The index represents the midpoint of valuation estimates for U.S. single-family homes, including co-ops and condos. The tax credit program offered up to $8,000 to first-time home buyers and, in a later expanded version, up to $6,500 for existing homeowners who bought again. It ran from January 2009 through April 2010, with the closing deadline eventually pushed to September.A 2008 predecessor program might have been an even worse deal, offering up to $7,500 to first-time buyers as a no-interest, 15-year loan. The typical home has lost $48,000 in value since March 2008, according to the Zillow index.

Home Sellers Become Lenders to Poor-Credit Buyers - Financing provided by home sellers, popular in the 1980s when mortgage rates reached 18 percent, is making a comeback in markets such as Michigan that have been hit hard by foreclosures and where tightening lending standards and years of economic distress have drained the pool of creditworthy buyers. For a small but growing number of people, it’s the only way to get a deal done.  “This is the American dream, and we’re going for it no matter what,” said Sue Reed, 56, who sells snacks from a trailer at estate auctions and going-out-of-business sales. “We’ll either make it or it will break us.”  Michigan, where unemployment is 10.3 percent, leads the nation with about 1,600 home listings advertising seller financing, according to Trulia Inc., a San Francisco-based real estate information company. It is followed by Florida, Ohio, California, Wisconsin, Minnesota and Texas.

Why are Adjustable Rate Mortgages So Rare? - NY Fed Liberty Street - The fraction of mortgage borrowers who choose an adjustable-rate loan has fallen significantly over the past five years or so. Although the fraction edged up slightly in 2010, it remains close to historic lows, with less than 10 percent of mortgage originations since 2009 featuring an adjustable interest rate. What explains the striking decline? And what are its implications for borrowers and policymakers?    U.S. mortgage borrowers face a host of important but difficult financial decisions, including not only how much to borrow and which lender to use, but also what type of mortgage best suits their needs. The low current share of adjustable-rate mortgages is documented in the chart below, which plots the ARM share using information from two large mortgage datasets. For data reasons, the chart focuses on purchase-only mortgages (those used to finance a new home purchase), although the trends are similar for refinancings as well.

How All-Cash Buyers Are Preventing The Collapse Of The Housing Market: "I’ve asserted in previous writings that buyers paying all-cash for properties have been keeping some of the worst bubble markets from collapsing. Inside Mortgage Finance, which surveys roughly 3,000 brokers each month and issues a monthly report, revealed at the end of March that a record 33.7% of property purchases nationwide were all-cash. The National Association of Realtors (NAR) conducts an Investment and Vacation Home Buyers Survey annually. The latest survey covering 2010 found that a record 59% of investors paid all-cash for their property. That figure was only 32% in 2006 and a mere 17% in 2004 according to previous NAR surveys. For Broward County on the Florida east coast, the Southeast Florida MLS reported that a record 69% of all February property sales were all-cash purchases. Zillow.com revealed at the end of February that 54% of all sales in the three south Florida counties of Dade, Broward, and Palm Beach were purchased with cash in the fourth quarter of 2010. In California, 30% of all 2010 sales were cash purchases. According to the highly-regarded California blog, drhousingbubble.com, the average in that state over the last 10 years was a mere 12.9%. Take a look at this amazing chart showing cash sales in Phoenix.

Just how out of line are house prices? -- Atlanta Fed's macroblog - In Wednesday's post, I referenced commentary from several bloggers regarding the sizeable decline in housing prices reported by Zillow earlier this week. As I discussed yesterday, the rat-through-the-snake process of working down existing and prospective distressed properties is likely far from over, and how that process plays out will no doubt have an impact on how much prices will ultimately adjust.  Recently, Barry Ritholtz's The Big Picture blog featured an update of a New York Times chart that suggests there will be a significant adjustment going forward:  Prior to the crisis, I was persistently advised that the better way to think about the "right" home price is to focus on price-rent ratios, because rents reflect the fundamental flow of implicit or explicit income generated by a housing asset. In retrospect that advice looks pretty good, so I am inclined to think in those terms today. A simple back-of-the envelope calculation for this ratio—essentially comparing the path of the S&P/Case-Shiller composite price index for 20 metropolitan regions to the time path of the rent of primary residences in the consumer price index—tells a somewhat different story than the New York Times chart used in the aforementioned Ritholtz blog post:

Foreclosures crush home prices -- Home prices continued to plummet during the first three months of 2011, falling 4.6% from a year earlier. The U.S. median price, according to the National Association of Realtors (NAR), dropped to $158,700 for a single family house. Condo prices fell even harder -- 10.4% to $152,900. The median home price has now slumped 30% from its 2006 high of $227,100, and prices have fallen nearly 7% so far this year. "We're seeing prices dropping faster than they did in 2010," said Pat Newport, an analyst with IHS Global Insight. "That's troubling. Falling home prices precipitated the recession and are slowing the recovery1." NAR blamed much of the latest price drop on sales of foreclosed properties. These "distressed" property sales accounted for 39% of the market, up from 36% from a year earlier. Distressed properties, often in poor condition and are priced to move, sell for about 20% less than conventional home sales.

Delays push foreclosures to 40-month low in April - More than 219,200 properties received a foreclosure filing in April, a 9% drop from March and the lowest level seen in 40 months, according to RealtyTrac.Filings – default notices, scheduled auctions, or repossessions – were actually 34% lower than one year ago. It's the seventh straight month of yearly declines. Last fall, servicers came under investigation for faulty foreclosure practices and held up the process to make corrections and improvements. RealtyTrac CEO James Saccacio said these "massive delays" in the process continue to bring down filings, not a housing recovery."The first delay occurs between delinquency and foreclosure, when lenders and servicers are no longer automatically pushing loans that are more than 90 days delinquent into foreclosure but are waiting longer to allow for loan modifications, short sales and possibly other disposition alternatives,” Saccacio continued. According to the Mortgage Bankers Association, roughly 3.7 million properties are in this seriously delinquent stage. "The second delay occurs after foreclosure has started, when lenders are taking much longer than they were just a few years ago to complete the foreclosure process,"

Foreclosure Filings Drop to 40-Month Low as U.S. Lenders Delay Processing - Foreclosure filings in the U.S. fell 34 percent last month from a year earlier as lenders already swamped with seized homes delayed action on thousands of additional delinquent mortgages, RealtyTrac Inc. said.  A total of 219,258 properties received default, auction or repossession notices in April, the fewest in 40 months, the Irvine, California-based data seller said today in a statement. It was the seventh straight month that filings dropped from a year earlier. They were down 9 percent from March. One in 593 U.S. households got a notice.  “Banks already sitting on thousands of properties they can’t sell as quickly and profitably as they’d like aren’t going to be anxious to accelerate foreclosures on tens of thousands more,”  The U.S. housing market faces “enormous challenges,” Three-fourths of U.S. cities had declines in home prices in the first quarter, according to the National Association of Realtors. Distressed properties, which include foreclosures and short sales, accounted for 40 percent of transactions in March, the group said.

Massive Backlog Freezes Foreclosures - “Massive” delays in foreclosure processing brought the number of new foreclosures to a 40-year low in April, extending the average foreclosure timeline to 400 days but reached 900 days in some states. RealtyTrac reported foreclosure filings in April 2011 fell 9 percent from March and decreased 34 percent from April 2010. “Foreclosure activity decreased on an annual basis for the seventh straight month in April, bringing foreclosure activity to a 40-month low,” said James J. Saccacio, chief executive officer of RealtyTrac. “This slowdown continues to be largely the result of massive delays in processing foreclosures rather than the result of a housing recovery that is lifting people out of foreclosure.“The first delay occurs between delinquency and foreclosure, when lenders and services are no longer automatically pushing loans that are more than 90 days delinquent into foreclosure but are waiting longer to allow for loan modifications, short sales and possibly other disposition alternatives,”

No end in sight to foreclosure quagmire -  Four years after a wave of rogue mortgage lending sent the U.S. housing market into the worst collapse since the Great Depression, the devastating flood of resulting foreclosures shows no sign of abating. In some ways, the problem is getting worse.  House prices are falling again, forcing more homeowners “underwater” — owing more than their house is worth. Lenders’ shoddy document practices have brought widespread court challenges, slowing the process and leaving millions of homeowners in limbo. And the foreclosure crisis continues to weigh heavily on the fragile economy.  “Right now, it’s the second-biggest drag on the economy after the surge in oil prices,” said Moody's Analytics chief economist Mark Zandi. Already some 5 million homes have been lost to foreclosure; estimates of future foreclosures range widely. Zandi, who has followed the mortgage mess since the housing market began to crack in 2006, figures foreclosures will strike another three million homes in the next three or four years.

Foreclosures Crush Home Prices -- Home prices continued to plummet during the first three months of 2011, falling 4.6% from a year earlier.  The U.S. median price, according to the National Association of Realtors (NAR), dropped to $158,700 for a single family house. Condo prices fell even harder -- 10.4% to $152,900. The median home price has now slumped 30% from its 2006 high of $227,100, and prices have fallen nearly 7% so far this year. "We're seeing prices dropping faster than they did in 2010," said Pat Newport, an analyst with IHS Global Insight. "That's troubling. Falling home prices precipitated the recession and are slowing the recovery¹." NAR blamed much of the latest price drop on sales of foreclosed properties. These "distressed" property sales accounted for 39% of the market, up from 36% from a year earlier.  Distressed properties, often in poor condition and are priced to move, sell for about 20% less than conventional home sales. Those sales attract speculators, investors and cash buyers² who gravitate toward lower priced homes, said Lawrence Yun, chief economist for NAR

Is Another Housing Crash Coming? - Mark Zandi talks with the New York Times' David Leonhardt about the U.S. housing market's current woes: Q. I’m struck at how much higher the rent ratio still is in many places, relative to its average from 1990 to 2010. It’s about 18 in Washington (relative to a 1990-2010 average of 13), about 17 in Boston (relative to 15) and 15 across all metropolitan areas (relative to 11). Is there any reason to think the ratio should remain higher in the future than it was in the not-too-distant past? Or should we expect the ratio to continue falling in coming years, either through further house-price declines or through rent increases? A: I expect the house-price-to-rent ratio to continue falling at least through the remainder of this year and next. National house prices are set to decline by 5 percent this year, and apartment rents are on track to rise by about 5 percent. I do expect house prices to stabilize in 2012, but rents will continue to rise strongly.

Foreclosures drag Ohio home values down $1.6 billion since 2009 -  Foreclosures in Ohio's three largest cities caused an estimated $1.6 billion loss to home property valuations around those areas since 2009, evidence the state is still feeling the effects of the housing crisis. National People's Action, a national network of community organizations, analyzed foreclosure trends in Cincinnati, Cleveland and Columbus between January 2009 and March 2011. The report released Monday cited a study that found every foreclosure impacts properties within a 500-foot radius and decreases the home value by 0.74%. Using these statistics, the consumer group found the 45,000 foreclosures in these cities since 2009 dragged down home values by a collective $1.6 billion. "Columbus is estimated to have lost some $576 million in declining home values, Cincinnati suffered a $437 million loss in home values, and Cleveland had $628 million in home equity wiped away by foreclosures reported since 2009," the report said.

Bankrupt homeowners shed second mortgages - Stung by the crash of the housing market, some struggling homeowners are using a little known but increasingly popular provision of the bankruptcy code to eliminate second mortgages and avoid foreclosure. Shulman, co-founder of the National Association of Consumer Bankruptcy Attorneys, said he has helped a number of clients who have filed for personal bankruptcy use the law to hold on to their houses -- including three last week.  Bankruptcy laws prevent homeowners from eliminating the debt of a first mortgage if they plan to stay in their home. But second mortgages are treated differently. They can be declared unsecured debt when there is no equity to cover them, as is the case for millions of houses that are now worth far less than a few years ago.

McMansions dead at last? The kind of houses we’ll build in the future - The U.S. housing market is going through an adjustment of historic proportions. Before 2006, when the housing slump commenced, American home builders regularly built as many as 2 million new houses annually, rarely less than a million. This amount was needed to keep up with new household formation, immigration, homeowners moving up, and replacement due to obsolescence. Since then the number of new houses built has dropped drastically—the seasonally adjusted annual figure announced by the federal government in February 2011 was about 400,000! What's going on?  The recession, obviously. High unemployment and unease about the economy have made potential first-time homebuyers leery of entering the market, and many have decided to wait on the side lines. Although house prices have fallen, few are convinced that they have bottomed, and no one wants to buy a house and see its price decline. The large number of foreclosed (or about to be foreclosed) houses on the market, which account for no less than four out of 10 sales of existing homes, likewise dampens demand for new houses. And those willing to take the plunge discover that, despite low interest rates, lenders who were burned by the subprime mess now require large down payments.

Florida Legislature Votes to Ease Rules on Development -  Just before the Republican-led Florida Legislature finished up its session for the year, it gave developers a parting gift: It pushed through measures that would reverse 25 years of growth management law by loosening state oversight of builders and making it harder for people to challenge development.  Republican leaders hailed the measures as a step toward modernizing Florida’s growth management rules and reducing duplicative bureaucratic regulations.  Lawmakers also provided $30 million in tax breaks to 15,000 businesses, limited lawsuits against businesses, paved the way for prison privatization and reduced unemployment compensation. But environmentalists and Senate Democrats called the legislation approved last week a throwback to the 1970s and early ’80s, when tracts of land in Florida were gobbled up by developers who put up strip shopping malls, houses and office buildings with no concern for local communities. Developers also encroached on sensitive land, including Everglades National Park.

Merits of Buying vs. Renting a Home - Real estate agents across the country are aggressively making the case that now is a good time to buy a house. Mortgage rates are near record lows and will probably rise in coming years. Home prices may not be done falling, but they probably don’t have much further to go in most places either. Rents, on the other hand, seem set to increase, thanks to low vacancy rates.  Real estate agents, like mortgage brokers and home builders, have a big financial stake in persuading people to buy homes. That’s why many agents are always pushing home buying, whatever the rationale of the moment happens to be.  The truth is that you can make just as strong a case in many places for renting. I’ve made a near-annual habit in this column of looking at the rent-versus-buy decision, and The Times has built an online calculator so that readers can make their own comparisons. The idea isn’t only to help potential buyers but also to figure out whether and where house prices are overvalued. That question is of obvious importance to homeowners and to the American economy.

NY Fed Q1 Report on Household Debt and Credit - From the NY Fed: New York Fed's Quarterly Report on Household Debt and Credit Shows Signs of Healing in Consumer Credit Markets Since Last Quarter  The Federal Reserve Bank of New York released the Quarterly Household Debt and Credit Report for the first quarter of 2011 today, which showed signs of healing in the consumer credit markets. Evidence of improvement includes:
• an increase in credit limits, by about $30 billion or 1%, for the first time since the third quarter of 2008;
• a steady number of open mortgage accounts, following a period of decline beginning in early 2008;
• continued decline of new foreclosures and new bankruptcies, down 17.7% and 13.3% respectively in the last quarter;
• a 15% decline of total delinquent balances, compared to a year ago; and
• a broad flattening of overall consumer debt balances outstanding.

Consumer Credit Making Progress, NY Fed Report Shows - U.S. consumer credit markets made more progress down the road to recovery, according to a report released Monday by the Federal Reserve Bank of New York. The New York Fed’s “Quarterly Household Debt and Credit Report” shows improvement in some measure of credit. The report shows credit limits increased for the first time since the third quarter of 2008, rising $30 billion or about 1%. Other positive trends included: New foreclosures and bankruptcies declined last quarter, and the total amount of delinquent balances dropped 15% from year-ago levels. “We are beginning to see signs of credit markets healing gradually and evidence of greater willingness of consumers to borrow and banks to lend,” said Andrew Haughwout, vice president and New York Fed research economist. “We will continue to closely monitor these trends and see if they are sustained in coming quarters.”

It's Not A Banking Problem - Krugman - I’ll need to write more about this, but I thought I should put this up for now: one theme you still find running through many policy discussions, especially about things like taking action on foreclosures, is the constant warning that you mustn’t be mean to the banks — because things are fragile, you know, and we don’t want another financial crisis. So I thought it might be worth pointing out that this long ago ceased being a banking problem. The St. Louis Fed has an indicator of financial stress (it’s the first principal component of a vector of different financial measures; aren’t you sorry you asked?). It looks like this: You can clearly see the oh-God-we’re-gonna-die period following Lehman’s fall; you can also see that it’s over, and stress is more or less back to normal. So what’s holding back the recovery? Housing and household debt.

Representatives ask for review of rule limiting credit for stay-at-home spouses - Just in time for Mother's Day, four influential U.S. representatives are urging the Federal Reserve Board to take another look at a rule that financial advisers and retailers say will prevent many applicants -- particularly stay-at-home moms -- from qualifying for new credit cards.  At issue is a rule, approved by the Federal Reserve in March, that orders credit card companies to consider only an individual's own salary or other income when assessing the creditworthiness of anyone who applies for a credit card under his or her own name. No longer can household income -- the combined resources of a married or other couple living together -- be considered.  That could prove prejudicial -- and harmful -- to stay-at-home spouses, the four representatives said in a letter sent Friday to Federal Reserve Chairman Ben Bernanke. The group, which included three Democrats and one Republican, asked Bernanke to commission a six-month study of the issue.

How did debt and credit become the 'American way'? - For many participants, the disconnect between what consumers say they should do and what they actually do begins in young adulthood. "When their parents did talk about credit/debt, it was to counsel them to use credit only in emergencies," the authors write. "In contrast, these study participants viewed debt as acceptable and necessary for middle class Americans who 'have to' buy a house, furnishings, a college education, and a car—items most cannot afford without credit."Participants recognized the value of a good credit history and understood that they needed to use credit to build one. "The only one who had avoided credit in an attempt to live within her means found it impossible to be a 'normal consumer' without it, recalling that she had been denied a cell phone and had difficulty when traveling because she did not have a credit card," the authors write.

Retail Sales increased 0.5% in April  - On a monthly basis, retail sales increased 0.5% from March to April (seasonally adjusted, after revisions), and sales were up 7.6% from April 2010.  This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).Retail sales are up 17.0% from the bottom, and now 2.9% above the pre-recession peak.  The second graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993.Retail sales ex-gasoline increased by 5.9% on a YoY basis (7.6% for all retail sales).  Here is the Census Bureau report:

Sticky prices, leverage, and Pascal's wager - A while back I had a post that described the price of extinguishing old debt as “the stickiest price”. After a wonderful comment exchange with Nick Rowe and others, we came, I think, to some agreement that sticky nominal debt contracts were both like and unlike sticky goods prices in important ways. However, I’ve recently come to think that, besides the direct but distinct distortions associated with rigid nominal debt, indebtedness might be an important source of downward stickiness in the prices of goods and services. The argument is a form of Pascal’s wager. Suppose that I own a firm which generally operates at capacity. The firm is leveraged in the expectation of achieving a certain level of nominal income, out of which my debt will be serviced. Should I fail to service my debt, I will face outcomes that are very dire. Perhaps my firm will be out of business, perhaps I will have to surrender the firm to creditors. Perhaps I’ll manage to squeak by after a very radical downsizing that allows me to service my debts but destroys the long-term value of the firm. Suppose there is a shock to nominal demand, and people become less willing to part with money. I have two choices. I can cut prices to maintain my expected volume of sales, or I can leave prices alone.

Cost of U.S. Imported Goods Rose More Than Forecast in April - Prices of goods imported into the U.S. rose more than forecast in April, driven by gains in fuel and food that may put pressure on some companies to raise prices. The 2.2 percent increase in the import-price index followed a revised 2.6 percent gain in March, Labor Department figures showed today in Washington. Compared with a year earlier, import prices increased 11 percent, exceeding the 10 percent increase projected by economists surveyed and the biggest 12-month gain in a year. The cost of imported petroleum increased 7.2 percent from the prior month and was up 37 percent from a year earlier. Excluding all fuels, import prices climbed 4.3 percent from April 2010, matching the prior month’s 12-month increase as the biggest since October 2008.Imported food was 1.8 percent costlier last month and was up 20 percent from a year earlier, the biggest 12-month increase since records began in 1977.

U.S. import prices climb 2.2% in April - U.S. import prices climbed 2.2% in April, the Labor Department said Tuesday, marking the first time prices have climbed over 2% in consecutive months since June 2008.  The April advance follows the 2.7% jump in March and was stronger than the 1.6% gain that economists polled by MarketWatch had anticipated. Prices of imports are up 11.1% compared to April 2010.  Imported fuel, accounting for 80% of the April 2011 gain, shot up 6.7% on the month.  But excluding fuel, import prices also are up, rising 0.6% on the month and 4.3% over 12 months. Industrial supplies and materials accounted for most of that gain, the Labor Department said.  “We see the import price data as a clear and present danger on the inflation front — although it is a perspective that has not been shared by Federal Reserve Chairman Ben Bernanke,” said analysts at RDQ Economics. Bernanke has often said he expects the commodity price impact on inflation to be “transitory.”

U.S. trade deficit hits 9-month high in March - The U.S. trade deficit widened sharply in March to the highest level in nine months despite a new record high for exports of goods and services, government data showed Wednesday.  The trade deficit — that is, the difference between exports and imports — widened to $48.2 billion for the month from a downwardly revised $45.4 billion in February, originally reported as $45.8 billion.  Imports of goods and services rose by 4.9% to a seasonally adjusted $220.8 billion during March, while exports rose 4.6% to $172.7 billion, the Commerce Department estimated. This was the biggest one-month jump in exports since March 1994. The 6% increase in the deficit was larger than expected. Analysts surveyed by MarketWatch had expected the deficit to widen to $47.0 billion.

Trade Deficit in U.S. Widened in March on Oil Imports - The U.S. trade deficit widened more than forecast in March as the highest oil prices in more than two years boosted imports, eclipsing record exports.  The trade gap rose 6 percent to $48.2 billion, the biggest since June, from $45.4 billion in February, the Commerce Department reported today in Washington. The median forecast of 72 economists surveyed by Bloomberg News projected it would widen to $47 billion. Sales abroad climbed by the most in 17 years.  Crude oil costs that surged above $100 a barrel for the first time in more than a year and a 9.4 percent drop in the dollar will probably keep driving up the cost of imports. At the same time, the weaker currency is making American goods more competitive to customers in emerging markets from Argentina to China, benefiting manufacturers like United Technologies Corp. (UTX) and Caterpillar Inc. (CAT)

LA Port Traffic in April: Imports increase, Exports decrease - The first graph shows the rolling 12 month average of loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for April. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, this graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic is up 16% and outbound up 8%. The 2nd graph is the monthly data (with strong seasonal pattern).  For the month of April, loaded inbound traffic was up 7% compared to April 2010, and loaded outbound traffic was up 8% compared to April 2010. Even with the decline in April, exports are near the pre-recession peak. This suggests the trade deficit with China (and other Asians countries) probably increased in April.

To restore jobs, U.S. has to ramp up exports - For 20 years, America's exports have been surpassed by its imports, with a big bite of that trade deficit composed of oil imports. Addressing the imbalance could have a huge effect on the job market, but only if it goes beyond reducing imports. We need to actively strengthen exports as well.Even if the economic recovery continues, as is likely, joblessness will remain a colossal disaster. The unemployment rate is hovering at about 9%, and for some groups it is far higher. Nearly 16% of African Americans are unemployed, with young people and Latinos not far behind. The United States is about 19 million jobs behind the curve if employment is to return to its pre-recession levels. Among the world's most developed nations, the G-7, we have the highest unemployment. Here at the Levy Economics Institute, even in our best-case growth scenario, we see unemployment dropping only to about 7% — way above healthy levels — by 2015. We're not alone in that pessimism: The figures vary, but the prevailing outlook, including from the Federal Reserve, is that job-seekers face years of pain.

Rising Food and Gas Costs Push Up Consumer Prices -  Consumers paid more for gas and food in April, lifting inflation to its highest level in two and a half years. But inflationary pressures have begun to ease this month, and analysts say some prices could taper off by summer. The Consumer Price Index increased 0.4 percent in April, the Labor Department said. In the past 12 months, prices have risen 3.2 percent. That's the biggest year-over-year gain since November 2007 through October 2008.  Excluding volatile food and energy, which account for about 20 percent of the CPI, the index increased 0.2 percent in April and has risen 1.3 percent over the past 12 months. That's still below the level the Federal Reserve considers a healthy pace of inflation.

April CPI At 0.4%, In Line With Expectations, Core Up 0.2%, Gasoline Accounts For Half Of Price Increase - April consumer inflation rose 0.4% in April, in line with expectations, and 3.2% year over year. This is a modest drop in the monthly increase from 0.5% in March, while the Y/Y number was an increase from 2.7% to 3.2%. The energy index posted another increase in April as the gasoline index continued to rise, the latter accounting for almost half of the seasonally adjusted all items increase. For those who eat in addition to use energy, the BLS had this to say: "The food index increased as well in April, though the 0.5 percent rise in the food at home index was the smallest increase this year." Still: "Within the food at home component, the indexes for meats, poultry, fish, and eggs, for dairy and related products, and for nonalcoholic beverages all posted notable increases, though the fresh vegetables index did decline following recent advances." Core CPI rose for 0.2%: the third such increase in 4 months. Overall, CPI continues to be far less than indicated by the MIT BPP.

Goods Prices Increase, as Services Costs Lag - A few months ago, the Journal pointed out the rising disconnect between goods prices in the U.S. and services prices. Goods prices face upward pressure because goods tend to be globally traded and are getting pushed higher in part by demand abroad. Meanwhile, service prices, which are less subject to the whims of demand from abroad, are being held back because there’s so much slack in the domestic economy. In other words, despite public hysteria from some quarters in recent months about hyperinflation hitting the U.S. economy and on the other hand about deflation risks, the truth is that consumer prices are being pulled in two directions at once. The trend has only intensified. Here are some data and charts — based on today’s consumer price index report released by the Labor Department — that bear out this point. The data are all year-on-year percent changes through April. Overall, goods prices were up 5.7% from a year earlier in April, thanks in part to rising gasoline prices. Services prices, meanwhile, were up just 1.5%. They appear to be rising, but at a glacial pace, and in some sectors they still are slowing down.

No Surprise: Gasoline prices expected to fall sharply - A brief comment: If oil prices stay at the current level, gasoline prices will probably fall 30 cents per gallon or more over the next few weeks. This AP article says some analysts expect a "drop of nearly 50 cents" by June.  I'll be checking GasBuddy.com. They are already showing a 2 cent decline since yesterday in my area (not much, but a start). Since I've felt that oil and gasoline prices are the biggest downside risk to the economy, this is welcome news.  The preliminary Reuter's/University of Michigan's Consumer sentiment index for May will be released next Friday and that is too soon to see the impact of falling gasoline prices. Professor Hamilton has been discussing the impact of oil prices on the economy: Will high oil prices bring a new recession?. Hamilton noted: "[O]nce energy expenditures get above 6% of average consumer spending, we start to see significant changes in spending patterns. We crossed that threshold in March ..."

Gas Prices: Get Comfy with $5, not $3 - Gas prices still haven't reached the ominous $4 a gallon expected in the weekly gas price report out yesterday. In fact, the painful rise in gas prices seems to be slowing (from $3.963 last week to $3.965 today). But if gas prices do start to drop, don't get too comfortable. As noted in last week's blog, at $4 a barrel consumers tend to recoil, which can send gas prices down in the short-term as demand for gas and other stuff subsides and economic activity weakens. But that kind of “demand destruction” won't last long. Even Goldman Sachs, which predicted last week's oil price drop back in April, predicts that by next year oil prices will upstage their recent highs. Why? First off, the weakening dollar makes the price of all commodities more expensive. The dollar has fallen more than 6% this year amid worries about the U.S.'s precarious fiscal position and the Federal Reserve's lax monetary policy. And a weaker dollar is good for U.S. exports and rebalancing, so don't expect President Obama or the Fed to launch the kind of currency PR campaign coming out of Europe.

Americans Turn to Credit to Deal With High Oil Prices -- Faced with soaring energy bills, businesses and consumers have had to develop coping mechanisms. The strategies seem to be helping the U.S. economy weather this headwind. For shoppers, the approach is twofold: spend less on other items and rely more on credit. On the surface, shoppers are spending freely. Retail sales increased a healthy 0.5% in April, on top of a 0.9% jump in March. But more than half of the two-month gain, 56%, was accounted for by increased sales at gas stations, although that sector is only 11% of total retail sales. The rise reflects the 50-cent jump in gasoline from end-February until end-April. Excluding gasoline, store receipts increased 0.5% in March and 0.2% in April.Consumers may also be dealing with sticker shock at the pump by pulling out their credit cards. According to the National Association of Convenience Stores, its members are seeing more gasoline bought on credit. (In the U.S., about 80% of fuel is bought at convenience stores.)

How higher gas price affect consumer behavior - A dollar is a dollar is a dollar, so goes the economic theory of fungibility. But do people really act that way? In a new working paper, Brown University economist Justine Hastings and Jesse Shapiro of Chicago Booth School of Business find striking evidence that basic consumer choice behavior violates this bedrock theory. "Fungibility is an important assumption in many economic models, but we have a lot of laboratory evidence suggesting that people don't, in fact, treat a dollar as a dollar," said Hastings, associate professor of economics. "People instead try to manage their budgets based on rules of thumb, which is a divide-and-conquer strategy." Otherwise known as "mental accounting," that strategy means households often budget things like rent money, gas money, and grocery money separately. While a significant body of laboratory and experimental evidence shows that households maintain mental budgets, Hastings says that until now, it's been tough for economists to demonstrate this model of consumer behavior in the real world.

Guest Post: Exxon CEO Admits that Oil Should Be $60-70 Dollars a Barrel Based on Supply and Demand - Under probing questioning by Senator Cantwell, Exxon Mobil CEO Rex W. Tillerson admitted that oil should be $60-70 dollars a barrel based on supply and demand: Some of the increase in price above this “supply and demand” level price is due to companies using futures contracts to lock in oil prices to ensure certainty (which is a valid business purpose).  Some of it is due to speculation. Indeed, using high frequency trading, it is relatively easy to manipulate the price of oil.

Why do voters care most about the prices politicians can’t change? - There is virtually nothing that American politicians can do to change the price of oil. Mitt Romney talks about the need to keep “supply” in line with demand, but he neglects to mention that the relevant quantities are world supply and world demand, and that the US has nowhere near enough oil to make a dent in world supply. With energy prices, on the other hand, there’s an element of politicians creating their own reality. Since energy encounters price spikes so frequently, it’s an obvious target for popular anger, and thus an easy target for political pandering. Even if there’s absolutely nothing they can do on the issue, politicians are forced to say something about it. And since politicians talk about energy prices so much — and those prices become perceived as a legitimate topic of political debate — voters assume that government must be able to have some impact. Meanwhile, hardly anyone in the US — save for Alaskans and investors piling into Exxon Mobil stock — benefits from high energy prices. It’s hard to imagine anything less politically risky than complaining about the price of gas.

Businesses Pass Along The Price Of Fuel - Businesses of all sorts — from shippers to dry cleaners — are tacking on or raising surcharges to offset their high fuel costs, hitting consumers already squeezed between surging gas and food prices, and slow-growing wages.Over the past several weeks, UPS and FedEx, which have longstanding surcharges that track fuel prices, have increased these fees for ground shipping to 8.5 percent from 6.5 percent. At Gentle Giant Moving Co. of Somerville, officials estimate the fuel surcharge, a flat fee charged per truck per day, adds about $32 per day to the average move.Peapod, Stop & Shop’s grocery delivery service, institutes a 28 cent surcharge for fuel whenever gas rises above $2.75 a gallon, and then increases it by 10 cents for each subsequent 10 cent increase in gas prices. The surcharge, added to delivery fees, is approaching $1.50 locally.

Gas Prices Increase Amtrak Ridership - Amtrak ridership increased in April to be the best April on record and extends the national passenger railroad's streak to 18 consecutive months of year-over-year ridership growth.  Ridership for April 2011 was nearly 2.7 million passengers, which represents an increase of 9.9 percent over April 2010 and keeps America's Railroad on track to set a new annual ridership record.  The strong performance is part of a long-term trend that has seen Amtrak set annual ridership records in seven of the last eight fiscal years, including more than 28.7 million passengers in FY 2010.  Strong Easter Sunday travels in April and high gasoline prices contributed to the continuing success of Amtrak.

Freight Transport Rose to Multi-Year Highs in March - Freight shipments rose in March to their highest level in nearly three years, the U.S. Department of Transportation said Wednesday. The amount of freight carried increased by 1.9% over February, pushing the agency’s freight transport service index, or TSI, to a 33-month high. The increase illustrates an improving economy as more goods are shipped throughout the country. The agency measures freight movement for-hire freight transport via trucking, rail, inland waterways pipelines and air freight. It measures the month-to-month changes in freight shipments in ton-miles, which are then combined into one index. Whether the activity continues into April’s statistics is in doubt, however. The Association of American Railroads reported rail carloads decreased by 0.2% year over year in April, the first drop in 14 months.

AAR: Rail Traffic "mixed" in April - The Association of American Railroads (AAR) reports carload traffic in April 2011 decreased 0.2 percent compared with the same month last year, and intermodal traffic (using intermodal or shipping containers) increased 9 percent compared with April 2010.This graph shows U.S. average weekly rail carloads (NSA).  From AAR: On a seasonally adjusted basis, total U.S. rail carloads fell 2.5% in April 2011 from March 2011, continuing the up-down-up-down trend of the past couple of years. As the chart shows, since the recession ended in mid-2009, the trend for seasonally adjusted U.S. carload traffic has clearly been upward, but over the past six months it’s been flat and over the past four months it’s actually been down a bit. As the first graph shows, rail carload traffic collapsed in November 2008, and now, almost 2 years into the recovery, carload traffic has only recovered about half way. The second graph is for intermodal traffic (using intermodal or shipping containers): The news is much better on the intermodal side. In April 2011, U.S. railroads originated 914,518 intermodal trailers and containers, up 9.0% (75,706 units) over April 2010 and up 24.6% (180,417 units) over April 2009. April 2011’s weekly average was 228,630 units, up from 209,703 in April 2010 and the second highest average for any April in history (behind only April 2006).

The economics of political spin on gas prices - Sometimes I wish the "laws" of demand and supply were real laws and economists had the authority to punish politicians who violate them. The ideal punishment would be increasing levels of "time out" (one hour, one day, one week, one month, one year, ...) during which the politician was not allowed to talk (Democrats see ...): Senate Democrats say they will move forward this week with a plan that would eliminate tax breaks for big oil companies and divert the savings to offset the deficit. With high gas prices and rising federal deficits in the political spotlight, senior Democrats believe that tying the two together will put pressure on Senate Republicans to support the measure or face a difficult time explaining their opposition to voters whose family budgets are being strained by fuel prices. ... Increasing taxes on oil companies will not lower gas prices, so Democrats are hoping that voters see it as unfair that oil companies are making so much money and receiving tax breaks (economists don't have much to say about equity arguments -- there is no economic theory to explain differences in your "fairness" and my "fairness"). Oil companies are saying that they pay more in gas taxes than they recieve in profit per unit (an argument that has holes).

Used Car Prices Hit Record High In April - Prices for used cars hit a record high in April and are expected to climb even higher. It seems car production cutbacks in this recession are making used vehicles a hot commodity.  "Today, I'm noticing the prices indeed are a little bit more than I expected,"   Since January, the Kelly Blue Book says the average trade-in value for a mid-size car rose nearly $2,000.  "I was expecting to spend between $9,000 and $11,000, and I'm finding between $16,000 and $17,000 for the cars I'm looking for," High gas prices are slowing down the market for new cars. Owners are hanging on to their old ones, so fewer trade-ins are making it to these used car lots.

Small-Business Pessimism Deepens - Small-business owner pessimism worsened in April for a second consecutive month, even though current sales performance was the best in 40 months, according to data released Tuesday. The National Federation of Independent Business‘s small-business optimism index dropped 0.7 point to 91.2 in April. That followed a 2.6-point decline to 91.9 in March. The NFIB called the April index “a disappointing outcome following the March decline.”The report said the weak economy and political uncertainty were dimming the outlook. The drags mentioned by NFIB members included the government deficit, a potential inflation threat, and rising gas prices. The subindex of expected business conditions in the next six months fell 3 percentage points to -8%, and the expected higher real sales index slipped 1 point to 5%. Even so, there was improvement in the recent pattern of earnings. The earnings trend subindex rose 6 points to -26% in April. One reason for the increase was the rise in the share of small-business owners lifting their selling prices.

USPS posts $2.2 bln loss, warns of Sept insolvency (Reuters) - The U.S. Postal Service posted a $2.2 billion net loss in its second quarter and said it might be unable to pay its debts by September. The agency, which has been battling falling mail volumes and competition from FedEx and United Parcel Service said it expects to hit its borrowing limit by the Sept. 30 end of the fiscal year, and will have to default on payments to the federal government unless Congress intervenes."The Postal Service continues to seek changes in the law to enable a more flexible and sustainable business model," said Chief Executive Patrick Donahoe in a statement. The Postal Service -- which posted a net loss of $8.5 billion at the end of fiscal 2010, its fourth straight year of losses -- has asked Congress for permission to cut Saturday mail delivery. The agency lost a bid last summer to raise rates on first-class mail beyond the pace of inflation. The mail carrier, which delivers about 40 percent of the world's mail and does not receive tax revenue, announced in March that it would eliminate 7,500 jobs and close 2,000 post offices in an attempt to cut costs.

Construction Employment Update  - By request, here is an update to a graph I posted over a year ago on construction employment. Last year the outlook for construction employment was grim. This year will be a little better - but not much.  This graph shows the number of construction payroll jobs (blue line), and the number of construction jobs as a percent of total non-farm payroll jobs (red line). Construction employment is down 2.2 million jobs from the peak in April 2006, but up 26 thousand jobs so far this year. Unfortunately this graph is a combination of both residential and non-residential construction employment. The BLS only started breaking out residential construction employment fairly recently (residential building employees in 1985, and residential specialty trade contractors in 2001). Usually residential investment (and residential construction) lead the economy out of recession, and non-residential construction usually lags the economy. This table below shows the annual change in construction jobs (total, residential and non-residential).

Employment report sends mixed signals on job outlook - Last week's report of better-than-expected employment gains in April raised hopes that U.S. job growth that has sputtered since the recession ended almost two years ago is finally picking up momentum. But some economists see flashing yellow lights in the numbers that could signal at least a temporary lull the next few months. Employers added 244,000 jobs in April, driven by the largest private-sector gains since 2006, according to the survey of businesses and government agencies. Private employers have added an average 253,000 jobs the past three months. But the government's report contained some worrisome signs. Its survey of households showed that 190,000 fewer Americans were working in April than the previous month and the unemployment rate rose to 9% from 8.8% in March. "At best, this is a self-contradictory report," .

Digging Still Deeper In Friday's Jobs Report; What's the Real Unemployment Rate? - Every month the government posts the unemployment rate yet few know where the unemployment rate comes from, how it is determined, and the relationship between the unemployment rate and the monthly reported jobs total. For a quick recap, the unemployment rate comes from a "Household Survey" while the reported headline jobs total comes from the "Establishment Survey". The former is a monthly phone survey, the latter is a sample of actual business employment. The reason for the "Household Survey" is that it will pick up new business formation, especially small businesses that might not be on the radar of the "Establishment Survey" sample. Even if the "Establishment Survey" sample size was 100%, unless duplicate names were weeded out, it would double-count those holding multiple jobs. The "Household Survey" attempts to determine five key items.

1. Do you have a job?
2. Is so was it full or part-time?
3. If not, do you want a job?
4. If you do not have a job and want a job, did you look for a job in the last 4 weeks?
5. Are you in school, on leave, etc.

The Real Employment Situation in April 2011 - While members of the Obama administration and mainstream news media are really pounding home the non-farm payroll portion of the April 2011 U.S. employment situation report, which saw the number of these jobs rise by 244,000, if you look closer at the seasonally-adjusted household survey portion of the report, you’ll find that 190,000 fewer Americans were counted as having jobs in April 2011 than had jobs in March 2011.  This is also the portion of the report where the unemployment rate is calculated, which is the major reason why we saw this rate rise from 8.8% to 9.0% in April 2011.  Some other interesting tidbits and observations from the April jobs report and other sources:

Why aren’t the powers that be tackling the jobs crisis?… Washington is the only city in America where housing values are going up. That may help explain why the political class is so divorced from the nation’s agonies. Sure, the entire nation celebrated the dispatch of Osama bin Laden, but when it comes to the economy, the Beltway is a world unto itself. Two years from the official beginning of the “recovery,” America continues to suffer a deep and punishing jobs crisis. One in six Americans of working age is unemployed or underemployed. College students, laden with record levels of debt, are graduating into the worst jobs market since the Great Depression. Long-term unemployment is at unprecedented levels. At current rates of job growth, we won’t return to pre-recession employment levels until 2016. And the jobs that are being created — largely in the service industry — tend to have lower pay and benefits than the jobs that were lost.

The Jobs Numbers and the President’s Job- The economy added 244,000 jobs in April. That should be good news for President Obama and the Democrats. But according to the Economic Policy Institute, at this rate of job growth it would take until the fall of 2016 for unemployment to come back down to where it was before the recession. Among the not-so-great items in the Labor Department's report:

• Fourteen million people are still officially unemployed, and millions more have given up looking for work.
• Counting those out of the labor force or working part time but wanting full time jobs, the total number of unemployed or underemployed was just under 25 million -- not significantly better than at the pit of the recession. The number of people with involuntary part time work actually rose by 167,000 in April.
• Among young workers, 24 or younger, the jobless rate was a sickening 17.6 percent. And among African Americans, 16.1 percent were out of work.
• Despite the growth in employment, the overall percentage of Americans in the labor force did not increase. The workforce is still more than a million people smaller than it was a year ago -- meaning that the economy will need to grow at a much faster rate to soak up the unemployed.
• There still 5.8 million workers who have been jobless for more than six months, still close to an economic record.
• While the private sector added more than a quarter million jobs, the public sector kept laying off workers. State and local government shrank by another 22,000 in April.

Obama to U.S. Companies: ‘Bet on American Workers, Products’ - President Barack Obama said that with the economy recovering, U.S. companies have to step up and start hiring more Americans. They’ve got to start placing their bets on America,” Mr. Obama said of U.S. companies at a town-hall style event sponsored by CBS and aired Thursday morning on CBS’s “The Early Show.” He continued, “Now’s the time for them to start betting on American workers and American products.” Mr. Obama said some U.S. companies are seeing surging profits and benefited from taxpayer assistance during the recession. The government bailed out both the auto and financial sectors will billions of dollars in taxpayer money. While the private sector has added jobs for about a year, the pace hasn’t been enough to return the unemployment rate anywhere close to pre-recession levels. Companies are sitting on some $2 trillion in cash but have yet to unleash it amid uncertainty about the economy’s direction and whether new regulations will hamper business growth.

New Claims for Unemployment Insurance Remain Elevated - Unemployment insurance claims were over 400,000 for the fifth week in a row. There were 434,000 claims last week, and the elevated claims ought to be raising cautionary flags about the labor market recovery. We keep hearing that recovery is just around the corner, and all that is needed is more patience, but recent numbers don't support this optimism. Whenever the data is at odds with the rosy predictions of good days ahead, predictions that take policymakers off the hook, we hear about problems with seasonal adjustment, holidays that distort the numbers, bad weather, etc., etc. -- there's always a reason to ignore the bad numbers and emphasize the good and this week is no exception. But after five months of elevated claims in a row, middling job creation numbers, and an unemployment rate that is far, far too high, it's time to quit looking for rationalizations, face the weakness in labor markets directly, and then take the necessary action.

The Job Delusion: Growth is Just Around the Corner - Mark Thoma - According to the latest employment report, there were 268,000 private sector jobs created in April.  But this is nowhere near the robust job growth we’ve seen in recoveries from previous recessions, and there are worrisome signs that the troubles for labor markets are far from over. For example, a key measure of labor market health, the employment ratio,  fell from 63 percent to 58.5 percent during the recession and it has been stuck near 58.5 percent for more than a year and a half. Some analysts are counseling patience.   I don’t think we can assume that accelerating job growth is just around the corner, and at present rates of job creation we are looking at five years or more until we reach full employment. That is far too long for those who need jobs today.  When unemployment is persistently high, permanent drop-outs from the labor force increase, more people settle for jobs below their capability, get stuck there, and end up permanently underemployed, and lifetime income is, on average, lower. These effects are particularly large for teens, but older workers can also find it difficult to find new employment after losing a job.

Don't Count on Job Growth. Bring Back the WPA! - Our current approach is a combination of denial and wishful thinking (just give it time; the economy will expand; companies will hire). Then we spend money, reluctantly, on making sure those millions unemployed don't starve. Treating unemployment as temporary albeit painful result of the recession, we hardly consider alternatives that might actually make a difference. These benefits currently cost about $100 billion a year by many estimates; those billions do little to create jobs and not much for the morale and confidence of workers. So, if we are going to pay people not to work, why not pay them to work? That was the idea of the New Deal Works Progress Administration and Civilian Conservation Corps.  Those programs didn't jump-start employment, but they did provide work as well as income. They also reversed years of despair that itself was impeding society. The Depression proved stubborn, but these programs changed the tenor and improved urban infrastructure – problems that sorely need attention today.

Where the Jobs Were Lost - Ben Bernanke, the chairman of the Federal Reserve, said recently that people with less-than-average incomes bore the brunt of the recession’s job losses. Census Bureau data confirm Mr. Bernanke’s statement and show employment gains at the high end. For the 12 months ended September 2008 employment in the United States was 146 million. Over the next 12 months, employment fell to 141 million. The Census Bureau conducts a monthly survey of households and asks some of them what household members have been earning, if anything, on their jobs. I have used that data to investigate the types of jobs that were lost during the Great Recession and have classified the jobs by their weekly pay. Chart 1 categorizes people by their weekly earnings –- people earning $1 to $100 a week are in the first group, those earning $101 to $200 a week in the second, and so on. Although the chart’s horizontal axis goes to $2,500, most workers are in the first seven categories.

Unemployed Mother's Day - Single mothers are still more likely to be employed than married mothers, for the obvious reason that they depend more heavily on their own earnings. But it’s harder for them to find jobs, in part because they find it harder to make child-care arrangements. Unemployment rates among single mothers have long surpassed those among married men and women. In 2010, their unemployment rate averaged 14.6 percent, compared with 6.8 percent among married men and 6.3 percent among married mothers. The Institute for Women’s Policy Research emphasizes that women have historically had less access than men to unemployment benefits. Most states restrict eligibility to those who experience involuntary job loss and exclude those who quit for reasons such as loss of child-care assistance or the need to tend to a sick family member. Until recently, most states excluded part-time workers from coverage.Yet unemployment insurance has become an increasingly important source of assistance for single mothers. In a detailed analysis of changes in benefit receipt between 1990 and 2005, researchers at the University of Michigan, found a distinct pattern: After TANF was established in 1996, low-educated single mothers who lost jobs became more likely to receive benefits through unemployment compensation than through “welfare” (means-tested cash assistance).

Loser men -- David Brooks writes:…in 1954, about 96 percent of American men between the ages of 25 and 54 worked. Today that number is around 80 percent. One-fifth of all men in their prime working ages are not getting up and going to work. According to figures from the Organization for Economic Cooperation and Development, the United States has a smaller share of prime age men in the work force than any other G-7 nation. The number of Americans on the permanent disability rolls, meanwhile, has steadily increased. Ten years ago, 5 million Americans collected a federal disability benefit. Now 8.2 million do. That costs taxpayers $115 billion a year, or about $1,500 per household. …There are probably more idle men now than at any time since the Great Depression, and this time the problem is mostly structural, not cyclical. These men will find it hard to attract spouses. Many will pick up habits that have a corrosive cultural influence on those around them. The rise in disability comes across a time horizon when jobs are becoming much safer and health care is improving.

Useless men -  DAVID BROOKS has written a column on the labour market troubles facing American men, and low-skilled men in particular. Apparently, he's been reading (though not citing!) his copy of The Economist. Matt Yglesias reads Mr Brooks and comments: Even when there wasn’t a huge shortfall in aggregate demand, high school dropouts had a very high unemployment rate. That right there is your “structural” unemployment. But then you see this gigantic increase in the unemployment rate for dropouts that precisely coincides with an increase in the unemployment rate for folks with high school diplomas and with an increase in unemployment rate for folks with some college and with an increase in the unemployment rate for people with bachelor’s degrees. That’s right, even folks over the age of 25 with college degrees took the hit at the exact same time. And that is what a shortfall in demand looks like. But Tyler Cowen fires back: [H]is numbers don’t support his case.  As I’ve argued before, it’s a lot “harder” to get a shift from ten to twenty percent unemployment than it is to get a shift from one to two percent. 

BLS: Job Openings increased in March, Highest since 2008 - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in March was 3.1 million, up from 3.0 million in February. This marks the first time since November 2008 that job openings have been at or above 3.0 million for two consecutive months. The job openings level has trended up since the end of the recession in June 2009 (as designated by the National Bureau of Economic Research) but remains well below the 4.4 million openings when the recession began in December 2007. The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Notice that hires (purple) and total separations (red and blue columns stacked) are pretty close each month. When the purple line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

Four Workers for Every Job Opening - The job market still isn’t good, but at least it’s on its way back. There were just 4.3 unemployed workers for every available job in March, the best ratio in over two years, according to a new Labor Department report. When conditions were worst, there were nearly seven workers per opening.  March’s jobless-to-jobs figure was still well below its level before the recession, however. On the other side of the ledger, the raw number of layoffs and discharges continue to be near lows:The moral is that the  source of problems in the job market isn’t that people are still being laid off, but that those laid off during the Great Recession have nowhere to go. And as we’ve noted before, the longer these workers take to find companies that will hire them, the less employable they become.

JOLTS Day - Here is a calculation I am keeping an eye on: Job Openings minus Quits. The idea is that this might capture the aggressiveness with which businesses are looking for workers.  Obviously if you have a lot of quits then even in the same business climate you need new workers. So we take out quits. If this is a meaningful measure it is showing a decently aggressive hiring climate for private industries. All of my charts are for the private sector only.
Another interesting fact that I don’t have a good explanation for is this: Hires less Openings is countercyclical. What these seems to be saying is that number of people who get a job without there being a formal job opening goes up during recessions. Not just the fraction of jobs filled without an opening but the absolute number.

Job Openings Data revisions and Structural Unemployment - I just wrote a short paper titled Dramatic Job Revisions Bust Structural Unemployment Myths.

• - The debate over structural unemployment that has taken place surrounding high levels of job openings and the Beveridge curve in 2010 needs to be reconsidered. Due to a pre-recession calibration of its birth/death model, the Bureau of Labor Statistics dramatically overestimated the number of job openings throughout 2010. It corrected the numbers for 2009 through 2010 in March 2011.
• - On average, there were 172,000 fewer job openings per month in 2009 and 235,000 fewer job opening per month in 2010, reducing the job opening rate by an average of 0.18% over 2010 than had previously been reported.
• - Since April 2010 when concerns about structural unemployment started to enter the debate, the Beveridge curve has almost entirely shifted leftward, with unemployment down roughly 1% and job openings up a meager 0.1%. The Bureau of Labor Statistics reported that the number of job openings spiked in the summer of 2010. While this might normally be a cause for celebration, it actually worried a number of economists and policymakers. If an increase in the number of job openings co-exists with high unemployment, it means firms’ ability to find workers has decreased.

Spilled Beveridge - Paul Krugman - Last year there was a flurry of interest in the apparent fact that there were many more job vacancies than one should have expected given the high level of unemployment — a shift in the so-called Beveridge curve. And this was seized on by a number of people as evidence that much of our current unemployment is structural, that we need to accept a “new normal” of high unemployment rates. See Mike Konczal on this eagerness. Well, Mike is back with a new bulletin. We now know what that shifted Beveridge curve was about: bad data.  The BLS numbers on job openings aren’t raw data, they’re based in part on imputations about new business formation. The imputations have been updated with new information — and guess what, much of the apparent anomaly has disappeared. No, it’s not structural. And we’ll only face a “new normal” of high unemployment if policy makers want it that way.

Higher wages aren’t free, and why environmentalists should be the defenders of efficiency - Anyone arguing that employers in some industry should raise wages should have to sit down with a labor market supply and demand graph and explain what it is they’re asking for. As it is most people calling for so-and-so to raise wages don’t seem to be thinking about labor markets, and instead think of wages as something that you can always just raise without any consequences, for instance losses to workers via unemployment. You can see this in the common refrain that workers would be better off if we had a vastly more unionized economy. Maybe workers would be better off, meaning those that can get jobs would gain. But if you’re going to hold wages above market levels you’re going to decrease employment, so you’ll benefit workers at the expense of those who can’t get a job or who take a lower paying job.

Welcome to the McJobs Recovery -  It shouldn’t be surprising that a million souls flocked to McDonald's hoping for a steady paycheck, when nearly 14 million Americans are out of work and nearly a million more are too discouraged even to look for a job. At this point, it apparently made no difference to them that the fast-food industry pays some of the lowest wages around: on average, $8.89 an hour, or barely half the $15.95 hourly average across all American industries. On an annual basis, the average fast-food worker takes home $20,800, less than half the national average of $43,400. McDonald's appears to pay even worse, at least with its newest hires. In the press release for its national hiring day, the multi-billion-dollar company said it would spend $518 million on the newest round of hires, or $8,354 a head.  Of course, if you read only the headlines, you might think that the jobs picture was improving. The economy added 1.3 million private-sector jobs between February 2010 and January 2011, and the headline unemployment rate edged downward, from 9.8% to 8.8%, between November of last year and March. It inched upward in April, to 9%, but tempering that increase was the news that the economy added 244,000 jobs last month (not including those 62,000 McJobs), beating economists' expectations.

In Response to Professor Thoma and DeLong - Both Professor Thoma and DeLong are concerned about the employment to population ratio (Professor DeLong has a picture of it posted on his blog). I am not sure it is as concerning as they believe. Let me explain why. The employment to population ration is a calculation from the Household survey, which is one of the unemployment reports issued by the BLS every month (the other is the establishment survey). The household survey provides very important data: the civilian non-institutional population, the total unemployment rate, the number of employed and the number of unemployed. The employment to population ratio involves two numbers: the civilian non-institutional population, which comprises the following: Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.Basically, this is everybody who would be eligible to work in some capacity if needed. This number makes up the denominator of the equation. The second is an "employed person,"

Human Capital Can’t Explain The Precipitous Rise In Unemployment Across America - Two things are true. One is that unemployment in the United States is currently very high. The other is that levels of unemployment have a lot to do with educational attainment. This leads David Brooks to a completely wrongheaded inference that education is a primary driver of unemployment: Part of the problem has to do with human capital. More American men lack the emotional and professional skills they would need to contribute. According to data from the Bureau of Labor Statistics, 35 percent of those without a high school diploma are out of the labor force, compared with less than 10 percent of those with a college degree. [...] The result is this: There are probably more idle men now than at any time since the Great Depression, and this time the problem is mostly structural, not cyclical. Jamelle Bouie says Brooks is failing to mention the Great Recession. But I’d say he is mentioning it. He’s just positing that the cause of the Great Recession is either that America’s human capital stock took a sudden negative shock in 2007 or else perhaps that the value of human capital underwent a sudden and rapid increase in 2007. But as Charlie Eisenhood showed long ago this human capital differential existed well before the recession

Fiendishly Clever Foregone Conclusions - This just in from The Economist (thanks to Google alert): "The lump of labour fallacy is seductive, and in times of economic hardship it becomes very difficult to convince people that more competition for scarce jobs will make their lives better." It's "counter-intuitive" innit? The unemployed would be better off if there were more people competing for fewer jobs than if there were fewer people competing for more jobs. I wonder why it is so hard to convince people of such a fiendishly clever foregone conclusion? Stupid people. Maybe it's because it just ain't so? The editors of The Economist magazine must get some kind of product placement bonus for mentioning the lump of labour claim whenever they can. Last month it was a cover story on the idea that postponing pension eligibility until age 70 will make lives better for older folks, as well as for 20-25 year olds for whom there will be more jobs if the old folks don't retire. "A potential barrier to older people staying on in the workforce is the “lump-of-labour fallacy”—the belief that there is only so much work to go around."

The last jobs plans in Washington - This might be the best jobs report we’ve had since Lehman collapsed, but even the best jobs report in years — the other good jobs reports were inflated by temporary census hires — isn’t good enough. We can add 244,000 jobs a month and not get back to pre-recession unemployment until 2016. We remain 7 million jobs below where we were in November of 2007. We have a long, long way to go. And Congress is following the wrong map. As Paul Krugman writes, though the “D.C. economic discourse is saturated with fear: fear of a debt crisis, of runaway inflation, of a disastrous plunge in the dollar,” there is “an absence of any action to deal with the real crisis, the suffering now being experienced by millions of jobless Americans and their families.” But in the past week, there were some signs that might be changing: Senate Republicans released a jobs agenda (pdf), and so too did House Democrats. It’s the first time since the election that the two parties have actually laid out their job-creation ideas. And it’s ... not encouraging. First, note the authors. House Democrats. Senate Republicans. In other words, the two minorities. House Republicans haven’t proposed a jobs agenda, and neither have Senate Democrats, and nor has the Obama administration.

Marshall Auerback: Obama Needs to Get Serious About Jobs -  Yves here. I have no doubt that some readers will give a knee jerk negative response to the idea of aggressive measures to create more jobs, seeing it as undue government intervention in the economy.  But that horse has left the barn and is now in the next county. Like it or not, the economic damage done by the financial crisis was too severe for governments to sit on their hands. So the question is not intervention versus no intervention, but what sort of intervention is most likely to be salutary? That means the benchmark is not doing nothing, but the measures taken thus far, which consist heavily of overt and hidden subsidies to the financial sector. A universal Jobs Guarantee Program could free us from the predations of politicians and foster a strong economy.

Blinder Calls for More Fiscal Stimulus to Boost Jobs - (video)  Former Federal Reserve Vice Chairman Alan Blinder, now a Princeton University economist, talks about the central bank's monetary policy and the need for "somewhat more" fiscal stimulus from Congress in order to boost employment even as it legislates "fiscal consolidation in the future." Blinder speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." David Blanchflower, a professor of economics at Dartmouth College and a former policy maker at the Bank of England, also speaks. (Source: Bloomberg) (/Bloomberg)

The JOBS Act will result in fewer, not more jobs - The ‘‘Jobs, Opportunity, Benefits, and Services Act of 2011’’ (JOBS Act) allows states to divert the federal funds they will receive  to pay for emergency unemployment compensation (EUC) and extended benefits (EB) to other purposes, including paying off the debt many states owe to the federal unemployment trust funds, paying for regular state benefits, paying for reemployment services (e.g., job search assistance and job training), and improving the balance in their own state unemployment insurance trust funds. The Congressional Budget Office (CBO) anticipates that $32 billion will be paid for EUC and EB from July 2011 until May 2012 under current law.  The JOBS Act ends the entitlement to those funds and allocates $31 billion to the states in a new block grant. The JOBS Act essentially allows states to terminate the payment of EUC and EB, potentially eliminating about $40 billion in economic activity, according to CBO estimates, that would result from putting cash in the hands of needy families that will spend it.  The $40 billion in economic activity generated by the EUC and EB programs under current law would create around 322,000 jobs.

“Forward Funding” for Unemployment Insurance? Hardly - House Ways and Means Committee Chairman Dave Camp and Senate Finance Committee Ranking Republican Orrin Hatch have introduced a bill that, they say, would improve the unemployment insurance (UI) system by “forward funding” federal UI payments to states. That sounds good and, in fact, “forward funding” is a worthy goal. But, their bill actually would let states take federal funds that are supposed to help the long-term unemployed and use them for other purposes.  That not only would hurt some of the most vulnerable Americans but also would slow the economic recovery. The Camp-Hatch proposal would ... break a deal the President and Congressional leaders negotiated late last year in which lawmakers extended jobless benefits for one year for the long-term unemployed—those out of work for more than 26 weeks.  That assistance is especially important for the long-term unemployed because states’ unemployment benefits typically end after 26 weeks.— more than 4 in 10 unemployed workers are not able to find jobs within that time.

Multi-Factor Productivity Growth and Unskilled Workers - A while back I said that if high skilled workers were able to capture the gains from their additional skills that this would necessarily lower the Multi-Factor Productivity growth rate in the US. That is, saying that the gains in US income have been captured by the educated elite and saying that multi-factor productivity has slowed down are two different ways of saying the same thing.  I said this from a theoretical perspective on what multi-factor (in theorists’ language “total factor”) productivity is supposed to be. I just got a round to looking up the BLS methodology on the issue.First Technical Information About the BLS Multifactor Productivity MeasureThe hours at work for each of 1,008 types of  workers classified by their educational attainment, work experience and gender are aggregated using an annually chained (Tornqvist) index.  The growth rate of the aggregate is therefore a weighted average of the growth rates of each type of worker where the weight assigned to a type of worker is its share of total labor compensation. 

The low-hanging fruit across the border - Yesterday, President Obama visited America's border with Mexico to remind us all that there are plenty of growth opportunities out there waiting to be plucked. The president is, at long last, renewing his call for immigration reform, including creation of a path to citizenship for the country's undocumented immigrants. It would be nice if he would pair that with a strong call to allow in more foreign workers. Unfortunately, that's a difficult case to make to the American people in the best of times, and these are not the best of economic times. But the case is strong on the merits. Allegations that immigrants are a drain on the Treasury or contribute to increased crime or drag down wages are either wrong or significantly overstated. At a time when America is concerned about excess housing supply and anxious to boost its innovative capacity it is madness that so many willing immigrants, including high-skilled workers, including those educated in America, find it difficult to impossible to gain permission to work in the country on a stable, long-term basis.

Obama's immigration reform plan: He should admit lots of super-immigrants, the highly educated, future entrepreneurs. - We have, Cowen says, no more low-hanging fruit: no more cheap frontier land to farm, no more places to build new interstates, no rural homes to electrify, no more girls to send to school and then add to the workforce. From now on, Cowen says, growth will be slower, and transformative innovations like toilets and telephones will be rarer. But maybe there remains one last shiny, fat apple hanging right in front of our faces, one last endeavor that would bring us fast, costless, and easy growth. It is immigration reform. The United States can grow faster by stealing the rest of the world's smart people.  The low-hanging fruit of immigration is not simply an open-door policy, but rather letting in—or, really, rolling out the red carpet for—highly skilled and educated workers and entrepreneurs. Back in 1999, Berkeley scholar AnnaLee Saxenian published one of the first comprehensive studies of the economic contributions of highly skilled immigrants, such as computer programmers, in California. Her paper found that foreign-born entrepreneurs were at the helm of a full quarter of Silicon Valley start-ups founded between 1980 and 1998—start-ups like, say, Google. In 1998 alone, those companies created $17 billion in sales and accounted for 58,000 jobs.

"We Dare Not Let This Happen" (But Don't Support Doing Anything About It) - Dean Baker is frustrated with a Washington Post editorial telling the public there's nothing we can do about the unemployment problem, a problem it cannot even characterize correctly (see Dean on this point). Me too.The editorial starts by noting that: unemployment remains well above what it should be; the longer this persists, the more we risk a “new normal” of structural unemployment, which is a fancy term for elevated human suffering and snowballing economic waste. We dare not let this happen. The question, though, is how to generate the new jobs. We dare not let that happen! We need to do something! Unless, according to the editorial, fear of what might happen if we try to help the unemployed gets in the way. First, fiscal policy is ruled out as a solution to this urgent problem. As Dean Baker notes, "The Post tells readers that we can't try to create jobs through fiscal stimulus" because bond vigilantes might drive interest rates up. However, the "interest rate on 10-year Treasury notes is now 3.14 percent, much lower than it was in the budget surplus days of the late 90s" even though we've heard these warnings for some time now. Well, if the problem is so urgent, certainly the editorial will support money policy instead? Nope. Here, the worry is inflation. But, as Greg Mankiw notes this morning, he agrees with Paul Krugman that "the price of labor does not show any significant inflationary pressures right now," and hence there is little to worry about in terms of inflation (and other signs of inflation are absent as well).

VSP Economics - Krugman - Dean Baker and Mark Thoma both wax indignant — and rightly — over a WaPo editorial on economic policy, which says that we must act urgently on unemployment, then rules out any action. But let me suggest that this editorial is actually a collector’s item. The WaPo is Very Serious Person central — much more so than the Times — and this article encapsulates the essence of VSP economics, 2011 edition. Policy wisdom, as the WaPo describes it, is entirely dictated by fear of things that aren’t happening: fiscal expansion will invite an attack by the invisible bond vigilantes, if you try monetary expansion the inflation monster hiding under your bed will come out and eat you. The problem we actually have — the problem the Post says we dare not let happen — doesn’t seem to matter at all. Beyond that, think about the economic theory that seems to underlie this article, a theory that is remarkable in its inconsistency.

Breaking: Bear Suspected of Depositing Feces in Forest...What? Groundhog Day again? Brad DeLong cites Mark Thoma citing Dean Baker beating on the Washington Post for an editorial "We Dare Not Let This Happen [but don't support doing anything about it]." Paul Krugman joins the chorus. See also an open letter to Professor Krugman. Huh? Dog bites man is news? Over here in Sandwichland, we have an old saying, "If it walks like a duck and quacks like a duck, it's a duck. But if it sheds crocodile tears while eating the unemployed, it's a fucking crocodile." You wanna know how to stop the croc from eating the unemployed? Kill the beast. Dean says, "the buffoons running economic policy who could not see the largest asset bubble in the history of the world are still there running economic policy." Mark says, "I think the potential benefits of trying to do something exceed the costs by a safe margin." Brad says, "Once again the Washington Post making absolutely no sense at all." Bull. Shit.  The "buffoons" running economic policy are not buffoons. Or, they are not merely buffoons. They are stewards of a system that requires unemployment to keep the buffoons on top on top. Whether the potential benefits of doing something exceed the costs is irrelevant.

An Open Letter to Paul Krugman - I am writing to you because three times over the last 14 months your authority has been invoked to me on behalf of the assertion that people who advocate shorter working time as a remedy for unemployment are guilty of a "lump-of-labor fallacy" assumption that there is only a fixed quantity of work in the world. As did John Maynard Keynes, I believe that working less is one of "three ingredients of a cure" for unemployment. I find it odd to learn that I (and presumably Keynes) am thereby assuming a palpable absurdity: that the amount of work to be done is invariant.  I have researched the history of the fallacy claim and published two scholarly articles on it and I have documented rather glaring discrepancies in the often-repeated claim. Because your authority on the alleged fallacy is so frequently cited, I would be extremely grateful if you would consider the evidence I outline below and respond to it. I believe the history is curious enough to be entertaining and thought provoking, whether or not you are persuaded by my presentation.

Signs Of Decay During the "New Normal" - The most important change happening lately is invisible. Have you noticed it? The dismal "new normal" is becoming "normal". Even as things get crazier, complacency is setting in, at least in the obedient media. Only a few bloggers still talk about the millions of long-term unemployed. You won't hear about them on National Public Radio anymore. Do you remember the 99ers? More bad news on the economic front? Who cares? We already know the "recovery" will take years to achieve. Housing still looking for the bottom? No surprise there. Food and energy inflation out of control? $4 gasoline? Nothing to see there folks, move on. Now we see more stories about Obama's poll numbers, as if they matter. Or Donald Trump. For an entire week, the only thing people talked about was the killing of Osama bin Laden. The change is subtle, but it's definitely there. This shift is just the latest manifestation of The Empire And The Boiling Frog.

Putting the Squeeze on Jobless Benefits - This morning's jobs report confirms for what feels like the thousandth month in a row that the U.S. economy is getting better, but from a very low trough and somewhat slowly. The economy added 244,000 jobs in April, the Bureau of Labor Statistics reported this morning. But the unemployment rate jumped up two-tenths of a percentage point, to 9.0 percent. The month saw the strongest job growth since 2006. But there were fewer people employed overall. The report, then, will do little to change Americans' firm, and correct, conviction that the economy is still totally in the can. According to a CNN survey released today, about 80 percent of Americans say the economy is in poor shape. Only 1 percent—hedge fund managers and the serially confused, perhaps—say the economy is "very good." Unemployment remains the top concern. So why are governments across the country starting to kick the support out from under the chairs of the jobless?  It happened with barely anyone noticing. But, in the past few weeks, the unemployment-insurance system started shrinking back to its prerecessionary size.

Dozens Of States Eye Jobless-Borrowing Sting (Reuters) - Florida is the latest state to cut jobless benefits as a lure to businesses but remains high on a list of states facing imminent federal fees for the money they borrowed to help the unemployed during the worst of the U.S. recession. Like Florida, where about 1 million people are out of work, dozens of fiscally pressed states such as California, Illinois, Ohio, Wisconsin and the Carolinas may be hit with federal penalties in 2011 if their governments do not fully repay loans taken to pay unemployment benefits. States such as New Jersey, Georgia, Minnesota and Kentucky have taken short-term loans totaling more than $48 billion to bolster their tapped-out unemployment insurance funds. The federal loans were interest free, according to President Barack Obama's stimulus act, but were not exempted from penalties required under the Federal Unemployment Tax Act, if outstanding balances remained after two years,  States may lose federal business-tax credits, which in turn would result in higher fees for employers for each worker. Most states at risk of the federal penalties face a 0.3 percent cut in credits but Indiana and South Carolina could face cuts of 0.6 percent.Michigan, whose lawmakers in March passed a law similar to Florida's that slashes the traditional 26 weeks of unemployment payouts, may see its FUTA credit reduced by 0.9 percent.

War Against the Weak - Eliot Spitzer - Three recent Republican efforts, each one critical to the conservative agenda:

• 1) the attempt by Republican governors to eliminate the right of public employees to bargain collectively;
• 2) the attempt to eliminate the consumer protection bureau created in the Dodd-Frank financial services reform law—probably the most important part of the law for ordinary investors;
• 3) the recent 5-4*¹ Supreme Court decision to limit the right to "class-arbitration" in many circumstances—taking away the collective power of those whose injuries are too small to be effectively remedied individually yet who, together, might be able to stand up to much stronger institutions.

The unifying theme is an assault on the weak. The power of individuals, each of us feeble in isolation, to act collectively and hence stand up to the powerful is being eviscerated. Those who already begin behind are finding the few legal protections afforded them under attack. A critical element of the Republican agenda has become increasing the legal power of those who already have power, and diminishing the power of the weak.

20 Facts About Child Hunger And Child Poverty That Will Break Your Heart - Did you know that nearly half of the 44 million Americans that are on food stamps today are children?  Did you know that more than a fifth of all U.S. children are living in poverty and that a fourth of all U.S. children are enrolled in the food stamp program?  Did you know that most of the people that starve to death around the globe are children?  In 2011, child hunger and child poverty are major problems in the United States and they are at epidemic levels in many areas of the world.  The facts that are you are about to read are tough to stomach and they are meant to break your heart.  Most of us need to be touched on an emotional level before we will take action.  As I have written about previously, the world is on the verge of a horrific global food crisis.  Unless a miracle happens, there is not going to be nearly enough food for everyone in the world in the future.   The food stamp program is the modern equivalent of the old-fashioned bread lines.  Today, the number of Americans on food stamps is absolutely exploding.  Despite claims that the economy is "recovering", the number of Americans relying on food assistance just continues to increase.

Riverside County's homeless numbers up dramatically, new tally shows - The number of people in Riverside County who are homeless on any given day has increased an estimated 84% in the last two years, officials said Monday.A countywide tally Jan. 24 found 6,203 people living in emergency shelters, transitional housing or places not fit for human habitation, such as sidewalks, cars and abandoned buildings. The last count in 2009 put the figure at 3,366. The increase in the county’s chronically homeless population was even more significant: from 969 people in 2009 to 2,515 in 2011, a 160% jump. The county defines chronically homeless as people with a disabling condition who have been without a roof over their heads for a year or longer, or who have experienced at least four episodes of homelessness in the last three years.

Marshall Auerback: Revenue Sharing for the States – How It Works, Why We Need It and Why Nixon Liked It! - States are being cut off just at the time they most need federal assistance. Revenue sharing would be a winning strategy for the economy and for Obama. Our policymakers continue to believe that they must first ‘get credit flowing again’ to restore output and employment. Unfortunately the reverse is the case: restoring output and employment will restore the flow of credit. Creditworthiness precedes credit. And yet, as we get closer and closer to D-Day on the debt ceiling limit, the negotiations continue to turn on how much income the government should drain from the economy, even as private sector activity continues to stagnate. The economy has therefore continued to deteriorate, with only the ‘automatic stabilizers’ like unemployment insurance slowly adding financial assets and income to the private sector as the counter-cyclical deficit rises. The rate of federal deficit spending now exceeds around 8% of GDP and seems to have begun moving the economy sideways, but has been insufficient to offset the impacts of the worst recession in over 70 years. Indeed, the combination of a tepid fiscal response — which appears to have been just enough to ward off a second Great Depression — and the premature fiscal withdrawal are largely to blame for the weak and teetering recovery.

Study: Quinn budget plan shows deficit topping $9B - Illinois' budget deficit could surpass $9 billion, according to estimates in a report released Monday that criticizes Gov. Pat Quinn for artificially inflating the amount of money the state has to spend and contributing to an unbalanced budget that pushes the state's problems into the future. The Civic Federation said Quinn's proposed budget did not account for $971 million that the state should set aside to pay for anticipated income tax refunds and to clear a backlog of refunds to businesses that dates to 2008. That accounts for about $2.4 billion of the anticipated budget deficit in fiscal year 2012 when combined with a $1.45 billion budget gap caused by proposed new spending, the report said. The rest of the deficit comes from $4.6 billion in unpaid bills and $2.4 billion in Medicaid and insurance obligations — for a total estimated deficit of $9.4 billion.

Wisconsin Republicans rushing to pass agenda ahead of recalls - In Wisconsin, the Republicans in the state government are hoping to rush a packed slate of radical measures through the Legislature within the next eight weeks. Critics accuse them of accelerating the ratification process to get ahead of this summer's recall elections and the possibility of Democrats taking a majority of seats in the state Legislature. Republican lawmakers have proposed measures that will 'legalize concealed weapons, deregulate the telephone industry, require voters to show photo identification at the polls, expand school vouchers and undo an early release for prisoners', says the Wisconsin State Journal. Also looming is the threat of a rewritten version of Governor Scott Walker's controversial budget plan limiting the collective bargaining rights of public employees. Democratic Assembly Leader Peter Barca says the Republicans are reacting to the stiff backlash against Governor Walker's proposals and the fact that six Republican senators will be forced to defend their seats in recall votes this summer. 'They know there's a very strong possibility their days of controlling every level of government are numbered,' he says. Barca went on to say that the new laws will 'dramatically change the direction and traditions and values of this state'.

Wisc. GOP rushes to restrict voters ahead of recall elections | The Raw Story: "Claiming they only wish to prevent voter fraud, Wisconsin Republicans are rushing a bill that would impose additional identification requirements on citizens who attempt to cast a ballot -- all ahead of key recall elections that could see the GOP thrown from power in the state. The new rules would in effect limit the numbers of Democratic voters, according to research (PDF link) carried out by New York University. The elderly, the poor and minority voters tend to lean Democratic, and also have the highest percentages of people without driver's licenses or other photo IDs. A valid voter registration card is already required to cast a ballot, and voters must go to their assigned polling places to be checked against the registry. Despite Republican claims of sprawling conspiracies to steal prior elections, virtually no evidence has been found to support their allegations. Critics have compared the additional requirements to a 'poll tax,' which has been roundly rejected by U.S. courts. Procuring photo identifications costs money in every state, and many require citizens to travel to a state office, stand for photographs and make payment in person.

‘Everything’s been accelerated’ in Wisconsin - In early 2010, after Sen. Scott Brown (R) won his special election in Massachusetts, Senate Democrats chose not to rush through a bunch of legislation before losing their supermajority. It would have been improper, they said, to “abuse” the political process this way. Wisconsin Republicans don’t quite see things the same way. Wisconsin Republican Gov. Scott Walker and GOP leaders have launched a push to ram several years’ worth of conservative agenda items through the Legislature this spring before recall elections threaten to end the party’s control of state government.  Republicans, in a rapid sequence of votes over the next eight weeks, plan to legalize concealed weapons, deregulate the telephone industry, require voters to show photo identification at the polls, expand school vouchers and undo an early release for prisoners.

Wisconsin-Style Occupation Planned in California -The Wisconsin backlash against Gov. Walker’s union-busting crusade is widely seen as some of the most effective protests against austerity partly because activists occupied the state Capitol and refused to leave. These acts of physical resistance are truly the last refuge of the liberal class, according to Pulitzer Prize-winning journalist Chris Hedges. In fact, he says liberals have a “moral imperative¹” to perform them. [I]f we don’t begin to physically defend the civil society, all resistance will be ceded to very proto-fascist movements such as the Tea Party that celebrate the gun culture, the language of violence, seek scapegoats for their misery.” In other words, it’s not enough to sign on-line petitions. The only acts that still strike fear in the hearts of the wealthy and powerful are mass acts in which bodies fill rotundas and the halls of power.Following the Wisconsin tradition of meaningful protest, the California Teachers Association is planning a weeklong “State of Emergency²” campaign designed to focus on budget cuts in schools and the need to avoid further reductions to spending.

Republican Electoral Strategy: Don't Let the Democrats Vote - The Texas Legislature passed two bills yesterday that on the surface look like good governance measures but are actually efforts to discourage the Democratic base from voting. The state Senate approved a bill requiring voters to present a photo ID before receiving their ballots on Election Day. Support for the measure fell strictly along party lines, with all 19 Republicans voting in favor while the 12 Democratic senators in the chamber opposed the bill. The law would give voters a host of acceptable forms including driver’s licenses, passports, or a concealed handgun license. Studies show that the Democratic-tilting groups of the poor, elderly, and minorities tend to have the lowest percentage of official photo identification.The other measure is less overt but should have an equally powerful impact in blocking voters' participation. The state House approved an amendment that only allows Texas voters to register new voters in the state. 

The great government fire sale is on - Newark, N.J., was staring into a budget abyss so deep that it sold 16 city buildings to pay the bills. They included the architecturally significant Newark Symphony Hall and the police and fire headquarters. In New York, the transit authority may sell its Madison Avenue headquarters, complete with an underground tunnel connected to Grand Central Terminal and air rights to build a skyscraper on top. And soon, if state legislators have their way, private investors will be able to buy plenty of other municipal treasures: power plants in Wisconsin, prisons in Louisiana and Ohio and municipal buildings in Boston. The Great Government Tag Sale is on. As states and cities struggle with billions of dollars in shortfalls, elected officials are increasingly selling public assets to cover their costs. Sometimes municipalities sell the buildings to pocket a one-time pile of cash and then lease them back so they can continue to use them. To proponents, selling government property is an efficient way to plug budget holes. But to critics, these sales are as misguided as pulling money out of your house to pay your bills. They point out that the government is letting go of a long-term, valuable asset in exchange for a one-time payment. "This is tantamount to selling the family china only to have to rent it back in order to eat dinner," says economist Yves Smith..

Taxes, Spending, and the Politics of Economic Growth - A new study by Tulane's Department of Budget and Planning takes a close look at the effects of tax and spending policies at the state level.  Entitled  "Do State Fiscal Policies Affect State Economic Growth?", it examines  50 years of data  (from 1947 to 1997),  tracking  the effects of state tax policies, spending policies, and political orientation on economic growth. There are two major take-aways. First, a "state's fiscal policies have a measurable relationship with per capita income growth, although not always in the expected direction." Tax impacts, they report, are "quite variable"; "expenditure impacts are more consistent." Second, they find "moderately strong evidence" that a "state's political orientation, as indicated by whether the governor is Republican or Democrat, whether the state has enacted tax and expenditure limitation legislation, and whether the state frequently elects a governor of the same party as the incumbent, have consistent, measurable, and significant effects on economic growth."  And then they drop their bombshell: "Having a Republican governor," they conclude, "is associated with lower rates of growth."

NYC mayor's budget would cut 1 out of 12 teachers - Mayor Michael Bloomberg on Friday unveiled a shrinking budget that would cut corners throughout New York City - from classrooms, where public school children stand to lose one out of 12 teachers, to jails, where officials are saving pennies by cutting items like bread, pepper and ketchup from the menu. The $65.72 billion budget, which is likely to change before it wins approval from the City Council, also calls for a 12 percent cut to the city's libraries, the closure of some city swimming pools and the loss of 20 fire companies - a step that the city's fire commissioner said would slow firefighters' response times. Bloomberg placed the blame for the city's financial woes on cutbacks handed down by state and federal legislators, and on what he said was a national movement against funding government efforts. Business tax revenues have surpassed the level they were at before the collapse of the financial sector, he said.

Charlotte school district issues layoff notices to 739 employees - The Charlotte-Mecklenburg School district has sent layoff notices to more than 700 employees. The Charlotte Observer reported the district is sending layoff letters to 739 teachers, counselors, librarians and others.Nearly 340 other workers have been told they will be reassigned for the school year that begins in August. School spokeswoman LaTarzia Henry says the district hopes to be able to offer jobs to some of the workers before the school year begins.But Henry says dozens of tenured teachers with good performance ratings will see their current jobs disappear, and the district currently has nothing to offer them. She blames budget uncertainty and plans to close some schools. This is the third year Charlotte teachers have faced layoffs

Arts programs in San Francisco schools silenced by budget trouble - San Francisco voters were promised improved public education funding when they passed Proposition H in 2004, but they’re not getting what they expected, and some say arts budgets are taking the hit. At Tuesday’s school board meeting, teachers and students pleaded with officials to save music and art programs that individual schools were threatening to cut. District officials did not respond to repeated requests for comment. But a clause in Prop. H allows The City to decrease funding whenever its deficit exceeds $100 million. The City is currently projecting a $306 million deficit. Prop. H directed The City to increase its annual school subsidy for spending on enrichment classes. It provided that one-third be earmarked for sports, libraries, arts and music. The district could use another third for free preschool programs, and the balance for “general uses.”

Feel The Rapacity - Paul Krugman - One commenter on my inflation monster post suggests that while private-sector wages may be going nowhere, the story is different for “rapacious” workers in the public sector. Ah, those pillaging schoolteachers (because that’s largely who we’re talking about). Anyway, the BLS doesn’t provide an hourly wage series for public sector workers, but it does offer the employment cost index, a measure of wage and benefit costs adjusted for worker characteristics. Here it is: Feel the rapacity!

Corporate Martial Law: Public Schools Auctioned Off to Highest Bidder - If you’ve ever wondered whether the solution to a cash-strapped low-performing urban school district’s financial and education woes is the wholesale privatization of the public school system, you’re about to get your answer. Detroit, which is caught up in a state that has turned on its public workers, is auctioning off its public schools. The city is taking applications as part of its Renaissance 2012 plan to put 45 public schools¹ up for charter school takeover, and yesterday, the Detroit Free Press² reported its gotten 18 charter school companies eyeing some 50 schools³. The Detroit school system is facing a dizzying $327 million budget deficit, and is under strict orders to deal with massive debt. But under the rule of Bob Bobb, the emergency financial manager appointed to caulk the sinking ship, the deficit has actually grown by over a $100 million, even as teachers have made significant concessions in pay and benefits. His latest attempt to deal with the massive deficit called for 45 schools to eventually be shut down if they weren’t converted to charter school control. Of those, 18 would be shuttered in June if no new outside charter school operator is identified. The rest are slated for outside takeover by 2012, Bobb has said. Charter schools are privately run, publicly financed schools.

Reading, ’Riting and Revenues - American education is going to be reformed until it rolls over and begs for mercy. Vouchers! Guns on campus! Just the other day, the Florida State Legislature took a giant step toward ending the scourge of droopy drawers in high school by upping the penalties for underwear-exposing pants. Today, let’s take a look at the privatization craze and the conviction that there is nothing about molding young minds that can’t be improved by the profit motive. Enrollment in for-profit colleges has ballooned to almost two million, propelled by more than $25 billion in federal student loans, many of which are apparently never going to be repaid. More than 700 public K-12 schools around the country are now managed by for-profit companies. Last week, in Ohio, the State House went for the whole hog and approved legislation that would allow for-profit businesses to open up their own taxpayer-financed charter schools. “It takes the public out of public education,”

Faith, Education and Income - In this weekend’s Times Magazine, I have a column explaining the tight link between education and income for religious groups in this country. The most educated groups, like Hindus and Jews, are the most affluent, while the least educated are the least affluent. The chart with the column has more details. On Twitter, Matt Chingos, an education scholar and the co-author of an excellent book on college completion, asked whether the relationship depended on the exact cutoffs for income and educational attainment. It does not.  The chart in the magazine looks at the percentage of people with a four-year college degree and the percentage of people with family income of at least $75,000 a year, using data from Pew. Here are the percentages if the education cutoff is changed to at least some college (including a two-year degree) and the family income cutoff is changed to $50,000:

The DeVos Family: Meet the Super-Wealthy Right-Wingers Working With the Religious Right to Kill Public Education - By now you've surely heard of the Kochs. Meanwhile, the powerful, wealthy DeVos family has remained largely under the radar, while leading a stealth assault on America's schools.  Since the 2010 elections, voucher bills have popped up in legislatures around the nation. From Pennsylvania to Indiana to Florida, state governments across the country have introduced bills that would take money from public schools and use it to send students to private and religious institutions.Vouchers have always been a staple of the right-wing agenda. Like previous efforts, this most recent push for vouchers is led by a network of conservative think tanks, PACs, Religious Right groups and wealthy conservative donors. But "school choice," as they euphemistically paint vouchers, is merely a means to an end. Their ultimate goal is the total elimination of our public education system.The decades-long campaign to end public education is propelled by the super-wealthy, right-wing DeVos family. Betsy Prince DeVos is the sister of Erik Prince, founder of the notorious private military contractor Blackwater USA (now Xe), and wife of Dick DeVos, son of the co-founder of Amway, the multi-tiered home products business.

Public School Teachers: Are We an Endangered Species? - I see the face of a classroom teacher ready to spend another day teaching writing skills to eighth-graders in the Joplin, Mo. public school district. I see the face of someone who has spent the last dozen years making sure the children and the taxpayers always get their money's worth.I hope I am looking at the face of someone who can serve as a positive role model for children who sometimes have no one to look up to once they leave school for the day. One thing I do not see is a lazy, incompetent pervert, stealing taxpayer dollars and operating a private playground to prey on children. That is the brand Missouri's Republican-controlled legislature continues to put on us in its unprecedented attack on public education in general and public school teachers in particular.

Is Scholastic Selling Elementary School Kids on Coal? - Environmental groups are going after the world's largest publisher of children's books for teaming up with the American Coal Foundation to produce "The United States of Energy," a lesson plan designed for fourth-graders. The foundation, online at Teachcoal.org, is devoted to creating "coal-related educational materials and programs designed for teachers and students." "We hope that you and your students enjoy this energizing program!" proclaims the teaching guide. The materials use coal, oil, natural gas, and renewables as a starting point for lessons on geography, science, and math, and promise to teach students "that different types of energy (e.g., solar, fossil fuels) have different advantages and disadvantages." But the materials are decidedly lacking on that latter front. The worksheets ask kids to explore the question, "What are the benefits of this kind of energy?" without ever entertaining the possibility that there might be problems to consider as well.

Cal State weighs 32 percent tuition increase - If it must cut $1 billion from next year’s budget instead of the mere $500 million it has already planned for, trustees of the California State University system may have to increase tuition by 32 percent among other steps, CSU says Tuesday. For full time undergraduates, that would mean an additional $1,566 or a total of $6,450 tuition fee per year. The possible increase is contingent because any tuition fee increase depends on whether the state imposes further budget cuts, and the amount of those reductions, CSU says.  In addition to tuition fees, campuses charge various fees that average $950 per year.  As per board policy, one-third of the increase would be set aside for financial aid. "Raising tuition is always a painful choice," says CSU Chancellor Charles Reed. "But we would be faced with just trying to keep our classroom doors open."

CU Regents approve projected tuition increase - Concerns about tuition rates at UCCS have been refueled this semester as the University of Colorado Board of Regents recently announced there would be yet another increase in undergraduate tuition costs. Beginning in the Fall of 2011, UCCS undergrad students will pay an additional $450 dollars per year in overall tuition costs. A recent meeting in downtown Denver among the CU Board of Regents approved the tuition increases on all four CU campuses. At a nearly seven percent increase, the Regents were able to keep the elevated tuition rates to just below the nine percent cap established by the Colorado Department of Higher education. The UCCS rate increase is among one of the lowest in the state of Colorado and the overall cost of attending UCCS including tuition, fees, room and board, is expected to increase by no more than 5.3 percent.

Buying Influence at Universities - Over the years there have been concerns about donors’ subtle influence at universities. Professors might be reluctant to research gas taxes, for example, if the building they work in is named after Chevron. As schools become more desperate for money, though, donors are finding opportunities to become more directly influential.The St. Petersburg Times reported on Tuesday that Charles G. Koch, one of the billionaire brothers at Koch Industries, has pledged $1.5 million to Florida State University to be used for hiring in the economics department. In exchange, his representatives get to “screen and sign off on” the hires. Another philanthropist is using donations to shape classroom curricula. Bloomberg reported that John Allison, the former chairman of the banking company BB&T, is working through the company’s foundation to give schools grants up to $2 million. The condition is that they must agree to create a course on capitalism that has “Atlas Shrugged” on the reading list.The article reports that 60 schools, including at least four campus of the University of North Carolina, have begun teaching the book as a result of accepting the foundation money.

Charles Koch’s Assault on Academic Freedom - Billionaire Charles Koch, one half of the hugely influential Koch brothers duo and the CEO of Koch Industries, has splashed tens of millions of dollars to promote his freemarket, libertarian ideology. His charity has funded freemarket think tanks around the country, from the powerful Cato Institute in Washington. DC to state-level outfits pushing privatization and deregulation. Now, Koch is taking heat for a more controversial ploy: leveraging a donation to a major university in order to handpick college professors that agree with his worldview. Koch's charity, the Charles G. Koch Charitable Foundation, pledged $1.5 million to Florida State University to fund new hires in the economics department. But as the St. Petersburg Times reported, this was hardly a no-strings-attached gift. Koch representatives had considerable control over the hiring process: The contract specifies that an advisory committee appointed by Koch decides which candidates should be considered. The foundation can also withdraw its funding if it's not happy with the faculty's choice or if the hires don't meet "objectives" set by Koch during annual evaluations.

Survey: 85% of New College Grads Move Back in with Mom and Dad - The kids are coming home to roost. Surprise, surprise: Thanks to a high unemployment rate for new grads, many of those with diplomas fresh off the press are making a return to Mom and Dad's place. In fact, according to a poll conducted by consulting firm Twentysomething Inc., some 85% of graduates will soon remember what Mom's cooking tastes like. Times are undeniably tough. Reports have placed the unemployment rate for the under-25 group as high as 54%. Many of these unemployed graduates are choosing to go into higher education in an attempt to wait out the job market, while others are going anywhere — and doing anything — for work. Meanwhile, moving back home helps with expenses and paying off student loans. "Graduates are not the first to be hired when the job markets begins to improve. We're seeing shocking numbers of people with undergraduates degrees who can't get work."

Is higher education a waste of money? - Here's a familiar story. Americans had a near-religious belief in the soundness of this investment. Uncle Sam encouraged it with tax breaks and subsidized it with government-backed loans. But then, in the 1990s and especially the 2000s, easy money perverted the market. Prices detached from reality. Suddenly, millions of Americans found themselves holding wildly overvalued assets. They also found themselves without the salaries or jobs necessary to pay off the huge loans they took out to buy the assets. This is not just the story of American real estate. It is also the story of higher education, at least if you believe the dozens of different thinkers and publications that have come to this conclusion in the past few months. They say that higher education is a bubble, just like housing was a bubble, and that it is getting ready to burst. Famed entrepreneur Peter Thiel, for instance, insists that just about every degree is worth little more than the paper it is printed on: Schooling is not education, he says, and ambitious kids should drop out and skip forward to the workplace. New York magazine calls it one of "this year's most fashionable ideas." But is it really true?

Faulty Towers: The Crisis in Higher Education: I was approached by a student who was interested in going to graduate school. She had her eye on Columbia; did I know someone there she could talk with? I did, an old professor of mine. But when I wrote to arrange the introduction, he refused to even meet with her. “I won’t talk to students about graduate school anymore,” he explained. “Going to grad school’s a suicide mission.” The policy may be extreme, but the feeling is universal. Most professors I know are willing to talk with students about pursuing a PhD, but their advice comes down to three words: don’t do it. (William Pannapacker, writing in the Chronicle of Higher Education as Thomas Benton, has been making this argument for years. See “The Big Lie About the ‘Life of the Mind,’” among other essays.) My own advice was never that categorical. Go if you feel that your happiness depends on it—it can be a great experience in many ways—but be aware of what you’re in for. You’re going to be in school for at least seven years, probably more like nine, and there’s a very good chance that you won’t get a job at the end of it.

Is higher education a bubble? - MY COLLEAGUE at Democracy in America draws attention to an ongoing debate over the nature of higher education and, in particular, steady increases in the cost of getting one. The question of the hour is: is higher education a bubble?It's much harder to talk about a bubble in education than it was one in housing. In housing, there was a clear metric: prices, in absolute terms and as a ratio of just about everything, were soaring. And there was a clear debate: are these increases justified by some real economic shift or are they a bubble associated with new mortgage products and loose credit. In higher education, the questions are much more difficult. For one thing, it's hard to agree on what price should be the focus. Advertised topline tuition? Few people pay that. Average tuition paid? Average student loan debt? Is the bubble in higher education present at all universities, or just top universities, or just for-profit universities? And how is whatever rising price that is the focus connected to changes in the benefits of a higher education? Indeed, what are those benefits?

America's College Bubble Next to Burst - The National Inflation Association (NIA) is pleased to officially announce that it will soon be releasing its hour long documentary 'College Conspiracy', which will expose the U.S. college education system as the largest scam in U.S. history. NIA has been producing 'College Conspiracy' for the past six months and plans to release the movie on May 15th. NIA members will be given the first opportunity to watch this must see documentary, which we hope will change the college education industry for the better. NIA expects 'College Conspiracy' to take college education by storm and expose the facts and truth about tuition inflation to prospective college students. Almost everybody applying to college has heard the oft-repeated statistic that Americans with college degrees earn $1 million more in lifetime income than high school graduates without a degree. This is one of those statistics that gets repeated so many times that just about everybody accepts it as fact, but nobody actually does the research to confirm whether or not it is true. 'College Conspiracy' will prove once and for all if indeed this so-called statistic is true or just a myth.

CalPERS, San Mateo Co. to lose millions in bankruptcy - The Wall Street Journal is reporting that CalPERS and San Mateo County are expected to lose millions in bankruptcy court due to their investment in Lehman Brothers.  Meanwhile, a hedge-fund manager is expected to make hundreds of millions of dollars from Lehman debt he bought after the bank collapsed.  John Paulson is expected to make nearly $726 million while CalPERS and San Mateo County lose $68 million and $115 million on the same bonds because they bought them before Lehman failed.

Bonds becoming costlier for N.J. taxpayers - New Jersey’s long-term pension and benefit costs for government workers may not just be a ticking time bomb; they also could be costing taxpayers right now. New Jersey will have to pay $2 million a year in additional interest payments on a $600 million bond sale for transportation infrastructure improvements completed last week because of higher rates on state bonds, one analyst said. New Jersey’s bonds have been trading higher since September, and analysts say the increased interest rates — while small — are a result of the clouded picture of the state’s finances. New Jersey officials disagree and say that other factors are influencing the bond market. They note that the transportation bonds were sold off in a single day at better-than-expected rates.

Rhode Island pension plans facing gap of $9.4 billion - Rhode Island looks microscopic when compared with the State of New York in almost every way that matters. Except for perhaps one dubious distinction: the Ocean State blows the Empire State out of the water when it comes to the gap between how much the state and its municipalities have promised their employees in pension benefits and how much they have set aside for pensions.  The tab comes in at $9.4 billion for the unfunded liability for 155 separate plans run by state and municipal entities in Rhode Island, according to a Providence Journal analysis of pension-plan financial reports. The total in New York state: $45.8 million, less than 1 percent of Rhode Island’s.

Alan Simpson Attacks AARP, Says Social Security Is ‘Not A Retirement Program’ Alan Simpson’s cold relationship with AARP is no secret, but the former Republican Senator from Wyoming took it to a new level Friday. At an event hosted by the Investment Company Institute, Simpson delighted the finance industry audience members by aiming a rude gesture at the leading lobby for senior citizens. Financial and investment interests have long been supportive of Simpson’s broad critique of Social Security, since privatizing the old-age and disability support program would be a tremendous boon for Wall Street’s financial managers. ICI represents mutual funds and other money managers who control more than $13 trillion in assets. Simpson’s forceful gesture came after an extended diatribe against Social Security, which he said is a "Ponzi" scheme, "not a retirement program.” Simpson argued that Social Security was originally intended more as a welfare program. "It was never intended as a retirement program. It was set up in ‘37 and ‘38 to take care of people who were in distress -- ditch diggers, wage earners -- it was to give them 43 percent of the replacement rate of their wages. The [life expectancy] was 63. That’s why they set retirement age at 65” for Social Security, he said.

Alan Simpson Doesn’t Like “the Catfood Commission People” - Alan Simpson doesn’t like “the Catfood Commission people.” In a testy interview with Huffington Post’s Ryan Grim, the chair of Obama’s deficit commission questioned Grim’s stated facts about Social Security, speculating that Grim’s information came from “the Catfood Commission people.” (It actually came from the Social Security Administration.)“If that is the case — and I don’t think it is — then that means they put in peanuts,” said Simpson.Simpson speculated that the data presented to him by HuffPost had been furnished by “the Catfood Commission people” — a reference to progressive critics of the deficit commission who gave president’s panel that label. In the same interview, which came after he gave an “up yours” gesture to an AARP lobbyist, Simpson also said that Social Security was a Ponzi scheme. You think we got to him much?

Social Security and Longevity Increases: Getting the Facts Right - This last week, the Huffington Post derided President Obama’s fiscal commission co-chair, former Senator Alan Simpson, suggesting that his proposals to increase Social Security’s eligibility age were founded upon gross ignorance of the details of longevity trends (disclosure: I worked for the Senator fifteen years ago, but have not consulted with him about either the interview or this piece). Paul Krugman and Ezra Klein thereafter continued this attack on their blogs with the New York Times and the Washington Post respectively. The aim of the attacks was to spread the impression that the Simpson-Bowles commission’s Social Security eligibility age recommendations were premised on misinformation. An examination of the policy realities, however, demonstrates otherwise

Subtleties of life expectancy – ctd. - Debate over Alan Simpson’s comments on life expectancy continues.The last chart from my previous post on this topic showed differences in life expectancy by race. What you’d really like, however, is differences by socioeconomic status. After all, it’s far more likely that we can (and perhaps should) base policies on earnings rather than race. Unfortunately, the CDC data I used two days ago didn’t have differences by earnings. But then I received an email from Paul Van de Water, pointing me to a paper by Hilary Waldren that appeared in Social Security Bulletin in 2007. It’s entitled, “Trends in Mortality Differentials and Life Expectancy for Male Social Security–Covered Workers, by Socioeconomic Status.” She did the work for me. Let’s start with a chart I made from her paper (Table 4):

Take this job and retire from it - I LIKE this Ezra Klein post on Social Security, and I especially appreciate this thought: Most opinion elites — [Simpson-Bowles Deficit Commission Co-Chairman Alan] Simpson being one good example, and the U.S. Senate being another — show a very strong preference for working as long as possible. Most Americans show a very strong preference for retiring as early as possible. Elites who enjoy their jobs need to be very careful about generalizing their experience to people who don’t enjoy their jobs. More bluntly: Raising the retirement age is the worst of all possible options for reforming Social Security. It’s not only regressive, but it also falls most heavily on those with the worst jobs. Means-testing would be much better. Mr Klein's evidence on this is that Social Security payouts increase with the age of retirement and are largest at 70, but almost no American retirees wait until 70 to stop working. Most retire at 62, which is the earliest age at which one can receive benefits, despite the fact that the cheques one receives after retiring at 70 are 76% larger than those one gets after retiring at 62.

Markey: GOP now means 'get old people' - Rep. Ed Markey (D-Mass.) has a new definition for GOP: "Get Old People." At a press briefing detailing Democrats’ strategy to lower gas prices, the ranking member of the House Natural Resources Committee accused Republicans of “drilling into the pockets of grandma and grandpa” to give tax breaks for the oil industry. “GOP now stands for ‘Gas and Oil Party,’ and we’re going to make sure the American people understand that,” Markey said. GOP, he quickly added, also stands for “Get Old People.” Markey, House Minority Leader Nancy Pelosi and Rep. Tim Bishop (D-N.Y.) on Thursday laid out the Democrats’ plans to ease the pain of gas prices, which included ending tax breaks for oil companies and tapping the Strategic Petroleum Reserve to boost the supply of oil.

"Eight Facts about Social Security" -  Ezra Klein on Social Security:

• 1) Over the next 75 years, Social Security’s shortfall is equal to about 0.7 percent of GDP. Source (PDF).
• 2) For the average 65-year-old retiring in 2010, Social Security replaced about 40 percent of working-age earnings. That “replacement rate” is scheduled to fall to 31 percent in the coming decades. Source.
• 3) Social Security’s replacement rate puts it 26th among 30 Organization for Economic Cooperation and Development nations for workers with average earnings. Source.
• 4) Without Social Security, 45 percent of seniors would be under the poverty line. With Social Security, 10 percent of seniors are under the poverty line. Source.
• 5) People can start receiving Social Security benefits at age 62. But the longer they wait, up until age 70, the larger their checks. Source.
• 6) Raising the retirement age by one year amounts to roughly a 6.66 percent cut in benefits. Source.
• 7) In 1935, a white male at age 60 could expect to live to 75. Today, a white male at age 60 can expect to live to 80. Source.
• 8) In 1972, a 60-year-old male worker in the bottom half of the income distribution had a life expectancy of 78 years. Today, it’s around 80 years. Male workers in the top half of the income distribution, by contrast, have gone from 79 years to 85 years. Source.

Social Security: We’re Number…30! - We’ve long emphasized that Social Security benefits are modest — averaging only about $1,100 a month for retirees, disabled workers, and widows.  And they’re also low in relation to earnings.  According to the Organisation for Economic Cooperation and Development, they replace just 42 percent of a median worker’s earnings.  That puts us in 30th place among the 34 OECD member countries. “So what?” argues our friend Andrew Biggs, who recently panned CBPP’s and other organizations’ use of these comparisons.  Biggs notes that while the United States pays low benefits by international standards, it’s fairly typical of the Anglo-Saxon countries.   Most Americans don’t care what Luxembourg does, says Biggs.  He’s right that the United States is in good company among Anglo-Saxon nations, most of which are more parsimonious toward their retirees than nations that border the Mediterranean or the North Sea.

Good News for Grandpa - Death panels notwithstanding, Grandpa gets to live a little longer. The Medicare trust fund will probably be exhausted in 2024, five years earlier than previously estimated, according to an annual report from the trustees of the Social Security and Medicare programs. Likewise the Social Security depletion date was moved up to 2036, from 2037. Why? The revisions are partly due to a lackluster recovery, which leaves fewer people paying the payroll taxes that finance Medicare and Social Security. But they also have to do with changing expectations about the longevity of today’s elderly, and therefore how long they’ll be receiving these benefits. As Dean Baker notes, last year’s report forecast that men who turned age 65 in 2010 would live, on average, and additional 18.1 years. But the new forecast gives this group an extra six months, to 18.6 years. “While the assumption of longer life expectancies does raise the cost of Social Security and Medicare, the projected shortfalls in both programs are still relatively modest,” Mr. Baker writes. “Measured as a share of G.D.P., the combined shortfalls are roughly half the increase in the share of G.D.P. devoted to military spending between 2000 and 2011.”

April Update: 2012 Cost-Of-Living Adjustments and Maximum Contribution Base - The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 3.6 percent over the last 12 months to an index level of 221.743 (1982-84=100). For the month, the index rose 0.8 percent prior to seasonal adjustment ..." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation ... The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W¹ for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and not seasonally adjusted. This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year.The COLA adjustment is based on the increase from Q3 of one year from the highest previous Q3 average. So a 2.3% increase was announced in 2007 for 2008, and a 5.8% increase was announced in 2008 for 2009.

The Potential Impact of the Great Recession on Future Retirement Incomes - The results show that the recession will reduce average annual incomes at age 70 by 4.3 percent, or $2,300 per person. This drop results almost entirely from the anemic wage growth that occurred during the recession, which the model assumes will permanently reduce future wages. Employment declines will have little effect on future aggregate retirement incomes because most workers remained employed during the recession and the losses that occurred are generally inconsequential when averaged over an entire career. Retirement incomes will fall most for high-socioeconomic-status groups, who have the most to lose, but relative income losses will not vary much across groups. Those workers who were youngest when the recession began will be hit hard. They are most likely to have lost their jobs and the impact of lower wages will accumulate over much of their working lives. But retirement incomes will also fall substantially for those in their late fifties in 2008, because the drop in the economy-wide average wage will lower the index factor in the Social Security benefit formula, permanently reducing their annual benefits. Also, many workers who lost jobs late in life will never become reemployed. For executive summary in PDF

Medicare, Social Security running out of money faster - Medicare's trust fund will run dry in 2024, five years earlier than forecast just last year, and Social Security's will be exhaused by 2036, adding fuel to the debate over cutting one or both programs to reduce annual budget deficits. The government programs' trustees issued their gloomy findings today amid a rancorous debate in Washington over the future of the New Deal and Great Society programs, which eat up huge and growing shares of the federal budget. The pessimistic outlook was hastened since the last report in August 2010 by the continued impact of the recession, which has sapped revenue and increased spending. Both programs are running in the red and will continue to do so, the trustees said. Medicare is paying out more in benefits each year than it takes in in taxes. Last year, its trust fund wasn't expected to run dry until 2029. Social Security has longer before its trust fund runs dry in 2036, but it ran a deficit last year for the first time since 1983. Now it's projected to run deficits every year; last August, the trustees had projected a few more years of surpluses from 2012-14.

‘The Worst I’ve Seen By Far:’ Budget Cuts Meet Poverty in the Heartland - For Jack Frech, director of the Athens County Department of Job and Family Services¹ in Appalachian Ohio, the fact that Congress and statehouses across the country are pushing budgets that would further cut assistance² for poor people is downright frightening. “I’ve been doing this work for thirty years and this is the worst I’ve seen it by far,” says Frech. “And when I say the worst, I mean the absolute worst.” Frech says his clients are now “double and tripling up on housing,” and “only surviving because they wait in long lines at food pantries³.” They are forgoing medical treatment, and trying to maintain “some old junk car” so they can “put in their 15 or 30 hours—whatever they’re lucky enough to find—to meet their work requirement so they can continue to receive assistance.” “People on our programs get all the cash and food stamps they’re going to get, meet their work requirements, and still run out of food,” says Frech. “So we have to give food boxes out of our welfare department. That’s a first and it’s absurd.”

The new Florida Medicaid plan - It has passed the legislature, there is a 1/20 summary here, and an ungated piece here.  Here are a few salient points:

• 1.Most of the patients will be moved into managed care.
• 2. In most cases malpractice awards — for Medicaid patients only — will be capped at $300,000.
• 3. “Last month, the federal government advised legislators to choose the payment system that would guarantee that a percentage of the money, in this case 90 percent, would go to patient services. Instead, the Legislature chose the other option: to share profits with managed-care companies.”

Florida Senate passes historic Medicaid overhaul - A historic bill that would make sweeping changes to Florida's Medicaid program won Senate approval Friday, setting the stage for the care of nearly 3 million beneficiaries to be placed in the hands of private companies and hospital networks.The bill goes back to the House for a vote. Lawmakers on both sides have worked long hours in closed door meetings to reach a last minute deal the House will likely pass. Proponents say the bill will mitigate risingMedicaid costs which now top more than $20 billion a year. Democrats complained that the bill was negotiated in secret by a handful of people. "I believe we should have had a conference committee. Something that has this much impact, for three or four people to sit down and come up with whatever is in this legislation is not the right process," said Senate Democratic Leader Nan Rich of Weston.

Florida Legislators Pass H.M.O. Plan for Medicaid -In a sweeping overhaul of its $21 billion Medicaid program, the Florida Legislature approved a bill Friday to shift nearly three million Medicaid recipients into managed-care programs in the hope of saving money and improving services.  “Medicaid has grown faster than any other part of our budget,” said State Senator Joe Negron, Republican of Stuart, who took the lead on the bill. “It is crowding out funding for education, economic development and other parts of the budget that are equally important.”  If signed into law as expected, the bill will make Florida, with one of the largest number of Medicaid patients and a high rate of uninsured, one of the biggest states to jump almost entirely from a traditional Medicaid payment system into managed care. The wholesale shift would begin in July 2012.

Would Privatizing Medicare Lead to Better Cost Controls? - The annual Milliman Medical Index, released earlier this week by Milliman Inc., the Seattle-based employee-benefit consulting and actuarial company, is illuminating, and I highly recommend it. The index is particularly timely as the nation considers proposals to reduce sharply the role of the federal government in financing health care, along the lines proposed by Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee. The index measures the total cost of health care for a typical American family of four covered by a preferred provider plan, widely known as a P.P.O. The index’s great virtue is that it includes not only the employer’s and employee’s contributions to the premium for P.P.O. coverage but also the out-of-pocket expenses the family has under the plan.  Employers can control the growth of health insurance premiums by shifting more and more of the cost from the insurance policy to the family’s budget, through higher deductibles and coinsurance or by excluding benefits from coverage that had previously been covered. Thus, the index provides a more accurate picture of the actual burden of health spending for a typical American family than does just the premium for P.P.O. coverage.

Courts and Affordable Care Act...Much Ado About Not Much - The big legal news today was the first appellate-court oral argument, this afternoon, on the constitutionality of the Affordable Care Act. The argument—arguments, actually; two separate cases were argued separately—were to a three-judge panel of the Court of Appeals for the Fourth Circuit, the regional federal appeals court for several mid-Atlantic and southern states, including Virginia.  In one of the two cases argued today, Virginia’s Tea Party attorney general, Ken Cuccinelli, had sued on behalf of the state, challenging the constitutionality of the ACA in total and, jointly and severally, the individual-mandate provision providing for a civil fine for failure to obtain health insurance. In the other case argued today, Liberty University and a few individuals challenged the law as unconstitutional on several grounds, including that, according to the university, the law would allow for federal funding of abortions.  In the State of Virginia case, a threshold issue is whether the state has legal “standing” to challenge the constitutionality of the statute, ostensibly on behalf of its residents, since the statute doesn’t affect the rights of the state itself. In the Liberty U. case, the federal-funding-of-abortions grounds for constitutional challenge is a non-starter..

Up to $49 billion unpaid by uninsured for hospitalizations — Uninsured Americans — including those with incomes well above the poverty line — leave hospitals with unpaid tabs of up to $49 billion a year, according to a government study released today. On average, uninsured families pay only about 12% of their hospital bills in full, a government study finds.On average, uninsured families can pay only about 12% of their hospital bills in full. Families with incomes above 400% of the poverty level, or about $88,000 a year for a family of four, pay about 37% of their hospital bills in full, according to the Department of Health¹ and Human Services study. "This report shows that even higher-income, uninsured families are struggling to meet the high costs of health care," Sherry Glied, assistant secretary for planning and evaluation at Health and Human Services, said in a statement. "No family should bear the burden of being one illness or accident away from bankruptcy."

In the US, Some Health Care Waiting Times are Infinite - Quick thought: I've come across a couple of discussions of the waiting time objection to health care reform, an objection that has been debunked many times but stubbornly persists. But are these fair comparisons? I don't think they are. We are comparing systems with universal care to our own where some people cannot get the health care they need and desire no matter what they do. Thus, for some people in the US, and for some medical procedures, wait times are essentially infinite. Some people will not be able to afford the care they need, period, and if it isn't life-threatening or severely debilitating, then emergency care or other similar alternatives funded through social services won't be available either. If we add in these infinite wait times to our system, how does it stack up then?

Does ageing really affect health expenditures? If so, why? - Over the last half century, life expectancy in the industrialised world has risen dramatically – and so has the healthcare bill. Is population ageing the main reason? This column argues that while ageing does affect health spending, it is far less important than many think. It adds that obsession with an ageing population is a dangerous red herring that prevents dealing with the real culprits of rising costs.

A Bit of Healthcare Chart Porn - I’ve been tinkering with Google’s Fusion Tables (which are very cool and no relation to our host’s biz), and wondering how best to introduce a chart or two to TBP. BR’s recent post on healthcare gave me the perfect opening. So, herewith, the first of what I hope will be many Fusion Tables to come (hover over countries for data). First up, worldwide density of doctors per 10,000 population (these are doctors only; dentists, nurses, and other healthcare professionals are tallied separately). To spare you the trouble of searching, Cuba is #1 at 64, and Greece is #2 at 54; many countries are at one or less.  Next up, total healthcare expenditures as a percent of GDP. There are additional aspects of this to explore (private expenditures, government expenditures, etc.), but I’ll leave that for another time in the interest of getting the overall picture out.

It’s the Prices, Stupid: Consumers Don’t Drive High Health Care Costs - Yesterday, Speaker Boehner issued what Robert Bob Borosage of Campaign for America’s Future correctly labeled extortion: “Give us trillions in cuts in Medicare and Medicaid or we blow up the economy.” Boehner’s threat to tie the lifting of the debt ceiling to trillions of cuts in spending would force huge cuts in Medicare and Medicaid. Actually, there are no health care cost savings in the Ryan-Boehner budget, just cost shifts. The Ryan budget cuts Medicare by shifting more than $6,000 a year to each senior who benefits from it. It shifts Medicaid costs to state taxpayers by cutting federal funding to states for the program. While the extremes of the Ryan-Boehner budget have been widely decried, the underlying assumption behind their Medicare privatization plan is too often accepted by a broad array of health policy advisers. The Ryan budget assumes that the problem with health costs is that consumers don’t pay enough out of pocket for care and that plans are too generous. Unfortunately, that’s also been the view of some Democratic health policy advisers. White House officials backed the taxation of higher cost health plans in the Affordable Care Act (ACA), and others like former Clinton OMB Director Alice Rivlin support a less draconian version of Medicare privatization.

Health Care Is Expensive Because America Pays High Prices For Health Care Services - Ezra Klein posted a super-long chart making this point yesterday, but it really can’t be said often enough. The overwhelming reason that health care is so expensive in the United States is that Americans pay high prices for health care services. That sounds banal or even obvious, but it’s not banal and it keeps getting overlooked. But as an example, Medicare has lower reimbursement rates than do private insurance plans. Any given insurance plan would obviously be glad to reduce its reimbursement rates, but it can’t because providers would stop seeing the plan’s patients if they cut down to Medicare levels. But private insurance plans invariably benefit from federal tax subsidies. Congress could pass a law saying that insurers who pay higher than Medicare’s rates are ineligible for the subsidy. Payments would tumble and competition would reduce premiums. Alternatively, we could rescind the tax subsidy for private health insurance, institute a Value Added Tax, and create a Universal Medicare system. Either way, some providers would drop out but the vast majority would simply be forced to swallow lower payments.  Even more clearly, we could impose price controls on pharmaceuticals or reduce patent lengths.

Doctors trade integrity for insurance company profits - Recently, I had an intense debate with a doctor who works for one of the largest, supposedly nonprofit, health insurance organizations in our country. I wanted at least 24 hours of hospitalization for a patient, and he, clearly, did not. It didn't matter that the insurance company's doctor was in a remote location and had never laid eyes on nor spoken with my patient, using a faxed copy of a doctor-in-training's note to come up with a diagnosis and make a clinical decision. My citing current research to underscore potential risk and justify observation in the hospital were met with silence and a deaf ear. Despite the fact that the patient had made a serious suicide attempt less than 16 hours prior, it was evident that the insurance company's doctor had made a decision from the get-go, and that decision was to deny. What does he care? If the patient commits suicide or some other high-risk behavior, he's not liable.

Special report: Big Pharma’s global guinea pigs - (Reuters) - Poland and Hungary together accounted for 21 percent of all subjects studied in the pivotal 18,000-patient trial -- more than double the United States and Canada combined. A few years ago that would have been unthinkable. Major drug companies, with an eye on the commercial promise of the world's largest and most profitable market, would have run half their tests on a major cardiovascular medicine like this in U.S. hospitals under the supervision of U.S. doctors. Today, the clinical trials business has gone global as drugmakers seek cheaper venues for studies and cast their net further afield for big pools of "treatment-naive" patients who are not already taking other drugs that could make them unsuitable subjects for testing new ones.

Farm Antibiotics: ‘Pig Staph’ in a Daycare Worker - It’s been just about seven years since an alert epidemiologist in the Dutch town of Nijmegen identified an aberrant strain of MRSA, drug-resistant staph, in a toddler who was going in for surgery to fix a hole in her heart. The strain was odd because it didn’t behave normally on the standard identifying tests, and because it had an unusual resistance factor — to tetracycline, a drug that it should not have been resistant to, because the Netherlands had such low rates of MRSA that tetracycline wasn’t being used against the bacterium there. Pursuing the source of the strain, researchers at Radboud University found it in the toddler’s parents and sister, and in the family’s friends. Not knowing where else to look, they asked what the parents and their friends did for a living; discovered they were all pig farmers; and went to their farms, and checked the pigs, and found it being carried by them, too. Suddenly, that strange resistance pattern made sense: The Netherlands uses more antibiotics in pig agriculture than any other country in the European Union, and the drug that it uses the most is tetracycline.

Unnatural selection: Wily weeds outwit herbicides - The weedkillers atrazine and simazine were introduced in 1958. Ten years later, a plant nursery in the US that had been regularly using the pesticides reported that they were no longer effective against a plant called common groundsel – the first confirmed case of herbicide resistance. Half a century on, the number of known strains of resistant weeds stands at 357 and counting. "Herbicide resistance is a fantastic example of evolution in response to human-induced selection pressure," says Stephen Powles of the University of Western Australia in Perth, who studies the problem. Because of its huge commercial importance, a lot of money is spent studying the problem and in many cases we know exactly how plants are evolving resistance. The mechanisms range from changes in leaf shape or waxiness to reduce herbicide uptake, to mutations that prevent herbicides binding to the proteins they target.

Wheat Gains for Third Day as Adverse Weather Threatens Harvests Worldwide - Wheat futures advanced for a third day as dry weather threatened to damage winter crops in Europe and the U.S., and excess rainfall delayed planting of the spring variety in Canada, adding to concerns that global supplies may tighten. About 42 percent of the winter-wheat crop in the U.S., the world’s largest exporter of the grain, was rated poor or very poor in the week to May 8, up from 41 percent the previous week and 8 percent in the same week a year earlier, the U.S. Department of Agriculture said yesterday. Rain in the northern Plains and Canada has delayed spring-wheat seeding.  “We’re definitely seeing weather coming back into wheat markets,” said Erin Fitzpatrick, an analyst at Rabobank in London. “U.S. winter wheat poor-very poor increased again this week, no rain in Europe over the weekend and Canada only had 3 percent planted. We need to get some better weather soon.”

Climate shifts ‘hit global wheat yields’ - Shifts in the climate over the past three decades have been linked to a 5.5% decline in global wheat production, a study has suggested.A team of US scientists assessed the impact of changes to rainfall and temperature on four major food crops: wheat, rice, corn and soybeans.Climate trends in some countries were big enough to wipe out gains from other factors, such as technology, they said. The findings have been published in the online edition of the journal Science. "We focused on those four crops because they make up the bulk of calories consumed today," "There are already clear changes going on in most agricultural regions in terms of weather, and they have effects on food production that are sizeable," he told the Science podcast."But in terms of temperature, we see that North America seems, oddly enough, to be exhibiting no real trend at all over the past 30 years.  "Whereas places like Europe, China and Brazil - pretty much the rest of the world, in terms of major agricultural production - have seen remarkable warming."

Cereal Killer: Climate Change Stunts Growth of Global Crop Yields- The people of the world get 75 percent of their sustenance—either directly, or indirectly as meat—from four crops: maize (corn), wheat, rice and soybeans. The world's rising population—now predicted by the United Nations to reach 10.1 billion by century's end—has been fed thanks to rising yields of all four of these crops during the past century. Humanity's predilection for burning fossil fuels, however, is now contributing to the slowing of such rising yields, cutting harvests of wheat 5.5 percent and maize 3.8 percent from what they could have been since 1980, according to a new analysis of yields. "On a global scale, we can see pretty clearly significant changes in the weather for most places where we grow crops," explains agricultural scientist David Lobell of Stanford University's Woods Institute for the Environment, who led the analysis published in the May 6 issue of Science. "Those changes are big enough to sum up to pretty big losses for wheat and corn."

Feed Costs Eating Into Profitability - Record high feed costs ate into livestock profits last month and economists don’t see much relief through the summer. According to the U.S. Department of Agriculture’s ag prices report released in late April, corn prices hit an all-time record high of $6.40 per bushel, up 87 cents from March. That put the cost of feed per hundred pounds of milk at $10.71 on a national average, the highest level ever seen. But cash feed prices on many Idaho dairies were even higher. Although Class III milk prices were $19.40 in mid-April, prices hovered around $17 per hundredweight in both February and March. That’s very close to break-even prices for dairies when feed and all other expenses are included.Class III milk futures contracts through the rest of 2011 averaged $17.61, just the $17 average break-even price most Magic Valley dairies are calculating now. And the average futures price for 2012 is just over $16 per cwt.

'Breakneck pace' brings corn planting up to speed‎ - Iowa farmers used warm and dry conditions, 24-row planters and willingness to work 18- to 20-hour days to plant at what the U.S. Department of Agriculture described as a "breakneck pace." Iowa had planted 69 percent of its corn crop through Sunday, up from 8 percent a week ago, the USDA reported Monday. Ray Gaesser, who farms near Creston, said several days of 20-hour schedules allowed him to finish his planting. He also had planted 85 percent of his soybeans by Monday. Gaesser noted that the modern, 24-row planters can do up to 500 acres in a day. Global positioning satellites enable farmers to plant at night. "It's a lot faster than even 10 years ago," Gaesser said of planting.

Corn Planting Progress at 40%, Still Behind Schedule - Yesterday, the USDA released its weekly planting progress report. Corn planting made up important ground this past week, but is still significantly behind last year's pace. With 27% of the crop being planted last week, 40% of the total corn crop is in the ground for the 18 primary producing states. This compares to a five year historical average of 59% in similar time periods, and 2010's estimate of 80%. Wet weather patterns across much of the Corn Belt over the next week will undoubtedly play a major role in next week's progress numbers. Seven percent of the U.S. corn crop has already emerged compared to the five year historical average of 21% by this point in the year. This week was the first week that USDA reported soybean planting progress with 7% of the crop already in the ground, compared to 28% in 2010 and the five year average of 17%. The winter wheat crop condition worsened as more of the crop slipped grade this past week. Of the 2011 crop, only 33% is in excellent or good condition, compared to 66% one year ago. In 2010, 8% of the winter wheat crop was in poor or very poor condition while 42% is in such condition at this time in 2011. Winter wheat growth is still slightly ahead of schedule with 42% of the crop headed, compared to the five year historical average of 40%.

US: Washing Away the Fields of Iowa - To an untrained eye, the fields of Iowa have a reassuring solidity. You cannot tell that the state has lost half its topsoil in the past century. According to a new report from the Environmental Working Group, Iowa's soil is washing away at rates far higher than anyone realized.  For Iowa - and other Corn Belt states facing similar problems - this means an increasing loss of fertility that has to be replaced chemically. It marks a failure of stewardship, since these soils will have to feed future generations. And every particle that washes away causes problems downstream, including sedimentation - which can increase the risk of flooding - and the alarming dead zone in the Gulf of Mexico, the result of runoff of the chemical fertilizers farmers apply to make up for lost fertility.

Dr. Huber Explains Science Behind New Organism and Threat from Monsanto's Roundup, GMOs to Disease and Infertility - vimeo - David Murphy of Food Democracy Now interviews Dr. Don Huber, Professor Emeritus of Plant Pathology, Purdue University on discovery of new organism and crop disease, livestock infertility and threats to U.S. food and agriculture.

USDA's Pesticide Data Program - Each year, USDA's Pesticide Data Program publishes data on pesticide residues, principally in fruit and vegetable crops, selected in part because of their frequent consumption by children.  It is difficult to know how worried consumers should be about the results.  Here are some thoughts and questions on the most recent 2008 residue detections for fruits and vegetables. For some pesticides, EPA sets safety tolerances for the maximum amount of residue that should show up on food.  For other pesticides, EPA sets no tolerance, meaning that there should not be any residue of that pesticide at all. First, we look at data on total residue detections.  Many fruit and vegetable samples have multiple pesticide residues, but the amounts may be small, usually far within the Environmental Protection Agency's safety tolerances.  Let's say for the moment that we are not very worried about these total detections, but instead want to know about detections that violate EPA standards.

Factory farms the only way to ‘feed the world’? Not so, argues Science paper  - To "feed the world" by 2050, we'll need a massive, global ramp-up of industrial-scale, corporate-led agriculture. At least that's the conventional wisdom. Even progressive journalists trumpet the idea (see here, here, and here, plus my ripostes here and here). The public-radio show Marketplace reported it as fact last week, earning a knuckle rap from Tom Laskway. At least one major strain of President Obama's (rather inconsistent) agricultural policy is predicated on it. And surely most agricultural scientists and development specialists toe that line ... right? Well, not really. Back in 2009, Seed Magazine organized a forum predicated on the idea that a "scientific consensus," analogous to the one on climate change, had formed around the desirability of patent-protected genetically modified seeds. If I must say so, my own contribution to that discussion shredded that notion. If anything, a pro-GMO consensus has formed among a narrow group of microbiologists -- the people who conduct gene manipulations to develop novel crops. But no such accord exists among scientists whose work takes them out of the laboratory and into farm fields and ecosystems: soil experts, ecologists, development specialists, etc.

Jeff Masters: April 2011 -- Historic U.S. extremes in rains, floods, tornadoes, and fires - "April was a month of historic climate extremes across much of the United States, including: record breaking precipitation that resulted in historic flooding; recurrent violent weather systems that broke records for tornado and severe weather outbreaks; and wildfire activity that scorched more than twice the area of any April this century." Thus begins the April 2011 climate summary for the U.S. issued yesterday by the National Climatic Data Center. The month featured very cold air spilling southwards from Canada, which gave Washington, Oregon, and Idaho top-ten coldest Aprils. Exceptionally warm air flowing from the Gulf of Mexico, which had near record-warm sea surface temperatures, gave Florida, Louisiana, and Texas top-ten warmest Aprils.  The battleground where these two radically different air masses collided featured an exceptionally strong jet stream, which set the stage for the world's two largest tornado outbreaks in history: April 25-28 (201 confirmed tornadoes) and April 14-16 (155 confirmed tornadoes.) Incredibly heavy rains also resulted, with six states along the Ohio River and Mississippi River watersheds recording their all-time wettest April in history. Eight other states had top-ten wettest Aprils, and the month was the 10th wettest April in U.S. history. Some areas along the Ohio River Valley received up to 20 inches of rain during the month, which is nearly half their normal annual precipitation.

Swollen Mississippi, Ohio rivers halt barge traffic - The waters of the Cumberland River through Nashville looked pristine on a brisk, sunny Thursday morning, but troubles downstream had turned the river into a parking lot of towboats full of crews looking for chores to fill the time and barges idled along the shores. The surging waters of the Mississippi and Ohio rivers have sidelined river shipping in the central U.S. That condition is on full display on the Tennessee and Cumberland rivers, which can’t access the Ohio River and the rest of the country because of lock closures at Kentucky Lake and Smithland, Ky., and additional problems downstream. “Everything comes out of Paducah, so essentially the Cumberland is shut off,” Edgin said. “The river system is effectively shut down. I have never seen an instance where everything gets completely shut down.” In Cincinnati, high waters aren’t allowing many boats to fit underneath bridges. The confluence of the Ohio and Mississippi rivers at Cairo, Ill., is closed to river traffic for at least another week. Shipping isn’t allowed past Caruthersville, Mo., because of fears that boat wakes could top levees.

Mississippi Flooding: River Cresting, Louisiana Prepares for Rising Waters - As the swollen Mississippi River continues to rush downstream, flood-level water is heading directly for some Louisanna communities still recovering from last year's devastating oil spill and possibly forcing hundreds of thousands of people to evacuate. Many neighborhoods of Memphis, Tenn., remain submerged in dirty, debris-strewn and reptile-infested water.  The National Weather Service said the Mississippi River has reached 47.85 feet, according to the Associated Press.  The river will continue to press against Memphis levees for at least the next few days, officials said. The Mississippi there has swollen to six times its average width.  Further south, residents of Vidalia, La., have been warned to start working on an evacuation plan. City officials have already evacuated the local hospital. Vidalia is directly located across the river from Natchez, Miss.  Officials said the river is expected to crest at a record level there on May 21. Businesses owners and residents have been preparing for the worst by filling sandbags.

Mississippi River Flood Highlights Bailout Costs for Taxpayers - Near record-level cresting of the mighty Mississippi River and images of displaced families along its banks have revived criticism that U.S. taxpayers are unfairly burdened by the expense of accommodating and protecting Americans living in dangerous flood zones.  Since the devastating floods of 1927 and 1937, Congress has poured billions of dollars into a system of levees and spillways and subsidized flood insurance programs to help protect thousands of residents and businesses situated along the Mississippi.  Congress created the National Flood Insurance Program (NFIP) in 1968, designed to provide assistance to people living in flood plains. Since then, the federal government has paid out billions through the program and more in post-disaster relief. Last year alone, the program paid $709 million in flood insurance claims to home and business owners.  As the flood waters strike again, some critics have questioned whether the federal government is abetting the costly disasters by not imposing more stringent regulations for building on known and potential flood plains

Flood control quote of the day - The heavy strains on the system and concerns that floods are getting more frequent and damaging are sparking a re-examination of flood control. In years past, the call likely would have gone out for higher levees and more so-called gray infrastructure—concrete and cement structures to keep the Mississippi inside its banks. Now some flood experts, along with some states, are saying that trying to control the river won't do the job. Even the Corps itself is in the process of officially changing its approach. For decades, the agency has focused on preventing floods, with the Mississippi flood-control system dating to the aftermath of the great flood of 1927. This summer, it expects to win federal approval for a policy it has begun phasing in over the past several years: allowing more flooding, while working with local and state governments to manage development on surrounding land to reduce economic damage from floods. The idea isn't to dismantle the hard structures, but to use other techniques to prevent the river from getting so high. "Whenever possible, the best way to manage floods is with a natural flood plain," said Terrence "Rock" Salt, the U.S. Army's deputy assistant secretary overseeing the Corps of Engineers' water-resource policy.

Mississippi flooding drowns crops and casinos: What's the economic toll? - The economic toll of the Mississippi River flooding has yet to be calculated, as the crest pushes past Memphis towards New Orleans, but is expected to run in the billions. Floods swamping large areas in the lower Mississippi River region¹ are imposing significant economic costs that may ultimately total several billion dollars. The precise damage to economic activity is still uncertain, since the floods have not yet crested in key areas such as Baton Rouge. The impact could end up being relatively small in the context of the economy of the region and nation. But for farmers, businesses, and individuals who have been directly affected, the costs are already significant. The most expensive effects include: crops lost or threatened, casinos shut down for weeks, and a mighty aquatic highway temporarily closed to freight.  Farms alone could take a $2 billion hit from the flooding, estimates John Michael Riley, an agricultural economist at Mississippi State University."The impacts are pretty large," he says, since much of the land near the river is agricultural – used for farming catfish, cotton, and grains such as corn, wheat, soybeans, and rice. And the flooding has spanned a large region encompassing parts of Missouri, Tennessee, Mississippi, Arkansas, and Louisiana.

Flood waters set sights on Louisiana oil refineries - Record flooding along the Mississippi River threatens to inundate at least two Louisiana refineries and hundreds of oil and gas wells, officials warned. "We haven't seen this kind of flooding since 1927." Army engineers plan to open a major spillway by Saturday in order to divert water away from New Orleans and ease pressure on the Mississippi as it approaches the Gulf of Mexico. Floodwaters as deep as 20 feet will inundate areas west of the river which house about 24,000 people and 13,000 structures. Jindal urged residents to begin evacuations now. The state's fuel team has identified two refineries, over 1,750 oil and gas wells and 135 operators in the affected areas. "Safety is a top concern on these structures as the Spillway is opened," Jindal's office said in a press release."Flooding in the lower Mississippi valley, where 11 refineries process up to 2.5 million barrels a day, is causing problems for the US oil and oil product markets," analyst Nic Brown of Natixis said in a note.

A Quick Look At The Threat To Gas Production From Midwest Flooding - As floodwaters continue flowing south, the Mississippi River Commission is considering opening the rarely used Morganza Floodway. With 125 separate gates, this would be only the second time the Floodway has been used in its 57 year history. The last time waters breached the levees was in 1973. According to Bloomberg, the result will be 600,000 cubic feet of water per second pouring from the river into the Atchafalaya River and central Louisiana countryside — three times the amount of water flowing through Niagara Falls in its most swollen months. While this is bad news for residents, who will receive no compensation for their flooded property, it could also hamper Louisiana's on-shore oil and gas production. 150 companies, with 2,264 oil wells producing 19,000 barrels of crude a day are preparing for the flood. A spokeswoman for the Louisiana Department of Natural Resources, Anna Dearmon, said as much as 252.6 million cubic feet a day of gas may be threatened, along with operations at 10 refineries, accounting for about 14 percent of U.S. operating capacity. The final decision on whether to open the Floodway will be made today if the Mississippi River flow at Red River Landing reaches 1.5 million cubic feet per second.

Spillway to Open When Flow Meets Threshold - The commander of the Morganza Floodway has permission to open it within 24 hours, inundating the Atchafalaya River basin and reducing the flow down the Mississippi toward New Orleans.  Major General Michael Walsh, president of the Mississippi River Commission, has told Col. Edward Fleming to open the spillway as soon as the river’s flow reaches 1.5 million cubic feet per second at Louisiana’s Red River Landing, the U.S. Army Corps of Engineers said in a statement. The spillway, built in 1954, can release 600,000 cubic feet of water per second into central Louisiana and the Atchafalaya at maximum capacity, according to the corps. That’s enough to fill a football field 10 feet deep every second. The corps anticipates operating the spillway at 150,000 cubic feet per second, according to a statement.  Louisiana Governor Bobby Jindal said the Morganza would be opened gradually and wouldn’t result in a wall of water running the length of the state to Morgan City, 70 miles west of New Orleans, where the Atchafalaya empties into the Gulf of Mexico. He stressed the need for residents to move quickly.

How Big Is the Mississippi River Flood? - The deadly tornadoes and rainstorms that tore across the Midwest last month combined with melting snow have left the Mississippi River bursting at the seams. Amidst the evacuations and extensive flooding along the river, experts know records are being broken, but they say they won't know the full extent of the flood — such as how much water has actually breached the riverbanks — until things quiet down."We get rain across the [Mississippi River] basin all the time, and if it is spread out in time it will not cause a problem," said Tom Salem, science and operations officer at the National Weather Service in Memphis, Tenn. "It is when it comes at the same time and multiple rivers add to the total of the entire system that we have problems," .Some areas along the Mississippi River have seen 10 to 20 inches (25.4 to 50.8 centimeters) of rain during April, said Royce Fontenot, a hydrologist at the National Weather Service.While the river levels are currently reaching record levels, the extent of the damage won't be known until after the flooding stops, which could be well into June, Fontenot said

What is causing the Mississippi River Floods? What Does Climate Change Have to Do With the Flooding? - Two main factors are behind the record flooding. First is the heavy rain that fell during April in the Ohio Valley, where six states — Illinois, Indiana, Kentucky, Ohio, Pennsylvania, and West Virginia — recorded their wettest April since instrument records began 117 years ago. Nine states recorded their wettest February through April period on record, according to a report released Monday by the National Oceanic and Atmospheric Administration (NOAA). In addition, snowmelt from the Midwest added more water to the Mississippi River and its tributaries. Here’s how NOAA described the weather pattern that led to the repetitive doses of heavy rain in the Ohio Valley during April. The storm track repeatedly tapped Gulf of Mexico moisture in a southerly surface airflow that generated storm systems week after week over the Midwest... Some areas received up to 20 inches of rain during the month, which is nearly half their normal annual precipitation.

Ron Paul: ‘Why Not?’ Abolish FEMA, since helping victims of disaster is “compounding our problems”  - Paul told CNN host Wolf Blitzer today that he would do away with the Federal Emergency Management Agency (FEMA), even at a time of unprecedented need.  Viewing the agency as unconstitutional, Paul questioned why federal funds should pay to protect citizens from natural disasters and concluded, “It’s a moral hazard to say that government is always going to take care of us when we do dumb things“: BLITZER: On the whole issue of FEMA, the Federal Emergency Management Agency, do you want to see that agency ended? PAUL: Well, if you want to live in a free society, if you want to pay attention to the constitution, why not? I think it’s bad economics. I think it’s bad morality. And it’s bad constitutional law. Why should people like myself, who had, not too long ago, a house on the Gulf Coast and it’s – it’s expensive there and it’s risky and it’s dangerous. Why should somebody from the central part of the United States rebuild my house? Why shouldn’t I have to buy my own insurance and protect about the potential dangers? I mean it’s – it’s a moral hazard to say that government is always going to take care of us when we do dumb things. I’m trying to get people to not to dumb things. Besides, it’s not authorized in the constitution.

Argentine Crackdown on grain/bean exporting companies, including Cargill and Bunge - According to BNA's David Haskel in the May 1, 2011 Daily Tax Report, Argentina has sent 1200 tax agents out to raid the offices of major grain and bean companies, including two US agribusiness MNEs, Cargill and Bunge.    The agents carried out raids across the country on Friday and Saturday, targeting 200 companies and individuals (including notaries and accountants) suspected of being involved in the scams.  The documents seized will be studied as the tax administration determines its next moves.Companies are thought to be using various tax evasion techniques, including setting up shame companies attributable to deceased people, money laundering, and claiming abandoned silos as place of origin for grains.  Cargill is accused of billing its sales to a Uruguayan subsidiary, that would then bill companies set up in tax havens.  In addition, the Uruguayan subsidiary claimed it was making sales at below purchase price, generating losses that allowed it to reduce taxes.  Bunge is suspected of the biggest tax-dodge, based on raids of its offices and seizure of files.  It may have used the scams to avoid $300 million in taxes. 

Food inflation, land grabs spur Latin America to restrict foreign ownership - One of the first things passengers see when disembarking at Cuiaba airport in central Brazil¹ is a real estate advertisement promoting arable land to foreigners. South America has some of the most productive land on the planet, and buyers have long been drawn to pastureland for cattle; fields for grains, soybeans, and sugar cane; and forests where they can plant eucalyptus for timber and paper. Farms can reach the size of small nations. Such advertisements may soon be preaching to an empty audience, however, as this and other South American nations that traditionally welcomed foreign investors are now changing land laws to restrict foreign ownership as arable areas worldwide become more sought after, a fact underlined by recent food crises. For lawmakers in Brazil, Argentina, and Uruguay, a nation where an estimated 25 percent of all land (an area the size of Denmark) already sits in foreign hands, it isn't a moment too soon to roll back the welcome mat.

Subsidies—Love Them or Hate Them, It’s Better to Target Them - IMFdirect - For decades, countries in the Middle East and North Africa have relied heavily on food and fuel price subsidies as a form of social protection. And, understandably, governments have recently raised subsidies in response to hikes in global commodity prices and regional political developments. Like many things, there may be a time and a place for using subsidies. But, they need to be better targeted. And, often, there will be better alternatives. Alternatives that do a better job of protecting the poor. Countries in the region stand out because of their heavy reliance on subsidies. The region accounted for almost two-thirds of petroleum price subsidies worldwide in 2009, according to estimates by the International Energy Agency. Food subsidies are also widespread.

Does the Earth Have Room for 10 Billion People? - But suppose world population will reach 10.1 billion by the end of this century. Would that be a good or a bad thing? Arguably a good thing, on several grounds. One is that it would enable greater specialization, which reduces costs. Second is that it would increase the returns to innovation by increasing the size of markets, though an offset is that innovation can produce immensely destructive as well as constructive technology. Third, the more people there will be, the more high-IQ people there will be, and hence the faster the growth of knowledge will be; though a possible offset is that the more evil geniuses and other monsters there also will be; persons of great potential for evil, such as Hitler, Stalin, and Mao, presumably are rare. Fourth, if the total subjective welfare of the 10.1 billion exceeds that of a smaller population, or (depending on one’s version of utilitarianism) the average welfare of the greater population is greater than that of the smaller one, the world will be a happier place in a utilitarian sense (the excess of pleasure over pain will be greater).

Yes, the Earth Will Have Ample Resources for 10 Billion People-Becker - World population grew by almost 300% during the twentieth century; over the same time period, world per capita incomes grew by about 400%. This association of sizable increases in world population with large increases in per capita incomes should continue to the end of this century. Forecasts of the world’s population only a few years in the future are generally quite accurate because the number of births and deaths during the next few years are largely determined by the existing distribution of the number of people at different ages. At the same time, forecasts of the population 50 or more years into the future are notoriously inaccurate because of difficulties in predicting changes over a long time period in birth rates, and to a much lesser extent, also in death rates. However, for the sake of this discussion, I assume that the UN forecast is approximately correct, so that about 10 billion people will inhabit the earth by the end of this century. Posner mentions various likely benefits of a much larger population, such as greater demand for and supply of innovations in the medical and other sectors, and greater world specialization by skill.

Hell and High Water: Weather Channel labels Texas drought and Mississippi floods truly “exceptional” - Masters: This is "only" a "1-in-100 to 1-in-300 year flood."  - Weather Channel Senior Meteorologist Jonathan Erdman writes today:There comes a point at which a meteorological event becomes truly “exceptional”.We’ve already seen two events just in the past few weeks that pushed the record books to the limit: The deadly swarm of tornadoes from April 25-28 particularly in the South, and now the slow-moving flood disaster that, in some areas is topping the Great Flood of 1927.There is another weather event that has now crossed the “exceptional” threshold … the Southern drought.  Here’s a question:  At what point do three nearly simultaneous truly exceptional weather events in the same part of one country become something beyond exceptional?

Jeff Masters: Great Texas drought of 2011 intensifies - April 2011 was the 5th driest and 5th hottest April in Texas history, going back 117 years. Exceptionally dry conditions have parched the soil and vegetation in Texas, which recorded precipitation of just 1.68 inches (43 mm), on average, since February 1st. This is easily its driest February-April period on record for the state, nearly an inch less than the previous record (2.56 inches or 65 mm, February-April 1996). The six-month period November 2010/April 2011 was the 2nd driest such period on record. Based on the U.S. Drought Monitor, 94% of Texas is in severe to exceptional drought. As a result of the great drought, an all-time April record of 1.79 million acres of land burned last month in the U.S., mostly in Texas. Much of the fuel for the fires came from dried underbrush and grasses which experienced ideal growing conditions during the summer of 2010, when there was abundant rain across the region. Nation-wide, the year-to-date period, January-April, has the greatest acreage burned in history, according to the National Interagency Fire Center.

Texas Drought 2011: State Endures Driest 7-Month Span On Record  -- With much of the nation focused on a spring marked by historic floods and deadly tornadoes, Texas and parts of several surrounding states are suffering through a drought nearly as punishing as some of the world's driest deserts.Some parts of the Lone Star State have not seen any significant precipitation since August. Bayous, cattle ponds and farm fields are drying up, and residents are living under constant threat of wildfires, which have already burned across thousands of square miles. Much of Texas is bone dry, with scarcely any moisture to be found in the top layers of soil. Grass is so dry it crunches underfoot in many places. The nation's leading cattle-producing state just endured its driest seven-month span on record, and some ranchers are culling their herds to avoid paying supplemental feed costs. May is typically the wettest month in Texas, and farmers planting on non-irrigated acres are clinging to hope that relief arrives in the next few weeks.

Texas drought threatens cattle ranchers' livelihood - It's auction day at the West Cattle Barn in central Texas, reports CBS News correspondent Don Teague. For 74-year-old rancher Cotton Dietrich, this will be his last. Deitrich is selling off his herd -- all of his cattle -- because the once-fertile grasslands that feed them are gone. Three-quarters of Texas is in extreme or exceptional drought. Lubbock has had less than an inch of rain this year. Houston has had just over an inch-and-a-half in three months -- about the same as the Sahara desert. Wildfires are ravaging the tinder dry landscape, scorching more than two million acres since January. To make matters worse, this is typically the Texas rainy season.  "We should be seeing rainfall, so if we don't get rainfall in the next several months, the impact is going to be devastating," said Victor Murphy, meteorologist at the National Weather Service. For Dietrich and thousands of ranchers across Texas, the only choice is to sell their herds or go broke trying to feed them.

Spiegel: Troubled Waters - Raindrops sit on a camera lens along the banks of the Rhine river in Cologne, Germany, on Tuesday. The rain shower was brief and provided little relief for the river, which has sunk to its lowest May level in 90 years. The water level was measured at just 1.25 meters in Cologne on Tuesday. Meanwhile llow water levels have caused headaches along one of Europe's most important shipping routes. On Tuesday, carmaker Ford said that its ships couldn't be fully loaded because of concerns over water levels on the river.

Off the Deep End — Beijing’s Water Demand Outpaces Supply Despite Conservation, Recycling, and Imports - A farmer, hungry and frustrated, sits by an ice-fishing hole in the reservoir and skittishly lifts his gaze from the pit to make sure there is no one else around. He is nervous. The reservoir is exclusively reserved, according to unwritten rules, for the local government officials. He might get fined more than $US 1,200 (RMB 8,000)—four times his annual salary—for fishing for food for himself and his family. His uneasy look underlines a widespread, but unspoken, tension. Once a magnet for tourism and booming agriculture, this area of eastern Hebei Province can no longer provide enough water for irrigation. To feed the thirsty Chinese capital, Hebei’s Guanting Reservoir has lost more than 90 percent of its water, and the nearby Yongding River, which filled the entire flood plain in the 1980s, is down to a trickle. The Beijing government is now paying the area to cut back on irrigation, yet farmers say that local authorities don’t give them any of the subsidies that compensate for the losses.  “What can we do? If you don’t let us irrigate our crops, we have no other options"

Water - It's Not Just For Drinking Anymore (Reuters) -Selling water on exchanges in the same way other commodities are traded could help solve a shortage of the world's most precious raw material likely to hit long before oil runs dry, the chairman of Nestle said on Tuesday. "I am not against the idea," Peter Brabeck, chairman of the world's largest food group, told Reuters when asked about the idea of exchange-based water trade. The first place to consider it should be Alberta province , he said, where competition could be particularly fierce between farmers needing water for crops, and oil companies needing water to exploit oil sands, which require far more water than other kinds of oil deposit. "We are actively dealing with the government of Alberta to think about a water exchange," Brabeck said. As a first step, he added, Alberta had separated land rights and water rights, so owning land did not automatically give rights to water that ran through it.

IPCC report: Renewables can never meet energy demand - The UN Intergovernmental Panel on Climate Change (IPCC) has issued teasers ahead of an upcoming report into renewable energy. The IPCC says¹ that "close to 80 per cent of the world’s energy supply could be met by renewables by mid-century". However this is derived from the most optimistic possible scenario for renewables, and even then it requires most of the human race to remain in miserable poverty. Total world energy supply, according to the IPCC, now stands at around 490 exajoules per year at the moment – which chimes fairly well with other previous analyses. The IPCC suggests that no less than 13 per cent of this comes from renewable sources, though once the full report becomes available it will probably turn out that a lot of this is biofuel consumption which may or may not actually be renewable or sustainable. Certainly the US Energy Information Administration figures² show that only 7.7 per cent of world energy production comes from renewable electricity generation right now. The IPCC manages to generate its "close to 80 per cent by 2050" claim by assuming that the human race can actually get by on much less energy than it uses today.

Sierra Club calls on Gov. Brown to revise global warming plan - The Sierra Club of California, the state’s oldest and largest environmental group, called on Gov. Jerry Brown this week to substantially rewrite the cap-and-trade program for greenhouse gases that former  Gov. Arnold Schwarzenegger considered to be his greatest legacy. The trading system, which would curb emissions from 600 California industrial plants, is the centerpiece of the state’s 2006 global warming law, AB 32. Scheduled to take effect in January, it would be the nation’s most extensive program to cut carbon dioxide and other gases that are trapping heat in earth’s atmosphere. However, in a letter to the governor released Wednesday, Sierra Club California Director Bill Magavern called Brown “well-suited to the task of scrutinizing and revising the cap-and-trade rule adopted by the previous administration. The rule has some serious flaws that will limit its effectiveness in reducing emissions and generating green jobs.”

The Zombie Apocalypse - What will be the most pressing issue for people after the end of the world as we know it (TEOTWAWKI)? The search for food to ease the hunger pangs in your stomach? Finding shelter for warmth and dryness during a bitterly cold night? The relentless pursuit of clean, potable water to rehydrate yourself? For people living in densely populated areas of the country, such as the suburbs of Chicago, Dallas, Seattle, or most any of the cities in the NorthEastern U.S., the most immediate threat to their very existence will not come from lack of supplies. It will not come from diseases or waterborne illnesses like dysentery or cholera . It won’t even come from starvation. The most frightening threat will come from other people.

This Time We’re Taking the Whole Planet With Us by Chris Hedges = Civilizations rise, decay and die. Time, as the ancient Greeks argued, for individuals and for states is cyclical. As societies become more complex they become inevitably more precarious. They become increasingly vulnerable. And as they begin to break down there is a strange retreat by a terrified and confused population from reality, an inability to acknowledge the self-evident fragility and impending collapse. The elites at the end speak in phrases and jargon that do not correlate to reality. As food and water shortages expand across the globe, as mounting poverty and misery trigger street protests in the Middle East, Africa and Europe, the elites do what all elites do. They launch more wars, build grander monuments to themselves, plunge their nations deeper into debt, and as it all unravels they take it out on the backs of workers and the poor. The collapse of the global economy, which wiped out a staggering $40 trillion in wealth, was caused when our elites, after destroying our manufacturing base, sold massive quantities of fraudulent mortgage-backed securities to pension funds, small investors, banks, universities, state and foreign governments and shareholders. The elites, to cover the losses, then looted the public treasury to begin the speculation over again. They also, in the name of austerity, began dismantling basic social services, set out to break the last vestiges of unions, slashed jobs, froze wages, threw millions of people out of their homes, and stood by idly as we created a permanent underclass of unemployed and underemployed.

NoamChomsky: Human Intelligence and the Environment - Mayr pointed out that if you take a look at biological success, which is essentially measured by how many of us are there, the organisms that do quite well are those that mutate very quickly, like bacteria, or those that are stuck in a fixed ecological niche, like beetles. They do fine. And they may survive the environmental crisis. But as you go up the scale of what we call intelligence, they are less and less successful. By the time you get to mammals, there are very few of them as compared with, say, insects. By the time you get to humans, the origin of humans may be 100,000 years ago, there is a very small group. We are kind of misled now because there are a lot of humans around, but that’s a matter of a few thousand years, which is meaningless from an evolutionary point of view. His argument was, you’re just not going to find intelligent life elsewhere, and you probably won’t find it here for very long either because it’s just a lethal mutation. He also added, a little bit ominously, that the average life span of a species, of the billions that have existed, is about 100,000 years, which is roughly the length of time that modern humans have existed.  With the environmental crisis, we’re now in a situation where we can decide whether Mayr was right or not. If nothing significant is done about it, and pretty quickly, then he will have been correct: human intelligence is indeed a lethal mutation. Maybe some humans will survive, but it will be scattered and nothing like a decent existence, and we’ll take a lot of the rest of the living world along with us.

Nuclear Agency Is Criticized as Too Close to Its Industry…In the fall of 2007, workers at the Byron nuclear power plant in Illinois were using a wire brush to clean a badly corroded steel pipe — one in a series that circulate cooling water to essential emergency equipment — when something unexpected happened: the brush poked through.  The resulting leak caused a 12-day shutdown of the two reactors for repairs.  The plant’s owner, the Exelon Corporation¹, had long known that corrosion was thinning most of these pipes. But rather than fix them, it repeatedly lowered the minimum thickness it deemed safe. By the time the pipe broke, Exelon had declared that pipe walls just three-hundredths of an inch thick — less than one-tenth the original minimum thickness — would be good enough.

Disaster Plan Problems Found at U.S. Nuclear Plants - Despite repeated assurances that American nuclear plants are better equipped to deal with natural disasters than their counterparts in Japan, regulators said Thursday that recent inspections had found serious problems with some emergency equipment that would have made it unusable in an accident.  In addition, the staff of the Nuclear Regulatory Commission¹ acknowledged that the agency’s current regulations and disaster plans did not give enough consideration to two factors that had greatly contributed to the continuing Fukushima Daiichi crisis in Japan: simultaneous problems at more than one reactor and a natural disaster that disrupts roads, electricity and other infrastructure surrounding a plant.   The problems included pumps that would not start or, if they did, did not put out the required amount of water; equipment that was supposed to be set aside for emergencies but was being used in other parts of the plants; emergency equipment that would be needed in case of flood stored in places that could be flooded; and insufficient diesel on hand to run backup systems.

Deadly Silence on Fukushima - I received the following email a few days ago from a Russian nuclear physicist friend who is an expert on the kinds of gases being released at Fukushima. Here is what he wrote:  About Japan: the problem is that the reactor uses "dirty" fuel. It is a combination of plutonium and uranium (MOX). I suspect that the old fuel rods have bean spread out due to the explosion and the surrounding area is contaminated with plutonium which means you can never return to this place again. It is like a new Tchernobyl. Personally, I am not surprised that the authority has not informed people about this. I have been following the Fukushima story very closely since the earthquake and devastating tsunami. I have asked scientists I know, nuclear physicists and others about where they find real information. I have also watched as the news has virtually disappeared. There is something extremely disturbing going on, and having lived through the media blackout in France back in April and early May 1986, and speaking to doctors who are deeply concerned by the dramatic increase in cancers appearing at very young ages, it is obvious that information is being held back. We are still told not to eat mushrooms and truffles from parts of Europe, not wild boar and reindeer from Germany and Finland 25 years later.

Guest Post: Simulation Shows High Levels of Radiation Hitting the West in May - The Norwegian Institute for Air Research (Nilo) ran models and forecasts of the radioactive fallout from the Japanese nuclear accident for some time. Nilo has stopped providing such forecasts to the public. However, Alexander Higgins discovered an internal page of Nilo’s website showing high levels of radioactive iodine 131: (Click for larger image). Because this comes from an internal – rather than publicly-released – portion of Nilo’s website, it cannot be confirmed that these are real readings, as opposed to some sort of fictitious simulation. However, the webpage containing the simulation contains “flexpart”, which is the name of Nilo’s official,formerly-public simulations. Despite the lack of official confirmation, given that the readings show high levels of radiation hitting much of the West this month, that the EPA has suspended all but routine radiation monitoring, that American states aren’t really monitoring, that Canada has drastically slashed the amount of monitoring it is doing, and that the situation in Japan is worse than the Japanese have previously admitted, I had to post this information … with appropriate caveats.

Japan's Nuclear Energy Debate: Some See Spur For A Renewable Revolution - The crisis at the Fukushima Daiichi nuclear power plant has spawned antinuclear protests in Tokyo on a scale not seen for decades, raising hopes among activists that Japan's¹ future is geared toward a revolution in renewable energy. Japanese media estimated that 15,000 people calling for immediate closure of all the country's nuclear plants marched through Tokyo's Koenji neighborhood on April 10, and more are expected for a similar demonstration this Saturday. Although Japan's nuclear crisis has forced several countries to rethink nuclear energy, in Japan, where the industry has long wielded influence over energy policy, the emphasis for now is on improving safety, rather than abolition.  But a growing number of Japanese are concerned about the cost of continued investment in nuclear power and are attempting to push Japan toward replacing nuclear energy with renewables.

Japan Anti-Nuclear Protesters Rally After PM Call To Close Plant (Reuters) - Several thousand Japanese anti-nuclear protesters marched in the rain on Saturday, welcoming a call from the prime minister to shut down a plant in central Japan and urging him to close more to avoid another nuclear crisis. The surprise call from Prime Minister Naoto Kan on Friday to shut down Chubu Electric Power Co's Hamaoka plant followed pressure on the government to review nuclear energy policy after a March 11 quake and tsunami damaged another plant and triggered the worst disaster since Chernobyl in 1986. Tens of thousands of residents around the Fukushima Daiichi plant on the northeast coast have been ordered to evacuate after radiation leaks into the air, soil and sea. Radiation checks have led to shipment bans of some vegetables and fish. Students, labor union members and parents with children hoisted on their shoulders marched through Tokyo's bustling Shibuya district to music and chants, carrying flags written with "Close all nuke plants at once!" and "No More Fukushima."

Japan to shut nuclear plant on quake fears -The March 11 earthquake that hit eastern Japan was so powerful it pulled the entire country out and down into the sea. The mostly devastated coastal communities now face regular flooding, because of their lower elevation and damage to sea walls from the massive tsunamis triggered by the quake. In port cities such as Onagawa and Kesennuma, the tide flows in and out among crumpled homes and warehouses along now uninhabited streets. A cluster of neighborhoods in Ishinomaki city is rare in that it escaped tsunami damage through fortuitous geography. So, many residents still live in their homes, and they now face a daily trial: The area floods at high tide, and the normally sleepy streets turn frantic as residents rush home before the water rises too high.

Fukushima in America - For the first time ever for a sitting prime minister, Naoto Kan has requested that a nuclear plant — Hamaoka, 125 miles southwest of Tokyo — be shut down. It was considered too lax on security, too vulnerable to a tectonic fault line and too close to densely populated areas. But if Japan can be changed by this disaster, what about America? When it comes to nuclear issues — from atomic weapons to nuclear power — no two nations could be more irredeemably intertwined. After the atomic destruction of Hiroshima and Nagasaki, despite dissenting voices of some of its own citizens, America drew mostly wrong conclusions as it plunged into nuclear expansion. In their 1995 book “Hiroshima in America,” Robert Jay Lifton and Greg Mitchell painstakingly recount the relentless public relations campaign — unleashed by the Truman administration almost within hours of the Hiroshima bombing — that led to the Faustian bargain that blinded the Americans (and later the Japanese) to the insidious, long-term damage of radiation. Prominent journalists and media outlets of the time embraced, with enthusiasm, the “Dawn of the Atomic Age” and America fell, in the authors’ words, into the “nuclear entrapment” that is with us to this day.

Fukushima Reactor 1 Fuel Rods Fully Exposed, Reactor 4 In Danger Of Collapsing…  According to the latest update from a now government funded TEPCO, “fuel rods are fully exposed in the No. 1 reactor at its stricken Fukushima Dai-Ichi nuclear plant, setting back the utility’s plan to resolve the crisis. The water level is 1 meter (3.3 feet) below the base of the fuel assembly, Junichi Matsumoto, a general manager at the utility known as Tepco, told reporters at a briefing in Tokyo. Melted fuel has dropped to the bottom of the pressure vessel and is still being cooled, Matsumoto said. The company doesn’t know how long the rods have been exposed, he said.” And apparently even more skeptics are emerging: ““I’ve been saying from the beginning the water tomb plan won’t work,” said Tadashi Narabayashi, a professor of nuclear engineering at Hokkaido University. “Tepco must work on a water circulation cooling system as soon as possible. They’ve been going round and round in circles and now realize this is what they need to do.” And the kicker: “It’s unlikely the situation has worsened with the discovery the rods are exposed because they’ve probably been out of the water since shortly after the crisis started, Narabayashi said.“ Which means that the situtation has indeed been dire from the very beginning, that TEPCO and the government have been lying, that radiation has been spewing, and that prevalent radiation is likely far higher than most have conceived.

BBC News - Setbacks at Japan nuclear plant: A reactor at Japan's crippled nuclear plant has been more badly damaged than originally thought, operator Tepco has said. Water is leaking from the pressure vessel surrounding reactor 1 - probably because of damage caused by exposed fuel rods melting, a spokesman said.... Work to restore cooling systems had been most advanced at reactor 1, the smallest and oldest at the site. But a spokesman for the power giant said when a faulty gauge had been repaired, it showed water levels in the pressure vessel 5m (16ft) below the level needed to cover fuel rods. "All the fuel is unprotected at this point and the water levels are below that," said Junichi Matsumoto. "However temperatures in the reactor pressure vessel have cooled to 100 to 120 degrees so we have come to the conclusion that the fuel mass... is actually not at the proper levels but somewhat below that or even possibly at the bottom of the vessel."

Fukushima reactor water leak risks delaying crisis plan - Japan's crippled Fukushima nuclear power plant is leaking water from the center of the reactor seen as the closest to stabilizing, its operator said on Thursday, risking a delay in its plan to resolve the worst nuclear disaster since Chernobyl. The discovery of the leak, through a hole in the container that houses the reactor core, provides new insight into the sequence of events that triggered a partial meltdown of the uranium fuel in the No. 1 reactor at Fukushima after the plant was struck by a massive earthquake and tsunami on March 11, officials said. The battle to bring Fukushima under control has been complicated by repeated leaks of radioactive water, threatening both the nearby Pacific Ocean and nearby groundwater.

Greater than expected damage seen at Japan reactor - One of the reactor cores at Japan's crippled nuclear power plant has been damaged more severely than originally thought, officials said Thursday, in a serious setback for efforts to stabilize the radiation-leaking complex. The new findings followed repairs to monitoring equipment, which also showed that the water level in the core of Unit 1 at the Fukushima Dai-ichi plant is much lower than previously thought, totally exposing remaining fuel rods and pointing to a greater-than-expected leak in the chamber. However, temperatures there are still far below dangerous levels because the plant's operator, Tokyo Electric Power Co., continues to inject new water to keep the rods cool. That water is apparently then leaking into and through the larger, beaker-shaped containment vessel and pooling up in other parts of the reactor building.

Japanese Reactor Damage Is Worse Than Expected -  In a development that is likely to delay efforts to bring the Fukushima Daiichi Nuclear Power Station under control, the plant’s operator said Thursday that one reactor, No. 1, had sustained much more damage than originally thought and was leaking water.  The company released a plan last month to bring the plant into a relatively stable state in six to nine months, but that was predicated on the notion that it could efficiently cool the fuel in several reactors — a harder task if water is leaking out. The company had long suspected that the containment vessels at two other reactors were breached and leaking, but it had hoped the No. 1 reactor was intact and therefore easiest to bring under control.  The company, Tepco, was able to better assess the reactor on Thursday because workers had recently been able to get close enough to fix a water gauge. It showed that the water level in the reactor was much lower than expected despite the infusion of tons of water since a devastating earthquake and tsunami knocked out the plant’s crucial cooling systems

Fukushima 'Full Meltdown' Made Official - TEPCO officials confirmed today the months-long of suspicion that the Reactor No. 1 at Fukushima suffered a full meltdown. According to the disclosure today, workers discovered earlier this week that No. 1's containment vessel has been leaking water and today discovered a sizeable hole they believe was created by fallen fuel pellets. The water leakage not only indicates that the clean up efforts will take longer than originally expected but also that the worst case scenario was already underway when TEPCO said it had been avoided.Before anybody panics over the very scary phrase "full meltdown," it's worth pointing out that nuclear scientists don't necessarily agree on what that means. The difference between a "partial meltdown," which is what we were lead to believe had happened, and a "full meltdown," which is the term dominating today's headlines, is unclear and perhaps not even that important. According to Columbia's David Brenner, a "full meltdown" occurs when the exposed fuel melts through the bottom of the containment vessel.

Japan's Latest Proposal To Contain Fukushima's Radioactive Fallout - A (Circus) Tent -- You just can't make this up: proving that Japan can outdo even the Russians when it comes to nuclear crisis "response", Dow Jones reports that the latest scheme to come out of TEPCO is to cover Fukushima with a giant tent. It is unclear if it will have a circus coloration yet. From DJ: "Giant polyester covers will soon be placed around the damaged reactor buildings at Japan's Fukushima nuclear complex to help contain the release of radioactive substances into the atmosphere, the plant operator said Friday. Tokyo Electric Power Co. (TEPCO) will install the first cover at the No. 1 reactor, the focus of recent stabilization efforts, starting next month." This probably means that Japan looked long and hard at the concrete shell option and realized it was impossible, which is true. The problem is that by now the melted cores are not in the complex, but deep beneath it and the radioactivity is actively seeping directly into the soil. And since the polyester tent idea is doomed to failure, it is only a matter of time before the Simpsons dome is firmly in place over a ragion with a radius of about 20 kilometers. Impossible you say? Just wait.

Japan Reaffirms Nuclear Energy Use -  Japan¹ remains committed to nuclear power despite the crisis at the Fukushima Daiichi Nuclear Power Station², Prime Minister Naoto Kan³ indicated Sunday, as workers moved closer to repairing the crippled plant by opening the doors of a damaged reactor building. The move is intended to air out the building that houses Reactor No. 1 to ensure that radiation levels are low enough to allow workers to enter. The plant’s operator, the Tokyo Electric Power Company, said the procedure would release little radiation into the atmosphere because an air filtering system installed last week⁴ had already removed most of the dangerous particles.  The company has said it will take at least six months to stabilize the plant, in which three of the six reactors were damaged by a magnitude-9.0 earthquake and tsunami. Despite the crisis in Japan, Mr. Kan indicated Sunday that his government was not rethinking the nation’s energy policy. There had been speculation that the government might seek to shut down more nuclear plants after Mr. Kan requested last week that the Hamaoka nuclear plant in central Japan be temporarily closed⁵ because of safety concerns.

Japan Nuclear Power Expansion Plans Abandoned -- Japan is to abandon plans to expand its nuclear power industry and make renewables a key part of its energy policy, the prime minister, Naoto Kan, said as the country marked two months since the tsunami disaster. As workers continued efforts to stabilise the Fukushima Daiichi nuclear power plant, Kan said he would "start from scratch" a policy that initially envisaged nuclear making up more than 50% of Japan's energy needs by 2030.Japan, whose 54 nuclear reactors provide 30% of its electricity, had planned to build at least 14 new reactors over the next 20 years, but policymakers accept that will be impossible in light of the Fukushima crisis. Kan said that renewables, which make up 20% of overall supply, would have a bigger role to play in meeting the country's energy needs. "I think it is necessary to move in the direction of promoting natural energy and renewable energy such as wind, solar and biomass," he said.

Japan scraps plan for 14 new nuclear plants - Japan PM on Fukushima: "Taking this as a lesson, we will lead the world in clean energy such as solar and biomass" - Prime Minister Naoto Kan said Tuesday that Japan would abandon plans to build new nuclear reactors, saying his country needed to “start from scratch” in creating a new energy policy…. Mr. Kan said Japan would retain nuclear and fossil fuels as energy sources, but vowed to add two new pillars to Japan’s energy policy: renewable energy and conservation. Even before Fukushima, nuclear power had priced itself out of the market in most industrialized countries (see “Does nuclear power have a negative learning curve?“)  Back in October, Exelon CEO John Rowe explained that low gas prices and no carbon price pushed back nuclear renaissance a “decade, maybe two.”

Japanese nuclear firm asks for gov’t bailout to pay disaster victims - The president of TEPCO on Tuesday submitted a request for Japanese government aid in compensating those affected by its stricken nuclear power plant, as the utility said it faced funding problems. Presenting the request to trade and industry minister Banri Kaieda, Masataka Shimizu told reporters that TEPCO would undertake bold restructuring measures to help pay for damages caused by the world's worst nuclear accident for 25 years. Tokyo Electric Power (TEPCO) said in the submitted document that the company faced 'an extremely severe situation regarding fund-raising such as loans from financial institutions, not to mention bond issuance.' The company said it needed state help to continue operating and avoid a scenario that threatened 'fair and prompt compensation to affected people and causing fears over stable supply of electricity.' Some analysts have forecast that the utility faces compensation claims totalling around 10 trillion yen ($125 billion). The government is expected to decide on an assistance package for TEPCO later this week.

Japan's Fukushima crisis drives protests over world's largest nuclear plant in India - Even as Japan has decided to forgo nuclear expansion following the Fukushima crisis, India's government is insisting it will proceed with the world's largest nuclear facility despite mounting public opposition. India's³ break-neck growth has driven an intense need for energy – and nuclear power has been accepted within the country as a suitable and clean way to deliver this. But in the wake of the crisis at the Fukushima Daiichi nuclear power plant, citizens in and around Jaitapur, the seismic activity-prone region where the Indian government plans to build a 9,900 mega watt power station, are upset.  Tensions came to a head in mid-April when one antinuclear demonstrator was killed during a protest, and several others were injured.  "The locals, especially after what's happened in Fukushima, are not of two minds. They simply don't want it," says Greenpeace India activist Vinuta Gopal. "They see nothing to gain from it, and everything to lose," she says. On top of that, "India certainly doesn't have [Japan's] capacity for disaster management preparedness

Peak Coal This Year? -  In August last year, the journal Energy published A global coal production forecast with multi-Hubbert cycle analysis by Tadeusz W. Patzek and Gregory D. Croft. I'll let National Geographic introduce the findings. A new study seeks to shake up the assumption that use of coal, the most carbon-intensive fossil fuel, is bound to continue its inexorable rise. In fact, the authors predict that world coal production may reach its peak as early as next year, and then begin a permanent decline.The study, led by Tad Patzek, chairman of the Department of Petroleum and Geosystems Engineering at the University of Texas at Austin, and published in the August issue of Energy, predicts that by mid-century, the world's coal mining will supply only half as much energy as today.The idea that the world will face "peak coal" as soon as 2011 flies in the face of most earlier estimates and analysis. The London-based World Coal Institute, an industry group including the largest international coal producers, says "the use of coal will rise 60 percent over the next 20 years," and that "coal will last us for at least 119 years." And the U.S. Energy Information Administration, in its most recent international outlook, projects that coal consumption for electricity will grow more than 50 percent by 2035 unless policies are put in place to stop the growth of greenhouse gas emissions.

New Study Documents Methane Contamination From Fracking Natural Gas Operations.  - A controversial method of extracting natural gas from shale rock formations significantly increases methane concentrations in drinking water taken from wells nearby, suggests the latest study by US environmental scientists. The findings come just as a moratorium on the practice in one US state is due to expire, and are likely to stoke the public debate. Robert Jackson, a biogeochemist at Duke University in Durham, North Carolina, and his colleagues measured the methane concentrations in 60 drinking-water wells in northeastern Pennsylvania and nearby areas of New York state. Dissolved methane concentrations in water from the 34 wells located more than 1 kilometre from fracking operations averaged about 1.1 milligrams of dissolved methane per litre. But in water taken from 26 wells within 1 km of one or more fracking operations, methane concentrations averaged 19.2 mg l^–1. Isotopic analyses of the carbon in that methane shows that the gas has the same signature as that being recovered from deep underground by fracking operations

Duke Study Finds Methane In Well Water Near Gas Drilling Sites - A Duke University study has found that methane levels in private water wells are, on average, 17 times higher when within 1,000 yards of a natural gas drilling site. Of 60 wells that the researchers tested for methane in northeastern Pennsylvania and New York, they found the gas in 85 percent. When they fingerprinted the methane - comparing the chemistry of the methane in the wells with that from natural gas wells in the region - "the signatures matched," said Robert Jackson, a professor at Duke and a study author. "At least some homeowners who claim that their wells were contaminated by shale gas extraction appear to be right," he said. The authors said it was the first "systematic evidence" of methane contamination of private drinking wells in areas where gas extraction is occurring.

Drinking water in thousands of homes ‘contaminated with harmful levels of methane’ - A controversial natural gas production technique is contaminating drinking water in tens of thousands of homes, according to a study. Scientists collected 68 drinking water samples from near gas drilling sites in Pennsylvania and New York. They found potentially harmful levels of methane in the water due to its proximity to the process of hydraulic-fracturing, or fracking. The report, released by the National Academy Of Sciences, said: 'In aquifers overlying the Marcellus and Utica shale formations of north-eastern Pennsylvania and upstate New York, we document systematic evidence for methane contamination of drinking water associated with shale gas extraction.' Fracking involves releasing natural gas trapped in shale formations by blasting a mix of water, sand and chemicals into the rock.

Hydraulic Fracturing for Natural Gas Pollutes Water Wells - Drilling for natural gas is booming in Pennsylvania—thanks to fracturing shale rock with a water and chemical cocktail paired with the ability to drill in any direction. Despite homeowner complaints, however, research on how such hydraulic fracturing, or fracking, is impacting local water wells has not kept pace. Now a new study that sampled water from 60 such wells has found evidence for natural gas–contamination in those within a kilometer of a new natural gas well. "Methane concentrations in drinking water were much higher if the homeowner was near an active gas well," explains environmental scientist Robert Jackson of Duke University, who led the study published online May 9 in Proceedings of the National Academy of Sciences. "We wanted to try and separate fact from emotion." The researchers discovered methane in 51 of the 60 wells tested—that is not out of the ordinary. By measuring the ratio of radioactive carbon present in the methane contamination, however, the researchers determined that in drinking water wells near active natural gas wells, the methane was old and therefore fossil natural gas from the Marcellus Shale, rather than more freshly produced methane. This marks the first time that drinking water contamination has been definitively linked to fracking.

Shale Gas Extraction: The Need To Be Seen To Be Clean -- DRILL rigs tower over the silos on farms in Pennsylvania. Once-empty mesas in western Colorado, where mule deer and sage grouse ranged freely, now look like a neural network from a bird’s-eye view, with well-pads connected by dirt roads scattered across the landscape.  These are the signs of America’s natural-gas boom. Thanks to new drilling technology, and in particular a controversial process called hydraulic fracturing or “fracking,” the size of the proven reserves is growing. At the end of 2009 the United States had estimated reserves of 283.9 trillion cubic feet (8 trillion cubic metres) of natural gas, up 11% from the year before. In 2010 the country produced 22.6 trillion cubic feet of natural gas, up from 18.9 trillion cubic feet in 2005. The price at the wellhead has dropped from $7.33 per thousand cubic feet to $4.16 during the same period. But some question whether natural gas is really as green as all that. For one thing, fracking uses a tremendous amount of water, a severely undervalued resource inland. And the process gives off methane, a potent heat-trapper.

Republicans, Texans blast planned EPA study of hydraulic fracturing - Republican lawmakers and state regulators blasted the Environmental Protection Agency’s plans to broadly study the controversial hydraulic fracturing process that is essential to unlocking natural gas from shale formations across the U.S. Rep. Ralph Hall, R-Rockwall, the chairman of the House Science, Space and Technology Committee that was studying the issue today, questioned EPA’s objectivity in launching the probe. “Its draft study plan is yet another example of this administration’s desire to stop domestic energy development through regulation,” Hall said. “The study intends to identify the potential impacts of hydraulic fracturing on drinking water without ever taking into consideration the probability that such an effect may occur.”

French Lean Toward Ban of a Controversial Gas Extraction Technique - French lawmakers opened debate on Tuesday on proposals to ban a method for extracting oil and gas deposits from shale because of environmental concerns, throwing up the first serious stumbling block to firms that want to use the practice. Looking with alarm at the experience in the United States, where shale gas is booming, even members of President Nicolas Sarkozy’s governing conservative party have come out against the practice, known as hydraulic fracturing, in which water, sand and chemicals are pumped deep underground under high pressure to free scattered pockets of oil and gas from dense rock formations. Hydraulic fracturing, or fracking, “is not something we want to use in France,”

TransCanada Pipeline Spills Oil in North Dakota - TransCanada Corp. said Monday its Keystone pipeline system spilled about 500 barrels of oil at a pump station in North Dakota, amid heightened scrutiny from Washington over plans by the company to expand the pipeline. The spill occurred early Saturday morning, resulting from a valve failure at a pump station about 40 miles southwest of Milner, N.D. The spill was contained on TransCanada’s property, and two dozen workers have been able to clean up 300 barrels so far, company spokesman Terry Cunha said on Monday. The pipeline currently carries up to 591,000 barrels a day of heavy oil from oil-sands.

Health Crisis Rocks the Gulf in Aftermath of the Spill, But Feds and BP Turn a Blind Eye - Contrary to many national stories covering the one-year anniversary of the BP oil spill in the Gulf of Mexico, a health crisis in the region has developed among exposed workers and residents. And it's not so "mysterious." In recent meetings with public health, medical and chemical experts in Louisiana -- the Gulf state hardest hit by the worst offshore oil spill in history -- AlterNet found a striking symmetry between debilitating chronic symptoms being reported among those sickened and the known effects of chemicals in the toxic brew of oil, dispersant and burned crude to which they were exposed. One year later, persistent coughing, wheezing, headaches, fatigue, loss of balance, dry itchy eyes, runny nose, nosebleeds, rectal bleeding, skin lesions, gastrointestinal pain, cardiac arrhythmia and memory loss are common complaints -- all consistent with exposure to chemicals released in the water and air since the explosion of the Deepwater Horizon rig off the Louisiana coast. In addition to these physical heath issues, mental health experts are finding an increase in associated psychological distress, including depression, anxiety and post-traumatic stress disorder, which are fueled by converging concerns over health, loss of livelihood and general insecurity about the future.

GOP bill shifts oil drilling cases to court dominated by judges with oil investments - Yesterday, the House passed the so-called “Putting the Gulf Back to Work Act,” which is intended to make it easier for the oil industry to drill in the Gulf of Mexico. Sadly, this bill also continues the GOP’s longstanding practice of rigging the court system to favor wealthy and influential interest groups.  ThinkProgress has the story. Tucked within the bill is a provision that consigns many lawsuits involving oil drilling into a federal court that is dominated by judges with close ties to the oil industry:SEC. 202. EXCLUSIVE VENUE FOR CERTAIN CIVIL ACTIONS RELATING TO COVERED ENERGY PROJECTS IN THE GULF OF MEXICO. Venue for any covered civil action shall not lie in any district court not within the 5th circuit unless there is no proper venue in any court within that circuit. It should come as no surprise that the oil industries’ allies in Congress want to make sure that only Fifth Circuit judges get to hear the industry’s appeals. When it is not busy ordering high school cheerleaders to pay $45,000 because they sued the school district that required them to cheer for their alleged rapist, the Fifth Circuit’s judges have cozied up tightly with the oil industry.

Democrats See Strategy to End Big Oil Tax Breaks - Linking two of the politically volatile issues of the moment, Senate Democrats say they will move forward this week with a plan that would eliminate tax breaks for big oil¹ companies and divert the savings to offset the deficit. With high gas prices and rising federal deficits in the political spotlight, senior Democrats believe that tying the two together will put pressure on Senate Republicans to support the measure or face a difficult time explaining their opposition to voters whose family budgets are being strained by fuel prices.  President Obama² and some top Congressional Democrats have said they want to take some of an estimated $21 billion in savings³ from ending the tax breaks and steer it to clean energy projects⁴. But the Senate’s Democratic leadership is calculating that using it to cut the deficit instead makes it a tougher issue politically for Republicans who are trying to burnish their conservative fiscal credentials. “Big Oil certainly doesn’t need the collective money of taxpayers in this country,”

Lower oil prices - Like a roller coaster ride, 2011 saw oil prices climb gradually, only to fall dramatically this last week. Here I offer my thoughts on some of the key contributing factors.Let's begin with the relation between oil prices and the exchange rate. If the dollar depreciates by 1%, the dollar price of oil would have to go up 1% to keep the price paid outside the United States constant. This is a bit simplistic, one reason being that there is usually some third factor, such as a rise in incomes outside the United States, that is causing a change in both real oil prices and the exchange rate. Different factors affect the two series differently, so one might see a 1% depreciation correspond to an increase in dollar oil prices of more or less than 1%, or sometimes even an oil price decline. Between September 2009 and September 2010, a 1% depreciation of the exchange rate was associated on average with a 1.3% increase in the dollar price of commodities like oil or copper. The dollar rose about 3.5% against the euro between Wednesday and Friday, and the 4.5% decline in the price of copper could be pretty well explained by the exchange rate alone based on the recent correlations (3.5 x 1.3 = 4.5). But something more is involved in the 11% drop in the dollar price of crude oil observed those same two days.

World's Largest Commodity Hedge Fund And Andrew Hall Taken To Cleaners On Last Week's Energy Plunge - And once again we get a reminder why the word "hedge" fund is such a misnomer. The FT reports the Clive Capital, the "world's largest commodity hedge fund" as defined by the FT (although we are more than confident various other and much largest "energy-heavy" funds would be much more appropriate for this moniker) lost $400 million out of its (paltry) $5 billion in total AUM during last week's coordinated energy take down, initiated by the forced margin intervention in precious metals. Clive "is the biggest of several big hedge funds believed to be reeling after the unexpected sell-off hit markets late last week." Clive is not alone: "Others, including Astenbeck Capital, the Phibro-owned fund run by Andrew Hall, are thought to have taken double-digit percentage point losses to their portfolios, according to investors." The FT's take: "The scale of the losses demonstrates that even the savviest investors in commodities were wrongfooted by the correction, one of the sharpest one-day falls on record."

Changing the Outlook for Oil Prices - How fast do markets absorb and react to new information?  Let's find out using the action on the crude oil market on 5 May 2011. Crude oil prices had closed the previous day by dipping slightly to $109.24 per barrel, but the price of crude oil futures plunged unexpectedly to close below $100 per barrel on 5 May 2011 as the world's markets responded to changing expectations of the future demand for oil.  Prices fell because those future expectations changed as investors adapted to news that indicated that less oil would be demanded in the future than they had previously been anticipating. That news first came in the form of the U.S. Department of Labor's scheduled announcement of the U.S.' initial unemployment insurance claim applications for the week ending 23 April 2011, which was released at exactly 8:30 AM Eastern Daylight Time (EDT) on 5 May 2011, which unexpectedly showed a sharp increase in new jobless claims.

AS Micro: What´s really behind the oil price rise? - The price of oil continues to rise ($114.61 per barrel) and there a number of reasons put forward why this is so, none perhaps more pertinent than the reason explained in this WSJ article.   We´re all aware of the political turmoil in the oil-rich Middle East and the implications this has on the supply of oil however, ”economists believe that oil prices would still be above $100 even if peace broke out in North Africa and the Middle East.” The key factor now behind the upward pressure on oil and therefore petrol and diesel prices is the voracious demand of the so called emerging economies of China, India, Brazil and even Saudi Arabia as can be seen in graph below.  ”China guzzled 874,000 more barrels of oil in March than it did a year earlier, a 10.6% increase despite high oil prices. Since 2000, U.S. oil consumption has edged down 4% to 19.2 million barrels a day. In the same period, the combined demand from Brazil, India, China and Saudi Arabia has risen 76% to 18.8 million barrels, nearly matching the U.S. By itself, China has more than doubled oil consumption to 9.4 million barrels.”

Speculators and oil prices: what experiments tell us -Another gas price spike, another wave of articles blaming "speculators." Here's an editorial in USA Today by Representative Ed Markey, D-Mass. Most Americans seem to agree with this idea. But is it true? Do speculators cause oil and/or gas prices to rise above their "natural" or fundamental level? .When we talk about "speculation," we're typically talking about futures contracts. If a speculator buys an oil futures contract, (s)he is not buying a barrel of oil; (s)he is buying the right to buy a barrel of oil in the future, for a price that is determined (locked in) today. This is a very different thing than hoarding, which is purchasing the actual physical commodity and storing it, with the intent to sell if in the future at a profit when the price goes up. Everyone agrees that hoarding can cause today's prices to rise; the question of whether futures contract purchases can have the same effect is far trickier. In fact, most economists will tell you that futures speculation can only raise spot-market prices if it causes physical hoarding to increase. The key question is: If we curbed activity on futures markets, would prices stabilize? Theoretically, it's hard to see how that would work.

Oil Climbs Above $101 a Barrel on Economic Outlook After 15% Weekly Loss -  Crude oil rose above $100 a barrel in New York, rebounding from the biggest weekly decline since 2008, on signals that the global economic recovery remains intact.  Futures climbed as much as 4.4 percent, snapping a five-day losing streak, after a report today showed German exports surged to a record in March and the U.S. Labor Department said last week that payrolls expanded. Prices also advanced on concern that a rising Mississippi River will flood Louisiana refineries.  “Some of the economic news has been stronger than expected, reducing worries about demand,”. “The Mississippi floods are increasing concern about disruptions, especially of the products.”  Crude oil for June delivery rose $3.53, or 3.6 percent, to $100.71 a barrel at 1:30 p.m. on the New York Mercantile Exchange. Futures dropped 15 percent in the five days ended May 6, the biggest weekly decline since December 2008. Prices are up 34 percent from a year ago.

Brent oil seen above $110 for rest of 2011- Oil prices will stay firmly above $100 a barrel for the rest of the year despite last week’s correction and might even attack new highs as supplies remain tight and developing economies grow, a Reuters poll showed.  Brent crude futures are seen averaging at $115 by the end of June and $113 by the end of the year, according to a Reuters poll of 10 analysts. US light crude is seen at $105.5 and $105 at the end of each period respectively. Oil prices saw one of the deepest drops ever last week with US crude plunging to $94 a barrel from $114 while Brent fell to below $110 from over $125, prompting some analysts to call an end of the commodities bull cycle.“The recent sell-off in the oil market has created more short-term bearish technical signals, while the long-term bullish trend remains intact,”

A Note on Trade - US trade data were released today; Calculated Risk has the broad outlines of the report. As Ryan Avent notes, the non-petroleum balance points in the direction of rebalancing. I am hopeful this is correct, but add that we still lack clear evidence at this point. Indeed, since the end of the recession, non-petroleum trade has generally been a drag on the recovery – note trend #1 below: The rebalancing story took a hit in the first half of 2010 as the trade deficit widened. That situation reversed in the second half of 2010, and the narrowing deficit helped propel final demand in the fourth quarter of last year. Since then, the rebalancing story has stalled on average. Now it appears we are arguably at something of a crossroads – will the general path of the US trade deficit follow path #1 or path#2? In other words, will the external sector be a drag or US demand, or a boost? I am cautiously optimistic ongoing general downward pressure on the dollar, in concert with policy changes and solid growth abroad, will sustain ongoing rebalancing.  That said, rising expectations of tighter monetary policy abroad serve as a reminder that the external environment could turn nasty.

Oil Drops Below $100 as U.S. Supplies Surge - Oil fell below $100 a barrel in New York and gasoline tumbled the most in more than two years after an Energy Department report showed that U.S. supplies surged and fuel demand slipped. Crude dropped as much as 5.2 percent after the department said stockpiles jumped 3.78 million barrels to 370.3 million last week. Gasoline inventories unexpectedly increased 1.28 million barrels to 205.8 million, the first gain in 12 weeks. Total fuel consumption declined 0.9 percent to 18.2 million barrels a day, the lowest level since June 2009. “We have a tremendous glut,”  “The rally in commodities appears to be over. We’re going to see prices work their way lower in coming weeks.” Crude oil for June delivery fell $5.13, or 4.9 percent, to $98.75 a barrel at 2:17 p.m. on the New York Mercantile Exchange. The contract slipped as much as $5.43 to $98.45. Prices are up 29 percent from a year ago

OPEC sees enough oil supply, holds demand view (Reuters) - OPEC held its forecast for world oil demand steady in 2011 on Wednesday and maintained its view that oil supplies are adequate despite the loss of Libyan barrels as its members and rivals pump more crude. In its monthly report, OPEC said it expected world oil demand to grow by 1.4 million barrels per day (bpd) this year, unchanged from last month and in line with a reduced estimate on Tuesday from the U.S. Energy Information Administration. The Organization of the Petroleum Exporting Countries has stuck to its view this year that supply is ample even as prices surged above $120 a barrel. Wednesday's report said the price plunge last week to as low as $105 was no great surprise. "This was an inevitable adjustment in prices which brought them more in line with short-term market fundamentals," OPEC's report said. "The global supply picture remains healthy."

Why OPEC's Greed Will Fuel Your Oil Profits: "Hopefully you're not waiting for a global peak in oil production. If that's the case, I have some bad news for you... It already happened... five years ago. I'm sure you remember when the International Energy Agency (IEA) reported in last year's World Energy Outlook that a global peak in oil production occurred back in 2006. What other people — particularly those who refuse to believe in $100/bbl oil — are finally starting to realize is that cheap, plentiful oil is a thing of the past. Allow us to show you the oil of the future, courtesy of the IEA: As you can see, the energy spent wishing and hoping for more easy-to-get conventional oil is better spent elsewhere

Pickens: Oil addiction funding terrorists - U.S. addiction to foreign oil subsidizes terrorism and is one of the greatest threats to the country’s economic wealth, financial magnate T. Boone Pickens said. Pickens is advocating a clean-energy future through the expanded domestic use of renewable resources such as wind and solar power. He proposes natural gas, meanwhile, as an alternative fuel for the transportation sector. He says based on the latest figures from the federal government, the United States imported 61 percent of its oil in April to the tune of $42.5 billion. “April’s oil import numbers are the highest we have ever seen and the implications are disturbing. This is a national security threat of the highest order,” said Pickens. “Our addiction to OPEC oil is so severe that it constitutes the greatest transfer of wealth in history.”

Rumors of Iraqi Target Cutback - The Australian has a news article claiming, based on anonymous sources, that Iraq will soon renegotiate the 12mbd worth of contracts that were issued in two rounds of bidding in 2009.  The goal, according to the article:IRAQ is preparing to halve its official oil production target, forcing companies including BP and Shell to renegotiate their contracts. The country's Oil Ministry, with backing from the Prime Minister Nouri al-Maliki, will set a new target to produce between 6.5 million and 7 million barrels per day by 2017, down from original plans to pump 12 million barrels, according to industry insiders... However, Reuters asked Hussain al-Shahristani, currently deputy Prime Minister of Iraq, and he firmly denied it:

Shrinking Oil Supplies Put Alaskan Pipeline at Risk - When the famed Trans Alaska Pipeline carried two million barrels of oil a day, the naturally warm crude surged 800 miles to the Port of Valdez in three days and arrived at a temperature of about 100 degrees. Now, dwindling oil production along Alaska's northern edge means the pipeline carries less than one-third the volume it once did—and the crude takes five times as long to get to its destination. That leisurely flow means the oil is above ground longer and more exposed to Alaska's frigid weather; the crude sometimes arrives chilled to 40 degrees. As the flow and temperature continue to drop, experts say the risks of a clog or corrosion increase, as do the odds of ruptures and spills.  Unless a technological solution can be found, the arcane physics of crude flow may force the multibillion dollar, 48-inch-wide steel pipeline to shut down—and determine the fate of the largest oil field ever found in the U.S.

Global Oil Supply Flat in April - The OPEC and the IEA are both out with their April numbers for total liquid fuel production.  OPEC shows it slightly up, but the IEA shows it slightly down, so I guess it's flat to within the margin of error.  The above shows the graph of the last couple of years (not zero-scaled to better show changes).  The next graph shows a slightly longer term, also with prices on the right side (but not zero-scaled either). Interestingly, both agencies made revisions that made the Jan-Mar fall greater.  With the sharp rise in prices in April, the price production graph stayed just about in the envelope of the last oil shock: Prices fell sharply last week, so this may change next month.  However, supply will need to increase for prices not to resume their upward march.

Paper vs Real: Exit From Normal, Ecological Economics, and Probabilistic Regimes in One Chart  A 20 year chart of the US 30 Year Treasury Bond vs. a broad commodity index is the occassion to make several macroeconomic observations. The comparison reveals how the purchasing power of the long-dated US Treasury Bond has fared against a basket of commodities over the period. Tracking the ability of the US Treasury bond, denominated in US Dollars, to maintain its viability as a capital storage unit is not arcane. Rather, it is central. All institutions and individuals eventually use financial assets to purchase energy, natural resources, and labor.

• 1.  Prior to the years 2000-2002 the Western economic system is still in expansion, funded by cheap fossil fuels.
• 2. The end of cheap energy after 2002 marks the end of economic growth in real terms. The balance of global population, resource availability, and innovation enters transition. Paper assets lose stability and begin their decline against natural resources as technological innovation runs into the harder limit of energy availability.
• 3. Having built up a surplus of paper assets (both liabilities and claims) over a 25 year period, the economic system succumbs to its own lack of industrial growth. Paper assets become highly unstable as they are now deprived of cheap energy.

ASPO-9: the ghost of hyperinflation to come - At the 9th conference of the Association for the study of peak oil (ASPO) in Brussels, one of the speakers said that it was time to stop economists bashing. That is probably correct: economists are not worse than other professionals: they just suffer of the great visibility of Sturgeon's law in their field. The law says that "90% of everything is crap" (or, in a stronger form, that 99% is). So, if 90% (or 99%) of economists just don't get it, there is at least a 1% of them who do. At ASPO-9 in Brussels we had two representatives of this 1% of economists: Jeff Rubin and Douglas Reynolds. Rubin was the first to speak and he gave a rather soft talk; he still predicted dark and dire things resulting from oil depletion, including the break-up of the European Union, the bankruptcy of Greece, and other niceties. Reynolds was more direct. He didn't mince words in saying that we were going to go the way the Soviet Union did in the 1990s. We are going to experience total collapse; together with hyperinflation. And he suggested to get ready to stock whiskey and cigarettes to use as exchange medium.

FSN In Depth: Chris Martenson, The Crash Course - The next twenty years will be completely unlike the last twenty years. The world is in economic crisis, and there are no easy fixes to our predicament. Unsustainable trends in the economy, energy, and the environment have finally caught up with us and are converging on a very narrow window of time—the "Twenty-Teens." Our money system places impossible demands upon a finite world. Exponentially rising levels of debt, based on assumptions of future economic growth to fund repayment, will shudder to a halt and then reverse. Unfortunately, our financial system does not operate in reverse. The consequences of massive deleveraging will be severe. Oil is essential for economic growth. The reality of dwindling oil supplies is now internationally recognized, yet virtually no developed nations have a Plan B. The economic risks to individuals, companies, and countries are varied and enormous. Best-case, living standards will drop steadily worldwide. Worst-case, systemic financial crises will toss the world into jarring chaos.

Oil: A battle for the Earth’s last remaining frontier - There are clear signs that a new Arctic oil rush has begun. Earlier this month, Shell submitted plans to the U.S. government for new drilling in the icy waters off Alaska's north coast, and now a Scottish company has won permission to take a similar gamble near Greenland. Tomorrow, Hillary Clinton will fly to the picturesque town of Nuuk in Greenland to discuss how spill response equipment might work in one of the world's most extreme and beautiful environments. I can save her the trip -- it won't. Over the next few years, a handful of powerful oil companies will tow rigs beyond the Arctic Circle to drill for a few short months before the winter sea ice closes in. They'll rely on untested equipment and wildly ambitious response plans in the event of a blowout or other major accident. When October comes, the sea ice will close in and leave the area completely isolated until the following summer. Think about that for a moment. This means that if a blowout happened in the fall, oil could gush out underneath the ice from Halloween through Thanksgiving, all the way to Memorial Day or, depending on the oil spill and the ice, the Fourth of July or longer.

Tepco Estimates Yen 1 Trillion Extra Costs For Fossil Fuel - Japan's Tokyo Electric Power company estimates its extra costs for fossil fuels in the 2011-12 financial year will be about Yen 1 trillion ($12.5 billion) as its dependency on thermal power generation has increased while fuel prices have also risen, company president Masataka Shimizu said Tuesday. Tepco's estimate was released as Shimizu handed in a formal request to the government for support to pay compensation resulting from the ongoing issues with its Fukushima-1 nuclear plant.In a statement, Shimizu said the company would proceed with preparations to pay compensation to affected people in accordance with Japan's Atomic Energy Damage Compensation Law.

Japan Has Biggest Property Loan Defaults in April, Moody's Says -  Defaults on debt backed by Japanese office buildings, shopping centers and warehouses rose to a record in April due to a single loan of more than 100 billion yen ($1.24 billion), according to Moody’s Investors Service.  Bad loans rated by Moody’s last month rose to 147 billion yen from 26.9 billion yen a year earlier, The monthly default balance was the biggest since the rating company started assessing commercial mortgage backed securities in 1999, they said.  Prices for Tokyo office buildings have fallen as much as 50 percent from their 2007 peak,  The March 11 earthquake, Japan’s strongest, may delay a recovery in the nation’s real estate investments by six months, according to Kumamaru.

Fixing Japan’s Fiscal Mess - Pity the Japanese economic policymaker. Even before the triple whammy of earthquake, tsunami, and nuclear crisis struck in March, Japan was facing the mother of all fiscal headaches. With public debt climbing to new heights, the government was facing an increasingly urgent dilemma: should it try to improve public finances with fiscal austerity measures, or continue to spend in the hope that the persistently weak economy would rebound. That dilemma is even more pressing now. Japan faces the most expensive recovery bill in history and a serious setback to its economy. Under the circumstances, fiscal hawks will need to wait. But at some point, Japan will have to combine deficit reduction with fiscal expansion. Orthodox approaches that put one before the other haven’t worked so far, and given demographic trends they are unlikely to help in the future.

Japan’s Most Important Banker Sees Only Bubbles - With his nation’s economy contracting under disaster damage of as much as 25 trillion yen ($310 billion), Bank of Japan Governor Masaaki Shirakawa is signaling that his biggest worry is inflation.  At stake for the student of Milton Friedman is protecting the bank’s independence from financing public spending, as urged by lawmakers after the record March 11 earthquake. Shirakawa, 61, instead oversaw a 40-trillion yen boost in short-term funds, eschewing the scale of longer-dated asset purchases the Federal Reserve mounted after confidence in credit markets collapsed and the U.S. entered its worst recession since the Great Depression.  His strategy, which won the plaudits of 17 of the 24 primary dealers in Japan’s government bond market in a Bloomberg News survey, may not be enough as he warns of the danger of asset bubbles. The yen’s climb to about 6 percent from a postwar high against the dollar risks undermining exporters’ earnings.

HSBC Sells Biggest Non-Guaranteed Samurai Debt Since Lehman Bros. Collapse -- HSBC Holdings Plc (HSBA) raised 143.4 billion yen ($1.8 billion) from the biggest sale of Samurai bonds without a government guarantee since Lehman Brothers Holdings Inc. collapsed and the first since the earthquake. HSBC’s unit HSBC Bank Plc sold 108.2 billion yen of five- year, 0.91 percent bonds priced to yield 31 basis points more than the yen swap rate, and 35.2 billion yen of floating-rate notes that pay 46 basis points over the three-month London interbank offered rate, according to data compiled by Bloomberg. The bank had planned to sell at least 50 billion yen of notes, according to a person familiar with the matter, who asked not to be identified because the information is private.  “The deal confirmed Japanese investors’ expectation that Samurai borrowers would return to the market,”  “Although the demand for Samurai bonds is strong, the pipeline doesn’t look clear yet.”

A strange few weeks - GLOBAL market moves since mid-April have been...interesting. Global commodity prices have swooned by over 11%, and while prices edged back up after a sharp decline in early May, that ground has since been given back. Equities have been bouncing around, but are generally down since April, albeit to different extents in different regions. The dollar has continued its steady decline, except against the euro, against which it has appreciated by about 4% since late April. Treasuries yields, on the other hand, have marched steadily downward since mid-April. So what's going on? Are expectations of global growth slowing? Are investors shedding risk? Did a commodity bubble pop? Here's Paul Krugman commenting on the commodity price drop: Was this because some investors really believed that rising commodity prices were a harbinger of higher underlying inflation? Or was it because expectations of growth were marked down, leading both to commodity decline and to lower inflation expectations? I don’t know. And here is The Economist in the new print edition: “it all started in the physical market.” Japan’s earthquake in March has had a profound effect on global industrial production, the most important determinant of commodity prices. J.P. Morgan thinks that production will grow by 3.1% in the second quarter, compared with 6.8% in the prior three months

What Michael Pettis Really Said About Copper in China...One commentator, in a widely republished post, alleged that in last week's private newsletter from Michael Pettis that Pettis disclosed a Ponzi Scheme in the import of copper to China, which appears to be used as bonded collateral for financing.  This is a sensationalistic depiction and not an accurate interpretation. As we quoted Pettis from his private newsletter last week, the imported copper, which is stored in bonded warehouses, is being used as collateral to obtain convoluted and more expensive financing.  As the financing becomes more difficult to rollover, the copper is exported, the financing paid off, and the transaction closed. As we wrote in "China: Copper In, Copper Out" on April 29th prior to Pettis' private news letter last week, the importing of copper, use as collateral, and then re-exported may eventually have a negative impact on real GDP.  It is creative financing; it is not a Ponzi Scheme in any manner, fashion, or form of the imagination.

China Inflation Spreading Beyond Food Shows Wen to Persist With Tightening - China’s inflation is spreading beyond food, signaling Premier Wen Jiabao’s strategy of quarter-point interest-rate increases every two months has yet to contain consumer prices.  Clothing costs climbed 1.4 percent in April from a year earlier, the biggest gain since 1997, a statistics bureau report showed yesterday. Non-food inflation held at 2.7 percent, the fastest pace in at least six years, while overall consumer prices rose 5.3 percent.  Higher wages and commodity costs are adding to price pressures as the government restrains gains in the yuan that would cut the cost of imports. Deutsche Bank AG sees inflation peaking at as much as 6 percent in June, with policy makers raising borrowing costs at least once more as they aim to limit full-year price gains to 4 percent.  “It is not the time yet for policy makers to ease the tightening stance as inflation is still elevated and underlying pressure remains,”

Commodities Extend Declines as China Raises Reserve Requirement - Commodities fell for a second day after China raised banks’ reserve requirements, heightening speculation slower growth will curb raw materials demand.  The Standard & Poor’s GSCI Index of 24 raw materials fell 0.9 percent to 674.89 by 3:15 p.m. London time after dropping 3.9 percent yesterday. Silver tumbled 5.3 percent. Crude oil declined 0.8 percent after the International Energy Agency cut its 2011 demand forecast. Reserve ratios will increase 0.5 percentage point from May 18, the People’s Bank of China said on its website today. It’s the fifth increase this year as the government tried to cool inflation. China’s inflation stayed above 5 percent in April, exceeding Premier Wen Jiabao’s 4 percent target, according to a government report yesterday. Investors are increasingly fearful that Chinese demand for imported oil and materials will slow if efforts to contain inflation lead to slower growth,

China's Growing Interest In Siberia - There are just 6 million Russians left on the Siberian side of the border with China. Ninety million Chinese, backed by a voracious economy, live on the other side. China's influence in Russia's far east is growing rapidly and Siberia has become the raw material supplier to Beijing's economic miracle.  Siberia, which covers three-quarters of the landmass of Russia, is home to only a quarter of the country's population: 38 million people. This is the equivalent of the population of Poland, except that Siberia is 40 times the size. It is a situation that many fear could once again spark the eternal rivalry between Russia and China, a rivalry that last produced military clashes in the 1960s. Chinese investors have already bought a former tank factory in Chita, where they are now producing trucks. They already control the markets in Russian border towns, where they are the richest private business owners. "China invests more in the Russian Far East than our own government does," writes the Moscow newspaper Niezawisimaja Gazieta.

China Inflation Signals More Tightening May Come - China’s inflation held above 5 percent in April and lending exceeded analysts’ estimates, signaling that further monetary tightening may be needed to cool the fastest-growing major economy. Consumer prices rose 5.3 percent from a year earlier and banks extended 740 billion yuan ($114 billion) of local-currency loans, according to reports from the statistics bureau and central bank. Weaker industrial-output growth, also reported today, may diminish price pressures in coming months. Today’s data showed that inflation has exceeded Premier Wen Jiabao’s 4 percent target each month this year. Today’s report showed a 25.4 percent increase in fixed- asset investment in the first four months of the year. That figure, combined with a report yesterday showing record export shipments in April, indicates the world’s second-biggest economy has made limited progress in shifting to a growth model more driven by domestic demand.

China’s Efforts to Cut Inflation Falling Short - — Consumer prices in April rose faster than the Chinese government’s target for the fourth month in a row, as bank lending also climbed faster than expected, economic data released Wednesday morning showed. The latest data underlined the challenges that China faces as it tries to tame inflation while at the same time issuing trillions of extra renminbi to prevent the currency from rising quickly against the dollar¹, which would erode the competitiveness of Chinese exports. Consumer prices were 5.3 percent higher in April than a year earlier. That represented a slight improvement from March, when consumer prices were up 5.4 percent. But economists had expected inflation to edge down to 5.2 percent or below, and the government’s target for the full year is 4 percent, a level not reached in any month so far this year. 

China learning to live with inflation - The Chinese authorities appear to have accepted that a higher inflation rate is an inevitable outcome of their broader economic strategy. The days when the People’s Republic could count on consumer prices increasing in the 2% to 3% range are past. Instead, the target is 4%, but this spring has seen year-on-year increases of more than 5%. Higher inflation is now part of the Chinese landscape — and the consumer price index captures only part of the boom in real estate prices. Three main factors lie behind this shift: credit, food and wages. The 2009 credit splurge, in which banks advanced $1.3 trillion in new loans, has led to high liquidity, pushing up asset prices across the board, from property to fine French wines. The supply side is deficient. Arable land is shrinking under the impact of urbanization, infrastructure development and desertification. Pollution is affecting farms. Water is short in northern China, especially around Beijing. Food distribution logistics are inefficient. Lack of ownership rights for farmers who hold their fields on a leasehold basis, while all farmland belongs to the state as represented by local authorities, creates distortions. Too many farmers work small leasehold plots that cannot provide efficient larger-scale farming or support mechanization.

China raises bank reserves again to tame inflation  China lifted bank reserve requirements by 50 basis points on Thursday, signalling that containing inflation and soaking up excess cash remained its top priority even after signs the economy was slowing down.  The announcement of more tightening came as a surprise to some analysts who had expected the People's Bank of China to tap the monetary brakes more gently after a host of data from industrial output to imports were weaker than expected in April.  To many of them, China's latest directive to lock up more of the deposits that banks would otherwise have lent was simply an attempt to drain inflationary capital inflows rather than opt for a rate rise, ostensibly a heavier monetary tool.  "The central bank is moving the deposit reserve ratio again to soak up liquidity as hot money inflows and current account surplus remain large,"

Michael Pettis on Rebalancing Through Wage Increases in China - In Michael Pettis' most recent private newsletter, from which I am only allowed to make excerpts, which arrived by email yesterday, he brings up in the beginning the question of what is going on in copper in China and comes to the same conclusions I did in my April 29 article, "China: Copper In, Copper Out".  He observes, "What is happening here in China is not that credit growth is too slow, but rather that infrastructure and real estate investment is so high that it has overwhelmed the available sources of credit ... Borrowers are resorting to some fairly convoluted and expensive ways of obtaining short-term credit largely because they cannot obtain financing from the local banks ... That doesn't mean there isn't liquidity in China.  There is tons of it, but much of the credit is being disintermediated because of constraints on bank lending ... So Chin's problem isn't that liquidity is tight --- how could it be with so much credit expansion and hot money inflow?  The problem is that much of the real investment growth seems to be funded outside the normal lending channels ... The weird distortions in the banking system, where credit isn't rationed by price but by quantity and hierarchy, has turned China, at least temporarily, into a revolving door for copper imports and exports."

Why Roubini may be wrong on China’s property doom -  If China is on course for a hard landing after 2013, as Nouriel Roubini of New York University is predicting, a key driver could be the country’s vast number of empty apartments. It’s become the symbol of over investment that Beijing is struggling to tame. Earlier this year, Yi Xianrong from the Chinese Academy of Social Sciences put the figure at 64.5m − enough to house a third of China’s urban population. The estimate, along with the bearish scenario, appears to overstate the problem, according to a China Confidential survey in seven provinces which counts vacant new homes at around 13m . While this is still a huge number, it could ease over time as rural to urban migration fills up the empty flats. The large number of empty – but sold – apartments is driven not only by speculation, in which people buy a home in the hope of selling it six months later for a 30 per cent profit, but also by a combination of rapid urbanisation and soaring inflation that makes multiple homeowners better off in the long run.

China's Trade Surplus Surprises - China's trade surplus swelled dramatically in April, likely adding pressure on Beijing to allow a faster appreciation of the yuan just as U.S. and Chinese officials meet for talks focused partly on contentious issues of trade and currency. The country's trade surplus widened unexpectedly to $11.4 billion in April from a narrow $139 million in March as import growth slowed and exports powered ahead, data from the General Administration of Customs showed Tuesday.  Market expectations were for a surplus of just $1 billion, according to the median forecast of 14 economists polled earlier by Dow Jones Newswires.   Since China let its currency float somewhat in June, the yuan has risen by about 5% against the dollar, or an average of about 0.5% a month. While there is a debate among leading Chinese economists about whether the government should pick up the pace of appreciation to fight inflation and limit the build-up of its $3 trillion in reserves, there has been no indication that the government plans to make a significant change in exchange-rate policy any time soon.

Back to surplus - IN THE first quarter of the year, China's economy ran a trade deficit. So much for that; in April, the Chinese economy posted a current account surplus of $11.4 billion, much larger than forecast. Crucially, the missed forecast was entirely due to import growth well below what economists were anticipating. What will this mean for relations between China and America? Well, as Menzie Chinn notes here, there has been a substantial amount of real exchange rate appreciation against the dollar, and this appears to be having some effect on China's trade balance. But because the euro had been rising rapidly against the dollar, there has not been much of an exchange rate improvement against the euro area. While American officials at Sino-American trade talks will still bang away about additional appreciation and rebalancing, it's their European counterparts with more to complain about. One concern worth thinking about is whether slowing import growth is primarily about exchange rate factors or mainly to do with a slowing Chinese economy. Rising food and energy costs are surely impacting household budgets, and Chinese authorities have pushed up interest rates in an attempt to quell inflation.

China's Currency and Trade Balance: Two Pictures - The US-China Strategic and Economic Dialog is underway. [0] The topics span many issues. One of the perennials is the yuan's real value and the Chinese trade balance. Here are two figures. First, one needs to recall the distinction between bilateral and multilateral real exchange rates. The figure highlights that the CNY is appreciating in real terms (see this post for a discussion of the components due to nominal appreciation and due to inflation). The bilateral appreciation is actually more marked than the multilateral. I think this phenomenon partly reflects the fact that it was becoming increasingly difficult to maintain the previous policy configuration, and (as I observed here) faster appreciation was going to become increasingly harder to resist. The correlation of the CNY value with Chinese trade balance (with the world) is shown in Figure 2.

Trade Deficit increased to $48.2 billion in March - The Department of Commerce reports: Total March exports of $172.7 billion and imports of $220.8 billion resulted in a goods and services deficit of $48.2 billion, up from $45.4 billion in February, revised. March exports were $7.7 billion more than February exports of $165.0 billion. March imports were $10.4 billion more than February imports of $210.4 billion. The first graph shows the monthly U.S. exports and imports in dollars through March 2011. Both imports and exports increased in March (seasonally adjusted). Exports are well above the pre-recession peak, but imports are now increasing at a faster rate - mostly because of oil prices. The second graph shows the U.S. trade deficit, with and without petroleum, through March.  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. The petroleum deficit increased sharply in March as both the quantity and price increased - prices averaged $93.76 per barrel in March, up from $87.17 in February. Prices will be even higher in April.

Rebalancing, except for the oil bit - AMERICA'S trade deficit rose to $48.2 billion. In a positive sign for the economy, both exports and imports rose. But the data release as a whole would have been a blockbuster one, but for one small thing: oil. For much of this series, the trade deficit and the deficit less petroleum move in tandem. But they now seem to be moving in opposite directions. Petroleum aside, American rebalancing seems to be underway; net exports ex-petroleum are marching slowly but fairly steadily toward zero. But the petroleum deficit and the total deficit are steadily rising.  If the American economy doesn't change its petrol-thirsty ways, it will need to run a substantial surplus across most goods and services in order to pay for its petroleum imports. It might be worth looking into whether that petroleum dependence can't be weakened at least a little.

Are High Oil Prices Good for U.S.-China Trade? - The U.S. trade deficit climbed 6% in March, according to numbers out from the Commerce Department. But the widening trade gap, the highest since June 2010, may not be as worrisome as it seems. Much of the jump has to do with the recent uptick in oil prices, which makes the U.S. bill for oil imports more expensive. But if you take oil prices out of the equation (since they don't really say anything structural about what's going on with U.S. trade), things look a lot better. In fact, when it comes to trade with manufacturing-heavy countries like China, in some ways the uptick in oil prices actually plays to the U.S.'s advantage. Even though the trade gap widened, U.S. exports grew at a record 4.7%, their biggest month-over-month gain in 17 years, while the trade deficit with China dropped by 4%. That's because increased trade with China is driven by exports of U.S. services like insurance, banking, and education (in other words, Chinese families sending their children to U.S. schools), which are far less commodity-intensive than the factory-churned goods that give China its competitive export advantage.

U.S. Will Urge China to Boost Interest Rates in Washington Talks --  Treasury Secretary Timothy F. Geithner will urge China to allow higher interest rates when he meets with Chinese leaders this week, as the U.S. extends its push for a stronger yuan. Geithner will say China should relax controls on the financial system and give foreign banks and insurers more access, said David Loevinger, the Treasury Department’s senior coordinator for China. Officials from both nations are meeting in Washington today and tomorrow as part of the annual Strategic and Economic Dialogue.  U.S. officials argue that a yuan kept artificially cheap to help exporters also makes it harder for China to lift interest rates and curb an inflation rate that hit a 32-month high in March. China, led at the talks by Vice Premier Wang Qishan, blames record U.S. budget deficits for contributing to lopsided flows of trade and investment.

Number of the Week: Foreign Banks Bet on China - 86%: Increase in foreign banks’ lending to China in 2010. The world’s banks are betting China is the place to put their money. That could complicate Chinese officials’ efforts to cool down the country’s economy and real-estate market. During 2010, banks that report their holdings to the Bank for International Settlements plowed an exchange-rate-adjusted $77 billion into China, increasing their exposure by 86% from the end of 2009 and bringing the country’s share of global cross-border lending — while still small at 1.1 % — to its highest level on records going back to 1977. The shift represents a vote of confidence in China, as banks pulling out of financially troubled European countries such as Greece, Portugal and Ireland send more money east. But it also underscores the pitfalls of China’s efforts to find its own solution to a fundamental problem of international finance, the so-called “trilemma”: While countries may want to maintain stable currencies, run an independent monetary policy and keep their borders open to foreign capital, they can do only two of the three.

Do Americans hold “simple” ideas about China's economy? -- Wang Qishan, China's vice-premier, caused a bit of a stir this week when he accused Americans of having “simple” ideas about his nation during an interview on “The Charlie Rose Show.” According to a transcript, Wang said:It is not easy to really know China because China is an ancient civilization and we are of the oriental culture. And for the Americans, the United States is the world's number one superpower, and the American people are a very simple people. If they're asked to choose to understand a foreign country, their first choice would be the European countries, and the South American countries may come second. It was not only until recent years that the American people have begun to pay more attention to China. But over the years American media coverage of China has been scarce, and if there were some coverage, most of them are lopsided. Wang's views about the “simple-mindedness” of Americans when it comes to the world are widely held by people just about everywhere – and they sting.

How China boomed by trial and error - What is the secret of China’s success? While the US, Europe and Japan have been struggling, China’s economy has doubled in size in real terms every seven to eight years for the past three decades. Part of the answer is simply that if a poor country gets its act together, it has the potential to grow much faster than a rich one. China was wretchedly poor in 1980 – poorer than Afghanistan or Chad, with half the per capita income of Niger or Ghana. It is far from wealthy today, with per capita income of about $10 a day. (No westerner would envy the income of a rural Chinese peasant.) And so the potential to catch up remains large, with China’s economic clout a matter of population rather than wealth And yet it is impossible to dismiss China’s economic achievement so easily. So what is the recipe for growth? If I was forced to sum it up in one phrase, I’d say “trial and error”. After Deng Xiaoping took power in the late 1970s, local experiments were tolerated, and if they worked, they were allowed to spread. The “household responsibility system”, which gave rural farmers the right to profit if they were able to generate extra crops, was used in 1 per cent of collectives in 1979 and was almost universal by 1983, largely as a result of benign neglect from Beijing.

China's Growing Overseas Portfolio -  A study released last week by the Asia Society in New York forecast that over the coming decade China could invest as much as $2 trillion in overseas companies and projects, with a big share of that money heading to the United States.  But analysts say that just as startling are figures not included in the study, which show the explosive growth of China’s overseas lending and portfolio investments.  According to figures released by CEIC Data, a division of ISI Emerging Markets, China’s overseas lending and trade finance spending reached $102 billion last year, up from $19 billion in 2008.  In addition, the United States Treasury department released figures last week that show that the value of China’s holdings of United States stocks climbed to $127 billion in June 2010, up from about $3 billion in 2004.  With the world’s largest foreign exchange reserves and a growing number of state-owned companies bidding to acquire overseas assets, China is quickly shifting from being a country known for exports to one capable of making huge investment in global financial markets, analysts say.

China's Xinjiang to boost yuan settlement in cross-border trade‎ -- China's northwestern Xinjiang Uygur Autonomous Region aims to have five percent of its foreign trade settled in yuan, China's official currency, in 2011 as the country continues to push for the use of the yuan in international trade.  Officials with the region's financial department said on Tuesday that yuan-settled cross-border trade has exceeded 12.2 billion yuan (about 1.88 billion U.S. dollars) since last October, when the region started to allow the Chinese currency to be used as an alternative to the U.S. dollar in international trade.  Fifteen banks in Xinjiang are certified to handle cross-border yuan services, while 20 foreign banks and institutes offer other yuan-related services, officials said.  Cross-border yuan settlement refers to the use of the yuan in international trade and investment deals.  Xinjiang is located on China's border near central and western Asia. The vast region borders eight countries, including Russia, Kazakhstan, Kyrgyzstan, and Pakistan. The central government has announced a series of favorable policies to help Xinjiang become a key region for western trade.

"Currency Wars" and the Impossible Trinity (Wonkish) - Krugman - Putin says we’re hooligans; Brazil accuses us of “currency wars”; and the Chinese are, well, being their usual charming selves. But what’s going on in the international currency scene? I don’t know why I didn’t think to put it this way before — and I don’t know if anyone else is saying this — but what we have here is a classic example of the Mundellian impossible trinity, aka the trilemma, which says that you can’t simultaneously have free movement of capital, a stable exchange rate, and independent monetary policy. Here’s an illustration: So, how does this apply to current issues? Advanced countries, very much including the United States, are weighed down by the aftereffects of the 2008 financial crisis; this has led to low investment returns. Meanwhile, emerging markets are in much better shape, so capital wants to go there.

Big guns muffled as currency wars enter a lull -- Where have all the bullets gone, asks the FT’s Alan Beattie? When the currency wars broke out before the G20 meeting in Seoul last year, they dragged half the world into the conflict. China hit back against US criticism of renminbi manipulation, arguing that super-loose Federal Reserve monetary policy was pushing down the dollar and creating destabilising capital flows. Officials from other emerging markets and Europe said Beijing and Washington shared blame. The strife seemed likely to continue into 2011, with Brazil warning that exchange rate tensions could lead to a full-blown trade war. The dollar has fallen, on a nominal trade-weighted basis, to its lowest level since the mid-1990s, providing more ammunition for the Fed’s critics. Yet the guns have been muffled. China and other emerging economies have scaled down the public rhetoric against the US, and vice versa. At a US-China meeting in Washington this week, the US was able to focus less on currencies and more on the policy agenda that the White House and American multinationals have been pushing – the travails of US companies trying to invest, protect their intellectual property and bid for government contracts in China.

China should consider ways to reduce FX reserves -banker -  (Reuters) - China's needs only between $800 billion and $1.3 trillion in foreign exchange reserves and it should consider channelling some of its huge stockpile into domestic companies and strategic resources, a top Chinese banker said on Tuesday.  The rapid build-up in reserves, which hit a record of $3.05 trillion by the end of March, has been "a big problem" for the economy, Tang Shuangning, Chairman of China Everbright Bank, said in an article published in the official Financial News.  The reserves, already the world's largest, have become excessive, Tang said, saying it only needed enough to service foreign debt, pay for imports and accommodate earnings repatriated by foreign firms operating in China.  Analysts say the rise in China's reserves, which are now nearly triple Japan's holdings, the world's second-biggest reserve holder, have fuelled inflationary risks in the country.

Asia’s Supply Chain and Global Rebalancing - IMF direct - Much of the debate over global rebalancing has focused on the U.S.-China trade imbalance. But that’s missing the bigger picture. With the growth of cross-border supply chains—a signature feature of Asia’s trade in recent decades—it would be misleading to focus on bilateral imbalances and exchange rates. Instead of specializing in producing certain types of final goods, Asian exporters increasingly have specialized in certain stages of production and become vertically integrated with each other. So, as Asia’s economies strive to rebalance their growth models, we need to understand better how the regional supply chain affects the way exchange rates and shifts in global demand work. Take, for example, the iPad and its rising popularity in the United States.   According to PC Magazine “while final assembly is in China, most of the components seem to be actually manufactured in other Asian [economies],” including Korea, Japan, and Taiwan Province of China. It would be misleading, in assessing imbalances, to focus solely on the end producer.

Vietnam’s economy: Doing battle against inflation - TO HONOUR the dead, the Vietnamese sometimes burn fake banknotes, made out of “votive paper”, for the deceased to spend on the other side. Vietnam’s government recently complained that this votive money looked too similar to the real thing. Unfortunately the resemblance runs deeper than that. Over the past year the value of Vietnam’s official currency—the dong—has been steadily going up in smoke. Consumer prices rose by 17.5% in the year to April, outstripped only in Ethiopia and Venezuela. The dong has been devalued against the dollar six times since June 2008 (see chart). The Vietnamese have flocked to more reliable stores of value.  But Vietnam’s government seems newly determined to douse the inflationary fires. On May 4th the country’s central bank, the State Bank of Vietnam, raised one of its key rates to 14%, the latest in a flurry of increases since February. Its campaign was accompanied by a package of commitments to tighten money and credit, cut the budget deficit and rein in the country’s state-owned enterprises.

India: overflowing factories - India’s central bank has just secured more manoeuvring space in its efforts to tame inflation without killing economic growth – figures on Wednesday showed  industrial output grew much faster than expected in March, at 7.3 per cent or around double the consensus forecast. This increases the chances the Reserve Bank of India will raise rates again next month after this month’s surprise 50 basis point hike. Investors took the news in their stride, with stocks down around 1 per cent,  in line with a sell-off in other Asian bourses. The biggest contribution to IP growth came from a sharp jump in capital goods output which rose an annual rate of 12.9 percent compared with a contraction of 18 percent in February. Manufacturing , which contributes about 80 percent to the overall output, grew 7.9 percent in March, sharply higher than 3.6 percent annual growth the previous month.

Chile, Peru Raise Rates to Two-Year High to Tame Demand, Damp Inflation - Policy makers in Chile and Peru yesterday raised their benchmark lending rates to two-year highs on concern that domestic demand and rising global prices may cause inflation rates and expectations to spiral out of control. Chile’s central bank raised its benchmark rate more than expected to 5 percent from 4.5 percent. Four of 18 economists surveyed by Bloomberg forecasted a half-point increase, while 14 predicted a 0.25-point increase. Peru’s seven-member board raised lending costs by a quarter-point to 4.25 percent, matching 13 of 15 forecasts in a Bloomberg survey.  Peru’s economy in 2011 will lead growth in South America by expanding 7.5 percent while Chile will post the third-fastest growth at 5.9 percent, the International Monetary Fund said in a May 3 report. Yesterday’s rate increases -- the fourth straight for Chile and fifth straight for Peru -- seek to head off any quickening in consumer prices as economists in both countries still see inflation ending 2011 above target.

Why are reserves so big? And who is to blame? - Vox EU - Foreign-exchange reserves play a crucial role in macroeconomic management. They provide a safety net during times of economic turmoil and, for most developing countries, a means to peg the nominal exchange rate. They also provide a means to manage windfalls from commodity exports or from sudden surges of capital. Between 2000 and 2009, developing countries added almost $5 trillion to their foreign-exchange reserves – a number deemed too high by many, prompting accusations of protectionism. But this column argues that developed countries are equally to blame – as well as failures in international coordination. It concludes that remedies therefore require action by both groups.

Mirror image - It’s an advanced Western nation with historically weak household debt and rising savings, booming exports but a weak external position, a set of cunningly guaranteed too-big-to-fail banks, slumping house prices and a dramatically two-speed economy. Pop quiz: Is it the US or Australia? It’s a trick question because the answer is it’s both. Last week we saw the US ISM illustrate just how similar the US growth track is to Australia. The manufacturing index continues to power along at the best rates in decades. The services index, on the other hand, crashed 11 points to sit just above recession levels. There is a really interesting look at how this split shows up in rail traffic today. No guesses for why. Housing is once again accelerating downwards and consumers are still deleveraging (if at a slowing rate). So long as that happens, there’s little prospect for a boom in the services economy, which makes up three quarters of output.

China Takes Over Africa? - Africa is an important element of world domination given its large population and mineral wealth, and European powers have always sought to control it, carving it up conveniently in the meantime. But those days may be over. The Christian Science Monitor article excerpted above – entirely mainstream reportage – gives us an idea of what the West is up against in such cases. It tells us that the West's current neo-colonial approach is probably the wrong strategy at the wrong time. In fact, the West's recent heavy-handed actions in the Ivory Coast, in Libya, in Kenya and other countries may prove increasingly counterproductive. The Internet itself strips away the illegitimate justifications for the use of force and in a multi-polar world there are other patrons who may be introduced to provide protection against Western depredations. These include most prominently the BRICS – Brazil, Russia, India, China and South Africa. Malawi's President Bingu wa Mutharika's actions in this regard are especially noteworthy. Far from being cowed by the recent episode on the Ivory Coast, Mutharika has not shied away from a confrontation with the West.

Strong Growth Makes 1 in 3 Africans 'Middle Class' (Reuters) - Robust economic growth in Africa over the last decade has swelled the size of its middle class to a third of the continent's billion-strong population, according to a report released on Friday. The African Development Bank (AfDB) study said 313 million Africans could now be classified as middle class, compared with 151 million in 1990 and 196 million in 2000. The figures are further evidence of the growing consumer clout of the poorest continent, although the AfDB did qualify its findings by saying that 60 percent of the middle class "were barely out of the poor category"."Sales of refrigerators, television sets, mobile phones, motors and automobiles have surged in virtually every country in recent years," the report said. As an example, it cited an 81 percent increase since 2006 in the possession of cars and motorcycles in Ghana, whose economy may expand as much as 12 percent this year due to the start of commercial oil production in December. South Africa, far and away the continent's biggest economy, ranked top in terms of vehicle ownership, with 300 vehicles per 1,000 people in 2007, more than twice as many as five years earlier.

Iceland's Big Economic Thaw - During Iceland’s boom years, which lasted from 2003 until 2008, a customer showed up at Guffi’s dealership wanting to buy a Porsche on credit, no money down. Guffi didn’t inquire about the man’s line of work; in fact, he didn’t care if the man paid back the loan — that was the bank’s problem, not his. Guffi sold the Porsche, and the customer drove it for a month or so until the first payment was due. The man had no interest in making the payment, and so Guffi, who always aimed to please, helped the man resell the vehicle for a profit. Guffi did the same thing a month later, and again a month after that; all told, Guffi sold the same car five times in six months, amazingly charging a higher price on each successive sale.  During the boom years, Iceland became a nation obsessed with banking. “Everyone was working for the banks — from the physicists to the philosophers,” one Icelander told me.

Comparing Europe and the US: Alternative Measures of Economic Well-Being - Yesterday I went into some detail regarding official national income statistics and what they tell us about income differences between the US and Western Europe. And in particular, I drew attention to some of the limitations of those aggregate income statistics. So given the fact that GDP or National Income is a very imperfect way to compare economic well-being, what other data can help us to get a sense for which side of the Atlantic is doing better? The point of the last post was that we should not rely on any one single indicator to judge who’s more advanced, but rather assemble a variety of measures and build a composite sketch from their collection. So here are some brushstrokes that help us to paint a more complete picture. Hours of work (source: OECD): rs.Access to broadband (source: World Bank): It surprises me that the country that leads the world in internet technology lags in broadband internet access out of this group. Investment in transportation infrastructure (source: Int'l Transport Forum):

The EU is to end passport-free travel - European nations moved to reverse decades of unfettered travel across the continent when a majority of EU governments agreed the need to reinstate national passport controls amid fears of a flood of immigrants fleeing the upheaval in north Africa.In a serious blow to one of the cornerstones of a united, integrated Europe, EU interior ministers embarked on a radical revision of the passport-free travel regime known as the Schengen system to allow the 26 participating governments to restore border controls. Here is the story, which I take to be big news indeed.

Europe moves to end passport-free travel in migrant row - European interior ministers agree to 'radical revision' of Schengen amid fears of a flood of migrants from north Africa. European nations moved to reverse decades of unfettered travel across the continent when a majority of EU governments agreed the need to reinstate national passport controls amid fears of a flood of immigrants fleeing the upheaval in north Africa. In a serious blow to one of the cornerstones of a united, integrated Europe, EU interior ministers embarked on a radical revision of the passport-free travel regime known as the Schengen system to allow the 26 participating governments to restore border controls. They also agreed to combat immigration by pressing for "readmission accords" with countries in the Middle East and north Africa to send refugees back to where they came from. The policy shift was pushed by France and Italy, who have been feuding and panicking in recent weeks over a small influx of refugees from Tunisia. But 15 of the 22 EU states which had signed up to Schengen supported the move, with only four resisting, according to officials and diplomats present.

Live reports from Norway on the penal system that runs contrary to all our instincts – but achieves everything we could wish for - Can a prison possibly justify treating its inmates with saunas, sunbeds and deckchairs if that prison has the lowest reoffending rate in Europe? Live reports from Norway on the penal system that runs contrary to all our instincts - but achieves everything we could wish for. They spend their days happily winding around the network of paths that snake through the pine forests, or swimming and fishing along the five miles of pebble beaches, or playing on the tennis courts and football pitch; and recuperating later on sunbeds and in a sauna, a cinema room, a band rehearsal room and expansive library.  Their commune has handsomely furnished bungalows with cable TV. The residents eat together in an attractively spacious canteen thoughtfully decorated with Norwegian art. The centrepiece is a striking 10ft long model of a Norwegian merchant ship.

Germany powers eurozone growth… Germany and France powered an unexpectedly strong eurozone growth spurt at the start of this year that outpaced the US and cast a shadow over the UK’s much weaker recovery.  Germany’s economy grew 1.5 per cent in the first quarter, lifting activity in Europe’s largest economy back over the previous 2008 peak. France announced a 1 per cent expansion in gross domestic product compared with the previous three months The strong growth highlighted how much of the eurozone has put the economic crises of the past three years behind it – and could help ease the 17-country region from its debt crisis. Even Greece, where a €110bn ($155bn) international bail-out launched last year is running into trouble, provided a positive surprise. Greek GDP grew 0.8 per cent – after contracting sharply for the past four consecutive quarters. Across the eurozone, economic activity expanded by 0.8 per cent, twice as fast as first-quarter growth in the US. In France, Christine Lagarde, finance minister, declared that the country’s growth “machine has started again”.  Philipp Rösler, Germany’s new economics minister, said: “Germany is the growth motor among the industrial nations – and not just in Europe.”

Euro area GDP report: unbalanced - Rebecca Wilder -Today Eurostat released their estimate of Euro area growth for the first quarter of 2011. The economy grew smartly, or 0.8% on the quarter on a seasonally- and working day- adjusted basis. On the face of it, Euro area growth, which is 3.2% on an annualized basis, dwarfs the 1.8% seen in the US economy. Really, though, it's joint German and French growth that tower US Q1 GDP growth. Eurostat doesn't explicitly highlight how inordinately unbalanced is growth across the region in their report . Germany and France alone accounted for 72% of the quarterly growth of Euro area GDP.Eurostat only releases the growth rates for each quarter at this stage (the first release). They do not revise the recent growth trajectory until later releases. However, based on the current growth estimates and the unrevised base figures, I expect that the growth rate in Q4 will be revised upward. The implication is that 2010 was a very strong year for the Euro area. If final demand was growing so quickly in Germany, I would say that the Euro area is adjusting more healthily than I had expected. Spenders become savers and vice versa, and capital flows adjust current account balances (and trade) accordingly. Germany spends more at home and abroad, while the Periphery less so. This does seem to be occurring according to the Federal Statistical Agency:

Trichet Says Global Central Bankers United in Inflation Fight - European Central Bank President Jean- Claude Trichet said the world’s central bankers are united in fighting inflation fueled by surging commodity prices and fast- growing emerging economies.  “There is a solid unity of purpose of all central bankers concentrated on solidly anchoring inflation expectations,” Trichet said today in Basel, Switzerland, after chairing the Global Economy Meeting. The global economic recovery has been “confirmed” and there is “potential for real overheating in emerging countries,” Trichet said.  Global rate setters are growing more concerned about inflation as the world economy gathers strength and food and oil prices increase. The ECB raised interest rates last month for the first time in almost three years. Central banks in the Philippines, Malaysia and India also tightened borrowing costs last week.  Oil has gained 10 percent this year after unrest in the Middle East and North Africa toppled leaders in Tunisia and Egypt before spreading to Libya, Algeria, Bahrain, Iran, Oman, Syria and Yemen

The Euro Threat - I am not sure how to think about the break up in the Euro for the United States. My instinct is to think of it as a major threat to US growth. It would seem to support a strong dollar rally, which is the last thing we need.  Right now, it’s Indian Summer for US manufacturing. Here is the ISM Manufacturing employment index. It’s a survey of how many manufacturers say they are hiring or letting go. I subtracted 50 (which means matched hiring and letting go) so you could better see expansions and contractions. Look how far back you have to go to see conditions this good, that is this many folks hiring. The 70s recovery is the last thing that matches it. You have to go back to the 60s to find something that is clearly more solid. At the same time, however, a collapsing Euro means potentially lower commodity prices. That seems good as well. It just doesn’t seem as good as a weak dollar.

What? Greece has to raise capital in 2012 and meet a 7.5% deficit target? - Rebecca Wilder - Greece needs to raise roughly 30 bn euro in the private market next year - see .pdf page 50 here, where the IMF projects that Greece will finance 40.3bn in 2012, up from the 11 bn required in 2011. Furthermore, they'll need to issue debt with longer maturity than the 3-month bills they've been marketing this year. At 1200 basis points over German bunds on a 10yr note, Greece cannot 'afford' this and is very unlikely to be tapping markets for term loans anytime next year. Greece's privatisation plan - selling state-owned assets - is probably too aggressive, amounting to roughly 4% of GDP per year through 2015 (10 bn euro average per year, see .pdf of presentation here, as a percentage of average GDP spanning 2010-2012). But here's something that is really important, and another reason why I do not believe that Greece would voluntarily default until at least next year: they're expected to run a primary surplus in 2012. I take note that one can challenge the IMF's forecast, but it's the best information that I have at this time.Barring an immediate secession, I anticipate that Greece's 'circumstances' will change in one of two ways over the near term: (1) Greece terms out its loans - a very soft restructuring - in the amount of 30 bn euro (or roughly thereabouts), or (2) the EFSF raises another 30 bn - that's what it's for.

Fears For Euro In Greece Prompt Secret Talks - Europe's inner circle meet to discuss possible debt restructuring for Greece as well as problems in Ireland and Portugal. Finance ministers from an inner core of eurozone countries were holding secret talks in Luxembourg tonight to discuss a possible debt restructuring for crisis-ridden Greece. The single currency's leading creditor nations – Germany, France, Finland and the Netherlands – all attended the meeting, called amid concerns that Greece's problems were nearing breaking point. Sources said negotiations centred on the mounting eurozone debt crisis, and included not just Greece but the terms of Portugal's bailout and Ireland's demands for easier repayment terms on its loans. But they denied reports coming out of Germany that Athens had floated the idea of leaving the single currency altogether.

The consequences of a not so secret meeting - It was always our contention that crisis resolution would consist of permanent rollover. When faced with the question of whether to allow Greece to default, or agree yet another (unrealistic) programme, European finance ministers accepted the latter.  At a secret meeting in Luxembourg, the finance ministers of a subset of eurozone countries met to discuss the future of Greece, and, according to the FT,  reached a consensus that they want to seek a whole new package, as the current Greek programme, which foresees a return to the markets in 2012, is not realistic.  Greece needs to raise €25bn-€30bn next year. The FT reports that the EFSF might buy up Greek debt in primary markets, complemented by a voluntary restructuring to roll over debt that falls due in 2012. Officials seem to have firmly ruled out any involuntary debt restructuring, which would create more problems than it would solve. The Greek finance minister was invited to the meeting so that officials could impress on him the importance of more austerity, and privatisation.  On Friday night, Der Spiegel reported that Greece had considered an exit from the eurozone, and revealed that such a meeting would take place, with Wolfgang Schäuble having a study in his briefcase on why a Greek exit would come at a prohibitive cost – for Greece, but also the eurozone itself. The story gave rise to frenzied denials by EU officials, and caused a further rout of the euro, which decline from a peak of $1.49 to $1.43 in two days. EU officials first tried to deny that such a meeting was taking place at all, but when that became impossible to uphold, they merely denied that the ministers discussed a restructuring of debt, let alone an exit.

Europe pressured to revise Irish and Greek bailouts (Reuters) - The European Union is under pressure to renegotiate its financial bailouts of Ireland and Greece after an Irish minister said any concessions given to Athens should mean better terms for Dublin as well. The 110-billion-euro ($157 billion) rescue of Greece, agreed in May last year, and the 85-billion-euro scheme for Ireland, put together in November, were meant to be the cornerstones of the euro zone's response to its sovereign debt crisis.The fact that both may now be revised, in Greece's case perhaps radically, underlines how they so far have failed to convince markets that the problems are in hand, and suggests Europe may be on the hook to supply fresh aid for years to come.Irish Minister for Energy Pat Rabbitte told state broadcaster RTE on Sunday he would like to see a rescheduling of the emergency loans extended to Ireland under the bailout by the European Union and the International Monetary Fund. "Quite frankly the (interest) rate on Ireland must be reduced and in my own view the debt must also be rescheduled but that's another issue,"

More on Greece Restructuring and Eurozone Worries -  Yves Smith - While the Euro recovered from its stumble last week and the EU officialdom put out a round of denials of a story on Friday that Greece was considering an exit from the eurozone, the Euro tea leaf readers are still chewing over the significance of a not at all secret secret meeting over the weekend. The trigger is the fact that Greece is already on the verge of breaking the terms of its loans last year. This is hardly a surprise; austerity does not work and the Greek debt burden was clearly unsustainable. Per the Guardian: The eurozone’s first ever bailout of a debt-laden member country is failing and will need to be renegotiated exactly a year after the €110bn (£96bn) rescue package was agreed for Greece.Following secret talks in Luxembourg on Friday between Athens and some of the key EU players, it emerged that Greece will not be able to meet the terms of last year’s rescue and is hoping to ask the eurozone for more funds. So the solution, per a Financial Times report, is…yet another bailout:European officials are preparing to revamp Greece’s bail-out package after concluding that Athens would be unable to raise money in the markets early next year, as envisaged under a €110bn ($158bn) rescue plan.

Official Greek Response To Der Spiegel Article - Looks like this one time the Greeks may actually be telling the truth. But who cares: by Monday, when every nation in the eurozone will be right where it was on Friday, the EURUSD will be 200 pips lower. Mission accomplished. Although unlike in 2010, we are absolutely certain no investigation will ever be launched to discover who instigated this EUR hit piece which just end up benefitting both Greece, German and... the eurozone. And yet, should it be uncovered one day that none other than Greece initiated this process to weaken the euro we would be almost as surprised as learning that Greek banks had bought CDS on Greek debt.  From the Greek Ministry of Finance - Ministry of Finance (scribd)

Europe eyes bullet, considers bite - ON FRIDAY, the ongoing European debt crisis took a dramatic turn as Der Spiegel reported a meeting of finance ministers in Luxembourg, supposedly gathered to discuss a Greek threat to leave the euro zone. The euro-zone exit rumour was forcefully denied, and no wonder; whether or not it was true, the mere hint of the possibility of exit could generate a run on euro-denominated deposits in Greek institutions. Ultimately, European officials suggested they were meeting to discuss changes in the rescue packages extended to Greece and other peripheral countries. The EU is finally admitting that a new deal for Greece is inevitable, given its inability to meet the terms of the current package. A restructure of Greece's debt is also essentially inevitable, but Europe has yet to own up to that reality. (Standard & Poor's, as ever ahead of the curve, downgraded Greece's credit rating to level B, leaving the country alongside Belarus is the least creditworthy in Europe. Tellingly, Greek yields hardly moved on the news.) I don't know how this next act will play out, exactly. New terms for Greece will prompt Ireland and Portugal, the other bail-out recipients, to ask for similarly generous terms. At the same time, new terms for Greece will almost certainly leave Greece insolvent. But it's important to keep in mind that Europe's failure here is institutional, not economic.

Greece Slips Farther Behind Budget-Cut Target -  Europe's debt crisis has returned full circle to the problem that started it over a year ago: How to save the malfunctioning Greek state from running out of money. Greece has been slipping farther behind its targets for cutting its budget deficit and is expected to need nearly €30 billion ($43 billion) of extra financing for 2012, according to euro-zone officials.  The country's growing reliance on aid from other euro members is fueling a debate over whether Greece should hold talks with its private creditors about extending the maturity of its bonds, a step that Germany is quietly pushing but other euro nations are resisting. Euro-zone finance ministers meeting in Brussels early next week are expected to debate Greece's debt burden, its need for additional aid, and its request for more time to meet its fiscal targets.

Trichet: Restructuring of Greek debt is “not on the agenda” - Greek debt restructuring, anticipated by markets, is “not on the agenda,” insisted Thursday the president of the European Central Bank Jean-Claude Trichet in Helsinki. Greece has adopted a plan of budget cuts, said Jean-Claude Trichet. “The important thing is to fill point,” he added, saying that it is the only way for this country to regain its “credibility” in the markets.  Faced with speculation about this, the ECB has never hidden its opposition to a restructuring of the Greek debt, which could affect the entire banking system of the euro area. Jean-Claude Trichet also stressed the need for all countries in the euro area, not just those currently in difficulty, to lead a tight fiscal policy. The Governing Council of the ECB, meeting in Finland, decided Thursday to keep its key rate to 1.25% after rising 25 basis points last month.

EU Said to Consider Requiring Collateral for Extra Greek Aid - European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring, said a person with direct knowledge of the situation. Expanding the 110 billion-euro ($158 billion) lifeline Greece received last year may mean that assets or revenue from asset sales are used to secure extra funds, the person said. Demanding collateral, an idea floated last year by Finland, may help avoid a political backlash against bailouts. European Union finance officials, who held an unannounced meeting last night in Luxembourg, are preparing the help to ease a debt burden that some investors say will lead to a restructuring. Other steps may include lower interest rates or longer maturities on bailout loans, said Norbert Barthle, budget spokesman for German Chancellor Angela Merkel’s ruling party. “We think that Greece does need a further adjustment program,” Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, said after yesterday’s gathering. “We’re not discussing the exit of Greece from the euro area. This is a stupid idea -- no way.”

Central Bank Drift: Eupdate Extra - Now that everyone agrees that Greece will engage in a figleaf operation to extend maturities without inflicting net present value losses on its creditors, it is worth mulling the institutional implications of any such operation. If a debt exchange takes place as rumored, I am most worried about two things: the cost to Greece of paying higher interest rates to kick the can down the road, and the costs to the international financial system of getting central banks formally involved in a debt restructuring.... In financial crises, central banks often load up on "illiquid" securities before fiscal authorities reach political capacity for debt reduction and loss distribution. Such central bank actions are publicly characterized as monetary policy or Lender of Last Resort operations, but are often quasi-fiscal: temporizing while the political system gets ready for crisis response.  As a result of its crisis operations, the ECB has come to hold lots of Greek debt.  Some of it has migrated back to the Greek central bank. In addition to special operations, some national central banks hold Greek debt as part of their Euro hard-currency reserves. If Greece restructures, the ECB and national central banks have two choices:  participate alongside other creditors, or sit out. 

Greek CDS spreads widen on debt worries - The cost of insuring Greek and other peripheral euro-zone debt against default jumped on Monday on renewed worries about Greece's sovereign debt problems. The spread on five-year Greek credit default swaps, or CDS, widened 43 basis points to 1,360 basis points on Monday, according to data provider Markit. That means it would now cost $1.360 million annually to insure $10 million of Greek sovereign debt against default for five years, up from around $1.317 million on Friday. The Spanish CDS spread widened by 10 basis points to 253, while Portugal widened 11 basis points to 643 and Ireland traded at 670 basis points versus 655 on Friday. European officials have indicated that further changes are likely to Greece's aid program.

One in three Greeks want out of EU-IMF rescue: poll - One in three Greeks want their government to abandon a loan agreement with the EU and the IMF perceived to have sent the debt-hit country into a recession spiral, a poll found Sunday. The opinion survey by pollsters Marc in Ethnos daily found 33.3 percent of respondents want Athens to abandon a rescue memorandum it signed last year "because it leads nowhere, even if this means bankruptcy." And another 45.9 percent of 1,000 households contacted nationwide said Greece should renegotiate the terms of its loan rescue.The Greek government last year agreed to overhaul its economy in return for a 110-billion-euro ($157-billion) loan to avert a looming debt default. But sweeping cost cuts, tax hikes and wage reductions applied under the recovery programme drafted in cooperation with EU and IMF experts have caused the Greek economy to shrink faster than originally calculated.

Another Downgrade for Greece -From MarketWatch: Greek CDS spreads widen after downgrade Standard & Poor's lowered its credit rating on Greece to B from BB-minus. The spread on five-year Greek credit default swaps, or CDS, widened further to 1,375 basis points from around 1,360 basis points earlier in the day ... I've heard from an excellent source that there are EMU people working on the details of what a restructuring would look like - as a contingency plan - but nothing is imminent. Some sort of restructuring seems priced in with the yield on Greece ten year bonds is at 15.6% today and the two year yield at 25.2%.

Greek Debt Rating Cut to B by S&P on Restructuring Concerns - Greece’s credit rating was cut two levels to B from BB- by Standard & Poor’s, which said further reductions are possible as the risk of default rises. Another cut would make Greece the lowest-rated country in Europe as today’s move left it even with Belarus after the fourth reduction by S&P since April 2010. The yield on Greek 10- year bonds rose 12 basis points to 15.6 percent, more than twice the level of a year ago when Greece accepted a bailout.The S&P decision came on the first business day after an unannounced Friday evening meeting of European finance ministers May 6 in which they agreed Greece needed more help to avoid a restructuring. Extended repayment terms and demands for collateral may be part of a new aid plan.“The downgrade reflects our view of increasing sentiment among Greece’s key euro-zone official creditors to extend the debt payment maturities of their 80 billion euros ($115 billion) of bilateral loans pooled by the European Commission,” S&P said in an e-mailed statement.

S&P cuts Greece credit rating to B from BB-minus - Standard & Poor's Ratings Services on Monday cut Greece's long-term sovereign credit rating to B from BB- due to concerns euro-zone officials are looking to extend the debt payment maturities of the European Commission's portion of the nation's 110 billion euro bailout. "As part of such an extension, we believe the euro zone creditor governments would likely seek 'comparability of treatment' from commercial creditors in the form of their similarly extending bond and loan maturities," the ratings company said. Such burden sharing would constitute a "distressed exchange," according to S&P's criteria, which would result in a rating of SD, or selective default, the company said. "Even if there were no discount of principal, such an extension of maturities is generally viewed to be less favorable to commercial creditors than repayment according to the original terms of the debt," S&P said. Greece's ratings remain on CreditWatch with negative implications, S&P said

Unease About Greece Grows as S.&P. Downgrades Its Debt — Worries about Greece’s intractable debt problem deepened on Monday, stoking fears that the country remains on a path to fiscal disaster and that European leaders do not have a convincing plan to prevent a default.  Standard & Poor’s¹ downgraded Greece’s debt once again, and Moody’s Investors Service² put its rating on review for downgrade, compounding pressure on the government as it seeks to come up with a solution shy of a debt restructuring, including privatizing state enterprises, though there is resistance to that step.  Analysts and investors said they did not see how Greece could get its debt under control when output is slumping and there is little sign that efforts to restructure the economy are bearing fruit.  “Austerity is fine, but what you really need is investment and growth, and we just don’t see that,” S.& P. lowered its rating to B from BB –, reducing Greece to the same creditworthiness as Belarus, the lowest-rated countries in Europe. In a statement, S.& P. noted increasing sentiment among governments in favor of giving Greece more time to repay 80 billion euros ($115 billion) in loans from the European Commission⁴. But the commission would probably insist that private bondholders also accept slower repayment, S.& P. said.

Greek Bonds Lead European Slide, CDS Rise to Record, After S&P Downgrade - Credit-default swaps on Greek debt rose 19 basis points to a record 1,360, according to CMA, signaling a 68 percent probability of default within five years. Swaps on Ireland reached an all-time high of 676 basis points, and contracts on Portugal also rose. German 10-year bonds rose for a third day, pushing the yield on the securities back below that on similar-maturity U.S. Treasuries. They yielded three basis points less than their American counterpart, after exceeding them last week for the first time since 2009. Germany may consider more help for Greece under stringent conditions to avoid a restructuring, which would risk an “even bigger problem than we have already,” Michael Meister, the parliamentary finance spokesman for Merkel’s Christian Democratic Union, said in an interview in Berlin today.

When is a default not a default? - Outside of wartime, serious governments don't default. And if they do, it's a seismic market event. That's why the European authorities will do everything to prevent Greece from going down that path. But there are plenty of ways to lower a country's debt burden which stop short of a formal default. The question is whether the more benign, voluntary approaches to restructuring can be done quickly enough, or deliver enough relief to the hard-pressed Greeks. Officials have been looking into this privately since at least the G20 Summit in Seoul; some would say, since the Greek bailout was announced just over a year ago. In fact, there has already been a restructuring of Greek debt, in the decision to lower the interest rate and lengthen the maturity on the bailout funds that Greece signed up for just over a year ago.Now further market pressure and some enthusiastic German reporting has brought the discussions into the open, and made them a good deal more urgent.

Greece And The Euro: Bailing Out The Bailout - IT WAS a year ago that the European Union produced its big bazooka to quell the euro area’s sovereign-debt crisis: a €750 billion fund to safeguard the single currency, following within days of the €110 billion bail-out of Greece. It did not work. Ireland has since been bailed out, and a rescue of Portugal is in the works. Greece looks closer than ever to defaulting, or at least to having its debt restructured. After a year of muddling along, the EU seems more muddled than ever. The disarray was painfully apparent over the weekend. News of a secret meeting of selected European finance ministers in Luxembourg on May 6th was promptly leaked. Der Spiegel reported that Greece was considering leaving the euro zone; the briefing note for the German finance minister, Wolfgang Schäuble, made clear this would be economic suicide. It would greatly expand (perhaps double) Greece’s debt burden, provoke capital flight, cause turmoil across Europe’s banks and endanger the country’s membership of the EU. Greece described the report as "borderline criminal".

Why the Greek bail-out has worked - Everyone says that heightened talk of a Greek default is proof that last year's bail-out has "failed". But you could make a strong case for the opposite. In reality, all that the Greek support programme last year was ever going to do was buy time. And that is exactly what it has done. It just hasn't bought quite as much as governments hoped. As I said in my last post, officials are agreed that Greece needs more support. The only issue is what form this takes - and how many hoops the government has to jump through to get it. Germany is also looking for voluntary re-profiling of privately held debt along the lines that I described yesterday as part of the deal. (Though it's far from clear that can happen on the timetable available). Even the non-eurozone officials who have been most exasperated by Europe's management of the crisis would accept that governments were right a year ago to kick the Greek problem down the road and buy the system some time.

“I was told to say there was no meeting... We had certain necessities to consider” - Guy Schuller, spokesman for Jean-Claude Juncker, admitted yesterday to lying about the secret meeting of finance ministers on Friday. The Wall Street Journal Real Time Brussels blog has got it all, including the above quote from Mr Schuller, who was contacted by various media groups to whom he denied that the meeting was taking place. “There was a very good reason to deny that the meeting was taking place., Mr Schuller told the WSJ  ”It was self-preservation.” Helpfully, the WSJ also dug up an older press conference of Mr Juncker, who said “When it becomes serious, you have to lie.”  In his column on Monday, Wolfgang Münchau also commented on Mr Schuller’s lie, adding that he did not believe the pronouncement that the meeting did not discuss a Greek exit from the eurozone either. Furthermore, he no longer believed any statement by any EU officials in respect of this crisis. We are in the stage of the crisis where officialsare lying all the time. Much attention in today’s news coverage is focused on what actually happened at Friday’s meeting. One thing that has been discussed in Luxembourg, at least according Kathimerini, was Jean-Claude Trichet’s proposal for a new memorandum for Greece, with a new €50bn loan for the 2012-2013 period. .

Head Of Eurogroup Admits To Lying About "Secret Greek Meeting" Out Of Fears For Market Collapse - "When It Becomes Serious, You Have To Lie - On Friday the misinformation floated about the Greek expulsion event hit a fever pitch: while we correctly speculated that nobody would be expelled from the Eurozone, the amount of conflicting info was at an all time record, with glaring inconsistencies between various quoted authoritarians. Now, courtesy of the WSJ blog, we learn that, for the first time in history, a spokesman for Jean Claude Juncker, the PM of Luxembourg, and the head of the Eurogroup council of eurozone finance ministers, admits openly to having lied to media outlets. "In a phone call and text messages with two reporters for Dow Jones and the Wall Street Journal, Mr. Schuller repeatedly said no meeting would be held. He apparently said they same to other news outlets; at least one more moved his denials on financial newswires. Of course, there was a meeting–although not, apparently, to talk about Greece quitting the currency, which would be an extreme step to say the least. . So why the lie? “I was told to say there was no meeting,” said Mr. Schuller, reached by telephone Monday. “We had certain necessities to consider.”  “There was a very good reason to deny that the meeting was taking place.” It was, he said, “self-preservation.”" And there you have it: the Eurozone itself now admits that it will sacrifice credibility at the expense of a few FX pips and a few basis points in the ES.Everything else is smoke and mirrors

Euro Holds On to Top Spot in Currencies as EU Shows Resolve on Greece Debt - European Union leaders are showing their resolve in keeping the euro region together, agreeing in an unannounced meeting on May 6 to review the terms of the 110 billion-euro ($158 billion) lifeline Greece received last year.  The euro tumbled 3.45 percent in the final two days of last week, the biggest back-to-back loss since 2008, as the European Central Bank signaled it is in no rush to raise interest rates and Der Spiegel magazine said Greece may withdraw from the currency bloc. EU officials denied the report and said Greece will need more aid. Standard & Poor’s reduced the nation’s credit rating by two level today as investors drove yields on its two-year notes to more than 25 percent.  Even with last week’s decline, the single European currency was the year’s best performer through May 6 after German Chancellor Angela Merkel said Jan. 12 her country would do “whatever is needed to support the euro,” exports grew and the ECB raised borrowing costs for the first time since 2008.

Buiter Says Greek Debt Maturity Extension Wouldn’t Solve Problem - Citigroup Inc. Chief Economist Willem Buiter said that extending the maturities of Greek debt won’t solve the country’s underlying solvency problem. “Extension of maturities is of course the final option that would allow them at least to get over the funding gap in 2012,” he said in an interview with Ken Prewitt on Bloomberg radio from Edinburgh. “It doesn’t solve the underlying solvency problem of the Greek sovereign.” Standard & Poor’s yesterday cut the country’s debt rating two notches to B, citing the likelihood that Greece may need to restructure its debt. Euro-region officials said after an unscheduled May 6 meeting in Luxembourg that Greece needs “a further adjustment program.” “It’s clear that Greece will have to find money somewhere in a hurry,” said Buiter. Greece “can’t get it in the market, so we either need a new package, an extension of the existing package, or rapid privatization of assets.”"

More Greek Out - Krugman - An Argentine commenter on my Greece-leaving-the-euro post notes that Argentina, in addition to letting the peso drop, both defaulted on its debt and imposed temporary restrictions on bank withdrawals. Indeed. Something similar would have to happen for a euro exit to take place. But bear in mind that the first piece is already a foregone conclusion: everyone knows that Greece won’t repay its debt in full. The problem is that even if the country defaults on its debt, it still faces the problem of wages and prices way out of line with the core euro countries. So devaluation is what you do when default isn’t enough. As for the second point, the main argument against the possibility of a euro breakup has been precisely that any hint of exit would unleash the mother of all bank runs. So how could exit take place? I argued some time ago that it would have to take place in the context of a banking crisis that forces a temporary closure of the banks — something along the lines of the Argentine corralito — in any case. This is why I find it hard to see any European government making a solemn, deliberate decision to leave the euro.

The Greeks investigate the Germans --  Friday’s report in German paper Der Spiegel that Greece was considering leaving the eurozone — a prospect later denied by Greek and European officials — will be given the ol’ investigatory treatment. Capital.gr reports: Greek prosecutor Eleni Raikou opened an urgent initial probe on Monday into a Der Spiegel report suggesting that Greece might leave the euro zone. The report will be investigated if it had disseminated “false news”, intending to panic Greek citizens and undermine confidence on the single currency. The Greek prosecutor has requested the help of German authorities to question those responsible for the site and for the article, according to a Dow Jones Newswires source.Hellenic whispers have become de rigueur for European investors over the past year, and indeed, the Greek finance ministry has already asked for an investigation into a Citigroup email that allegedly suggested an Easter debt restructuring. Meanwhile, Greek and eurozone officials have become more talkative than a pack of Pi Beta Phi sisters, pouring further confusion and whiplash onto the market.

Why Greece Should Reject the Euro - SOMETIMES there is turmoil in the markets because a government threatens to do what is best for its citizens. This seemed to be the case in Europe last week, when the German magazine Der Spiegel reported that the Greek government was threatening to stop using the euro. As much as the move might cost Greece in the short term, it is very unlikely that such costs would be greater than the many years of recession, stagnation and high unemployment that the European authorities are offering.  The experience of Argentina at the end of 2001 is instructive. For more than three and a half years Argentina had suffered through one of the deepest recessions of the 20th century. Its peso was pegged to the dollar, which is similar to Greece having the euro as its national currency. The Argentines took loans from the International Monetary Fund, and cut spending as poverty and unemployment soared. It was all in vain as the recession deepened.  Then Argentina defaulted on its foreign debt and cut loose from the dollar. Most economists and the business press predicted that years of disaster would ensue. But the economy shrank for just one more quarter after the devaluation and default; it then grew 63 percent over the next six years. More than 11 million people, in a nation of 39 million, were pulled out of poverty.

The euro needs more than sticking plaster - Reports of a Greek exit from the euro, or debt restructuring, were dismissed as “stupid” by senior European Union officials, and “flippant” by the Greek government. But we are into one of those ‘no smoke without fire’ periods, symptomatic of what has happened to the eurozone over the past 12 months.First there was Greece, a year ago. Then six months later there was Ireland. Now, thanks to acting Portuguese prime minister Jose Socrates we have the broad outlines of Portugal’s EU/International Monetary Fund rescue package. Portugal will get 78 billion euros, about a quarter of it to prop up her ailing banks. The rescue means there have been three eurozone bailouts in the space of a year, at roughly six-monthly intervals. While things look less worrying for Spain at the moment — and stopping the rot in Portugal is important — at this rate of attrition Madrid might be nervous about whether it can get through November.

Irish to Avoid ‘Doomsday,’ Honohan Says as Rescheduling Mooted - Irish central bank Governor Patrick Honohan said the country will avoid economic “doomsday,” as a government minister and prominent professor suggested the nation should reschedule debts from its as much as 85 billion-euro ($121 billion) bailout.  Honohan was responding to Morgan Kelly, an economics professor dubbed Ireland’s Doctor Doom, who wrote in the Irish Times newspaper that Ireland faces a “prolonged and chaotic national bankruptcy.”  “What we are working on is a plan, that if things go well in terms of economic growth, is clearly something that will bring debt on a sustainable path,” Honohan said in an interview with Dublin-based RTE radio yesterday. “If things don’t go well, it will be much more difficult. In that case, there will be a problem.”  Kelly said the country faces “economic ruin” unless it walks away from last year’s bailout, withdraws support for banks and cuts its fiscal deficit to zero. Ireland’s debt will peak at 116 percent of gross domestic product in 2014, according to government forecasts published on April 29. The figure was 25 percent at the end of 2007. Energy Minister Pat Rabbitte said yesterday “in my own view” the debt stemming from Ireland’s bailout “must be rescheduled.”

Ireland's national debt is set to hit $248 billion - Ireland’s national debt is set to hit $248 billion (€173billion)  by the end of 2011 according to Bank of Ireland chief economist Dan McLaughlin. On Friday the Irish bank’s economic research unit published its monthly review of international and Irish markets. McLaughlin said that Ireland’s gross national debt stood at $157billion (€110billion) at the end of 2010, $129 billion  (€90billion) represented by Government bonds. "The net figure, which takes off cash balances, was $133 billion (€93billion), and it is this figure, further adjusted for liquid assets held by the National Pension Fund, which the IMF monitors as part of the current Irish programme."The EU prefers a broader definition of sovereign debt, however, called general government debt, and on that measure the Irish figure amounted to $212 billion (€148billion) or 96% of GDP, with the difference largely due to the $44 billion (€31billion) promissory notes for the state-owned banks," he said

On the Treasury’s Curious Denial That Geithner Blocked Deal on Irish Debt - Yves Smith - This is getting interesting. The US Treasury has roused itself to issue a narrow denial of an op-ed in the Irish Independent by one of Ireland’s most highly respected economists (by virtue of his having predicted a very severe housing crash), Morgan Kelly. To recap briefly, Kelly said that the IMF was willing last November to haircut €30 billion of unguaranteed bonds by roughly two-thirds on average, but that Geithner’s disapproval on a conference call killed the idea:The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. The Irish Independent today reported on the Treasury’s objection:The US government last night rubbished a claim that one of its most senior officials “torpedoed” a plan to allow Ireland to write-off some of its bank debts…. Last night, a senior US official said this report was “inaccurate”.

We won't pay off our debt... Fine Gael Minister admits Ireland plans to restructure €250bn borrowings -Ireland will never repay the €250bn it has borrowed from the EU and IMF, senior government insiders have admitted – but we will not default until our ­EU partners agree we have no choice. A senior minister last night told the Irish Mail on Sunday that the Cabinet expects our crippling debts to be ‘restructured’ within three years. However, Fine Gael is pinning its hopes on the EU being forced by outside events, such as the collapse of the Greek economy, into a realisation that Ireland cannot hope to pay off the debt mountain accumulated by our rogue banks. The admission came as Professor Morgan Kelly, the economist who predicted our property crash and the bank crisis, warned that without a restructuring, Ireland will be crushed by its quarter of a trillion euro debt.

Rabbitte 'hopeful' of interest rate cut - Minister for Communications Pat Rabbitte Pat Rabbitte said today he “hopes” that Ireland will secure a lower interest rate on its bailout loans from the European Union. EU finance ministers are to hold meetings on May 16th and 17th to discuss the bailout for Portugal. Ireland's bailout is also expected to be on the agenda.Mr Rabbitte said today Ireland would continue to negotiate for reduced rates. "The decision has not yet been made," he said. "The Irish Government has been constantly involved in talks on the interest rate issue and hopefully, hopefully it might be brought to an end at the Ecofin meeting." The Minister said it is the Government’s view that the existing rates, which average 5.8 per cent, are "punitive" and must be lowered. "The whole point of this kind of agreement is that the country affected can get access to normal debt markets again within the timeframe prescribed,"

Ireland's future depends on breaking free from bailout - WITH THE Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable. By the time the dust settles, Ireland’s last remaining asset, its reputation as a safe place from which to conduct business, will have been destroyed. Ireland is facing economic ruin. While most people would trace our ruin to to the bank guarantee of September 2008, the real error was in sticking with the guarantee long after it had become clear that the bank losses were insupportable. Brian Lenihan’s original decision to guarantee most of the bonds of Irish banks was a mistake, but a mistake so obvious and so ridiculous that it could easily have been reversed. The ideal time to have reversed the bank guarantee was a few months later when Patrick Honohan was appointed governor of the Central Bank and assumed de facto control of Irish economic policy.

Trichet reiterates opposition to Irish debt restructuring - EUROPEAN CENTRAL Bank (ECB) chief Jean-Claude Trichet has reiterated his opposition to any debt restructuring by Ireland, saying the terms of the EU-IMF bailout plan for the State have been approved by “the entire world”. Mr Trichet’s remarks before a committee of the European Parliament come against the backdrop of demands for the renegotiation of key elements of the deal by Fine Gael and Labour, which hope to be in government within weeks. “We have plans. The plans have to be executed, have to be implemented in the best fashion possible as has been the case the world over and it is very, very important in my opinion not to confuse things,” he said. “We have a programme, approved by the international community, approved by the IMF board, the entire world, approved by the European [Union], approved and financed by the IMF and the European [Union].

Moody's warns Irish credit rating could go to 'junk' status - THE “VERY strong” commitment shown by Ireland and the EU-ECB-IMF troika to avoid default could change with developments in the euro zone, credit ratings agency Moody’s has warned. The external risks in other heavily indebted countries could push the credit rating on the Irish Government into “junk” status, Moody’s warned in its annual credit report on Ireland. The commitment to avoid default could also change as a result of “Ireland-specific events”. The country’s funding environment “could potentially be negatively affected by adverse sovereign developments in other euro area peripheral countries”, said the agency.

Irish central bank mulls rescheduling - Irish central bank Governor Patrick Honohan said the country would avoid economic “doomsday,” as a government minister and prominent professor suggested the nation should reschedule debts from its as much as 85 billion euros (US$121 billion) bailout. Honohan was responding to Morgan Kelly, an economics professor dubbed Ireland’s Doctor Doom, who wrote in the Irish Times newspaper that Ireland faces a “prolonged and chaotic national bankruptcy.” “What we are working on is a plan, that if things go well in terms of economic growth, is clearly something that will bring debt on a sustainable path,” Honohan said in an interview with Dublin-based RTE radio on Sunday. “If things don’t go well, it will be much more difficult. In that case, there will be a problem,” he said. Kelly said the country faces “economic ruin” unless it walks away from last year’s bailout, withdraws support for banks and cuts its fiscal deficit to zero.

Ireland to Impose Levy on Pension Funds to Finance Jobs Plan - Ireland’s government will impose a temporary levy on domestic private pension savings to fund a jobs plan aimed at cutting unemployment and aiding the economic recovery. The government plans to apply an annual 0.6 percent charge over four years on pension assets, excluding funds providing benefits to non-resident employers and members, Finance Minister Michael Noonan said in Dublin today. The move should generate 470 million euros ($675 million) a year, he said.  The sales-tax rate on tourism-related products and services will be cut to 9 percent from 13.5 percent, while a travel tax may also be suspended, subject to conditions, he said. The government will also introduce a partial loan guarantee program for small and medium-sized businesses.  “There is no escaping the fact that we do not have the resources available at present to fund large-scale policy initiatives to help to generate economic activity,”

Irish Bombshell: Government Raids PRIVATE Pensions To Pay For Spending: "The Irish government plans to institute a tax on private pensions to drive jobs growth, according to its jobs program strategy, delivered today. Without the ability sell debt due to soaring interest rates, and with severe spending rules in place due to its EU-IMF bailout, Ireland has few ways of spending to stimulate the economy. Today's jobs program includes specific tax increases, including the tax on pensions, aimed at keeping government jobs spending from adding to the national debt. The tax on private pensions will be 0.6%, and last for four years, according to the report. From the jobs initiative release: The various tax reduction and additional expenditure measures which I am announcing today will be funded by way of a temporary levy on funded pension schemes and personal pension plans. I propose that the levy will apply at a rate of 0.6% to the capital value of assets under management in pension funds established in the State. It will apply for a period of 4 years commencing this year and is intended to raise about €470 million in each of those years. The levy will not apply to pension funds established here and providing services and benefits solely to non-resident employers and members. Further details regarding the proposed application of the levy are set out in the Summary of Initiative Measures.

Ireland will seek to reschedule EU-IMF loans‎ - Ireland wants to reschedule debt issued under its EU/IMF rescue package and will not accept less favorable treatment than other bailed out countries in changing the deal, its public expenditure minister said on Thursday. Ireland, which between 2011 and 2013 will borrow 67.5 billion euros ($96 billion) from its creditors at a maturity averaging 7.5 years, is seeking improvements in the terms to ease a debt pile inflated by bank bailouts and a yawning budget deficit. Brendan Howlin told Reuters that the government intended to seek to reschedule the International Monetary Fund/European Union portion of its debt in due course. "Obviously long-term rescheduling of debt is something that would be desirable and we will deal with it," Howlin, appointed in March to the newly created expenditure department, said. Ireland is hoping to get a cut in the cost of its loans from the EU but Howlin said Dublin would also like a longer-term commitment from the European Central Bank (ECB) on the provision of emergency liquidity to Irish banks.

Are Michigan and Illinois like Greece and Ireland? - Vox EU - US states are a lot like Eurozone nations. Investors are concerned about the possibility of state default, especially for states like California, Michigan, and Illinois, just as they are concerned about possible defaults for European periphery countries like Greece, Ireland, and Portugal. The largest states pull roughly the same economic punch as the largest European countries. US states are in a dollar currency union, just like Eurozone members are in a euro one. Why is the risk of default by Eurozone countries much higher than for US states? After all, both Europe and the US have experienced defaults over the past century. This column presents evidence suggesting that systemic risk is not caused by close macro integration but rather by the strength of their financial markets.

Spanish Revenues Collapse by 16.8%, GDP Misses Target; Is a Bailout of Spain in the Cards? - Every day I get emails from a friend Bran who lives in Spain. Today Bran writes ... The big news here today is with government accounts. GDP is lower than expected, and revenue are down way more than expected (down 16.2% compared with a predicted drop of 12.8%). Therefore, the government is looking at another few billion in borrowing this year and its schedule of deficit targets is thrown out of line. Spain's budget is already tight after spending cuts and salary reductions, so the article suggests higher taxes might be need to get back on target. For those who can read Spanish, here is the link Bran sent: Zapatero, abocado a una subida de impuestos por no cumplir el crecimiento Google offers a rough translation Zapatero, heading to a tax increase for failing to meet growth from which it is easy to glean a few more facts.

• The deficit compromises growth objectives for 2012 through 2014.
• Staff reductions are increasingly difficult.
• Spain is in a very problematic situation.
• Personal income taxes are down 19.4%
• Corporate incomes taxes are down 42.7%
• VAT collection is down 22.4%
• Excise duties are down 40%

Spanish search in vain for an end to recession - Spanish accountant Raul Esgueva Arranz has been out of a job for more than two years. He has two young children and lives in a country where over one in five of the working population are all but scouring the streets for employment. Yet he is one of the luckier ones. "My dole money only ran out in March and we've got some savings," says the 34-year-old from Bilbao. "But from now on, I've got nothing coming in whatsoever. Where do I go from here?"  He is not the only Spaniard to be asking the question. Unemployment hit a new record high of 4,910,200 last week. Around one million unemployed receive no state benefits and in 1.38 million Spanish families, no one has paid work. In the first quarter of 2011, 256,500 people joined the dole queues. There is no sign of a quick end to the recession.

Italy Won't Regain Pre-Crisis Level Before 2013, OECD Says - Italy needs to raise productivity and cut its debt to fuel growth in an economy that won’t return to its pre-recession level for another two years, the Organization for Economic Cooperation and Development said.  Gross domestic product “will not return to its pre-crisis level before 2013-14, still well below the level that would have prevailed under the pre-crisis trend, even though this past trend was itself sluggish,” “A key priority is therefore to stimulate productivity growth and labor supply.”  The recession was deeper in Italy than in much of the European Union and the recovery slower, the OECD report said. The global recession reduced the size of the Italian economy by almost 6 percent between the first quarter of 2008 and the final three months of last year, the fourth-biggest impact for a euro- region country after Greece, Ireland, and Slovenia, the OECD said.  Italy’s budget shortfall, which the government plans to bring within the EU’s 3 percent of GDP limit by 2013, declined last year to 4.6 percent, while the public debt rose to almost 120 percent

PORTUGAL - Austerity cuts hit PS - Cuts to the Public Service and a freeze on State pensions are among the tough measures announced in Portugal following its €78 billion ($A108 billion) debt bailout.   New airports and high-speed rail lines are also sacrificed in a package of austerity measures which includes cuts to health and education spending of €745 million ($A1 billion).   Public Service staffing is to be squeezed by one per cent a year in Central Government, while regional administrations and town halls will be told to shed two per cent of their employees annually.  The country will also carry out a fire sale of the nationalised Banco Português de Negócios (BPN).   Portugal is expected to reduce public spending by 3.4 per cent of its Gross Domestic Product this year and raise an extra 1.7 per cent of GDP by raising taxes on cars, tobacco and electricity and getting rid of income and corporation tax loopholes.

Portugal Could Face Rating Downgrade Because of Banks, S&P Says - -- Portugal’s BBB- sovereign-debt rating by Standard & Poor’s may be downgraded if its banks are unable to meet capital rules or if they require more funding than currently anticipated, the ratings company said.“The possibility that Portuguese banks might require more significant government support (more than 3 percent of GDP) could place downward pressure on Portugal’s sovereign ratings,” S&P said in a statement today.“The capital needs of the banks may be higher than expected” and “it remains unclear whether Portuguese banks will be able to reach the Bank of Portugal’s new capital adequacy requirements,” S&P said. “If Portugal achieves its fiscal targets, continues to implement growth-enhancing reforms, maintains its current strong pace of export growth, and reduces its external financing gap, the ratings could stabilize at the current level,” the ratings company said.

Portuguese Austerity May Mean Greek-Like Recession -- Portugal may have followed Greece into recession even before implementing austerity measures demanded for its European Union bailout that are set to further choke the economic growth needed to tame the country's debt.Data to be released tomorrow may show the economy shrank 0.3 percent in the first quarter, economists surveyed by Bloomberg forecast, matching the contraction of the previous three months. The slump may deepen as the government starts executing the spending cuts and tax increases it agreed to in return for its 78 billion-euro ($111 billion) aid package."With the adjustment measures, the outlook for Portugal in the next few months isn't good, particularly in terms of consumption,"  Portugal, Ireland and Greece will make up the lagging group of European nations from an economic standpoint, he said.

Portugal Re-Enters Recession After Government Cuts Spending, Raises Taxes -- Portugal’s economy shrank for a second quarter in the three months through March, putting the country back into recession as the government tries to cut spending and raises taxes to narrow its budget deficit.  Gross domestic product dropped 0.7 percent from the fourth quarter, when it fell a revised 0.6 percent, the Lisbon-based National Statistics Institute said in a preliminary report today. Economists expected a decline of 0.3 percent, the median of three estimates in a Bloomberg survey showed. GDP dropped 0.7 percent from a year earlier. Portugal exited its last recession in the second quarter of 2009.  The contraction “reflects an accentuated negative contribution of internal demand, resulting from a reduction in consumer spending of households and public administration, and to a lesser degree, from a reduction in investment,” the institute said.

Spiegel Graphic: German banks have invested € 28 billion in Greece, 28.7 billion in Portugal, another €114.7 billion in Ireland and €146.8 billion in Spain. How big of a haircut can they stand?

Greek Restructuring Is Only Last Resort, German Bank Lobby Says -  The Greek government and its creditors should only consider a restructuring of the country’s debt after other steps to revamp its finances and the economy have been taken, Germany’s BDB banking association said.  Greece would run a deficit of 1.5 percent of gross domestic product this year even if it didn’t have to pay any interest on its debt, the BDB, which represents lenders such as Deutsche Bank AG (DBK) and Commerzbank AG (CBK), said in its monthly report. Any restructuring would have to be voluntary to keep its “negative consequences” small, it said.  “The loss of confidence in the cohesion of the monetary union and hence the contagion effects on other countries would be enormous in the case of a disorderly non-payment by a euro country,”. “The experience of the past shows that non-cooperative investors are a small minority when debtors negotiate in good will and constructively with their creditors.”

Merkel Allies Signal Germany Backs Off Greek Restructuring Push -German Chancellor Angela Merkel’s coalition may be backing away from signals it was willing to accept a Greek debt restructuring as the government tries to put off an outcome that some investors say is only a matter of time.  The parliamentary finance and budget spokesmen have both endorsed steps to avoid a restructuring before a meeting today of lawmakers from Merkel’s Christian Democratic bloc to discuss Greece.  The comments in recent days contrast with the position of German officials as recently as last month, when Deputy Foreign Minister Werner Hoyer said a Greek debt restructuring “would not be a disaster.” Finance Minister Wolfgang Schaeuble referred to restructuring Greece’s debt in an interview in Die Welt newspaper published on April 14. He subsequently said his remarks had been misinterpreted. A Merkel economic adviser, Lars Feld, has called it unavoidable.

ECB Rejects Restructuring as Greece Struggles to Repay Debts -  European Central Bank officials warned of catastrophic consequences if Greece is allowed to restructure its sovereign debt.  “Default or debt restructuring is a dramatic economic and social event for the country which experiences it -- I would call it political ‘suicide’ -- which leads many into poverty,” Executive Board member Lorenzo Bini Smaghi said in Florence today. Fellow board member Juergen Stark said restructuring “wouldn’t be a solution to the problems that Greece needs to overcome.”  Concern at the Frankfurt-based ECB is growing after Greek bond yields soared to all-time highs on speculation the government will be unable to meet its refinancing needs under the conditions of its current 110 billion-euro ($158 billion) bailout package. Greece’s credit rating was yesterday cut two levels by Standard & Poor’s, which said further reductions are possible as the risk of default rises.  “The ECB is fighting to keep politicians away from the restructuring debate,” . “They are worried that people are starting to consider it in important capitals.”

True Finns Party Chairman: Greece, Ireland and Portugal Ruined; Gangrene Spreads; Enron Looks Simple; Spain Next Zombie - True Finns party chairman, Timo Soini launched the most scathing and accurate attack yet against Jean-Claude Trichet, Jean-Claude Junker, and the ECB for its policy raping taxpayers of various countries to pay back German, French, UK, and US banks that made stupid loans for stupid reasons. Please read the Wall Street Journal article Why I Won't Support More Bailouts by Timo Soini. There is much more than this somewhat lengthy snip that follows. ECB President Jean-Claude Trichet and Jean-Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister are both blatant liars when it comes to who benefits from these bailouts.

WSJ Caught BLATANTLY Scrubbing…..... the words of Timo Soini after the fact and after they printed it unedited online yesterday. Here is what was originally published at this link, with the omitted parts that they scrubbed bolded: Why I Won't Support More Bailouts  When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the so-called bailouts of euro-zone member states. These bailouts are patently bad for Europe, bad for Finland and bad for the countries that have been forced to accept them.  Europe is suffering from the economic gangrene of insolvency—both public and private. And unless we amputate that which cannot be saved, we risk poisoning the whole body. The official wisdom is that Greece, Ireland and Portugal have been hit by a liquidity crisis, so they needed a momentary infusion of capital, after which everything would return to normal. But this official version is a lie, one that takes the ordinary people of Europe for idiots. They deserve better from politics and their leaders.  To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them. Let's follow the money.

The eurozone’s journey to defaults This has been the eurozone’s approach to the fiscal crises that have engulfed Greece, Ireland and Portugal, and threaten other member states. Policymakers have decided to play for time in the hope that the countries in difficulty will restore their creditworthiness. So far, this effort has failed: the cost of borrowing has risen, not fallen (see chart). In the case of Greece, the first of the countries to receive help, the chances of renewed access to private lending on terms that the country can afford are negligible. But postponing the day of reckoning will not make the Greek predicament better: on the contrary, it will merely make the debt restructuring more painful when it comes. Greek debt is on a path to exceed 160 per cent of gross domestic product. Unfortunately, it could easily be far higher, as a paper from Nouriel Roubini and associates at Roubini Global Economics notes. Greece may fail to meet its fiscal targets, because of the malign impact of fiscal tightening on the economy or because of resistance to agreed measures. The real depreciation needed to restore competitiveness would also raise the ratio of debt to GDP, while a failure to achieve such a depreciation may well curtail the needed return to growth. The euro may appreciate, further undermining competitiveness. Finally, banks may well fail to support the economy

Euro Zone’s Fundamental Flaws Must Be Addressed, Says Roubini Economist - Fundamental flaws within the euro zone must be addressed or else the euro could “end up in smithereens,” said a managing director at Roubini Global Economics Tuesday. Arnab Das, a managing director at Roubini, said that the flaws include a system in which transfer payments from stronger to weaker countries have become politically unsustainable, as well as rigid labor markets that do not allow, for example, the unemployed in Spain to take advantage of factory jobs in Germany. “In practice, there is very little labor mobility,” he said. In the near term, Mr. Das said struggling peripheral European countries such as Greece will end up having to reschedule debt payements because cutting their deficits will result in downward pressure on wages and eventual deflation — exacerbating the debt burden.Next time a crisis flares, he said, there is “an even chance that the euro could go,” he said.

Greece on strike standstill as debt storm rages - Police clashed with protesters near the Greek parliament on Wednesday as thousands demonstrated against a new wave of austerity cuts designed to keep the country's sinking economy above water.Security forces fired tear gas after being hit with stones by a small group of protesters who retreated, leaving behind a trail of vandalised garbage bins, bus shelters and stores in the Athens centre. At least 14 people were injured according to reports, and police said they had detained 24 people for questioning. One protester in his 30s was hospitalised with a serious head injury caused by truncheon strikes, a medical official said.

Greek Jan-Apr budget deficit widens, misses targets - (Reuters) - Greece's central government deficit widened about 14 percent year-on-year between Jan and April, missing an interim target, the finance ministry said on Tuesday.The budget gap widened to 7.23 billion euros from 6.37 billion euros, according to finance ministry figures. This is wider than a 6.92 billion euro deficit target for the first four months of the year.The data refers to the state budget deficit, which excludes local authorities and social security spending and does not coincide with the general government shortfall, the benchmark for the EU's assessment of Greece's economic policy programme.

The implausibility of denial - I APOLOGISE if you all are growing weary of our insistence that Greek default is inevitable (here's Buttonwood making the point just this morning). If we repeat ourselves, it is partially because the gap between reality and the message coming from European leaders is so yawning. Greece cannot continue on as it is doing now. And as Martin Wolf notes today: If one takes seriously the view that any debt restructuring must be ruled out, advanced by Lorenzo Bini Smaghi, an influential Italian member of the board of the European Central Bank, official sources must finance Greece indefinitely. Moreover, they must be willing to do so on terms sufficiently generous to make a long-term reduction in the debt burden feasible. That is possible. But it is a political nightmare: the moral hazard involved would be enormous.. It seems unlikely that needed agreement would be sustained. Unlikely is an understatement. The alternative is a restructuring, but officials at the ECB and elsewhere continue to protest the idea that this is necessary.

UBS’s Magnus Says EU Leaders Need to Restructure Greek Debt Soon - George Magnus, senior economic adviser for UBS Investment Bank in London, said European Union leaders must restructure Greek debt without further delay. “The sooner it happens the better,” . “It is incumbent on Europe to basically draw a line somewhere, to say enough is enough, we’ve basically got to deal with this in a traditional debt-restructuring manner.” Greece’s credit rating was yesterday cut two levels to B from BB- by Standard & Poor’s, which said further reductions are possible as the risk of default rises. The country’s debt is rising a year after it received a 110 billion-euro ($158 billion) bailout, and euro-region officials said after an unscheduled May 6 meeting in Luxembourg that Greece needs “a further adjustment program.” “There’s no such thing as a painless restructuring, no question about it,” Magnus said. “Not recognizing that obviously is a problem because the longer you leave it, the bigger the pain, the bigger the haircut becomes.”

BBC News - IMF says debt-hit euro states need 'unrelenting' reform: "Debt-hit states on the fringes of the eurozone need 'unrelenting' reform efforts to try to prevent the current crisis spreading, the IMF has warned. Greece and the Irish Republic have needed bail-outs, and Portugal is also now asking for assistance. The IMF has also called on the European Central Bank (ECB) to refrain from increasing interest rates further. And it urged the EU and member states to strengthen banks that need bigger cash cushions against another downturn. The IMF estimates that the 17 member eurozone will see economic growth of 1.7% this year and 1.9% in 2012, if debt crises do not harm the economy.

EU's Rehn Warns on Impact of Greek Restructuring - The European Union stepped up warnings against a restructuring of Greece’s sovereign debt, saying such a move would have “devastating implications” for the country and the euro area as a whole. “A debt restructuring in Greece would have major consequences on the soundness of the banking sector in Greece as well as on any banks having exposure to Greek securities,” EU Economic and Monetary Affairs Commissioner Olli Rehn said “Such a major banking crisis would lead to a massive credit crunch,” Rehn said. “The contraction of the economy would be unprecedented in Greece.” Rehn sharpened his assessment of the risks from a possible Greek restructuring after European finance chiefs held an unscheduled meeting in Luxembourg on May 6 and said Greece needs “a further adjustment program” on top of its existing 110 billion-euro ($156 billion) rescue package. European Central Bank officials have also intensified their opposition to a restructuring or default.

Greek Restructuring Would Be 'Huge Mistake,' Ackermann Says - (Bloomberg) -- Deutsche Bank AG Chief Executive Officer Josef Ackermann said Greek debt won’t be restructured as it would be a “huge mistake” that could risk contagion. “The losses in many areas would be too high and could provoke a contagion impact,”. “They have to increase the package for the next two years in order to cope with these challenges, there is no other solution.”European Central Bank officials have intensified their opposition to a restructuring or default and European finance chiefs held an unscheduled meeting in Luxembourg on May 6 and said Greece needs “a further adjustment program” on top of its existing 110 billion-euro ($156 billion) rescue package. European banks have $130 billion in exposure to the southern European country. Deutsche Bank, Germany’s biggest lender, had net sovereign risks tied to Greece of 1.6 billion euros at the end of last year, it said in March. German banks’ claims against Greek borrowers fell to $34 billion in the final quarter of 2010 from more than $40 billion, Bank for International Settlements statistics show.

The Full Brady - – Financial markets are increasingly certain that a Greek debt restructuring is coming, and European policymakers fear the worst. “In the worst case,” as Juergen Stark, a member of the European Central Bank board, has put it, “a debt restructuring of a eurozone member could put the consequences of Lehman’s bankruptcy in the shade.” The simplest way to achieve this would be to require banks exposed to southern European debt to raise more capital. The second round of stress tests by the European Banking Authority is ostensibly designed with this end in mind.  Plan B would extend the maturity of Greece’s debt. The Greek government could simply announce that it was exchanging its bonds for new ones maturing in, say, 30 years. There would be no write-down of principal, or “haircut” for creditors, only more time for repayment. But this would still leave Greece with an impossibly heavy debt burden.   Fortunately, there is another way: emulate the Brady Plan, under which commercial banks, together with the United States, the International Monetary Fund, and the Paris Club of sovereign creditors, restructured and took haircuts on the debt of Latin American and Eastern European governments at the end of the 1980’s.

Inching slowly, very slowly towards a deal on Greece - The troika starts its one week inspection of Greece today , as public and private sector unions started a 24-hour strike against austerity, Reuters reports. The visit will assess whether Greece's debt is sustainable and whether it has made enough progress on fiscal reforms to receive a fifth, €12bn tranche of aid under the existing bailout.    While the Germans want to condition any further discussions on aid for Greece on the EU/IMF progress report, France remains firmly against any sort of Greek restructuring.  The FT Deutschland reports that Angela Merkel is preparing the German public for a new aid package, given the results of the progress report. Wolfgang Schäuble told conservative MPs that no decision on extending loans to Greece will be taken before the review.  Christine Lagarde, meanwhile, ruled out any form of restructuring in an interview with Le Figaro (hat tip Reuters), saying that a debt restructuring would mean higher interest rates for all eurozone members and losses for the ECB.  On the agenda of the Ecofin meeting next Monday is the interest rate the EU is going to charge for Portugal’s €78bn bail-out. Olli Rehn said yesterday that it would be above 5.5% but “clearly below” 6%, putting it roughly in line with rates charged to Ireland, the FT reports. But next Monday would be too soon to determine wither Greece would require additional loans to cover its obligations next year.

Greek lessons - Here's what I learned from spending almost an entire day in Greece. First, most Greeks I spoke to don't want the country to default on its obligations, and the average person there probably has a better idea of what a default would mean for the country in the short-term than some of the outsiders who blithely recommend it.  Of course, that's especially true of anyone close to the financial system. But reformers - inside and outside the government - suspect the political cost of default could be equally high. To their mind, the debt crisis has forced a once in a generation opportunity to push through long overdue reforms. As and when the debt burden is lifted, they worry that this great window of reform opportunity will close as well.  That may explain why - as I mentioned on the Today programme this morning - the government is still, amazingly, a little ahead in the opinion polls. Austerity has few fans, but so far the opposition has not persuaded the voters that there is a better alternative.  Another observation from my brief time in Greece is that even the most committed optimists question whether the government can get to the end of the IMF programme without some form of debt restructuring.

The ECB’s Three Mistakes in the Greek Debt Crisis - By now just about everybody agrees that the European bailout of Greece has failed:  The debt will have to be restructured.    As has been evident for well over a year, it is not possible to think of a plausible combination of Greek budget balance, sovereign risk premium, and economic growth rates that imply anything other than an explosive path for the future ratio of debt to GDP.There is plenty of blame to go around.  But three big mistakes can be attributed to the European leadership. 

• Mistake number 1 was the decision in 2000 to admit Greece in the first place.   The country was an outlier, geographically and economically.  It did not come close to meeting the Maastricht Criteria, particularly the 3 % ceiling on the budget deficit as a share of GDP.
• The second mistake was to allow the interest rate spreads on sovereign bonds issued by Greece (and other periphery countries) to fall almost to zero during the period 2002-2007.  
• The third mistake was the failure to send Greece to the IMF early in the crisis, before Greek interest rates went to 600 basis points (see graph).

Why Greece's debt crisis matters (again) -It was almost exactly a year ago that the European Union stepped in with a 110 billion euro ($158 billion) bailout for debt-plagued Greece. Yet here we are, a year later, and Greece's debt is again the primary focus of Europe's policymakers. A meeting of euro zone officials conceded last week that the current bailout was insufficient.  The Wall Street Journal is reporting that Greece may require an additional 60 billion euros ($86 billion) to cover its financing needs in coming years.Nothing is final yet, but a do-over on the Greek bailout appears inevitable. European leaders are finally conceding what everyone else on the planet already knew – that last year's Greek bailout was little more than a delaying tactic on the route towards a real reckoning. The momentum towards effectively trashing the old arrangement is also symbolic of the growing realization in European capitals that the initial steps taken to resolve the euro zone's debt crisis fell far short of what was necessary.That's positive of course, but at the same time, an overhaul of Greece's bailout could cause potential ugliness for not just Europe, but the entire global economy as well. The fact is that Greece's debt problem is still very much a problem for all of us.

More Greek Drama: Who's Paying the Price? - Rumors abound that Greece is gearing up for a second bailout worth €60 billion ($86 billion), with details to be hashed out by European finance ministers next week. This of course would require other European countries (and the U.S. if the IMF is involved) to dole out more taxpayer money for the cause of Greek salvation, after contributing to a €110 billion package last year. For its part, Germany is pushing for something a bit more politically palatable: getting Greece's creditors to postpone the payback date on Greek bonds to 2012 or later. That would give Greece a bit more wiggle room in the short-term, though it's unlikely to prevent an eventual Greek default.The move relates to an interesting point by the FT's Gillian Tett this week about so-called "financial repression." The term is borrowed from Carmen Reinhart and Belen Sbrancia, who wrote a recent paper for the IMF describing the tendency of governments to wash their hands of public debts by craftily forcing them onto banks and citizens.

EU Raises Greek Deficit Forecast, Boosting Calls for New Bailout‎ -- Greece’s budget deficit is forecast to exceed the limit under a European Union-led bailout, reinforcing calls for a new rescue package to stave off default as EU finance ministers prepare to meet next week. The fiscal shortfall is seen at 9.5 percent of gross domestic product in 2011, the European Commission in Brussels said in an e-mailed statement today. That exceeds the 7.4 percent target adopted by the EU and International Monetary Fund in reviews of last year’s 110 billion-euro ($157 billion) rescue. Greece’s public debt, already the euro area’s biggest relative to economic output, is forecast to reach 158 percent of GDP this year. The economy grew 0.8 percent in the first quarter from the previous period, aiding Prime Minister George Papandreou’s efforts to stick to an austerity program imposed under the existing aid deal that has already led to two general strikes this year.

Greece Set to Miss Deficit Targets —Greece's economy is expected to contract more than previously expected this year, the European Commission said Friday, while it warned that the country's budget deficit would be sharply higher than government targets.  According to the European Union's 2011 spring forecast, the Greek economy will shrink 3.5% this year, against a forecast of minus 3.0% from just two months earlier as unemployment soars and austerity measures weigh on consumer demand. The report also said that Greece's budget deficit would hit 9.5% of GDP in 2011, more than two percentage points above the 7.4% goal set out in this year's budget.

EU warns debt in bailout countries above forecasts - The European Union warned Friday that the debt loads of Greece, Ireland and Portugal will be much bigger than previously forecast, adding to fears that international bailouts are failing to solve the region's crisis. The EU's Monetary Affairs Commissioner Olli Rehn said Greece needed to cut spending even further than foreseen in its bailout program. While he fell short of confirming the country may soon need a second bailout — on top of the euro110 billion ($156 billion) in rescue loans it got a year ago — Rehn said its situation was "very serious" and called on opposition forces to support the government's efforts. The bloc's biannual economic forecasts did paint a more optimistic picture of the economy of Spain — commonly seen as the next-weakest state in the eurozone — which supports the currency union's hope that the debt crisis won't draw in any other countries. However, for the three countries that have already received or are about to get international help, debt is expected to remain a problem for some time.

Greece Debt Default Anticipated by 85% in Global Investor Poll -- International investors view a sovereign default by a euro-area nation as more likely than not with more than four-fifths betting Greece will eventually fail to pay off its debt. Eighty-five percent of those surveyed this week said Greece probably will default, with majorities predicting the same fate for Portugal and Ireland, which followed Greece in seeking European Union-led bailouts, a new Bloomberg Global Poll shows. The outlook for all three countries deteriorated since January. The pessimism underscores how investors remain unconvinced that European policy makers can prevent the euro-area's first default even as they look to beef up Greece's 110 billion-euro rescue package ($156 billion). The cost of insuring against a Greek default reached a record this week as investors increased bets the country won't be able to make good on its borrowing.

Merkel supports Draghi with an obvious lack of enthusiasm –Grilli to head to Bank of Italy - For once, the eurozone has avoided a potential political crisis, after a reluctant Angela Merkel yesterday gave her unenthusiastic backing for Mario Draghi as president of the European Central Bank. She did so in an interview with Die Zeit. That means that the biggest hurdle to Mr Draghi’s appointment has now been removed. FT Deutschland’s headline this morning was that “Merkel has to live with Draghi”. Her scepticism about the Italian central banker was based on the fear that German voters find it hard to accept an Italian central banker so shortly after the decision to set up large rescue mechanisms. It will clear in the next few days what, if any, deal Ms Merkel was able to secure, but it is unlikely to be material. Vittorio Grilli, the current head of the Economic and Finance Committee, will take over from Draghi at the Bank of Italy (according to our own sources), which leaves a vacancy at the EFC. It is possible that Jörg Asmussen takes over. 

German rebellion against second loan tranche for Greece - The chancellor’s office is alarmed about the increasing resistance within the coalition parties against further euro rescues, Handelsblatt reports. The Christian Democrats and the Liberals have a majority of 21 in Bundestag. So far 20 deputies have let it be known that they are likely to vote against setting up the ESM and for a likely second aid package for Greece. Should there be 2 more deputies Merkel would not have her own majority. She would still get the measures through because large parts of the opposition Social Democrats and the Greens will most likely vote in favour.  But not having her own majority would be a disaster for the chancellor, and may even bring the coalition to a pre-mature end. Wolfgang Schäuble said that  Germany’s support for the rescue was “a question of fate” for Europe. Germany would be in position to throw the whole European project off track, he warned.  Der Spiegel also has an interesting, and scary, description of the revolt among the Christian Democrats in Germany against a second Greek rescue package. The article says that the internal opposition was growing and tensions among the leadership of the Christian Democrats are growing. According to Der Spiegel, 19 centre-right MPs have publically declared not to support Merkel over her policies.

How long can this go on? - EUROPE'S debt crisis is a year old and no closer to being solved than it was last summer. A growing number of commentators have joined The Economist in banging on about how the debt of insolvent peripheral countries needs to be restructured. But Matt Yglesias wonders if "needs" isn't too strong a word: I’m not intimately familiar with the details of Greek public finance, but it does occur to me that sage words I keep reading in the American press about how Europe’s leaders can’t just keep kicking the can down the road and need to deal with Greece’s basic insolvency strike me as unwarranted. In general, the capacity of large wealthy societies to allow festering problems to go un-addressed seems perennially underrated. I’ll be thirty next week and for as long as I can remember people have been talking about how the United States needs to address entitlement spending and trade imbalances. And as best I can tell, we do need to address those things. Presumably at some point something will happen. But in practice we’ve managed a great deal of can-kicking, seem to have more can-kicking in us, and actually the public and the political elite alike are quite averse to the kind of steps that would address these issues.

Argentina's advice for Greece - EU and IMF attempts to rescue Greece have failed and the faster everyone wakes up to that fact, the better it will be for the international economy. So says Roberto Lavagna, who is no stranger to crisis management – as Argentine economy minister from 2002-05, he was charged with picking up the pieces after his country’s catastrophic default on nearly $100bn in 2001. “Greece is heading for a four-years of recession. The fiscal situation is not getting better, it’s getting wrose. Socially, the situation is getting worse. Foreign debt is rising. Interest rates are rising. The current programme is a programme which has failed,” he told foreign correspondents. “They have to acknowledge this. The longer it takes – and in Argentina it took from 1994 to 2000 (to realise that the currency peg to the dollar was not working) – the more damage it will cause in the international and European context,” he said. He reckoned only European Union and IMF staff could possibly now defend the recipe for Greece’s rescue which he said “today is not viable”.

Greece: first the contingency plans and only then the restructuring - What amazes me about the ongoing speculation about a possible restructuring of Greek debt is that most commentators seem to miss some obvious, even self-evident, points: 1. Regarding the timing of a possible restructuring, most commentators, even those who should know better, seem to believe that it has been needlessly delayed, that it should be done NOW (or yesterday…) and -at any rate- “the sooner the better”. Among them: C. Reinhart here (the well-known economist and professor), L. Feld (Merkel’s adviser, here ), M. Lynn here , Citi analysts here , The Economist here , WSJ (editorial of April 20, 2011 here ), C. Simitis (ex-PM of Greece, here ), V. Papandreou ( here ), W. Munchau (in several articles in the FT), and many, many others. These people seem to forget, or do not realize, that (a) A restructuring (with or without “haircut” and/or reduction of interest) should NEVER be done before a positive primary budget balance is reached, otherwise the government would not be able to pay salaries, pensions and other inelastic expenses, because obviously, from that point on, borrowing in the markets would not be possible for a few years.  And (b) a debt restructuring SHOULD NOT take place before measures have been taken to protect Greek and European banks (recapitalization etc.) and pension funds, who hold most of the Greek bonds, and ways have been found to minimize the risk of contagion in the EZ, otherwise the result would be catastrophic.

A sea change is needed in ECB – or we’re sunk - Do you remember Hurricane Katrina in New Orleans? Louisiana was financed without the people of Louisiana putting their hands in their pockets. This is what is done in the US –where the concept “United” is taken seriously. The Federal deficit rises and the Fed prints dollars and the region in difficulty recovers or at least is helped towards recovery. Could this happen in Europe? In Ireland? Is there any way the Irish government could access funds without going to the bond market and, in so doing, have an orderly reduction in the budget deficit rather than something dramatic? The question is whether there is a third way. At the moment there are only two ways out of this crisis if we want to stay in the Euro.

Too Many Italians? - Krugman -- This is funny: The expected appointment of Mario Draghi as European Central Bank president threatens to trigger a dispute over the composition of the bank’s leadership. Mr Draghi’s appointment, to take effect from November, would mean two of the ECB executive board’s six members would be Italian – unless Lorenzo Bini Smaghi, his compatriot, could be persuaded to step aside. France, the eurozone’s second-biggest economy, would also lose its seat on the board, with the departure of Jean-Claude Trichet, the current president. Once again, the problems of having a single currency without a single nation.  But I think the euro area should be perfectly comfortable with this. Anyone who followed the creation of the eurozone knows that it was in large part a creation of the Italians — specifically, Italian civil servants, who were determined to ensure that their inflation-prone nation got itself some Germanic central bankers.

The Jekyll and Hyde economy - FROM one perspective the euro area is suffering an existential crisis as the sovereign-debt crisis goes from bad to worse. Early next week European finance ministers will talk about little else when they meet in Brussels. Not only will they have to sort out the planned bail-out of Portugal, the third country to require emergency funding, but they will also have to consider the predicament of Greece, which now looks as if it will require even more support next year or bite the bullet on restructuring its colossal debt.But from another vantage-point the euro area is confounding the sceptics and doing remarkably well. After a dull performance in the second half of last year the single-currency economy has put on a burst of speed. Figures out today showed that GDP grew by 0.8%, comfortably above the 0.6% generally expected, and a marked improvement on the dull performance in the second half of last year when it rose by 0.4% in the third quarter and 0.3% in the fourth. That acceleration pushed the annual growth rate up from 2% in late 2010 to 2.5% in the year to the first quarter of 2011.

Greeks bailout audited as eurozone debt storm rages - A Greek debt "disaster" would hit the entire eurozone, a senior European official warned on Tuesday, as an audit of Athens' reform efforts began amid rampant talk of a second bailout or restructuring. Experts from the European Union, International Monetary Fund and European Central Bank (ECB) began an audit of finances and reforms in Greece to determine if it merits a critical new slice of funding from a bailout package agreed last year. This was just as a top ECB official warned that debt default or restructuring would hit the entire eurozone. A restructuring would put Greece's banking system "on its knees," Lorenzo Bini Smaghi told the Italian daily La Stampa. Smaghi, who sits on the ECB executive board, warned of "the contagion that a Greek disaster would inflict on the rest of the eurozone." The current audit, although routine, is followed with trepidation in Greece because each such probe leads to recommendations and conditions linked to the next slice of aid.

Next On The Downgrade Docket: Belgium - With so much of the attention once again focused on Europe's periphery (which somehow the efficient market could not be bothered with for about 4 months, even though it was all there, staring people in the face all along), it may be time to recall the Europe's core is just as troubled as everything else. Some may recall that back on December 14, S&P came out with a bit of a stunner (which in retrospect looks rather tame following the now forgotten warning on the US Debt): "And so European contagion is back as S&P, now clearly with a mandate to remind that Europe is in a heap of trouble every month or so, puts Belgium on Outlook negative, saying that it is basically just a matter of time before the country loses its AA+ rating.  "If Belgium fails to form a government soon, a downgrade could occur, potentially within six months." Well, it is now 6 months later, and Belgium still has no government. Time to pull the switch?

Eurosceptics leave Finland talks  - Finland's eurosceptic True Finns party has withdrawn from talks to form a new government, its leader said today after disagreeing with the country's top two parties over the Portugal bailout. The move will not affect Finnish backing on the Portuguese rescue package because the prime minister-elect has secured the backing of the second biggest party and smaller parliamentary groups. The Finnish parliament's grand committee will vote tomorrow to grant prime minister-in-waiting Jyrki Katainen a mandate to back Portugal's bailout . Mr Katainen will attend a meeting on Monday of euro zone finance ministers to approve the €78 billion package."We will not take part in the government negotiations, with their stance... The views are so different, they aren't compatible," Timo Soini, the leader True Finns, the third largest party, told reporters.

Debt crisis could still spread to EU core-IMF (Reuters) - Despite bailouts for Greece, Ireland and Portugal, Europe's debt crisis may yet spread to core euro zone countries and emerging eastern Europe, the International Monetary Fund said on Thursday. The warning came as government sources in Athens said international inspectors checking on Greece's compliance with its EU/IMF rescue package had found problems and were pressing for deeper spending cuts to cover a likely revenue shortfall. A Reuters poll of investors and economists showed an overwhelmingly majority believe Greece will restructure its debt, possibly as soon as late this year. Most fund managers expect Athens to pay back less than half of what it owes. The IMF said it stood ready to provide more aid to Greece if requested, though the country that triggered Europe's sovereign debt crisis in 2009 still had plenty of untapped potential to raise extra cash itself though privatisations."Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk,"

Europe continues to demonstrate it has no answers - Last week, the German magazine Der Speigel carried the story (May 6, 2011) – Greece Considers Exit from Euro Zone. I thought that if the story was true then Greek leadership must finally be coming to their senses. The reality is that the EMU bosses have once again stalled the judgement day and provided some soft relief for an economy that continues to deteriorate. Everyone knows what the problem is – the EMU doesn’t work and without a federal fiscal redistribution mechanism it will never be able to deliver prosperity. Every time an asymmetric demand shock hits the Eurozone, the weaker nations will fail. Trying to impose fiscal rules and austerity onto the EMU monetary system just makes matters worse. Greece should definitely leave the Eurozone. Life will be difficult then but the adjustment mechanisms that would then be available to the government (floating exchange rate and currency monopoly) are more people-friendly (capable of increasing jobs and income) than the way they are currently pursuing the problem (internal devaluation and demand contraction). Europe continues to demonstrate it has no answers worth considering.

The Coming Euro Crack-Up - A spectre is haunting Europe​—​the spectre of the disintegration of the eurozone. All the powers of old Europe have entered into a holy alliance to exorcize this spectre: German chancellor and French president, the Brussels eurocracy and the bonus-laden bankers. Let the ruling classes tremble. The debtors have nothing to lose but their burdens. A quick review: Some 17 of the 27 nations that constitute the European Union have abandoned their own currencies in favor of the euro. This means they have given up control of their exchange rates and their interest rates, the latter set by the European Central Bank on a one-size-fits-all basis. In fact, it is the state of the German economy, the area’s largest, that dictates interest rate policy for the entire 17-country group. When Germany was suffering under the weight of the costs of reunification, its sluggish economy needed, and got, a low-interest rate policy from the European Central Bank. That eventually proved too stimulative for, say, Ireland, which was in the midst of an inflating property bubble.

The PPI racket reminds us that, for Britain’s banks, “business as usual was rotten” - There was a great editorial in Friday’s Guardian, which I’ve only just read. As the other UK banks including Royal Bank of Scotland, together with Angela Knight’s British Bankers’ Association, weigh up whether to appeal the recent High Court ruling that obliges them to compensate customers they swindled out of some £10 billion (£100,000,000,000) through the sale of largely redundant PPI (payment protection insurance) policies, the Guardian puts the decision — which the banks must make by Tuesday — into context. The leading article states that Lloyds Banking Group’s decision to set aside £3.2bn to compensate customers it, and banks it acquired such as HBOS, effectively fleeced through misselling PPI policies ”reveals the worrying state of an entire industry.” It said that Lloyds’ first quarter results, showing the bank lost £3.47bn in the quarter to March 3 ”paint a picture of a rotten industry practice.

Bank Of England Downgrades Growth Forecast, Upgrades Inflation Expectation - The Bank of England inflation report released this morning described a plunge into stagflation. The growth forecast for 2011 was downgraded to around 1%, from the previous estimate of 2%. There was a wider range of estimates than usual. Meanwhile the report said inflation would remain above the target rate of 2% all year and could reach as high as 5%. Here's the overview: CPI inflation remained well above the 2% target but the recent weakness in underlying output growth persisted. The recovery in the world economy was maintained and is expected to support growth in the United Kingdom, as should the considerable stimulus from monetary policy and the current level of sterling. But the continuing squeeze on households’ real incomes is likely to weigh on demand, especially over the next year or so. Further ahead, the chances of four-quarter GDP growth being either above or below its historical average rate are judged to be roughly balanced. CPI inflation is likely to rise further this year and is more likely than not to remain above the target throughout 2012. 

Pound Surges, Gilts Slump After Bank of England Lifts Inflation Outlook - The pound gained versus the dollar and the euro after the Bank of England said it sees inflation “markedly higher” in the near term, boosting speculation that borrowing costs will rise from record low levels. Gilts slumped. Sterling advanced versus all but one of its 16 major counterparts, snapping a two-day decline against the shared European currency. “There is a good chance that inflation will reach 5 percent later this year and it is more likely than not to remain above the 2 percent target throughout 2012,” the bank said in its inflation report today. Risks to economic growth are “skewed to the downside,” the report added. “People are bringing forward their predictions of when the BOE will make its first move on rates; that’s making sterling look like a reasonably sensible buy at these levels,”

Falling slowly - CHRIS GILES posted this image yesterday, calling it, "an amazing chart": What we see here are successive Bank of England forecasts for British output. From 2005 to 2007, the lines are tightly bunched and follow the longer trend. Beginning in late 2007, this pattern changes and output forecasts fall. And what's interesting is that after the big decline that occurs between August of 2008 and May of 2009, expectations continue to deteriorate. It isn't just the level that changes, either, but the slope. The last line, for the forecast released this week, seems not only to be well below the pre-recession trend, but to point away from it, suggesting that Britain won't be recovering its lost economic ground, and may well continue to fall farther behind the circa 2006 trend. Inflation forecasts continue to rise, by contrast, though Mervyn King argues that energy prices, and therefore inflation, would ultimately fall back. And I wonder if at least some of the members of the Bank of England's Monetary Policy Committee don't see things that way, as well.