week ending Aug 4

US Fed balance sheet grows a tad in latest week - - The U.S. Federal Reserve's balance sheet expanded for the first time in three weeks, as a result of increased lending via its liquidity swap lines with other central banks, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.834 trillion on Aug 1, a tad higher than $2.833 trillion on July 25. The Fed's holdings of Treasuries totaled $1.649 trillion as of Wednesday, versus $1.651 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $32 million a day during the week, up from the $17 million a day average rate the prior week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $853.48 billion, up slightly from $853.36 the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $91.03 billion, unchanged from the previous week. The Fed's liquidity swap lines with other central banks totaled $31.02 billion in the latest week, compared with $27.23 billion a week ago.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 26 2012

FRB: Recent balance sheet trends - Credit and Liquidity Programs and the Balance Sheet

A Look Inside the Fed’s Balance Sheet - Click for full interactive graphic - The level has held pretty stable since June 2011, when the central bank ended its bond-buying program, commonly known as QE2. The central bank has been engaged in a program known as Operation Twist since September of last year. The action shifts the Fed’s holdings into longer-dated government bonds without substantially increasing the size of the balance sheet. The balance sheet is up from less than $1 trillion prior to the recession. During the downturn the Fed expanded its balance sheet through several programs aimed at keeping markets functioning. As markets stabilized the Fed shifted out of emergency programs and into purchases of U.S. Treasurys, mortgage-backed securities and agency debt securities to drive down interest rates and encourage more borrowing and growth in two separate rounds of what is known as quantitative easing. The makeup of the balance sheet is moving back toward the long-term trend. The MBS and agency debt holdings, which were part of the first round of quantitative easing, have steadily declined as loans are paid off or mature. The Fed still holds more than $900 billion in MBS and agency debt, but now owns more Treasurys — over $1.65 trillion. The Treasurys holdings are likely to continue to rise, as the central bank purchases bonds with money reinvested from its shrinking MBS portfolio. Amid a continued high unemployment rate and uncertainties surrounding Europe, the Fed has already shifted its Treasurys holdings to focus on longer-term maturities.

Fed Weighs Cutting Interest on Banks’ Reserves After ECB Move - Federal Reserve Chairman Ben S. Bernanke may be taking another look at cutting the interest rate the Fed pays on bank reserves to bring down short-term borrowing costs and spur the slowing U.S. expansion.  Bernanke testified to Congress on July 17 that reducing the rate from its current 0.25 percent is one of several easing steps the Fed might take to reduce unemployment stuck above 8 percent for more than three years. In February, by contrast, the Fed chairman told Congress that lowering the rate might drive away investors from short-term money markets.  Policy makers meeting this week are looking for new monetary tools after the Fed lowered its benchmark interest rate to near zero in December 2008 and purchased $2.3 trillion of securities to spur the economy. A government report on July 27 showed economic growth slowed to a 1.5 percent annual rate in the second quarter as consumers curbed spending.

Fed says US economy has slowed, takes no new action - The Federal Reserve said Wednesday that the U.S. economy is losing strength and repeated a pledge to take further steps to boost growth if hiring remains weak. The Fed took no new action after a two-day policy meeting. But it acknowledged in a statement released after the meeting that economic activity had slowed over the first half of the year. It also said unemployment remains elevated and consumer spending is rising at a somewhat slower pace. Market reaction to the Fed's announcement was muted. Stock indexes dipped shortly after the statement was released at 2:15 p.m., but then moved higher. The yield on the 10-year Treasury note increased from 1.50 percent to 1.53 percent.

The Fed is worried, but leaves policy on hold - The Federal Reserve's monetary policy committee did not offer any bold new moves at the conclusion of its two-day meeting. The committee reiterated its plan to keep interest rates exceptionally low through the end of 2014, and noted once again its plan to extend operation twist, its attempt to lower long-term interest rates, through the end of the year. But despite falling short on both its inflation and employment mandates, and widespread speculation by outside analysts that the Fed would do more to help the economy, policy remains on the same trajectory it was on before the meeting began. The Fed indicated that the economic outlook has worsened since its last monetary policy meeting, and that makes it more likely it will take further action at some point in the future if conditions don't improve. But the decision to maintain current policy for now will disappoint analysts outside the Fed who have been calling for the Fed to do more.If the Fed does do more at its next meeting, it is likely to follow one of the two policies Chairman Ben Bernanke emphasized in his recent testimony before Congress. In those remarks, Bernanke indicated that if the Fed does ease policy further, it is most likely to either engage in an additional round of quantitative easing, or extend its forward guidance on interest rates beyond the current guidance that rates will remain low through the end of 2014. Both of these policies would reduce interest rates some, but with interest rates already at historic lows, neither of these policies is likely to have a large impact on the economy.

Fed Watch: First Policy Disappointment of the Week - The Federal Reserve offered no additional easing at the conclusion of their two-day meeting, disappointing market participants who increasingly came to expect fresh monetary action. The Wall Street Journal is trying to keep hope alive:The U.S. Federal Reserve signaled more strongly it will take new steps as needed to boost the economy, but held back from immediately starting a new round of bond buying or taking other actions on Wednesday. Fed officials flagged intensifying concerns over the economic outlook and gave a stronger indication they are moving closer to taking further action as they continue to monitor the fragile recovery. A string of disappointing jobs reports, a sharp slowdown in second-quarter growth and a softening in inflation have fanned expectations that the Fed may step in later this year with new stimulus for the economy. Maybe next meeting, maybe not. I get the sense that the WSJ's contacts are on the dovish side of late, given the frequent stories that suggest the Fed is about to do more, in contrast to actual Fed inaction. This dates back to at least the story of "sterilized" QE this spring. While in the past, I have said to ignore the hawks with regards to monetary policy, now I am thinking you need to ignore the doves as well. It seems that both camps are caught up in the short-run fluctuations, with the hawks gaining ground on the upswing, and the doves on the downswing, but neither camp can make any traction when year-over-year growth continues to track around 2%:

The Fed stands pat, at least for now - Today's statement from the FOMC, the decision-making body for the Federal Reserve, basically said that, yes, the economy has worsened since the FOMC's previous meeting, but no, they're not going to do anything about it. At least, not right now. Over the longer run, the Fed says it is aiming for an inflation rate of 2% and an unemployment rate below 6%. Normally, the policy decision involves a short-run tradeoff between those two objectives. For example, if unemployment is much higher than the long-run target (as is the case right now), the Fed might tolerate inflation above target for a while in hopes of bringing unemployment down more quickly. But, as the numbers have been coming in for 2012, inflation is below target and unemployment is way above. That would seem to suggest the Fed would opt for more stimulus, end of story.

See no evil - THE Federal Open Market Committee has released its latest policy statement. It reads:The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate. Little if any improvement in unemployment, lots of downside risk, inflation at or below the Fed's preferred level. Of course that's exactly what it said in June. Fittingly, the Fed took no additional action. Many economists felt that signs of economic deterioration in America and abroad might lead the Fed to extend its low-rate guidance into 2015 or roll out a new asset purchase plan (QE3). No such luck.

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

Fed Statement Following the August Meeting - The following is the full text of the Fed’s statement following its August meeting.

The FOMC's Decision in a Parallel Universe -- The FOMC continues to disappoint.  Other than acknowledging the economy is getting worse, the FOMC decided to sit on its hands and hope the aggregate demand slump disappears on its own.  As I have noted before, this failure to act by the Fed when money demand is elevated and growing amounts to a passive tightening of monetary policy.  Caroline Baum in her latest Bloomberg column agrees. Can anyone say Lords of Finance 2.0?  I have been disappointed for so long that sometimes I feel the need to believe in parallel universes where somewhere out there a FOMC actually does its job.  In that universe, the FOMC responds forcefully to the aggregate demand slump and does so using a nominal GDP level target.  Below is what the FOMC statement in that parallel universe would look like.  (It is an update on a similar post I did for the April FOMC.  I plan to update and post it every FOMC meeting the Fed fails to do its job.)

Fed Should Act, Not ‘Communicate’ -  Federal Reserve Board Chairman Ben Bernanke When Fed Chairman Ben Bernanke has, over time, listed the possibilities for action still at the central bank’s disposal to try to spur what it today called a decelerating economy, he has mentioned communications. By that he means, in part, the Fed can tell the world that it expects short-term interest rates will remain “exceptionally” low for an even longer period than that which already has become boilerplate in the announcements that follow meetings of the policy-setting Federal Open Market Committee. The federal funds rate effectively has been zero since December 2008. The Fed regularly says, as it did Wednesday, that the economy likely will be weak enough to justify something in that extreme neighborhood at least through late 2014. The communications arrow in the Fed’s quiver, as a further easing mechanism, is to say extraordinarily low rates are likely to last even longer than that. But such a statement would be counterproductive. It isn’t just that actions (mortgage-backed or Treasury securities purchases) would speak a lot louder than words, even though the real-world impact of any further Fed action is highly debatable. It is mainly that these particular words would encourage the exact clinging to the sidelines by economic decision makers that now so imperils the economy.

The Fed as Little Orphan Annie - The Bernanke Fed has made a significant effort since June 2009, when the NBER judges the recession to have ended, to increase transparency by providing guidance about future policy and macroeconomic forecasts. What is striking, however, is how this transparency has not prevented in the slightest the intellectual dishonesty in ignoring its failure to meet its own goals. A disparaging but not unfair comparison would be to little orphan Annie. "The sun'll come out tomorrow," Annie sang. "Bet your bottom dollar that tomorrow there'll be sun." The 3-to-4 percent recovery growth we've been long promising will come out tomorrow, the FOMC basically says every quarterly meeting. Bet your bottom dollar that tomorrow there'll be lower unemployment. The Fed must love tomorrow. Because, as they say, it's always a day away.

The Federal Reserve's "Bridge to Nowhere" - In recent weeks and months, we've been reading many headlines in the mainstream media along the lines of "Markets react positively to central bank actions" or "Markets suffer double digit losses based on central bank inaction". Earlier this year, Dr. Mohamed A. El-Erian, an economist and CEO and co-CIO of Pimco, one of the world’s largest bond investors, gave a speech entitled "s " at the Federal Reserve Bank of St. Louis. In this speech, he outlines the role of the ECB and the Federal Reserve in today's highly complex environment. Central bankers tend to like certainty and, in the current post - Great Recession economic environment, uncertainty is a greater part of our world than it has been for decades. Dr. El-Erian suggests that, in some cases, central bankers "...have even had to make things up as they go along...", a phrase that pretty much says it all. As well, he states that "...the outlook remains unusually uncertain..." and that changes are necessary to prevent "...bad surprises down the road...". Dr. El-Erian feels that central banks have been carrying the bulk of the policy burden and that both the public and private sector have not stepped up to the plate. The declining effectiveness of the tools used by the world's central banks (i.e. near-zero interest rates and quantitative easing) has left the world's economy with a growing risk of collateral damage and unintended consequences from central bank actions. Governments have done very, very little to improve the situation by meaningfully controlling debt level by reigning in spending. Since governments appear to be sitting on the side-lines while central banks act in ways that they would not have previously, this has led to increasing demands that some of the world's central banks be more carefully policed by those that we elect. As I have posted before, actions taken by four of the world's most influential central banks have led to ballooning balance sheets as shown here:

Why the Fed's stimulus 'didn't work' -- You needn't look hard to see the contrast between presidential candidates when it comes to what role Washington should play in reviving the economy. Stanford University economist John Taylor has spent decades looking to answer that question, in theory and practice. Taylor, 65, has worked for four Presidents -- Ford, Carter, and both Bushes -- and is advising Mitt Romney's campaign. A senior fellow at the conservative Hoover Institution, he created the influential "Taylor rule," which posits how central banks should target interest rates in response to inflation and economic output. Today Taylor is harshly critical of some of the stimulus policies pursued by the Federal Reserve and the younger Bush and Obama administrations. He argues that short-term attempts to juice the economy lead to higher unemployment and slower growth, a case he makes in his recent book, "First Principles: Five Keys to Restoring America's Prosperity." Taylor spoke with contributing writer Janice Revell. Their conversation was edited.

The best argument for a more expansionary monetary policy? - It’s not very glorious or motivational, but here goes: the costs of inflation, within reasonable ranges, are not very high. I am more agnostic about the gains from monetary expansion than are many of its advocates.  I think we do not know where the point of “potential output” lies, I think sticky nominal wages (especially for new labor market entrants and the unemployed) are overrated as a problem, I doubt the ability of the Fed to make credible commitments at this point, and often I view “hiring” as more of an multi-dimensional investment and longer-term commitment, which requires various variables to be set at the right places, not just the short-run real wage in spot markets. A bit more personally or perhaps psychologically, the contrarian in me gets nervous when I read the ongoing ritual excoriation of Ben Bernanke in the blogosphere, every time the Fed decides to take no further major action. Still, at the end of the day if we try further monetary expansion and it fails to stimulate employment, I don’t see a huge social cost to having a three or four percent rather than a two percent inflation rate.

The Fed Should Stop Paying Banks Not to Lend -- Historically, banks held as little in the way of excess reserves as possible, because this was money that could be lent immediately, upon which no income was earned. One way income on excess reserves could be earned was by lending them to other banks overnight, through what is called the federal funds market. The interest rate charged on such overnight loans is called the fed funds rate and it is essentially controlled by the Federal Reserve, which routinely adds or subtracts reserves so as to meet its target rate. Since Dec. 16, 2008, the target fed funds rate has been between zero and 0.25 percent. Under normal conditions, such a low fed funds rate would be more than adequate to create a considerable amount of new lending. Since the rate is the basic cost of money to banks, they would make a profit even if they made loans at a 1 percent interest rate. But rather than make loans, banks instead are simply sitting on the money, so to speak. According to the Federal Reserve, they have $1.5 trillion in excess reserves. This is extraordinary. It is as if individuals took $1.5 trillion of their savings out of stocks, bonds and every other income-producing financial asset and put it all into non-interest-bearing checking accounts back in 2009, and just left it there.

An Intriguing Idea to Encourage Bank Lending - The Bank of England decided to spur bank lending because credit has not snapped back enough and because the euro-zone crisis is darkening banking prospects. Does that sound familiar? One way to induce banks to lend more to households and small and medium-size business is to enhance the profitability of doing so. And one way to accomplish that without interfering in private credit-allocation decisions is to reduce banks' funding costs.  Under the British plan, the more a bank lends, the more it saves on funding costs. But no bank is forced to lend, nor told what loans to make. Also, any loan losses remain with the banks. Here's how it works. For a 25-basis-point annual fee, the Bank of England will soon start lending banks Treasury bills for terms up to four years. The banks can then turn around and use these bills as collateral to borrow at exceptionally low rates in the private markets; after all, T-bills are the ultimate collateral. The key point is that the plan gives banks an incentive to increase lending at the margin: They gain access to more low-cost funds by lending more.

Should Fed Target Credit Instead of Rates? - Milton Friedman, who would have turned 100 on Tuesday, cautioned against identifying easy money with low interest rates. In the debate over whether the Federal Reserve should push through more quantitative easing, economist Paul Kasriel worries that’s exactly what’s happened. After two rounds of quantitative easing, along with the Fed’s “Operation Twist” bond-buying operation, the hoped-for spending boost hasn’t happened. One reason a third round of quantitative easing, if it occurs, would likely target mortgage securities is that Fed research suggests that would affect household and corporate borrowing costs more directly than Treasury purchases would. But Mr. Kasriel, who retired from Northern Trust earlier this year, says that quantity should be the point of quantitative easing. The problem, as he sees it, is that even though lenders are charging low rates for loans, they aren’t granting all that many loans. Indeed, even though the Fed’s balance sheet continues to grow quickly, it has not grown quickly enough to make up for the meager growth in bank credit holdings. In the first quarter, the sum of Federal Reserve assets and private bank credit holdings was 4% higher than a year earlier. That compares to average growth of 7.2% over the past 60 years. What the Fed should do he says

Central Banks Can’t Save the World - Mohamed El-Erian - The three central bank meetings this week -- the Bank of England, the European Central Bank and the Federal Reserve -- made very good cases for additional stimulus measures, though they failed to specify what these would be.  Equities and certain bonds that had surged on the basis of last week’s verbal assurances by central bankers and political leaders sold off. There was no panic given central bankers’ promises to do more in the future should additional action be needed. This is what the standard narrative has been.  But it misses important context, and there is more at play here. The unfortunate reality is that, unlike during the financial crisis of 2008 and 2009, central banks can’t be the saviors this time around for a struggling global economy. Other government entities, with better-suited policy tools, need to step up to the plate.

Twist is Fed's most effective policy tool right now - The most probable outcome of the FOMC meeting currently under way is the continuation of "Operation Twist" and possibly the extension of the current “exceptionally low… through late 2014” rate guidance to "mid 2015." Other policy changes are much less likely. A drop in the rate paid on bank reserves is possible but not preferable because it could destabilize money markets functioning (potentially pushing repo rates deep into negative territory with a sharp drop in liquidity). A UK style policy to lend to banks below market rates (to encourage lending) is also unlikely because of legal limitations and political ramifications of the Fed lending to banks again. And there is almost no chance that any sort of unsterilized asset purchases (QE3) will be announced.  The Fed should be quite happy with the impact of the Maturity Extension Program (Twist). The central bank has taken a considerable amount of duration out of the treasury market. This happened just as demand for treasuries rose due to escalating problems in the Eurozone as well as negative rates in the "safer" European nations. This combination has created the most accommodative long-term rate environment in recent US history. The 10-year zero coupon real yield is at record low of negative 82bp.

The Fed’s 2% Inflation Target Trap - The Federal Reserve has now openly adopted a two percent inflation target, with both Chairman Bernanke and the Federal Open Market Committee publicly committing to holding inflation at that level. Though not a problem today, this two percent target represents a policy trap that will undercut the possibility of future wage increases despite on-going productivity growth. That promises to aggravate existing problems of income inequality and demand shortage. The Fed’s new policy is tactically and analytically flawed. Tactically, at this time of global economic weakness, the Federal Reserve should be advocating policies that promote rising wages rather than focusing on inflation targets. Analytically, its inflation target is too low and will inflict significant future economic harm.  There is little reason to believe a two percent inflation target is best for the economy. Those economists who claim it is are the same economists who should have been discredited by the financial crisis of 2008 and the economic stagnation that has followed.  If, in the future, the Federal Reserve feels it must set inflation targets, there are strong grounds for believing a slightly higher inflation rate of three to five percent produces better outcomes by lowering the unemployment rate and creating labor market bargaining conditions that help connect wages to productivity growth.

Types of Prediction - Paul Krugman - I thought I would follow up on Brad DeLong’s musings on inflationistas and their weak excuses for getting it all wrong. What I think is going on is an attempt to blur the line between two kinds of prediction — unconditional and conditional. An unconditional prediction is something like this: SCHIFF: You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment. For the most part, however, the economists who got it wrong didn’t make that kind of prediction; what they said was more along the lines of “if we have a massive increase in the monetary base and continue running trillion-dollar deficits, we’re going to see soaring inflation and interest rates”. So it was more a statement about the implications of their model than a prediction of what would happen in any event. But here’s the thing: the conditions for their prediction have been met. The point is that it’s not a very good excuse to say that you didn’t specifically predict runaway inflation if you gave an “if-then” story and your if came to pass without your then.

Two Measures of Inflation: New Update  - The BEA's Personal Consumption Expenditures Chain-type Price Index for June shows core inflation below the Federal Reserve's 2% target at 1.80%. In contrast, the Core Consumer Price Index, also data through June, is above the target at 2.22%. The Fed, of course, is on record as using Core PCE as its inflation gauge: [Source]  The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 1.08% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September. This close-up comparison gives us a clue as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that the less volatile Core PCE is their metric of choice. The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.

Behind the Numbers: PCE Inflation Update - Dallas Fed - The Dallas Fed’s trimmed mean inflation rate for June was an annualized 1.4 percent. This follows back-to-back readings of 1.5 percent in April and May. The average rate for April, May and June—just under an annualized 1.5 percent—is the lowest for a three-month period since the three months from November 2010 to January 2011. Looking over a bit longer period, the six-month trimmed mean rate was an annualized 1.7 percent in June, down from 1.9 percent in May. The index’s 12-month rate held steady at 1.9 percent for a third consecutive month. The release of June PCE data always incorporates the results of the BEA’s annual revision to the national income and product accounts (NIPA). These annual revisions incorporate more complete or more reliable source data as well as occasional changes in the BEA’s methodology. The revisions—typically covering the previous three years—affect many of the underlying data series that are the grist for our calculation of the trimmed mean inflation rate. This year’s annual revision—discussed in more detail below—affected data going back to 2009. As far as the trimmed mean is concerned, the main impact of the revision is to raise somewhat the inflation rate over mid- to late-2011. The six-month trimmed mean inflation rate recorded for August of 2011 had been an annualized 2 percent; it’s now 2.2 percent. That’s a small change, to be sure, but—in combination with the most recent reading of 1.7 percent—it does give the six-month rate a noticeable downward trajectory. Prior to the revision and the latest release, the six-month trimmed mean rate had looked fairly flat.

Fed Watch: Employment Day Updates - The report surprised on the upside, with nonfarm payrolls adding 163k jobs, a clear improvement from the last three months: On the surface, this would seem to weigh against additional Fed action at their September meeting. I would say the counterargument is two-fold. First, wage growth continues to stagnate: Low wage growth is a consequence of sustained weakness in labor markets and should be seen as further evidence inflation will remain "at or below" levels consistent with the Fed's mandate. Second, the internals on household survey were weak. Employment dropped 195k, reducing the employment to population ratio to 58.4, while the ranks of the unemployed grew by 45k. The labor force participation rate declined further to 63.7, down from 64.0 a year ago. No progress on the unemployment rate, which edged up a notch. The establishment survey argues for a steady hand, the household survey argues for easier policy (arguably, even the establishment survey argues for easier policy, but I don't think the Fed sees it this way). Also note that we have another employment report before the next meeting. That said, if I had to choose today, I think that the establishment report would get the upper hand, pointing to steady policy in September. But there is lots of data between now and then.

Economy may be permanently stuck in slow-growth mode - Federal Reserve policymakers wrapped up a two-day meeting Wednesday with few options to rev up an economy that may be “stuck in the mud," as Fed Chairman Ben Bernanke recently told Congress. The problem is the things that are holding back the economy -- the uncertainty about tax rates next year, the problems in Europe and the problems in Asia -- are absolutely nothing that U.S. monetary policy can address with the tools it's got left. Central bankers are considering more steps, including possibly buying more long-term bonds to keep interest rates low. But those measures are not expected to be announced when the Fed issues a policy statement Wednesday. So for now, it's wait and hope. The latest data on gross domestic product highlight the Fed’s long-term quandary. Though growth has slowed sharply from a burst late last year, the expansion continues to chug along at an anemic 1.5 percent annual pace. That growth avoids the technical definition of recession. But the sluggish pace of hiring makes it feel like a downturn for the 12.7 million American workers still sidelined.

The Federal Reserve Doesn't Want the Economy to Grow Faster - The Federal Reserve announced today that neither weak employment growth nor falling inflation will inspire it to loosen up monetary policy. Instead they're just going to adopt a random anchor and stick with the status quo unless disaster strikes. Here's their description of the recent past: Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. Slow growth in employment should militate in favor of looser money. Declining inflation should militate in favor of looser money too. What about the forward-looking situation: the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate. Unemployment that is only declining slowly toward a level consistent with the dual mandate should militate in favor of looser money. Inflation that's at or below the optimal rate should militate in favor of looser money. Naturally, the statement ends with the Fed saying there will be no change in policy. Epic fail.

Yet another discouraging GDP release - The Bureau of Economic Analysis reported Friday that U.S. real GDP grew at an anemic 1.5% annual rate during the second quarter. When the same bad thing keeps happening to you again and again, "disappointed" no longer seems the appropriate word to use. Lower spending by state and local government and lower net exports each subtracted about 0.3% from the annual GDP growth rate. And there just wasn't any oomph anywhere else to make up for it. Consumer spending grew at the same meager rate as GDP itself, with an outright decline in spending on durable goods, the big ticket purchases that consumers postpone when they're worried about the economy. Nonresidential investment and housing made modest positive contributions.  And things have been "disappointing" like this for quite a while. Although the 2011:Q4 growth has been revised up to what might seem to be an encouraging 4.1% value, most of this was inventory accumulation; growth in real private spending for Q4 was 1.6%, the same sort of anemic numbers we'd been seeing before and since.

Halfway Through, 2012 Has Been a Disappointment -- This year began with such hopeful expectations–almost all of which have been dashed. Real gross domestic product rose by only 1.5% in the second quarter, the weakest pace since 2011′s third quarter. Revised data show real GDP expanded by a ho-hum 2.0% in the first quarter. Demand across most major sectors has downshifted. In the second quarter, real consumer spending slowed to its lowest pace in a year; government outlays dropped for the seventh-consecutive quarter; and while businesses spent more on equipment, their investments on structures basically flat-lined. Faster inventory accumulation contributed to GDP growth last quarter. But if demand doesn’t pick up to justify those higher stockpiles, businesses will cut back on ordering and production, which in turn will cut into payrolls. That feedback loop is one of the big headwinds for the second half. Unless job growth strengthens after its spring stall, consumers will remain reticent to shop.

Real GDP Per Capita: Another Perspective on the Economy - On Friday we learned that the Advance Estimate for Q2 real GDP came in at 1.5%, down from the upward revision of 2.0% for Q1. Let's now review the numbers on a per-capita basis. For an alternate historical view of the economy, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in current dollars for the inflation adjustment.  The real per-capita series gives us a better understanding of the depth and duration of GDP contractions. As we can see, since our 1960 starting point, the recession that began in December 2007 is associated with a deeper trough than previous contractions, which perhaps justifies its nickname as the Great Recession. In fact, at this point, 17 quarters beyond the 2007 GDP peak, real GDP per capita is still 1.87% off the all-time high following the deepest trough in the series. Here is a more revealing snapshot of real GDP per capita, specifically illustrating the percent of the most recent peak across time, with recessions highlighted. The underlying calculation is to show peaks at 0% on the right axis. The callouts shows the percent off real GDP per-capita at significant troughs as well as the current reading for this metric.

Why the U.S. Recovery is So Sluggish - The economy merely muddled through the second quarter. Mark Zandi discussed the prospects for a pickup on PBS.

Government Cutbacks Separate This Expansion From Others - The recoveries and expansions that occurred in the Bush, Clinton and Reagan eras all saw government spending increase along with most other major drivers of growth. But in the current Obama recovery, which began in 2009, total public outlays have decreased at an annualized rate of 1.5%, according to a Dow Jones/Wall Street Journal analysis of newly revised government data. In the previous five expansions, dating back to 1975, government spending grew a yearly average of 1.9%. The current pull back in government spending, which is most pronounced at the state and local level, helps explain why on annualized basis, the gross domestic product has grown by just 2.2% since the recovery began. By that measure, the current rebound is the weakest of the post World War II era. Measuring growth on an annualized basis controls for recoveries and expansions of varying lengths. Much of the attention in this election season has been focus on government spending that ballooned at the end of the most recent recession and during the early part of the recovery. But since the middle of 2010, that aid to growth has fallen off when adjusted for inflation.

State and Local Spending Cuts Dampen the Recovery - On Friday, the Bureau of Economic Analysis released its first look at Gross Domestic Product and its components for the second quarter of the year plus revisions going back to 2009. Those data confirmed that weak government spending continues to hamper the economy.  In the second quarter, government spending declines subtracted more than a quarter point from GDP growth, almost exclusively from the state and local government sector. State and local spending cuts also dragged the economy down in 2010 and 2011. In 2011, the state and local sector contracted 3.4 percent, the largest decline since World War II. In 2009, real GDP fell 3.1 percent, the largest contraction since 1946, and would have contracted even more without government spending. That decline is smaller than previously reported because of an upward revision in state and local spending. Most of the revision was to the final quarters of 2009 which was the same time as the American Reinvestment and Recovery Act (ARRA) began distributing funds.

The Secret of Our Un-success - Krugman - The Wall Street Journal — yes, the WSJ — explains: Government Cutbacks Separate This Expansion From Others. Over at Angry Bear, Spencer shows that private GDP — GDP not including government spending — has risen almost exactly as fast under Obama as during the “Bush Boom”; of course, if government spending hadn’t been falling despite a weak economy, there would have been more jobs, and private spending would have risen faster. It’s really amazing: between miscalculations on Obama’s part and scorched-earth Republican opposition, what we’ve had is insane austerity in the face of depression — yet we’re having an election centered on the claim that the weak economy shows that government spending doesn’t work.

America’s Other 30% - The American consumer is but a shadow of its former almighty self. Personal consumption in the United States expanded at only a 1.5% annual rate in real (inflation-adjusted) terms in the second quarter of 2012 – and that was no aberration. Unfortunately, it continues a pattern of weakness that has been evident since early 2008. Over the last 18 quarters, annualized growth in real consumer demand has averaged a mere 0.7%, compared to a 3.6% growth trend in the decade before the crisis erupted. Never before has the American consumer been this weak for this long. American consumers’ unprecedented retrenchment has turned the US economy’s growth calculus inside out. Consumption typically accounts for 70% of GDP (71% in the second quarter, to be precise). But the 70% is barely growing, and is unlikely to expand strongly at any point in the foreseeable future. That puts an enormous burden on the other 30% of the US economy to generate any sort of recovery. In fact, the other 30% has not done a bad job, especially considering the severe headwinds coming from consumers’ 70%. The 30% mainly consists of four components – capital spending by firms, net exports (exports less imports), residential construction, and government purchases. (Technically, the pace of inventory investment should be included, but this is a cyclical buffer between production and sales rather than a source of final demand.) Given the 0.7% trend in real consumption growth over the past four and a half years, the US economy’s anemic 2.2% annualized recovery in the aftermath of the Great Recession is almost miraculous. Credit that mainly to the other 30%, especially to strong exports and a rebound in business capital spending.

Q2 2012 GDP Details: Office and Mall Investment increases slightly, Single Family investment increases - The BEA released the underlying details today for the Q2 Advance GDP report. The first graph shows investment in offices, malls and lodging as a percent of GDP. With the annual revisions, it now appears office, mall and lodging investment has increased slightly - but from a very low level. Investment in offices is down about 61% from the peak (as a percent of GDP). With the high office vacancy rate, investment will probably not increase significantly (as a percent of GDP) for several years. Investment in multimerchandise shopping structures (malls) peaked in 2007 and is down about 59% from the peak (note that investment includes remodels, so this will not fall to zero). Lodging investment peaked at 0.32% of GDP in Q2 2008 and is down about 75%. The second graph is for Residential investment (RI) components as a percent of GDP. According to the Bureau of Economic Analysis, RI includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories (dormitories, manufactured homes). Usually the most important components are investment in single family structures followed by home improvement. Investment in single family structures is finally increasing after mostly moving sideways for almost three years (the increase in 2009-2010 was related to the housing tax credit). Investment in home improvement was at a $158 billion Seasonally Adjusted Annual Rate (SAAR) in Q2 (just over 1.0% of GDP), significantly above the level of investment in single family structures of $122 billion (SAAR) (or 0.78% of GDP).

The GDP Revision - On Friday the Bureau of Economic Analysis revised its estimates of the U.S.' inflation-adjusted GDP going back to the first quarter of 2009. Our animated chart below shows what changed:  The quick takeaways:

• The U.S. economy performed better than previously reported in 2009, as the December 2007 recession bottomed and began turning around.
• The economic recovery following the bottoming of the recession has been far weaker than the previously reported data indicated.
• We really don't know what to make of the GDP data recorded in 2011-Q4 onward, where the reported data is really characterized by its relative lack of adjustment in the BEA's 27 July 2012 revision. It would be really odd that after the rather large adjustments of 2009 through 2011-Q3 that the BEA would suddenly master the determination of GDP for just these most recent quarters.

Taking the bigger picture into account, given the typical 6 to 18 month lag in time from when macroeconomic policies are implemented to when they begin having a measurable effect upon the economy, it would appear that the policies implemented by the U.S. government and Federal Reserve in 2008 were more effective in arresting the decline of U.S. GDP and initiating the economic recovery in the second quarter of 2009 than the data previously suggested.

The Main Driver of GDP Growth: A Strong Rule of Law - Economist and investment adviser John Mauldin notes: I had dinner with Dr. Woody Brock this evening in Rockport. We were discussing this issue and he mentioned that he had done a study based on analysis by an institution that looks at all sorts of “fuzzy” data, like how easy it is to start a business in a country, corporate taxes and business structures, levels of free trade and free markets, and the legal system. It turned out that the trait that was most positively correlated with GDP growth was strength of the rule of law. It is also one of the major factors that Niall Ferguson cites in his book Civilization as a reason for the ascendency of the West in the last 500 years, and a factor that helps explain why China is rising again as it emerges from chaos. One of the very real problems we face is the growing feeling that the system is rigged against regular people in favor of “the bankers” or the 1%. And if we are honest with ourselves, we have to admit there is reason for that feeling. Things like LIBOR are structured with a very real potential for manipulation. When the facts come out, there is just one more reason not to trust the system. And if there is no trust, there is no system. Dr. Brock is not alone.  Economists have thoroughly documented that failure to enforce the rule of law leads to a loss of trust … which destroys economies.

Why would Treasury want to issue floaters? - Treasury announced yesterday that it was going to start issuing floating-rate notes, probably at some point next year, although the details are still extremely vague:Treasury projects that it must now sell an estimated $667 billion of additional debt to the public over the next four years. The floating-rate notes will help give the government flexibility in its increased debt offerings…Officials confirmed that the notes will not be indexed to the Libor overnight lending rate, which has come under scrutiny in the wake of a scandal that it was manipulated during the financial crisis.The Borrowing Advisory panel said it was interested in referencing the securities to the DTCC GCF Repo index.None of this makes a huge amount of sense to me. For one thing, if you’re the US Treasury, with $16 trillion of debt outstanding, an increase of half a trillion over four years is not a really huge deal — especially in a world where demand for Treasury securities remains incredibly robust. What’s more, a floating-rate note isn’t really a new product. At heart, it’s incredibly similar to an investment in T-bills; the only real difference is that you don’t need as many roll-overs with a floating-rate note.

When Monetary and Fiscal Policy Collide: the Interesting Case of Floating Rate Notes - One of the FOMC's more recent policy innovations is Operation Twist.  Initiated last September, this program aims to shrink the average maturity of publicly-held U.S. Treasury debt and thereby encourage a rebalancing of private portfolios toward riskier assets. This rebalancing, in turn, would help spur a recovery in aggregate nominal expenditures via balance sheet and wealth effects.  At least that is how it is suppose to work. There are, however,  two big problems with this initiative.  First, it has not been accompanied by an explicit economic target and therefore does little to improve nominal spending expectations.  Second, it has been countered by the U.S. Treasury which is increasing the average maturity of the publicly-held debt.  This can be seen in the figure below which comes from a recent U.S. Treasury report: Not only has the Fed been failing to lower the average maturity, but it faces a U.S. Treasury determined to continue raising it as seen by the green forecast line. By swapping its short-term treasuries to the public in exchange for their long-term treasuries, the Fed has forced the U.S. Treasury to face unexpected financing costs.So how will the U.S. Treasury pay for it? By rolling over the debt of course.  And not just any new debt, but a special new kind of floating rate note that will come out in a year.

How GOP Lawmakers Have the Fed Over a Barrel - The GDP report released late last week showed economic growth slowing to 1.5 percent, and this has raised expectations that the Fed will to do more to help the economy. With more and more signs pointing to a stagnating recovery, additional help from the Fed is certainly needed. But no matter what the Fed does, it cannot solve the economy’s problems on its own. When a recession as severe as the one we’ve just experienced hits the economy, fiscal policy also has an important role to play. But if fiscal policy is so important, why haven’t fiscal policymakers in Congress done more to help the economy recover? One answer is that Congress is broken, but broken would mean that neither side is making progress on its goals, and that is simply not the case. Through a combination of deliberate policy actions and deficits created by the recession, the Republican’s “Starve the Beast”  strategy to reduce the growth of government is working. Federal tax revenues are at a 60 year low as a percentage of GDP, deficits are increasing, government has been contracting at a time when it ought to be expanding to combat the recession, and there is mounting pressure to reduce spending on social insurance programs.

INFOGRAPHIC: Austerity Has Been An Epic Fail - Visual.ly posted an infographic completely tearing apart the notion that austerity is completely incompatible with a healthy economy:

Beyond Debt/Deficit Politics: The $60 Trillion Plan for Ending Federal Borrowing and Paying Off the National Debt - Well, here we are again, House leaders have agreed on a compromise continuing spending resolution at the same level as before from October 2012 through January 2013. It’s likely now that the President(s?) will probably try to make the money available for deficit spending as of today, last through the time period of the continuing resolution so that one deal including both the budget and raising the debt limit can be made by March of 2013. According to the July 31, Daily Treasury Statement, there’s $499,424,000,000 left until the debt ceiling. That’s an average of $62,428,000,000 deficit spending per month for the next 8 months, ending March 31, 2013.  So, what ought to be done? The most important thing that can be done is to change the fiscal context of politics from one of apparent scarcity “justifying” austerity to one where spending capacity is so plentiful, that Congress will be hard-pressed to impose austerity, because its justification in the form of apparent limitations on spending capacity will just seem silly. In the summer of 2011 I proposed a solution to the debt ceiling crisis calling for the minting of a $30 T platinum coin to overcome the problem and also improve the fiscal context for progressive legislation. Now, I want to update that post and apply it to the present political situation, where based on the above events, the next serious fiscal crisis is likely to happen in February and/or March of 2013. So, here’s the update.

What The US Government Spends Its Money On - The following chart from today's TBAC presentation slidedeck should put to bed all debate of not only what the US government spends its money on (of which about half is generated through tax collection and half is borrowed primarily from either China or the Fed), but also what the trends in current year spending are compared to 2011. In summary: of the 4 biggest categories HHS (Medicare & Madicaid), Social Security or together Welfare, Treasury and Defense, Welfare is higher, Treasury is higher, and Defense is not only lower, but has lost to Treasury as the third biggest expense category year to date.

Dissecting the Deficit - My colleagues Kathy Ruffing and Jim Horney have shown that the economic downturn, President Bush’s tax cuts, and the legacy of the wars in Iraq and Afghanistan explain virtually the entire federal budget deficit projected for the rest of this decade (that is, through 2019).  That is, there would be practically no deficits over that period if the tax cuts, the wars, and the downturn had not occurred and other policies remained the same.  This widely circulated CBPP chart makes their point vividly. Last week columnist Robert Samuelson looked at a related — but different — question, one that looks backward in time rather than forward:  why did the federal government amass large deficits between 2002 and 2011, rather than the large surpluses that the Congressional Budget Office (CBO) projected in early 2001? Over the 2002-2011 period, the negative budgetary impact of so-called “economic and technical” changes — most notably, the 2001 and 2007-2009 downturns — dwarfed that of any single legislative change that policymakers enacted.  Samuelson cites an analysis of CBO data that accordingly ascribes about a quarter of the deterioration in the budget over that period to President Bush’s 2001 and 2003 tax cuts and the Iraq and Afghanistan wars. CBPP found that the tax cuts (if policymakers extend them in full) and the wars, plus the lingering effects of the recent downturn, essentially account for the entire deficit between now and 2019.  Indeed, the tax cuts and the wars alone account for nearly half of the public debt by 2019.

CEOs and bankers driving the 'deficit-reduction' debate - That we are now being treated to finger-wagging about the need to get our fiscal house in order by corporate CEOs like JPMorgan Chase's Jamie Dimon (trading loss $5.8 billion and counting, potential cost to ratepayers from alleged manipulation of the California electricity market $200 million and counting). Or is it that the remedies for the deficit always seem to involve cutting taxes for the top 1% of U.S. income earners while cutting Social Security retirement benefits (average monthly check: $1,230) for everyone else?  The fiscal cliff is supposedly what lurks at the end of this year, when billions of dollars in tax cuts expire and government spending cuts mandated by the big deficit deal in 2011 kick in. According to the bipartisan Congressional Budget Office, the combination of a steep increase in the tax bite and a steep reduction in spending across the board could cut economic growth in 2013 to 0.5% from a projected 4.4% (if none of these events takes place). The CBO says that by any traditional reckoning, that would mean recession. Only a political structure in the grip of hopeless insanity would allow that to happen. That's why the Washington observer class still expects Democrats and Republicans to reach a deal eventually, even if brinkmanship may keep them yammering past the supposed drop-dead deadline of Dec. 31.

The One-Sided Deficit Debate - Michael Hiltzik (hat tip Mark Thoma) wrote a column lamenting the domination of the government deficit debate by the wealthy. He clearly has a point. The fact that Simpson-Bowles—which uses its mandate of deficit reduction to call for . . . lower tax rates?—has become widely perceived as a centrist starting-point for discussion is clear evidence of how far to the right the inside-the-Beltway discourse has shifted, both over time and relative to the preferences of the population as a whole. What’s more, the “consensus” of the self-styled “centrists” is what now makes the Bush tax cuts of 2001 and 2003 seem positively reasonable. With Simpson-Bowles and Domenici-Rivlin both calling for tax rates below those established in 2001, George W. Bush now looks like a moderate; even many Democrats now endorse the Bush tax cuts for families making up to $250,000 per year, which is still a lot of money (for most people, at least). But some of the blame for this state of affairs must rest with Democrats, liberals, and their usual mouthpieces as well. For over a year now, the refrain of the left-leaning intellectual class has been that the only thing that matters is increasing growth and reducing unemployment, and any discussion of deficits and the national debt plays into the hands of the Republicans.  There is no explanation of how to deal with our long-term debt problem in a way that preserves government services and social insurance programs and protects the poor and the middle class.

Bowles-Simpson: What am I missing? - The Bowles-Simpson deficit reduction plan is causing consternation among people with whom I usually agree.  But it has a couple of important features that I like--it cuts tax expenditures that tend to be both distortionary and regressive (such as the mortgage interest deduction) and it taxes investment income at the same rate as ordinary income.  This second feature essentially ensures implementation of the Buffet rule. As it happens, the Tax Policy Center at the Urban Institute and the Brookings Institution evaluated the distributional impact of Bowles-Simpson relative to current policy.   Here is what they found: Look at the column entitled "Percent Change in After-Tax Income."  Everyone takes a hit, but the hit in the lowest quintile is near zero--for the top one percent, the hit is almost three times higher than average; for the top 0.1 percent, it is four times higher than average.   This looks awfully progressive to me...

Should Obama Deal With Europe Or The Fiscal Cliff? What I Told CNBC Today - video

How to avoid 'lunatic' fiscal cliff - Congress and the White House face a clear choice on the "fiscal cliff." They can go over it and push the economy into recession in 2013, as the nonpartisan Congressional Budget Office and the International Monetary Fund have projected. Or they can avoid it. If they do, CBO projects GDP growth of 4.4% and more than 2 million new jobs in 2013. Unfortunately, the high-stakes game of political chicken currently under way in Congress is increasingly viewed as "good strategy." It is a lunatic strategy. The fiscal cliff is a "perfect storm" of tax, spending and debt deadlines at the end of 2012. The most significant are the expiration of the Bush tax cuts, the onset of automatic budget cuts and raising federal debt ceiling. The Bush tax cuts expire on Dec. 31. Republicans want to extend all of them. President Obama and congressional Democrats want to extend them for most Americans but let them expire on income over $250,000. Without a negotiated compromise, everyone's taxes will go up, affecting the middle class and seriously dampening consumer spending. Related: We also face damaging, across-the-board spending cuts of 8% to 10% in nearly all defense and non-defense programs on Jan. 2 unless Congress acts. 

Legislation to prevent government shutdown will wait until Sept. - House Republicans have no plans to move forward this week on a catch-all spending bill to avert the government shutdown, sources confirmed Monday. Congress will instead leave town for a five-week recess without voting on a continuing resolution or even introducing it, these sources said. “No CR this week,” one GOP aide said, adding that there is “zero chance” of text appearing this week. A new spending bill wasn't included on House Majority Leader Eric Cantor’s (R-Va.) weekly schedule, released late Friday, and sources said that there are no plans to change that. Without a resolution to keep the government operating, the government would shut down after Sept. 30. Both sides have reason to avoid that, but they won't get to a vote until closer to the deadline day.

Congress strikes stopgap budget deal: Sen. Reid -  Senate and House leaders on Tuesday struck a deal to fund the government for six months, Senate Democratic Leader Harry Reid said. Government funding is due to expire when the current fiscal year ends on Sept. 30, and an agreement averts a government shutdown. The deal "provides stability for the coming months, when we will have to resolve critical issues that directly affect middle class families," Reid said in a statement.

Congressional leaders reach budget deal  - US congressional leaders have reached a short-term budget deal to fund the government for six months from September, extinguishing a potential partisan fiscal fight ahead of the election. Although legislation enshrining the deal still has to be written and must be passed after the August congressional recess, the agreement appears to have ended one of Washington’s numerous budget battles sapping investor and consumer confidence. News of the six-month funding deal came in statements from John Boehner, the Republican speaker of the House of Representatives, and Harry Reid, the Democratic Senate majority leader. The agreement also has the imprimatur of Barack Obama, whose spokesman said the president was “encouraged that both sides have agreed to resolve this issue without delay”. The budget deal does not resolve the bigger issue of the so-called “fiscal cliff” looming at the end of the year, when Congress will face a series of difficult and costly budget decisions.

Congressional Leaders Reach Tentative Deal on Spending - Congress is nearing another budget deadline, and Republicans still want to cut spending. But this time, the presidential and Congressional elections are just months away. As a result, House and Senate leaders on Tuesday, with little fanfare and no drama, said they had reached a tentative agreement that would pay for federal government operations through next March, averting the prospect of another messy shutdown debacle. Under the deal, lawmakers have agreed to a spending rate slightly higher than the current one, despite a call by some conservative Republicans for a lower one. The current level was agreed to last summer as part of a deal to raise the debt ceiling, another partisan standoff. The emerging legislation stands in sharp contrast to previous occasions when House Republicans used the leverage of a spending deadline to insist on deep spending cuts in exchange for their votes. Further, the agreement signals that Speaker John A. Boehner, who has spent much of the 112th Congress heeding the wishes of the most conservative corners of his conference, has decided to polish off an agreement before any fight can ensue, and pass an eventual bill with Democrats, if necessary. Simply put, with the Oct. 1 deadline for enacting spending bills for 2013 coming so close to the election, Republicans leaders were eager to avoid a government crisis that voters at the polls could blame them for, and to keep the focus on criticizing President Obama.

GOP, White House reach budget deal to avoid government shutdown - Congressional leaders reached a tentative budget deal with the White House on Tuesday that would avert a politically risky government shutdown right before the election. The six-month stopgap measure would keep the government running at current levels through March — dashing, for now, the hopes of conservative Republicans who want to make steeper cuts, including eliminating money for President Obama's healthcare law. Although the deal would end the threat of a stalemate that could be politically damaging for both parties, it does not address the looming "fiscal cliff" of tax increases and mandatory spending cuts that are scheduled to take effect after Jan. 1. Votes on the tentative deal are set for September, before the new fiscal year begins Oct. 1, clearing the postelection lame-duck session for the tax-and-spending debate. White House Press Secretary Jay Carney called Tuesday's breakthrough a "welcome development." The swift agreement with House SpeakerJohn A. Boehner(R-Ohio) is a turnaround from the shutdown threats that have dominated this Congress. The GOP's House majority was elected on pledges to slash government spending. Republican leaders calculated that it was better to reach a short-term agreement to pay for the routine functions of government so lawmakers could campaign on broader issues.

Tentative Deal Reached to Fund Government Through March 2013 - Following up on a previous item, Congressional leaders have indeed agreed to a 6-month stopgap spending bill to avoid a government shutdown at the end of September. The emerging deal is a sharp contrast to previous occasions when House Republicans used the approach of a spending deadline to insist on deep spending cuts in exchange for their votes, once avoiding a shutdown by a matter of hours. But with the Oct. 1 deadline for enacting spending bills for 2012 coming so close to the election, Republicans leaders were eager to avoid a government crisis that they could be blamed for by voters at the polls. Under the agreement that takes the spending fight off the table before the presidential and Congressional elections, lawmakers have agreed to continue the current rate of spending into early next year despite a call by some conservative Republicans for a lower rate. By pushing the spending into next year, the House and Senate would also eliminate it as a bargaining chip in post-election negotiations over what to do about expiring tax cuts. The rate of spending will be consistent with the $1.047 trillion agreed to in the debt limit deal last year. Harry Reid added that there are no riders in the bill. It’s just a budget deal to keep the government running through March 2013, at the level Democrats wanted, with no concessions to Republicans.

CR Deal: Just Kicking The Fiscal Cliff Down The Road? - Let me start by stating for the record that, while it would have been extremely entertaining to have a government shutdown a month before the 2012 election, the deal for a six-month continuing resolution kind of/sort of announced yesterday by Senate Majority Leader Harry Reid (D-NV) and House Speaker John Boehner (R-OH) and blessed later in the day by the White House is a good thing for the economy, financial markets, investors, business, and the country as a whole. Having said that, there are several points that need to be raised. First, in spite of yesterday's announcement, I'm not sure this really is a done deal. In particular, I'm not convinced that the tea party wing of the GOP has signed off on it. The fact that the House isn't going to take a vote on the CR before it leaves this week for the August-labor Day recess may be an indication that Boehner isn't confident he actually has enough support from his own caucus for the deal. And as anyone who has ever worked a legislative issue will tell you, the longer you wait before you take a vote on something that is as much a political hot potato as federal spending, the more likely it is that opposition will develop or intensify. Second, the CR could be the first step in a new version of Washington's favorite budget game -- Kick the Can Down the Road. The latest edition would be kicking the fiscal cliff down the road, that is, delaying the fiscal cliff into next year and setting up a new deadline for imposing short-term damage on the economy.

CR Deal Does Not Eliminate The Fiscal Cliff Or The Sequester - There seems to be some confusion both inside and outside the beltway about the impact of the deal on a six-month continuing resolution that kind of/sort of was announced yesterday in separate statements by House Speaker John Boehner (R-OH) and Senate Majority Leader Harry Reid (D-NV). The bottom line: Appropriations were never a formal part of the fiscal cliff so a deal on a CR is a separate issue that doesn't affect it. To be technical...Something had to be done by October 1 -- the start of fiscal 2013 -- to avoid a government shutdown; the fiscal cliff as it was used by Fed Chairman Ben Bernanke primarily referred to the tax cuts that expire on December 31 and the sequester that will cut spending by $120 billion on January 2. The CR and cliff are related only in the sense that they both deal with the budget and so are often discussed at the same time, but the two are and always have been completely different.

Congress Budget Fail: The Sequestration Tranparency Act - The STA corrected an obvious flaw in the Budget Control Act, the law adopted with so much fanfare last August that increased the debt ceiling, created what turned out to be an anything-but-super committee to come up with a deficit reduction plan, and produced the sequestration process if, as ultimately (if not inevitably) happened, the committee failed. But because of the speed with which the BCA was developed, it didn’t include a requirement that the president reveal in advance which programs would be cut if the sequester occurred. And unlike the situation with the sequesters created by the Gramm-Rudman-Hollings Act in the 1980s, the BCA inadvertently or otherwise gave the president great discretion on how the required spending reductions could be achieved. The White House wasn’t required to tell anyone before Jan. 2, 2013, and certainly not before the elections, which programs were on the cutting block. That effectively made a deal to prevent the sequester from occurring far more difficult because those who might be affected by the cuts either didn’t know what was coming, couldn’t be sure their preferred program would be hurt or simply assumed it would be protected. As a result, there has been less pressure on Congress and the White House to come up with an alternative to the sequester and prevent the spending reduction part of the fiscal cliff from going into effect.

As 'fiscal cliff' looms, debate over pre-Election Day layoff notices heats up - The deep federal spending cuts scheduled to take effect at the start of next year may trigger dismissal notices for tens of thousands of employees of government contractors, companies and analysts say, and the warnings may start going out at a particularly sensitive time: Days before the presidential election.  By law, all but the smallest companies must notify their workforce at least 60 days in advance when they know of specific job cuts that are likely to happen.  Obama administration officials say that the threat of layoffs is overblown and that Republicans are playing up the possibility rather than trying to head it off. The Labor Department said Monday that it would be “inappropriate” for contractors to send out large-scale dismissal notices, because it is unclear whether the federal cuts will occur and how they would be carried out. Republicans reacted with fury, saying it is the White House that is playing politics.

Romney’s Weird Plan to Decouple Military Spending From National Security Needs and To Tie It Instead to … GDP?? -  Romney's plan calls for linking the Pentagon's base budget to Gross Domestic Product, and allowing the military to spend at least $4 dollars out of every $100 the American economy produces.” -- Defense spending to spike $2.1 trillion under Romney, CNN.) In a post here two weeks ago I noted that peculiar proposal of Romney’s, and also mentioned my dismay that neither the Obama campaign nor (to my knowledge) any other mainstream-media outlet had mentioned it.  I titled the post Crony Capitalism and Its Variety of Flavors.   I said in the post that, given Romney’s open (if unnoticed) proposal to untether actual national-security needs from national-security spending and attaching it instead to GDP, its purpose is utterly unrelated to national security.  It’s unabashedly “a stunningly perverse pinstriped-patronage version of Keynsian economics,” I said.  My post got about as much attention as the May 10 CNNMoney report.  But now the Obama campaign has a new ad out highlighting the absurdity of Romney’s plan to increase defense spending—presumably (although the ad doesn’t say this) so that we’ll be prepared when Romney clumsily gets us into an unnecessary war.

Drought of Ideas in Congress Is Worse Than in Farm Belt - The worst drought in more than a half-century is gripping most of the U.S. Midwest and South, damaging crops and presaging higher food prices.  Congress is deadlocked as it tries to pass a new farm bill, as it does every five years, amid demands for broad emergency assistance for the hardest hit areas.  This impasse may be the best thing that one could hope for, considering the flaws in the proposed legislation. Instead of trying to adopt a new bill before its August recess, Congress should approve a one-year extension of the current law and create a narrow aid package aimed mainly at livestock producers. As bad as the existing law is, there is no reason to replace it with legislation that’s even worse.  Although some ranchers might need emergency aid, existing crop insurance protects 85 percent of the nation’s cultivated land against losses, according to the U.S. Department of Agriculture. This summer’s drought also follows a year when farm net income was a record $98 billion, thanks to some of the highest commodities prices ever.

House Releases One-Year Farm Bill Extension - The House has released an expected one-year extension of farm-related programs, in a bill which would also deliver needed relief to drought-stricken farmers in the Midwest. But the plan is imperiled by the continuation of direct payments to farmers, which members of both parties oppose. Direct cash payments would be trimmed modestly to help cover the costs, but their extension is controversial in itself since both the House and Senate Agriculture Committees have recommended reforms that would end the multibillion-dollar subsidies [...] Sen. Mike Johanns (R-Neb.), a former Agriculture secretary in the Bush administration, has roundly criticized any extension of direct payments, now costing $5 billion a year. And in what appears a slap at Senate Majority Leader Harry Reid (D-Nev.), the House draft specifically repeals a desert lakes program he has championed. This may not even pass the House, let alone get to the Senate. House Agriculture Committee ranking member Collin Peterson (D-MN) opposes the extension. He considered the bill in the context of getting the longer-term, five-year bill into a conference committee (a version has already passed the Senate and the House Agriculture Committee), but that doesn’t look to be on the menu for the House leadership. This could turn plenty of Democrats away, and House conservatives oppose the direct cash payments to farmers as well. In addition, while the House farm bill cut almost $30 billion from the budget over ten years, this measure, which includes aid for livestock producers from the drought, only saves $400 million.

House Leaders Drop Farm Bill Extension, Will Instead Push Disaster Relief -- Forget about the farm bill. The House GOP leadership has dropped their efforts to pass a one-year extension of farm programs under current policy, weeks after they dropped efforts to pass a Republican version of the farm bill which has passed the House Agriculture Committee. With substantial opposition on both sides to continuing a program that would deliver direct payments to farmers, something everyone wants to phase out, there was little chance that the one-year extension could pass. Instead, Republicans will try to pass a separate disaster relief bill dealing with livestock producers and their struggles with this summer’s historic drought: The substitute will restore livestock indemnity and forage programs that have expired in the current farm program, with some assistance also for specialty crops.To keep down costs, the aid will apply only to 2012, while offsets will come from imposing caps on two conservation programs much as the House Appropriations Committee has already proposed in its 2013 budget bill. Early estimates indicate the net savings would be about $256 million.

Drought Relief Bill Passes House, But Won’t Help Livestock Producers Through August - The House of Representatives passed their one-year drought relief bill by a relatively thin margin yesterday, 223-197. They needed 35 votes from Democrats to get it across the line, as 46 Republicans begged off the bill. Here’s the roll call. The House passed this on the last possible day of the session before the August recess, and the Senate did not get around to passage. So there will be no immediate diaster relief coming for livestock producers suffering under a price spike due to corn shortages.Democratic leaders in the Senate, which has already passed a bipartisan five-year bill, said they were not inclined to rush through the House measure, blaming the Republican leaders in the House for failing to consider the broader legislation in time. The end result was that Congress could end up taking no action to provide drought aid before breaking for five weeks.

Republicans vs. Women - NYTimes editorial - A new Republican spending proposal revives some of the more extreme attacks on women’s health and freedom that were blocked by the Senate earlier in this Congress. The resurrection is part of an alarming national crusade that goes beyond abortion rights and strikes broadly at women’s health in general. These setbacks are recycled from the Congressional trash bin in the fiscal 2013 spending bill for federal health, labor and education programs approved by a House appropriations subcommittee on July 18 over loud objections from Democratic members to these and other provisions. The measure would bar Planned Parenthood’s network of clinics, which serve millions of women across the country, from receiving any federal money unless the health group agreed to no longer offer abortion services for which it uses no federal dollars — a patently unconstitutional provision. It would also eliminate financing for Title X, the effective federal family-planning program for low-income women that provides birth control, breast and cervical cancer screenings, and testing for sexually-transmitted diseases. Without this program, some women would die, and unintended pregnancies would rise, resulting in some 400,000 more abortions a year and increases in Medicaid-related costs, according to the Guttmacher Institute, a leading authority on reproductive health.

How Congress Can Decide on Spending - It is difficult to get the House or Senate to decide anything, and even harder to get the two houses to agree between each other. Everything is partisan. But for the government to run, we need appropriations bills (most people at least want national defense running). We need a way to force decisions when there's deadlock. Here's an idea...

1. Each member of each house will vote for a specific budget amount for each appropriation bill.
2. The median (middle) amount for each house will selected on each bill.
3. The average of the two house medians will be the reconciled appropriation amount in the bill sent to the President (who will have a strong incentive to sign it, or else reopen Pandora's box).
4. The ballots are secret so that the parties cannot manipulate the voting.

The advantage of using the median over the average is that the median isn't influenced by extreme values. A ballot with an extreme value will by definition never be the median value, and at most can only influence directionally which of the other votes is the selected median. Hopefully with this approach there will be more incentive for moderation and competition to be the middle vote rather than the obstructionist.

Payroll Tax Cut on Track to Quietly Expire -  Amid a high-decibel fight over the nation's budget, there is one emerging area of agreement: Both parties appear willing to quietly let a major tax cut expire—a payroll tax break enjoyed by about 122 million people. Congress, aiming to give wage-earners a few extra dollars in each paycheck, first cut the payroll tax, which funds Social Security, to 4.2% from 6.2%, for the 2011 calendar year.  A Democratic proposal to extend the tax cut for 2012 was the subject of a pitched battle last year before it narrowly passed in December.  This time, the White House isn't pushing for another extension. "That was always intended to be a temporary measure to support job creation and economic growth," Jason Furman, a top White House economic adviser, said recently. "It's not something that we have at this stage called for extending into next year."

Underwater homeowners face a tax time bomb - The letter from Bank of America Home Loans got right to the point. “We are pleased to inform you that we have approved your Home Equity Account for participation in a principal forgiveness program offered as a result of the Department of Justice and State Attorneys General global settlement with major mortgage servicers.” In the letter, which I obtained from an anti-foreclosure activist, Bank of America offered the homeowner full forgiveness of their entire home equity loan balance of over $177,000. But then Paragraph 5 came with an ominous warning: “Please be aware that we are required to report the amount of your cancelled principal debt to the Internal Revenue Service.” Under current law, a principal reduction like this would be exempted from tax liability. However, that law, the Mortgage Forgiveness Debt Relief Act, expires at the end of the year, and after that, any mortgage debt forgiveness provided to a borrower will count as gross income for tax purposes, potentially costing millions of families several billion dollars. In the above case, the borrower would be required to pay taxes on the entire $177,000 amount forgiven by the bank, as if it were earned income. And that’s money that struggling homeowners simply don’t have.

Republican-led House rejects Democratic tax plan – Republicans in the House of Representatives approved the extension of all Bush-era tax cuts, including deeply polarizing cuts for the wealthiest Americans, in a mostly symbolic presidential election year move Wednesday. Republicans said the cuts could help shore up a still-frail U.S. economy, while the Obama administration warned that threatened budget cuts could send some of America's troops into battle with less training. For all the action and talk, however, both taxes and spending were deeply enmeshed in campaign politics, with no resolution expected until after the November elections. The House measure has no chance of passing the Democrat-controlled Senate or surviving an Obama veto. The vote was more about political messaging three months before the election than a genuine attempt to resolve longstanding differences that threaten to hit Americans with a tax increase if the deadlock isn't broken in a post-election session. Democrats are demanding that any compromise to avoid the $110 billion in budget cuts that are scheduled to kick in Jan. 2 include a tax increase on high-income earners, returning tax rates on the richest Americans to pre-President George W. Bush levels.

House votes to keep Bush tax cuts - House Republicans voted Wednesday to keep tax rates at their current level through next year, using one of their last votes before recessing for most of August to approve politically symbolic legislation that President Barack Obama has vowed to veto. The vote was intended to showcase the contrast between the GOP view on taxes and the one pushed by Obama and congressional Democrats. The House voted 256-171, with 19 Democrats crossing party lines to join Republicans. One Republican, Timothy Johnson of Illinois, voted no. The Senate, with its Democratic majority, already has approved a measure that would allow income tax rates to rise on earnings above $200,000 for individuals and $250,000 for couples - a move that would affect the top 2 percent of earners. With no compromise in sight, the divide between the parties on taxes is expected to fuel the fall campaigns. The current tax rates, first approved under the George W. Bush administration, expire at the end of the year. Taxes will rise automatically if Congress fails to find agreement by Dec. 31.

Special interests win in Senate panel’s attempt at tax reform - It was supposed to be a first step toward tax reform. But as lawmakers tackled a list of 75 special-interest tax breaks, the special interests repeatedly won. An accelerated write-off for owners of NASCAR tracks: That has to stay.An economic development credit for a StarKist tuna cannery in American Samoa: That stays, too. A rum-tax rebate for Puerto Rico and the U.S. Virgin Islands worth millions of dollars a year to one of the world’s largest distillers: Check. A $2,500 credit for electric motorcycles and other low-speed vehicles: That stays. But “in the spirit of tax reform,” its sponsor, Sen. Ron Wyden (D-Ore.), said he agreed that electric golf carts would no longer be eligible. When the dust settled Thursday, members of the Senate Finance Committee congratulated themselves for agreeing to jettison 20 of the perks, including a $5,000 credit for first-time home buyers in the District and a cash-incentive program for ­wind-energy projects that has been derided as benefiting foreign companies. But their failure to weed out dozens more pet provisions clouded prospects for a far-reaching simplification of the nation’s tax laws advocated by President Obama, GOP challenger Mitt Romney and congressional leaders in both parties.

Pile of Bills Is Left Behind as Congress Goes to Campaign — An effort to provide emergency aid for American ranchers and farmers reeling from a year of drought, frost and other calamities collapsed on Thursday as members of Congress departed for their five-week August recess, leaving behind a pile of unfinished legislation as they go home to campaign for re-election.  After refusing to consider a sweeping five-year farm measure, House Republican leaders jammed through a short-term $383 million package of loans and grants for livestock producers and a limited number of farmers. The measure passed 223 to 197, a narrow margin for a bill that has an impact on so many states. But Democrats balked in protest over the way the farm legislation has been handled and some Republicans objected to the costs.  Democratic leaders in the Senate, which had already passed a bipartisan five-year bill, refused to take up the House measure, faulting House Republican leaders for failing to consider the broader legislation in time.

Bush Tax Cuts Have Provided Extremely Large Benefits to Wealthiest Americans Over Last Nine Years - The tax cuts first enacted under President Bush in 2001 and 2003 have made the tax code less progressive and delivered a large windfall to the highest-income taxpayers.[1]  Tax Policy Center estimates for the years 2004 to 2012 (the years for which TPC provides data that are comparable from year to year) give us a sense of the cumulative effect of these tax cuts:

• If one adds up the average tax cuts that households with incomes between $200,000 and $500,000 received in each of the last nine years, the total exceeds $74,000. 
• The sum of the average annual tax cuts delivered to households with incomes between $500,000 and $1 million exceeds $189,000 over the last nine years. 
• The sum of the average annual tax cuts delivered to households with incomes over $1 million in each of the last nine years exceeds $1.1 million.  The average tax cut these individuals received was more than $110,000 in each of these years.[3]

Charts: America Has the World's Luckiest Billionaires - The tax plan passed by Senate Democrats on Wednesday isn't really about taxing the rich; it's about taxing the megarich. As Timothy Noah has explained in The New Republic, the plan would actually reduce taxes on a lot of fairly rich people by renewing the (supposedly temporary) Bush-era tax cuts for everyone except those who make more than $250,000 a year. Even then, Democrats are only proposing a higher marginal tax rate, which means that even people raking in far more than $250,000 will still pay lower taxes on their first quarter million in annual earnings. Crunch the numbers, and it turns out that the biggest losers under the Senate plan are couples who earn more than $1 million a year—mostly multimillionaires and billionaires.

Low- and Moderate-Income Tax Credits Deliver More Bang for the Buck Than High-Income Tax Cuts - In this week’s US News & World Report blog post, I discussed the policies that would most likely boost the flagging recovery at a time when the economy is suffering from excess unemployment and underutilized business capacity: If policymakers want the best policies to create jobs and cut unemployment as soon as possible, they should focus on policies that boost demand for goods and services — not policies to expand the economy’s capacity to supply goods and services. I applied this logic to a key difference between the one-year tax cut extension bills that the Democrat-controlled Senate passed last week and the Republican-controlled House passed this week.  Both bills extend the so-called “middle-class tax cuts” enacted in 2001 and 2003 and “patch” the Alternative Minimum Tax for 2012 to limit its reach to relatively high-income taxpayers.  The House bill would also extend the upper-income 2001 and 2003 tax cuts, making the dubious argument that doing so would prevent a “job-killing” tax increase on small businesses, while the Senate bill would extend tax credits that President Obama and Congress enacted in 2009 that mainly benefit low-and moderate-income households.

Does the Tea Party support Tax Dodgers? - Andrew Leonard's July 27 article in Salon, Tea Party Shields Tax Dodgers, looks at the way Jim DeMint and Rand Paul are carrying water for the big banks--suggesting that Treasury shouldn't be implementing the "FATCA" legislation passed as part of the HIRE act because it might cost the big banks some paperwork they'd rather not do. Here's the issue with FATCA. It requires banks to report on substantial accounts held abroad--more than $50,000 for individuals or more than $250,000 for entities. The Treasury believes it can generate almost $9 billion in additional tax revenues through the implementation of FATCA over the next ten years. But Paul, DeMint and other right-wingers have complained about the cost to banks to carry out the law. As Leonard puts it, FATCA isn’t about making life hard for expatriates. It is targeted at big players who are moving huge amounts of cash overseas for the specific purpose of avoiding their U.S. tax obligations. And Rand Paul and Jim DeMint are defending these upstanding members of the 1 percent by carrying water for banks who want to avoid the paperwork costs involved in ferreting out the tax dodgers. Is that how the Tea Party wants this country to be run — in the best interests of the richest Americans and the banks?

The Most Important Lesson from the TPC Analysis of the Romney Tax Plan Is Neither What Obama Nor Romney Suggests -- Today the Tax Policy Center (TPC) released this analysis of the distributional effects of Mitt Romney’s proposed tax reform plan, and it got so much (deserved) attention that both President Obama and presidential candidate Romney talked about it.  Too bad both candidates were speaking entirely as candidates and not as policy analysts or even as the supreme policymaker that we will elect one of them to be. President Obama decided that the report was sufficiently unfavorable to the Romney plan as to make it great campaign speech fodder.  As reported in Politico: President Obama is set to attack Mitt Romney on Wednesday for pushing tax reforms that would cut taxes for the rich while raising the burden on other taxpayers. “Just today, an independent, non-partisan organization ran all the numbers,” Obama is to say, according to excerpts of his speech released by the Obama campaign. “And they found that if Governor Romney wants to keep his word and pay for his plan, he’d have to cut tax breaks that middle-class families depend on to pay for your home, or your health care, or send your kids to college.  That means the average middle-class family with children would be hit with a tax increase of more than $2,000.” “But here’s the thing – he’s not asking you to contribute more to pay down the deficit, or to invest in our kids’ education,” Obama adds. “He’s asking you to pay more so that people like him can get a tax cut.”

Dooh Nibor - Krugman - Lots of justified talk today about a new Tax Policy Center report on the distributional implications of the Romney tax plan, showing it to be very much a Dooh Nibor – that is, reverse Robin Hood – thing. Obama is talking it up; Romney, predictably, is dismissing the report as the work of a “liberal group”.The question one might ask is, did TPC – which is actually painstakingly and painfully nonpartisan – make questionable assumptions to get its results, so that some other set of assumptions might portray Romneynomics in a more favorable light? And the answer is no: TPC actually bent over backwards to literally give Romney every possible benefit of the doubt. Here’s what they did. They took Romney at his word that he plans to offset his cuts in income tax rates by broadening the base, that is, limiting exemptions and other loopholes. They also assumed, however, that Romney would not be willing to tax dividends and capital gains as ordinary income, since he has made it clear that he opposes any rise in taxes on investment income. As they point out, this leaves a relatively small pool of loopholes to close – big enough that the Romney tax cuts could, in principle, be paid for by base broadening, but not with a lot of room to spare.

The Distributional Effects of Base-Broadening Tax Reform - Brookings - This paper examines the tradeoffs among three competing goals that are inherent in a revenue-neutral income tax reform—maintaining tax revenues, ensuring a progressive tax system, and lowering marginal tax rates. As a motivating example, we estimate the degree to which individual income tax expenditures would have to be limited to achieve revenue neutrality under the individual income tax rates and other features advanced in presidential candidate Mitt Romney’s tax plan, and how the required reductions in tax breaks could change the distribution of the tax burden across households. (We do not score Governor Romney’s plan directly, as certain components of his plan are not specified in sufficient detail, nor do we make assumptions regarding what those components might be.)  Our major conclusion is that a revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed – including reducing marginal tax rates substantially, eliminating the individual alternative minimum tax (AMT) and maintaining all tax breaks for saving and investment – would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers. This is true even when we bias our assumptions about which and whose tax expenditures are reduced to make the resulting tax system as progressive as possible. For instance, even when we assume that tax breaks – like the charitable deduction, mortgage interest deduction, and the exclusion for health insurance – are completely eliminated for higher-income households first, and only then reduced as necessary for other households to achieve overall revenue-neutrality– the net effect of the plan would be a tax cut for high-income households coupled with a tax increase for middle-income households.

Mitt Romney's Tax Plan Would Cut Taxes For Rich, Raise For Middle Class: Study -Mitt Romney's plan revamping the tax code would end up cutting taxes for the richest 5 percent of Americans and raising taxes on everyone else, according to new independent study from the Brookings Institute and Tax Policy Center released Wednesday morning.   The study finds that Romney's plan would end up cutting taxes by about $87,000 on millionaires under a revenue-neutral model. The top 0.1 percent would see their after-tax revenue income rise by 4.4 percent. Meanwhile, the study estimates that the bottom 95 percent would see about 1.2 percent less after-tax income. They'll see taxes rise about $500, according to the study.  Romney's individual tax plan consists of five key bullet points, according to his campaign website:

• Make permanent, across-the-board 20 percent cut in marginal rates
• Maintain current tax rates on interest, dividends, and capital gains
• Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains
• Eliminate the Death Tax
• Repeal the Alternative Minimum Tax (AMT)

“It is not mathematically possible to design a revenue-neutral plan that preserves current incentives for savings and investment and that does not result in a net tax cut for high-income taxpayers and a net tax increase for lower- and/or middle-income taxpayers,” the authors of the Brookings/TPC study write in their conclusion. Here's the chart that breaks down the effects of Romney's plan:

Why Romney’s Tax Agenda Doesn’t Add Up, Even if it Isn’t a Middle-Class Tax Hike -- A new paper by Brookings Institution scholars and Tax Policy Center colleagues Bill Gale, Adam Looney, and Samuel Brown is generating lots of media buzz. Even Barack Obama has has put his spin on it with a campaign ad that says if you are middle class, Mitt Romney wants to raise your taxes by up to $2,000 even as he cuts taxes for rich people like himself. That is a powerful political message, but it isn’t how I read the Gale-Looney-Brown paper. To me, the study highlights something else: The deep contradictions embedded in Romney’s tax platform. Romney has promised at least five big things. They are:

• To start, he’d make all of the 2001 and 2003 tax cuts permanent but repeal the 2009 Obama tax cuts and the tax increases included in the 2010 health reform law.
• After that, he’d cut tax rates by 20 percent across the board and eliminate both the Alternative Minimum Tax and the estate tax.
• He’d eliminate taxes on investment income for couples making $200,000 or less (individuals making $100,000 or less) and keep current low rates for those with high incomes.
• He’d do this without increasing the budget deficit (beyond the cost of extending the 2001-2003 tax cuts) by curbing some tax preferences.
• He’d do it in a way that retains the progressivity of today’s tax system.

Romney’s problem is he cannot possibly achieve all of these goals. He is doomed by both political reality and simple mathematics.

The folly of the GOP’s ‘tax reform’ agenda  - Mitt Romney and House Budget Committee Chairman Paul Ryan (R-Wis.) are both pushing “tax reform” plans that would lower marginal tax rates while broadening the base (curbing tax deductions, credits, and exclusions). Romney’s plan, for example, would reduce all individual income tax rates by a fifth—e.g., the top 35 percent rate would fall to 28 percent—and the revenue loss would be made up by limiting or eliminating unspecified tax expenditures. And he says he would do this without cutting taxes for high-income households (beyond continuing their Bush-era tax cuts), meaning that he would more or less preserve the progressivity of the current tax code (i.e., tax burden distribution).  Why are these proposals pure folly?  First, because they’re obviously not serious—if they were, the plans would lead with the tax expenditure reform rather than the rate cuts.  But most importantly, these plans aren’t serious because their stated intent isn’t mathematically possible. In an analysis released Wednesday, researchers at Brookings and the Tax Policy Center analyzed a plan that is consistent with Romney’s proposal, including lowering rates by a fifth and eliminating the Alternative Minimum Tax. The researchers then attempted to construct a base-broadening approach to both make up the revenue lost from the rate cuts and maintain the progressivity of the current tax code.  Turns out, they couldn’t.

Romney's "Recovery Plan" Could Bring On Another Recession - In today’s Wall Street Journal, the Columbia economist Glenn Hubbard, who is one of Mitt Romney’s top economic advisers, has an op-ed piece entitled “The Romney Plan for Economic Recovery.” When I saw the headline, I felt a rush of anticipation: at last, I thought, here is the big new jobs initiative that the G.O.P. campaign is relying on to turn things in its favor. I was mistaken. The first two thirds of Hubbard’s piece is taken up with an attack on the Obama Administration’s economic record: ineffective stimulus, too much regulation, failure to tackle the housing market—all very familiar stuff. When Hubbard eventually gets to laying out Romney’s alternative, there is nothing new either, just a reiteration of the existing policy plaform: a vague promise to cut federal spending and reduce the budget deficit, an even vaguer plan to cut taxes but in a “revenue-neutral fashion,” and a commitment to repeal Obamacare and Dodd-Frank. Judging by this piece, and by recent statements from Romney himself, the G.O.P. campaign still doesn’t have a recovery program worth the name. Indeed, if we are to believe the evidence of our eyes and ears, he remains committed to immediate spending cuts that could well bring on another recession.

Tax Policy Center Analysis of Romney Tax Plan - The Romney campaign’s increasingly desperate attempts to dismiss a new study of its tax plan are a pretty good sign that the study is devastating. That isn’t to say the campaign is trying to counter it with actual specifics. Performed by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, the study shows that Mitt Romney’s proposal would lead to significantly lower taxes for the rich, and a higher tax burden on middle- and lower-income taxpayers.It’s been well known for a while that Mr. Romney’s tax plan was a mathematical impossibility. He promised to reduce marginal tax rates by 20 percent, eliminate the estate tax and the alternative minimum tax, and end the capital gains tax for middle-income taxpayers – all while not lowering the amount of revenue coming into the treasury. Mr. Romney said he would offset those losses by ending a series of loopholes, but has yet to cite a single loophole he would delete. The study tried to estimate what those loopholes might be. But it found that there simply aren’t enough loopholes in the tax code to balance the cut in high-end rates that Mr. Romney has proposed. Thus the rich would wind up with a cut, but to offset the loss of $360 billion by 2015, the middle-class would have to pay more when the breaks for mortgage interest, state taxes, education and medical expenses are wiped away.

Does Romney Even Know What the Word “Plan” MEANS? - Romney released a new middle class economic plan [today]. [The] plan is called: “Mitt Romney’s new plan for a stronger middle class.” It contains ideas we’ve heard before: more access to domestic energy resources; cutting taxes and capping spending; repealing Obamacare. Mark Hopkins at Moody’s Analytics tells me that it is mostly a set of assertions about outcomes Romney wants, rather than a set of policies on how to achieve them. “There aren’t enough specifics here to evaluate the plan,” Hopkins said. “It’s not clear in most cases what specific policies underlie the assertions of outcomes he wants.” -- Hopefully Obama and more members of the media will point out the distinction between a stated plan and a mere statement of claimed outcomes of an unspecified plan.

Who Would Gain in a Romney Tax Overhaul - A tax system overhaul along the lines that Mitt Romney has proposed would give big tax cuts to high-income households and increase the tax burden for middle- and lower-income households, according to a new analysis from economists at the Brookings Institution. On their own, these cuts to personal income and estate taxes would reduce total tax revenue by $360 billion in 2015 relative to what is expected of current policy, according to the Brookings scholars. Mr. Romney has said that his plan will include offsets to the revenue losses from his proposed lower tax rates, although he has not specified what kinds of policies would offset those cuts (that is, how he would come up with an additional $360 billion to offset the lost $360 billion in tax revenue).  The Brookings analysis assumes that those offsets would be achieved chiefly through reducing or altogether eliminating other tax breaks — like the mortgage interest tax deduction or the child tax credit — and does not factor in spending cuts as a means to offset lost tax revenue. The Brookings analysis assumed that the first tax breaks to go would be those that primarily affected the highest earners. But even if all possible loopholes for households earning more than $200,000 were eliminated, this group would still be a net gainer under Mr. Romney’s plan, since the marginal tax rate decreases and other changes lop off so much of its tax burden. As a result, middle- and lower-income households — the 95 percent of the population earning less than about $200,000 annually — would have to make up the difference.

Charles Murray: Panderer to Fraudulent Plutocrats - Bill Black - Charles Murray believes that the wealthiest person should be made President of the United States.  “Who better to be president of the greatest of all capitalist nations than a man who got rich by being a brilliant capitalist?” If the standard is wealth makes right, then the wealthier the person, the more appropriate that he should be made President.  There is no need for elections or fixed terms of office under this standard of political governance.  Whoever tops the Forbes list becomes President – that will create the appropriate competitive incentives.  Wealth being the full measure of a man there is no need for that the wealthiest person to be a U.S. citizen.  Under the Murray governance standard Mitt Romney’s problem is that he is not wealthy enough to be our ruler.  Carlos Slim can run all of North America south of Canada. Alternatively, if we limit the eligible list of our rulers to U.S. citizens, Bill Gates will be our President with Vice President Buffett.  Larry Ellison will be waiting in the wings.  If Charles and David Koch agree to combine their fortunes in a single corporation wholly owned by them (“corporations are people”) their corporation will be Gate’s Vice President.

National Debt? There’s No Such Thing - Any politician who bemoans the national debt, whether they be American, Greek, Spanish or otherwise, is lying to you if they blame anyone but the richest 0.001% for the state's massive debt. Because the richest 0.001% have anywhere between $21 trillion and $32 trillion stashed in overseas bank accounts simply to avoid paying their fair share of taxes. It's a number that's simply beyond comprehension. Even if someone were to spend a million dollars a day since Jesus was born, they would have only spent $700 billion by today, just $0.7 trillion. $32 trillion is a hell of a lot of money. In fact, it's more than double the United States' total accumulated debt. In fact, $32 trillion would be enough to settle both the debt of the United States and the European Union, combined. Visualized in cash, the amount of money stashed overseas by the 0.001% would be almost as high as the Statue of Liberty, and wider than two football fields. And thanks to the numerous loopholes, gimmicks and special deductions written into the tax code at the request of corporate lobbyists who have the ear of the chairmen of tax-writing committees worldwide, public debts and corporate profits are skyrocketing, while tax revenues and the standard of living for the other 99% of us is plummeting.

IRS may have sent more than $5B to identity thieves - Investigators say the Internal Revenue Service may have delivered more than $5 billion in refund checks to identity thieves who filed fraudulent tax returns for 2011. They estimate that another $21 billion could make its way to ID thieves' pockets over the next five years. The Treasury Department's inspector general for tax administration says the IRS is detecting far fewer fraudulent tax refund claims than actually occur. Thieves assume the identity of a dead person, child or someone else who normally wouldn't file a tax return. Advertise | AdChoices For example, investigators found one single address in Michigan that was used to file 2,137 separate tax returns seeking a total of more $3.3 million in refunds. In other cases, hundreds of refunds were deposited into the same bank account.

Tax evaders (and those who aide them), not regulatory complexities, cause tax evasion -- The July 24 New York Times Magazine carries an article by Adam D entitled My Big Fat Belizean, Singaporean Bank Account. The author shows how easy it was for him to establish a secret offshore bank account that would allow him to evade US (and other nation's) taxes with ease. It only cost around a thousand dollars, and the firms that do this for a living can set you up with a fake corporation in one tax haven and a real bank account in another, both of them sworn to secrecy about your identity as a US citizen and complicit in aiding wealthy taxpayers in avoiding required reporting to the IRS. And that means a lot of moolah gets stashed abroad, and a lot of taxes remain unpaid.The Tax Justice Network, a global research firm that advocates against such havens, suggests that the amount hidden offshore is between $21 trillion and $32 trillion. If properly taxed, that could yield more than $200 billion in revenue around the world. Furthermore, because a 2010 McKinsey & Company report estimated the world’s financial assets at about $200 trillion, somewhere around 10 percent or more of the world’s wealth is effectively invisible. And it’s also almost certainly in the hands of the people and institutions that most actively influence major investment decisions.. So far, so good. But where the author goes wrong is in his ruminations about the reasons such shenanigans go on. He thinks it is because regulations and tax laws are so complex. Pshaw. This is, quite simply, garbage regulatory mythology. Shenanigans happen in brute force capitalism--the kind we've had in place for the last few decades--until there is one dominant beast who controls everything. Regulations ain't the cause.

Theses On Taxes - Paul Krugman - Some brief notes:

• 1. Neither candidate is offering a realistic tax plan, because the fact is that the federal government is going to need more revenue than either is currently proposing. But the two men are not equivalent in their unrealism: Obama is proposing to raise revenue by around $80 billion a year compared with current policy, while Romney is proposing to cut revenue by around $450 billion a year compared with current policy. Obama is inadequate; Romney is intensely, screamingly irresponsible.
• 2. On top of that, Romney is scamming voters, claiming not only that he can make up the lost revenue by closing unspecified loopholes, but that he can do so in a way that doesn’t shift the tax burden away from the rich onto the middle class. He can’t, as a matter of sheer arithmetic — which is the point of that Tax Policy Center study.
• 3. The Romney campaign isn’t even trying to make a substantive argument in response — they’re just calling names.

Corporations Don't Need More Tax Breaks - If you listen to the corporate lobbyists, and the right-wingers who plead their cases for them in Congress and in the media, you'd think that corporations are so heavily taxed that it is threatening their ability to continue to conduct business and be competitive in world markets. But is that really the case? This blog has often pointed out two obvious shortcomings in the corporate whine: first, the corporate statutory rate of 35% is honored in the breach--most corporations pay actual tax rates so significantly lower than 35% that the statutory rate is an illusion; and second, as far as global competitiveness is concerned, the corporate tax rate is the only significant tax that US corporations pay, whereas most other countries have both corporate income taxes and VAT taxes, often paid at each transactional stage of production.  A site called "NerdWallet" provides considerable information based on analysis of the financial statements of companies, providing greater transparency for investors and, lucky for us, for those of us interested in tax facts.   . A press release about the study notes just how much corporate taxation has shrunk as a source of revenue in the US, as corporations pay lower rates than ordinary Americans. A new NerdWallet study found the 10 most profitable U.S. companies paid an average of just 9% in federal taxes last year. These low rates are particularly shocking given that the official tax rate is 35%. The study also revealed that more than half of the 500 largest U.S. companies paid a lower tax rate than the average American. 

Taxes Needn’t Discourage Philanthropy, by Robert Shiller - Should charitable deductions be fundamental to financial capitalism? I argue so... We need to accompany any tax increases with an affirmation and a broadening of the tax system’s support of philanthropy. After a big tax increase on high incomes, people should have an especially strong incentive to give money to good causes: to the needy and to schools, colleges, hospitals, churches, the arts and other purposes. Many such donations reduce the need for government spending, so the deduction isn’t terribly costly to the government. It is also likely to bring entrepreneurial creativity to such causes. Of course, there are counterarguments: that few people are motivated to work for money that will largely have to be given away, and that it’s natural for people to want to make their families better off from their earnings. But there is an answer to that line of thinking: after one attains a certain level of comfort, greater wealth arguably contributes only to social status, which philanthropy certainly bolsters. That’s a good reason for national policies that encourage philanthropy. Although it’s natural for people to want high social status, there are ways for high achievers to reach the same relative rank without so much wasteful conspicuous consumption.  Unfortunately, much talk today focuses on just the opposite idea: curtailing the charitable deduction for high-income people, in order to help close the federal deficit.

America’s Constrained Choice, by Mohamed A. El-Erian -The conventional wisdom about the November presidential election in the United States is only partly correct. Yes, economic issues will play a large role in determining the outcome. But ... whether President Barack Obama or Mitt Romney prevails in November, the next president will be constrained by the twin need for urgent economic stabilization and longer-term reforms. And, with headwinds from Europe and a synchronized global slowdown, the candidates will have no choice but to pursue, at least initially, similar economic policies to restore dynamic job creation and financial stability.  This is not really an election about such hotly-debated issues as outsourcing, tax increases versus entitlement reforms, government control of production versus unfettered private sector activity, or job creators versus free riders. It is much more about the accompanying concepts of social fairness, entitlement, equality and, yes, standards of behavior for a rich and civilized society. This is an election about social responsibility – a society’s obligation to support those who are struggling, through no fault of their own, to find jobs and make ends meet. It is about protecting the most vulnerable segments of society, including by providing them access to proper health coverage. It is about reforming an education system that fails America’s young people (and about providing appropriate retraining to those who need it). Among the numerous issues of fairness and equality, it is about the rich giving back to a system that has brought them unimaginable wealth.

Pathetic Plutocrats - Krugman - One of the great revelations of this political season has been the pettiness and whininess of many of the very wealthiest Americans — not to mention what awful people they are. From New York Magazine: But over the past few months, it’s become clear that rich people are very, very afraid. Sometimes it feels like this was the main accomplishment of Occupy Wall Street: a whole lot of tightened sphincters. It’s not a stretch to say many residents of Park Avenue harbor vivid fears of a populist revolt like the one seen in The Dark Knight Rises, in which they cower miserably under their sideboards while ragged hordes plunder the silver. …More often than not, fears like these manifest as loathing for the current administration, as evidenced by the recent wave of Romney fund-raisers in the Hamptons. “Obama wants to take my money and give it to do-nothing animals,” one matron blurted at a recent party at the Pierre for Dick Morris’s Screwed!, the latest entry into a growing pile of socioeconomic snuff porn geared toward this audience. Wow.

Private equity assets hit record $3tn -The value of assets managed by the private equity industry globally continued to rise last year, hitting a record $3tn despite financial market turmoil and sluggish economic conditions. The results will provide a boost to the private equity industry which has been struggling with difficult conditions for raising new funds, a slump in deal making activity and heightened public scrutiny following the US presidential campaign of Mitt Romney, the Republican candidate who ran Bain Capital before turning to politics.

Bond Markets Control Governments - We have plenty of evidence that governments are afraid of bond markets. In the US, fears of the retaliation of the bond market have driven the fiscal policy of both parties. The Republicans want immediate cuts in spending, and their pet economists bray about an impending inflation that never comes. These intellectually dishonest hacks refuse to change their minds in the face of overwhelming evidence and increasingly sarcastic statements from people who got it right, like Paul Krugman, here, here, and here (among many). The Obama administration refused to see reason either. It adopted a policy of short-term stimulus, including tax cuts for the filthy rich, followed by drastic spending cuts on a time frame guaranteed to cause further economic distress. Which it did.  It’s worse in beleaguered Greece, Spain, and the Eurozone generally. Their troubles begin as the bond markets set higher and higher interest rates for new issues of sovereign debt, and eventually, the country is brought to its knees. Bond holders get paid and governments inflict pain and suffering on their citizens. These bond vigilantes have enough cash to crush the Greek government, and to shake the confidence of Spain, leading to adoption of policies that have produced economic disaster. When people talk about the bond market in this context, they really mean a small group of people who control tons of money. Where does all the money come from, and just who is trading it? There is plenty of money out there. The Tax Justice Network estimates a minimum of $21 trillion hidden offshore, plenty of money to crush most economies. That, of course, also has its insane defenders, the Wall Street Journal blog Washington Wire

Pirate Banking: $21 to $32 Trillion in Estimated Tax Haven Money, Managed by Big Global Banks - Yves Smith - An interview on Real News Network with James Henry of the Tax Justice Network covers his newly released report “The Price of Offshore Revisited” in which he estimates the size of the “offshore” market as somewhere between $21 and $32 trillion as of December 2010. Note that this total includes only financial assets, and thus omits real assets (real estate, gold, artwork, yachts) that are held via trusts or corporate entities in tax havens. If you are in finance, the broad outlines of this story are familiar. Much of “private banking”, particularly the Swiss variety, is to serve as a bolthole for money that the wealthy are trying to keep out of the hands of the taxman (or have looted from their country’s treasury). Henry estimates that 90% the total funds in “offshore” accounts is not reported to tax authorities. But US firms have become fierce competitors in this business. In the 1980s, Citibank became a major player in the Latin American market. And the current ranking of private banking operations puts Goldman as number three, behind UBS and Credit Suisse. And the results are perverse. Developing countries, which in theory should be the targets for investments by advanced economies, are instead often capital exporters as the wealthiest locals move their funds into tax havens.

Neil Barofsky Gave Us The Best Explanation For Washington’s Dysfunction We’ve Ever Heard - In his interview with Business Insider, Barofsky touched on everything from yesterday's announcement that Americans holding Fannie and Freddie mortgages would not get a principal write downs, to the general culture in Washington. Bottom line: Barofsky said the incentive structure in our nation's capitol is all wrong. There's a revolving door between bureaucrats in Washington and Wall Street banks, and politicians just want to keep their jobs. For regulators it's something like this: "You can play ball and good things can happen to you get a big pot of gold at the end of the Wall Street rainbow or you can do your job be aggressive and face personal ruin...We really need to rethink how we govern and how regulate," Barofsky said. Watch the whole video below:

Cocaine Cowboys Know Best Places to Bank -- By chance I recently came across a fabulous documentary, “Cocaine Cowboys,” by Miami filmmaker Billy Corben. Then last month a Senate panel held a hearing on the U.K. bank HSBC Holdings Plc (HSBA) and its ties to drug lords, money laundering, al- Qaeda and rogue nations such as Iran and North Korea.   Here’s a bank with $2.7 trillion of assets that flouted U.S. laws for a decade, according to the July 17 report by the Senate Permanent Subcommittee on Investigations. HSBC turned a blind eye to organized crime, Mexican drug cartels and overseas terrorism financiers, and gave them access to the U.S. banking system. HSBC’s main U.S. regulator, the Office of the Comptroller of the Currency, for years tolerated its violations of anti-money laundering laws.

No Big Boy Pants for Banks That Whine Over Rules - Let’s imagine the customers of a financial firm get word that more than a billion dollars of their money is missing. Then, less than a year later, customers of another firm learn that $200 million of their money is gone, too.  If such a sequence of events occurred, it’s likely that leaders from the industry would be called to appear before a government committee. And they would probably say something like:Sorry, folks. But don’t try to slap us with expensive new rules. Welcome to the era of financial regulation, cost-benefit style -- emphasis on the costs, not the benefits.  Although it seems to have escaped the memories of the people in charge on Wall Street, the economy just about collapsed in 2008, and a lot of bad things followed. Credit froze, financial firms went under, and millions of people were thrown out of work as business owners lost their financing and their confidence.

Corporate crime: basic economics - Unlearning Economics says that capitalism gives us "institutionalized law-breaking": Corporations have long history of force, fraud and theft...In a system based on private accumulation, they will use their profits to corrupt the legal system, hijack public funds, get the best lawyers, and make their operations as opaque as possible to avoid prosecution, no matter the charge. None of this is a bug of capitalism; it is a feature.If this sounds like a lefty rant, it shouldn't. It's just elementary economics. This tells us that firms supply things up to the point at which the marginal benefit equals the marginal cost. But this doesn't merely apply to the supply of goods and services. As Gary Becker showed (pdf) it also applies to crime. Companies (like individuals) will commit crime up to the point at which the benefit of doing so - higher profits - exceeds the cost. In the amoral world of econ 101, the cost is the penalty for being caught (criminal punishment plus loss of business from irate customers), multiplied by the probability of being caught*. We should, then, expect there to be a positive level of corporate crime and bad behaviour: fraud, money-laundering, breach of health and safety laws, the silencing of critics and so on.

Corrupt Government Officials Should Be In Jail … Alongside Corrupt Banksters - Wall Street fraud caused the Great Depression and the current financial crisis. Top economists and financial experts agree that our economy will never recover unless Wall Street fraud is prosecuted. Yet the government has more or less made it official policy not to prosecute fraud, and instead to do everything necessary to cover up for Wall Street.  For example, the Obama administration is prosecuting fewer financial crimes than under Reagan or either Bush. The government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are.But it is not only a matter of covering up fraud that has already happened. The government also created an environment which greatly encouraged fraud. Tim Geithner was complicit in Lehman’s accounting fraud, (and see this), and pushed to pay AIG’s CDS counterparties at full value, and then to keep the deal secret. And as Robert Reich notes, Geithner was “very much in the center of the action” regarding the secret bail out of Bear Stearns without Congressional approval. William Black points out: “Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth”

SEC Shows Abject Incompetence in Toxic CDO Case Against Citi Staffer - Yves Smith -- The verdict is in: nearly 20 years of keeping the SEC budget starved and cowed have rendered a once competent and feared agency incapable of doing more than winning cases on illegal parking, um, insider trading.  The SEC’s performance in the case at issue, SEC v. Stoker, was such a total fail that the odds are high that any motivated member of the top half of the NC readership would have done a better job of arguing this case pro se than the SEC did. Even though this case was argued before a jury (ooh, scary! They might go into My Eyes Glaze Over mode on CDO details), the basic issues were simple. The CDO squared that Citigroup director Brian Stoker marketed to investors was presented as having its assets selected by an independent asset manager. This is crucial. Just as investors in mutual funds understand they are hiring a fund management firm, and they compete on track records, so to were managed CDOs sold on the notion that the managers were serving the interests of the investors. And this is particularly important for CDOs, since the fact that the final asset list is made available shortly before closing makes it pretty much impossible for investors to evaluate a CDO on their own even if they had the skills and motivation.

Banks Are The “Achilles’ Heel of Capitalism” - Edward Yardeni of Yardeni Research in this week’s Barron’s: “The problem with banks is that they tend to blow up on a regular basis. That’s because bankers are playing with other people’s money (OPM). They consistently abuse the privilege and shirk their fiduciary responsibilities. Whenever they get into trouble, government regulators scramble to bail them out first and then scramble to regulate them more strictly. Without fail, the bankers respond to tougher rules by using some of the OPM to hire financial engineers and political lobbyists to figure out ways around the new regulations. In my opinion, banks are the Achilles’ heel of capitalism. They really do need to be regulated like utilities if their liabilities are either explicitly or implicitly guaranteed by the government, i.e., by taxpayers. Banks should be permitted to earn a very low utility-like stable return. Bankers should receive compensation in the middle of the pay scale for government employees, somewhere between the pay of a postal worker and the head of the FDIC. It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks.” ‘Nuff said . . .

Financial Reform: Five Reasons Why We're Screwed - This past week brought a spate of articles on the woes of financial regulation. John Kay writes that the regulation we are getting “is at once extensive and intrusive, yet ineffective and largely captured by financial sector interests.” James Kwak thinks that crude capture at the level of Congress is exacerbated by intellectual capture at the level of regulatory staff. John Gapper sees a slightly different form of intellectual capture in which “any oversight that is biased towards preserving stability will often shy away from making life too difficult for banks.”  Randal Wray sees outright fraud—a system in which top corporate managers run their institutions as weapons to loot shareholders and customers for their own benefit.So, can financial regulation be fixed, or not? Each writer points out reasons why effective financial regulation may be impossible, and I would add one more. As I see it, one of the biggest problems is that too many regulations, even those that are not tainted by capture, are prohibitions of specific risky activities, such as ownership of hedge funds or proprietary trading. It is like a parent who tries to get an obese child to take some weight off by saying, “No more chocolate ice cream, no more Big Macs.” The child just switches to mint chip ice cream and pizza.

The Three Rings of the Libor Circus (and a Sideshow) - The Libor scandal last week assumed for the first time the faint outline of a dispiriting caper movie. The Wall Street Journal reported on new details that have emerged about a suspected ring of thieves – “more than a dozen traders from at least nine banks, often allegedly working together in small groups to target different interest rates on separate continents … a wide conspiracy that continued for several years and cascaded around the world.” Thomas Hayes, a trader who worked for the Swiss bank UBS from 2006 until 2009, surfaced as a central figure in various probes. Citigroup hired Hayes away in 2009 and fired him the following year, according to the WSJ. So far no criminal charges have been filed – against Hayes, other traders whom he is alleged to have enlisted, or their supervisors.   But as the WSJ previously reported, Hayes was the central figure in a civil action against UBS and Citigroup brought by Japanese investigators last year. And new information, adduced from court filings by reporters Jean Eaglesham and David Enrich, shows that traders have told Canadian regulators, too, that Hayes “worked closely at several banks to push yen Libor submissions up and down” and “also tried to rig rates through employees at brokerage firms that supplied information to banks on the yen Libor panel.”

Libor Scandal Claims Big Media: ABC and NBC - Back on July 3, Matt Taibbi of Rolling Stone wondered aloud on his blog: “Why is Nobody Freaking Out About the Libor Banking Scandal?”  Now we have at least a partial answer: two heavily viewed network evening news programs have yet to discover the largest banking scandal in history.  In a blog post at Media Matters for America, Ben Dimiero and Rob Savillo reported the following yesterday: “Despite the enormous implications of the scandal, ABC’s World News and NBC’s Nightly News both ignored the story in the 16 days after news of the Barclays fine broke, as we documented earlier this month. In the 16 days following the period of our original study, the LIBOR blackout has continued on ABC and NBC’s flagship evening news programs. Those programs have gone more than a month without mentioning the controversy.”  What could possibly explain not one, but two, major network evening news programs blacking out the hottest banking scandal since the failure of Lehman. The NBC network is part of NBCUniversal. Stephen B. (Steve) Burke is the CEO of NBCUniversal and an officer of Comcast.  Steve Burke has served on the Board of Directors of JPMorgan since 2003.  JPMorgan is heavily implicated in the Libor rigging scandal. As previously reported here, prosecutors in the Canadian Competition Bureau have whistleblower testimony heavily implicating JPMorgan:

The Central Libor Question: Do We Want to Save Our Banks or Our Societies? -  Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth, wrote three weeks ago that Libor rigging was a criminal conspiracy from the start. Here he provides an update which summarizes how collusion between large banks and central banks/regulators allowed the rate-rigging scandal to continue unchecked, at the expense of society and the real economy, for decades. This is an edited version of Raúl’s piece.  There is no segment of private industry that has grabbed more power than the banking industry… Banks will offer up individual traders as lambs for the sacrificial chopping block, and lawmakers will declare that justice has been done. The traders can protest as much as they want that they were not operating in a vacuum, and that their superiors were very much aware of their machinations, if not outright demanding them, but it will make no difference. Bob Diamond was thrown to the wolves so Mervyn King could stay where he is. King himself made sure of it … The underlying idea for Libor was always: “by the bankers, for the bankers”. And if anyone involved in setting up Libor back in 1985 now wishes to claim that they had no idea that allowing banks to make up the rates at which they borrowed out of thin air created scope for manipulation, that would insult everyone’s intelligence including yours and mine. The problem is that in today’s climate, this doesn’t keep them from making precisely such claims. And that is very much part of a trend. It has increasingly become acceptable for bankers and politicians alike to deny anything flat out and see what happens, knowing their friends have their backs.

Libor, Mortgage Rates and Wall Street - As we await the full story, it’s worth remembering how Libor, the London interbank offered rate, became the world standard to begin with. You probably won’t be shocked to learn that in mortgages, at least, Wall Street played a role in pushing Libor over another rate benchmark — one that some bankers say was better for borrowers.  Before this scandal made headlines, few people outside of finance knew what Libor was. But according to the Center for Responsible Lending, half of the nation’s adjustable-rate home mortgages are based on it. Since 2002, more than 12 million A.R.M.’s, worth $3.5 trillion, have been indexed to Libor, according to the center.  That’s a lot of money resting on an interest rate that turns out to have been rigged.  But Libor didn’t always determine the rate on A.R.M.’s. Back in the 1990s, a much less volatile benchmark — the even more obscure-sounding 11th District Cost-of-Funds Index — was the norm for these loans. It represented the average rate paid to depositors by savings and loans in the Western region of the United States. The Federal Home Loan Bank of San Francisco, known as the 11th District and home to some of the largest mortgage lenders, compiled the rate every month. It makes sense to base adjustable-rate mortgages on lenders’ own costs of funds. That is because it links home loans’ rates to the rate paid on bank deposits. It also has the merit of being a rate based on reality — not, as in Libor’s case, on some bankers’ estimates.

The Peregrine Fraud Case Is Worse Than You Thought - Just when you figured the details of the Peregrine fraud case couldn’t get any worse, evidence is emerging that not only paints regulators as even more inept than first suspected, but also indicates that officers at the Iowa-based futures brokerage had reason to believe their boss was stealing customer money. Peregrine Financial Group’s chief executive, Russell Wasendorf, allegedly duped regulators for 20 years through an elaborate scheme in which he forged bank documents, faked e-mails, and set up a bogus bank address at a post office box. This allowed him allegedly to steal hundreds of millions of dollars of his customers’ money, some of which he spent on a state-of-the art, $18 million headquarters built in 2009. Last week, Senator Tom Harkin (D-Iowa) wrote to Dan Roth, CEO of the National Futures Association, the private trade group charged with monitoring futures brokerages such as Peregrine, essentially asking how in the world the NFA missed Wasendorf’s 20-year fraud, given the five times Peregrine was cited for disciplinary and enforcement actions dating back to 1996. In his response to Harkin, Roth admitted that in May 2011, NFA auditors appeared to be informed of a $211 million shortfall in Peregrine’s customer accounts by an employee of the U.S. Bank (USB) branch in Cedar Falls, Iowa, where Wasendorf kept Peregrine’s accounts.

Under Pressure, Biggest Banks Rely on 3 Myths -  Simon Johnson - Global megabanks have had a tough summer. Backed into a corner, representatives of these too-big-to-fail banks and their allies are forced to fall back on perpetuating three myths. First, their critics are “populists” who do not understand banking or economics. But this is belied by the credentials of the people raising serious issues with how global megabanks currently operate.The second myth is that a “cost-benefit analysis” would show that the Dodd-Frank financial reforms are not worth pursuing. This is actually a clever – or perhaps devious – legal strategy that is being pursued in a low-profile but effective manner. Even well-informed people in Washington frequently have no idea how much damage this myth can still cause within the rule-writing process.  We had a frank discussion of this report at the Peter G. Peterson Institute for International Economics on Monday, and I was struck by how many people have a hard time getting their minds around the scale of the damage wrought by large financial institutions that got out of control.This relates also to the third myth – the assertion that financial reform will hurt our growth prospects. Again, as laid bare by Better Markets, it was reckless risk-taking at the heart of our financial system that led to the largest crisis since the 1930s; the damage will be with us for a long time.

Michael Hudson on Fictitious Capital  - Michael Hudson spoke with Max Keiser about what he calls “fictitious capital” which is essentially lending backed by inadequate capital, such as collateral that has fallen in value. This is an idea he has explored in his previous papers, such as “From Marx to Goldman Sachs” and now in his new book, The Bubble and Beyond. For German readers, Hudson was also interviewed in FAZ.

FINRA “Meter Maids” Top 25 Fines: “Ain’t No Party” -Wall Street’s self-regulator FINRA just celebrated its 5 year anniversary. Congratulations to them. Sympathies and condolences to the rest of us. The Securities Technology Monitor highlights FINRA’s birthday with a grandiose slideshow presentation entitled, The First Five Years; FINRA’s Top 25 Enforcement Cases. While those at FINRA might be celebrating the anniversary with cookies, cupcakes, and lemonade, let’s take a more critical review of Wall Street’s industry-funded private police detail. In the five years since, the independent regulator of brokers has brought 6,291 disciplinary actions and levied fines totaling $254.1 million. 6,291 disciplinary actions brought over 5 years equates to 1,258 cases per year. With approximately 250 business days per year, FINRA has brought 5 cases for every business day during its existence. Strikes me as a busy organization. $254.1 million in fines levied over the course of 5 years equates to $50.8 million per year. What do we think of that? $50 million in fines levied per year for Wall Street’s private police. Not exactly a significant number. In fact, for an industry the size and scope of Wall Street, $50 million in fines levied on an annual basis is little more than a rounding error. Could very well be the boys and girls on Wall Street make that as a donation in the ‘tip jar’ at the industry sponsored summer barbecue.

Mortgages dominate complaints sent to CFPB - The majority of the consumer complaints filed with the Consumer Financial Protection Bureau during its first 11 months in existence relate to mortgage debt, the CFPB said in its semi-annual report to Congress.   CFPB data shows the bureau received 55,300 consumer complaints from July 21, 2011, through June 30. Of those complaints, 43% involved mortgage issues. Credit cards ranked second in terms of complaint volume, representing 34% of all first-year calls. Student loans represented only 4% of all calls to the CFPB, while bank accounts and service issues drove 15% of the agency's complaint traffic.

A Big Banker’s Belated Apology - Last week, in a CNBC interview, Sanford I. Weill, the former chairman of Citigroup, said that America should separate investment banking from commercial banking. This separation, of course, was the prime purpose of the Glass-Steagall Act of 1933, a piece of legislation that Mr. Weill and other bankers had successfully watered down, with Alan Greenspan’s support, before Mr. Weill helped engineer its official demise in 1999. Now, Mr. Weill, the creator of what was once the largest financial conglomerate in the world, suggests that Citigroup and others should be broken up. Banks can no longer “be too big to fail,” he told CNBC.  But what was most eye-catching was Mr. Weill’s claim that the conglomerate model “was right for that time.” Nothing could be further from the truth.  Rather, conglomeration bred conflicts of interest in Mr. Weill’s firms, and others — the very conflicts that the original Glass-Steagall Act was designed to prevent. This inevitably led to investment in and promotion of risky, poorly run and, in some cases, deceitful companies that brought us the high-technology and telecommunications bubble of the late 1990s.

Ludicrous Times Op-Ed Forgets Entire Year of Wall Street History _ Taibbi - It was riotous, side-splitting comedy last week when Sanford Weill, the onetime head of Citibank, went on CNBC to announce that he thought it was time to break up the big banks. Why this was funny: Through his ambitious (and at the time not yet legal) decision to merge Citibank, Travelers, and Salomon Brothers into one giant wrecking ball of greed, self-dealing and global irresponsibility called Citigroup, Weill more or less single-handedly created the Too-Big-To-Fail problem. You know, the one currently casting that thick, black doomlike shadow over all humanity which, if you look out your window, you can see floating over all our heads this very minute. Nonetheless, Weill came out last week against Too Big to Fail banks. "I’m suggesting," he told astonished reporters on a live CNBC interview, "that they be broken up so that the taxpayer will never be at risk…. What we should probably do is go and split up investment banking from banking." The interview became an instant YouTube classic. The very funniest part, I thought, was the response of Squawk Box host Andrew Ross Sorkin, the single most credulously slobbering financial reporter on the planet this side of Maria Bartiromo. Even he was so shocked by Weill’s comments that he lost his voice – "I’m speechless," he said.

European financial crisis has ripple effect on U.S. businesses - In the latest series of earnings announcements from U.S. corporations, top American brands such as Whirlpool, Ford, General Motors, Starbucks and Apple have reported disappointing revenue because of Europe’s troubles. These results, over the past two weeks, have heightened concerns on Wall Street about the health of U.S. business. The ripple effects of the European financial crisis, like its roots, are complex, but the impact on European consumers may be one of the easiest things to understand. As unemployment rates have soared — to a high of 11.2 percent in the euro zone as of Tuesday — consumer spending has plummeted. Surveys show that many Europeans, regardless of whether they have a job, have become increasingly uncertain about their economic future and are holding off on purchases of big-ticket items such as cars and appliances as well as splurges such as tech gadgets or an extra cup of coffee.

Tremendous demand for ABS paper - Asset backed securities (ABS) continue to hit the market in volume, with both high quality as well as subprime paper in high demand. Bloomberg: - Nissan Motor Co. sold $1.4 billion of bonds tied to auto loans at the lowest rate ever as the Federal Reserve’s efforts to spur economic growth reduce borrowing costs.  The company issued the top-rated securities with an average life of 1.49 years to yield 0.481 percent, the lowest financing rate for an auto company in the asset-backed market on record, according to data from Citigroup Inc. (C), the lead manager of the transaction. Though spreads on the debt were narrower in 2006, the higher lending benchmarks boosted the cost, the data show. Subprime:  Bloomnerg: - Sales of bonds tied to payments on subprime car loans are accelerating at the fastest pace in five years as investors seek high yields amid speculation the Federal Reserve will keep interest rates at record lows until mid-2015.  Led by Santander Consumer USA, issuance of $10 billion this year in asset-backed debt linked to vehicle loans to borrowers with spotty credit records compares with $8.2 billion in the same period of 2011, according to Barclays Plc. The demand is also seen in asset backed CDS rally - the "AAA" tranche of asset backed CDS index called ABX (chart below).

Spiral of banks warns of financial meltdown - Call it the financial meltdown forecaster. The team of economists who last year demonstrated that a small number of companies wield disproportional power over the global economy has now produced a simple visual tool that can monitor financial stability in real-time. Like a weather forecast, DebtRank could monitor global financial activity for telltale signs of impending disaster. Its designers say it could anticipate and so help prevent global economic crises like the events of 2008, from which the world is still reeling. Importantly, it's not just size that matters when it comes to how much risk a troubled bank poses to the financial system. Even a relatively small loss at a firm intimately connected to many other banks could cause a ripple effect that threatens the whole system.

Unofficial Problem Bank list declines to 900 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for July 27, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  As anticipated, the FDIC released its enforcement actions through June 2012, which led to many change to the Unofficial Problem Bank List. For the week, there were seven removals and two additions leaving the list at 900 institutions with assets of $349.5 billion. A year ago, the list held 995 institutions with $415.4 billion in assets. For the month of July 2012, there were 12 additions and 29 removals, with 20 from action termination, six from failure, two from unassisted mergers, and one from voluntary liquidation.

JPMorgan Chase fails to end US mortgage modification lawsuit (Reuters) - A federal judge rejected JPMorgan Chase & Co's bid to dismiss a lawsuit accusing it of misleading thousands of cash-strapped homeowners nationwide about modifying their mortgages. U.S. District Judge Richard Stearns in Boston on Friday let homeowners pursue claims that the largest U.S. bank systematically failed to keep its end of the bargain after signing up borrowers hoping to modify their mortgages under the federal Home Affordable Modification Program, or HAMP. Stearns also let stand claims that Morgan's Chase unit drove homeowners deeper into debt by prolonging the modification process through "gross ineptitude," sometimes adding fees to loans already in default and starting foreclosures while modifications were being negotiated. "(Some plaintiffs) allege that they would have fared better economically had their homes been foreclosed by Chase at the outset instead of at the end of a drawn-out and ultimately futile modification process that Chase had no real intention of honoring," Stearns wrote. "These are, of course, allegations -- but for present purposes, the court must credit them."

Lender Processing Services (LPS) Announces Settlement of CRIMINAL FELONY Case Brought by Missouri AG, Throws Former President of DOCX, Lorraine Brown, to the Wolves! - Lender Processing Services today announced that its subsidiary DocX, LLC, has reached a settlement with the Missouri Attorney General, resulting in a dismissal of the criminal charges pending against DocX, LLC. The terms of the settlement provide for, among other things, a voluntary contribution of $1.5 million to the State of Missouri, reimbursement of $500,000 to the Missouri Attorney General’s Office for its fees and costs of investigation, and a complete release of any potential liability of LPS and DocX in the State of Missouri. “This settlement is an important milestone in our ongoing efforts to resolve legal and regulatory issues related to the operations of DocX, which we closed in 2010,” said Hugh Harris, president and chief executive officer of LPS. “LPS remains focused on resolving all remaining legal and regulatory challenges as expeditiously as possible and is committed to ensuring that we continue to operate with integrity and compliance in everything we do.” Sellouts… But it gets even better! They are throwing the former president of DOCX, Lorraine Brown, to the wolves! We believe she was just following orders. There is no way she did this on her own. Another patsy takes the fall…

Can We Start the Merkley Plan Now Using TARP (And Bypass a Dysfunctional Congress)? - Senator Jeff Merkley (D-OR) has just released a new housing plan for dealing with the mortgage crisis by refinancing underwater mortgages titled "The 4% Mortgage: Rebuilding American Homeownership." This plan would create a Rebuilding American Homeownership (RAH) Trust, modeled after the HOLC plan in the Great Depression. It would buy out underwater mortgages for three years, then wind down while managing its mortgage portfolio. Underwater mortgages would have three payment options, including a 15-year 4 percent interest rate plan to help rebuild equity, a 30-year 5 percent plan like a standard mortgage, and a two-part plan that splits the loan into a first mortgage equal to 95 percent of the home's current value and a "soft second" for the rest. Here are links to the summary, the full plan and a YouTube video introduction. I think it is a great plan. Felix Salmon is also a "huge fan" of the plan and has a description of several of the positive features. Many will probably react to it like Matt Yglesias, who, after discussing the positive parts of the plan, notes that the "chances of Congress actually doing this are slim to none." But what if this plan didn't need Congress? What if the Executive Branch could do this right now, on its own?  Treasury Secretary Timothy Geithner said that he'd be willing to try to "find legal authority and resources to -- to test [the RAH] on a pilot basis."

A Step Closer to Principal Reduction at the GSEs  -- Well, well…this is potentially welcomed news.  According to hard-nosed-WSJ-housing-beat reporter Nick Timiraos, Fannie and Freddie’s regulator, the FHFA—which has heretofore argued that principal reduction was not something it wanted to add to the GSEs portfolio of loan mod programs, now finds that its benefits are considerably larger than they thought.…a new analysis by the regulator suggests that taxpayers could actually benefit from the move, according to people briefed on the findings. Fannie and Freddie could save about $3.6 billion more than current loss-mitigation approaches by reducing balances for some borrowers that owe much more than their homes are worth, these people said. The Federal Housing Finance Agency is nearing a decision on whether to allow the companies to participate in the debt-forgiveness program that it consistently has resisted. Until now, the regulator has maintained that the current housing-rescue programs offered by the taxpayer-supported mortgage companies are less-expensive options. As many as 500,000 underwater borrowers might be eligible for this new program, if the FHFA decides to go for it.  And at this point, assuming these early reports are accurate, it’s really very hard to see how they could avoid doing so without looking like they’ve just got a heavy, irrational thumb on the scale against reducing principal.

Data Show Fannie, Freddie Savings From Debt Forgiveness - As the regulator for Fannie Mae and Freddie Mac nears its decision on whether to approve debt forgiveness for troubled borrowers, a new analysis by the regulator suggests that taxpayers could actually benefit from the move, according to people briefed on the findings. Fannie and Freddie could save about $3.6 billion more than current loss-mitigation approaches by reducing balances for some borrowers that owe much more than their homes are worth, these people said. The Federal Housing Finance Agency is nearing a decision on whether to allow the companies to participate in the debt-forgiveness program that it consistently has resisted. Until now, the regulator has maintained that the current housing-rescue programs offered by the taxpayer-supported mortgage companies are less-expensive options The new analysis was done because the Treasury Department said in January it would pick up part of the tab if the companies would reduce principal balances when modifying mortgages for troubled borrowers. It would use unspent housing funds from the $700 billion Troubled Asset Relief Program. The Obama administration has argued strongly in favor of the FHFA adopting the principal-reduction program for Fannie and Freddie, saying it would provide more sustainable loan workouts. “We think there’s a set of cases where it’s clearly in the interest of the taxpayer for them to do principal reduction upfront,” said Treasury Secretary Timothy Geithner in congressional testimony earlier this year.

Fannie, Freddie Won't Cut Loan Balances - The federal regulator for Fannie Mae and Freddie Mac will not permit the taxpayer-supported mortgage giants to participate in an Obama administration program that reduces mortgage balances for certain troubled homeowners, the agency said on Tuesday. The Treasury Department, which had put heavy political pressure on the Federal Housing Finance Agency to permit the companies to participate in a limited program of debt forgiveness, immediately responded by questioning the regulator's assumptions and asking the agency to reconsider. In January, the Treasury sought to undercut concerns about the cost of such a program by offering unspent housing-aid funds to subsidize potential loan write-downs. But the regulator on Tuesday said the potential savings that a new loan-modification program might generate weren't overwhelming enough to trump potential costs, including the risk that homeowners who are current on their payments might default to seek better terms. "The potential benefit was too small and uncertain relative to known and unknown costs and risks," said Edward DeMarco, the FHFA's acting director, in a briefing on Tuesday. The decision marks the most public disagreement between the Federal Housing Finance Agency and the Treasury Department, which seized Fannie and Freddie four years ago.

Why is Ed DeMarco Blocking a Win-Win Housing Program? -- Underwater homeowners would obviously benefit from having their liability reduced, but mortgage lenders would also, in theory, benefit because principal reduction is usually much less expensive than the foreclosure process — and severely underwater homeowners are much more likely to default on their loans than are those who have some equity. Even if you’re not an underwater homeowner, this pertains to you because American taxpayers — through the government’s conservatorship of Fannie Mae and Freddie Mac — own or guarantee roughly 60% of the outstanding mortgages in America. So if proponents of principal reduction are correct, implementing such a plan through Fannie and Freddie would save taxpayers money, help out struggling homeowners, and stimulate the broader economy. So why haven’t we implemented this? The man in charge of Fannie and Freddie, FHFA Acting Director Ed DeMarco, doesn’t see eye to eye with the principal reduction crowd. He has argued that existing programs put forward by the Treasury and FHFA are just as effective as principal reduction, and that a program of principal reduction would attract dishonest “strategic modifiers” who would abuse a program they don’t actually need. If enough people did this, DeMarco has argued, the program would no longer be cost effective for the taxpayer, and therefore counter to his Congressional mandate to limit taxpayer losses.

The Black Financial and Fraud Report: Agency Says No to Mortgage Relief -  William K. Black The latest installment: Video Via therealnews.com

Fire Ed DeMarco, by Paul Krugman -DeMarco heads the Federal Housing Finance Agency, which oversees Fannie and Freddie. And he has just rejected a request from the Treasury Department that he offer debt relief to troubled homeowners — a request backed by an offer by Treasury to pay up to 63 cents to the FHFA for every dollar of debt forgiven. DeMarco’s basis for the rejection was that this forgiveness would represent a net loss to taxpayers, even if his agency came out ahead. That’s a very arguable point even on its own terms, because the paper he cited (pdf) in support of his stance took no account of the positive effects on the economy of debt relief — even though those effects are the main reason for offering such relief. Since a reduction in debt burdens would strengthen the economy, this would mean greater revenue — and this might well offset any losses from the debt forgiveness itself.Furthermore, even if there’s a small net cost to taxpayers, debt relief is still worth doing if it yields large economic benefits. In any case, however, deciding whether debt relief is a good policy for the nation as a whole is not DeMarco’s job. His job — as long as he keeps it, which I hope is a very short period of time — is to run his agency. If the Secretary of the Treasury, acting on behalf of the president, believes that it is in the national interest to spend some taxpayer funds on debt relief, in a way that actually improves the FHFA’s budget position, the agency’s director has no business deciding on his own that he prefers not to act. This guy needs to go.

Why “Firing Ed DeMarco” is No Solution to FHFA Refusal to Engage in Principal Modifications (Updated) Yves Smith - Today, Acting FHFA Director Ed DeMarco wrote to Congress, after due consideration, reaffirming his position that he will not permit Fannie and Freddie to lower principal balances of mortgages of borrowers that are delinquent. This is despite the fact that the top analyst in this space, Laurie Goodman, has determined that principal modifications are the most effective form of mortgage modification, resulting in much lower refault rates than interest rate mods or capitalization mods. And that makes sense. Why should a borrower struggle to hang on to a home when even if they make all the payments, when they sell they they are stuck with a big tax bill? And as we’ve stressed, private label investors are overwhelmingly in favor of deep principal mods for viable borrowers, and that’s because foreclosure is costly and leaves them worse off. So it’s more that a bit puzzling to see DeMarco nix principal mods, particularly in light of a Treasury program that provides subsidies to investors of 18% to 63% of the amount forgiven, depending on the loan to value ratio of the loan. With those kinds of bribes subsidies, how could DeMarco say no? Well, DeMarco has. His logic is twofold. First, bag considering the subsidies, they are just a transfer from one pocket (Treasury) to another (Fannie and Freddie) and therefore don’t count as far as the conservatorship mandate of saving taxpayer dollars is concerned. Second, he goes into dueling model mode, and not being able to see his model an d model assumptions, one can’t tell how hard his team has gone in tweaking assumptions to produce the desired result.  He concedes in his letter that if you do mods for borrowers that are now delinquent, you see a “small” net benefit. However, he contends the taxpayer could come up much worse off if people who were current defaulted in order to qualify. His bottom line: “We concluded that the potential benefit was too small and uncertain, relative to the known and unknown costs and risks.”

More DeMarco - Krugman - OK, I’ve slogged through the technical appendix (pdf) from the FHFA on the proposed debt relief, and while it’s eye-glazing reading, it makes DeMarco’s stonewalling even more outrageous. The key point is that in the agency’s base case (Table 11) taxpayers actually gain $1 billion from loan modifications, because they reduce the number of defaults. And the FHFA gains $3.7 billion, because of aid from Treasury. Now, DeMarco argues that “strategic defaults” — people deciding to stop payments on underwater homes in the hope of entering the program — could turn this into a net loss for taxpayers. Maybe, although there’s very little evidence that this would be important — and as I’ve already emphasized, you should also take the positive effect on the economy, and hence on revenue, into account. More to the point, it would take a lot of strategic defaulting to turn the thing into a loss for the FHFA, as opposed to taxpayers more generally. And DeMarco is, once again, charged with running his agency, not making national fiscal policy. So we have an administrator refusing to implement the president’s policy, even though it would actually improve his agency’s finances, and even though his own staff says that it would probably help the federal budget as a whole too, because he doesn’t feel like it.

Debt, Depression, DeMarco, by Paul Krugman - This week’s shocking refusal to implement debt relief by the acting director of the Federal Housing Finance Agency — a Bush-era holdover the president hasn’t been able to replace — illustrates perfectly what’s going on. Some background: many economists believe that the overhang of excess household debt, a legacy of the bubble years, is the biggest factor holding back economic recovery. ... And the obvious place to provide debt relief is on mortgages owned by Fannie Mae and Freddie Mac. The idea of using Fannie and Freddie has bipartisan support. But Edward DeMarco, the acting director of the agency that oversees Fannie and Freddie, refuses to move on refinancing. And, this week, he rejected the administration’s relief plan. Who is Ed DeMarco? He’s a civil servant who became acting director of the housing finance agency after the Bush-appointed director resigned in 2009. He is still there, in the fourth year of the Obama administration, because Senate Republicans have blocked attempts to install a permanent director. And he evidently just hates the idea of providing debt relief.

U.S. housing policy: “Absolutely insane” - If you were to read the headlines on the ongoing foreclosure crisis, you’d get very confused. Are “Foreclosure Filings Increasing in 60% of Large U.S. Cities,” as Bloomberg reports? Are “Foreclosure Machines Still Running on ‘Low,’” as the Wall Street Journal says? Or are we in the midst of a “Foreclosure Surge,” as CBS News would have us believe? The answer, unfortunately, is that we don’t really know.Six years after the foreclosure crisis began in earnest, “it’s impossible to get reliable, comprehensive information on foreclosures.” The government is still not effectively measuring the single biggest weight on the American economy, the foreclosure epidemic that has claimed millions of homes. There are four separate widely followed private foreclosure tracking services — Corelogic, LPS, RealtyTrac, and the Mortgage Banker’s Association National Delinquency Survey. Each has problems, and none is comprehensive. There are also government sources for foreclosures. The Office of the Comptroller of the Currency, which regulates national banks, has a widely cited Mortgage Metric Report. The data for that report comes from the big mortgage services, and it is “rigorously reviewed”, according to Bryan Hubbard, spokesman for the OCC. It’s considered good data, but it covers only 50 to 60 percent of the market, the part controlled by services regulated by the OCC. The FHFA tracks some limited data around Fannie and Freddie loans, and the VA and FHA track some data around loans guaranteed by those agencies. But like the private data services, none of these foreclosure sources are comprehensive.

California Passes Homeowners Bill of Rights - Am I dreaming? Wow! I really like this new Homeowners Bill of Rights, and I’m thrilled to see California passing AB 278 and SB 900. These are just two new bills that take effect on January 1, 2013 and require the banks to clean up their act. There are a couple of others pending that I haven’t read up on but may include in a later post. There three things I REALLY like about these bills: 1) the enforcement provision. We all know what happened under HAMP — it had no teeth. I’m pleased to see the legislation including a provision that gives homeowners some traction to get an injunction to stop a sale;  (2) borrowers may be entitled to recover attorneys fees; and 3) filing multiple unrecorded documents may subject the banks to $7,500.00 per loan. Filing statutory complaints against these entities is also allowed in addition to any legal action you might take.

A Presidential Candidate Willing to Get Arrested to Fight Foreclosure Abuse - It is not quite true that a third-party presidential candidate has to get arrested to get attention from the media. Dr. Jill Stein, the Green Party’s nominee for the presidency this year, has gotten her share of attention—in part because she is a genuinely impressive contender, in part because her campaign has been strikingly focused and professional in its approach. But Stein got a good deal of attention Wednesday for a good reason. She was busted with fellow Greens and activists from the Poor People’s Economic Human Rights Campaign outside the Philadelphia office of Fannie Mae, the government-backed mortgage lender that is foreclosing on precisely the people it is supposed to help. Most politicians avoid saying—let alone doing—anything of consequence regarding the foreclosure crisis. But Stein, her vice presidential running-mate (Cheri Honkala, who last year mounted a campaign for sheriff in Philadelphia as part of an anti-foreclosure fight), labor lawyer James Moran and Sister Margaret McKenna of the Medical Mission Sisters were arrested after attempting to gain access to the Fannie Mae office through an adjacent financial institution on Philadelphia’s “Bankers Row.”  The charge was one that any activist would be proud of: “defiant trespassing.”

Housing crisis datapoint of the day, tax-relief edition - In 2007, it became clear to Congress that there was a serious mortgage crisis, with lots of underwater borrowers. And it was also obvious that an important part of working through the mess would comprise some combination of short sales and principal reductions. Thus was the Mortgage Forgiveness Debt Relief Act of 2007 born. Until the act was passed, any lender offering a short sale or a principal reduction would in doing so leave the homeowner with a massive tax bill, since the written-off debt would count as simple income for income-tax purposes. In 2007, however, no one had a clue how long the mortgage crisis would drag on for, or how slow lenders would be to offer principal reduction. The original act expired at the end of 2009; it was then extended, through the end of 2012. But here we are, in August 2012, and principal reductions are only just beginning in earnest. David Dayen has a good piece on the expiry of the tax break, including the interesting nugget that the CBO has put the cost of extending it for two more years at $2.7 billion. If the average underwater homeowner pays a marginal tax rate of 20%, then that means the CBO expects write-downs from principal reductions and short sales of somewhere in the $10 billion to $15 billion range during 2013 and 2014. And this, remember, is six years after the housing bubble burst.

CoreLogic® Reports 60000 Completed Foreclosures in June - CoreLogic today released its National Foreclosure Report for June, which provides monthly data on completed foreclosures and the overall foreclosure inventory. According to the report, there were 60,000 completed foreclosures in the U.S. in June 2012 compared to 80,000 in June 2011 and 60,000* in May 2012. Since the financial crisis began in September 2008, there have been approximately 3.7 million completed foreclosures across the country. Completed foreclosures are an indication of the total number of homes actually lost to foreclosure. Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory as of June 2012 compared to 1.5 million, or 3.5 percent, in June 2011. Month-over-month, the national foreclosure inventory was unchanged from May 2012 to June 2012. The foreclosure inventory is the share of all mortgaged homes in some stage of the foreclosure process. "While completed foreclosures and real-estate owned (REO) sales virtually offset each other over the past four months, producing static levels of foreclosure inventory for most of this year,  they are beginning to diverge again," said Mark Fleming, chief economist for CoreLogic.  "Over the last two months REO sales declined while completed foreclosures leveled out. So we could see foreclosure inventory rising going forward."

The real story behind RealtyTrac’s foreclosure data - The online database calculates foreclosure rates by first looking at the total number of single-family properties that began the foreclosure process, called foreclosure filings, within a certain period. Those filings are matters of public record and collected by RealtyTrac, said Daren Blomquist, a vice president and spokesman for the Irvine, Calif.-based firm. In Arizona, such public documents can include notices of trustee sales, and are usually filed with the county recorder’s office. “We take the total number of properties with foreclosure filings and then divide that by the total number of housing units in the metro area or state,” Blomquist said. While no piece of research is without even a minor flaw, the second part of the equation is where the foreclosure rate calculation may be problematic. The total number of housing units in a certain area come from the U.S. Census Bureau, and Thursday’s report was based off of the agency’s 2010 estimates. Other than the fact that the property count is two years old, the other issue is using the number of all standing homes. If every single-family home in an area had a mortgage, then RealtyTrac’s calculations would be a very accurate depiction of foreclosure activity in an area. But especially given the number of distressed homes that have been, and continue to be, snatched up by investors who generally pay in cash, the RealtyTrac report’s accuracy must be called into question.

Another Way Banks Abuse Homeowners and Distort Markets: Refusing to Take Title to Foreclosed Properties - If there’s any way for banks to cut the cake to work to their advantage, they do. One example that has not gotten attention is that servicers will complete all the steps of a foreclosure, sometimes even scheduling the sheriff’s sale, and then not put in a bid. The reason? The home is of so little value that at even a $100 price, the bank deems it to be not worth the trouble.  But keeping houses in limbo is a horrorshow for the old homeowner, who unknown to them, still owns the property (meaning they could have lived in in it and maintained it, preventing neighborhood blight) and is still on the hook for property taxes. And of course, these abandoned homes damage the value of neighboring properties.  And needless to say, because they aren’t on the market, these houses are also not considered to be part of official inventories. Foreclosure experts in Florida have told me they see a lot of houses where the banks take the home up to the final step of foreclosure, then let it languish. This story, from Cleveland.com via April Charney, is confirmation that this is a broader phenomenon. Notice that this is a long standing practice; the article cites examples dating from 2006 and 2007.

Fannie Mae and Freddie Mac Serious Delinquency rates declined in June -- Fannie Mae reported that the Single-Family Serious Delinquency rate declined in June to 3.53% from 3.57% May. The serious delinquency rate is down from 4.08% in June last year, and this is the lowest level since April 2009. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined in June to 3.45%, from 3.50% in May. Freddie's rate is only down from 3.50% in June 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  These are loans that are "three monthly payments or more past due or in foreclosure". Although this indicates some progress, the "normal" serious delinquency rate is under 1%, so there is a long way to go. At the current rate of decline, Fannie will be back to "normal" in 2015, and Freddie in 2020.

MBA: Refinance Activity Highest in Three Years -- From the MBA: Refinance Applications Increase Again to Three-Year High in Latest MBA Weekly Survey The Refinance Index increased 0.8 percent from the previous week to its highest level since the week ending April 17, 2009. The slight increase in refinance activity was muted by a 6 percent drop in government refinance applications, while conventional refinance activity increased about 2 percent over the week. The seasonally adjusted Purchase Index decreased about 2 percent from one week earlier.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.75 percent from 3.74 percent, with points increasing to 0.51 from 0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate increased from last week. The first graph shows the MBA mortgage purchase index. The purchase index has been mostly moving sideways over the last two years.  Yesterday Zillow reported record low mortgage rates in their survey: "The 30-year fixed mortgage rate on Zillow(R) Mortgage Marketplace is currently 3.34 percent, down one basis point from 3.35 percent at the same time last week." The second graph shows the refinance index. The refinance index is at the highest level in three years.

Another measure of household formation and vacancy rates - It is difficult to find good and timely data on the number of household formations in the US, and also for the number of excess vacant housing units. The decennial Census is probably the best measure (and also the ACS), but those two estimates aren't consistent (the Census Bureau is looking into the reasons why). Another Census Bureau survey, the Housing Vacancies and Homeownership (HVS) is clearly flawed. The HVS indicates that the number of occupied households increase by 809 thousand over the last year - and that seems too low. Jed Kolko, chief economist at Trulia, has been looking at Postal Service data: Housing Glut or Housing Shortage? America’s Got Both With this post, we present a new measure of vacancies, based on U.S. Postal Service (USPS) monthly data on the number of addresses that are and are not receiving mail. ... Here’s what we found. Nationally, the number of occupied housing units – that is, those receiving mail – rose by 970,000 in the last year, from mid-July 2011 to mid-July 2012. Over the same period, the total number of housing units – those that could receive mail – rose by 760,000. The difference – 210,000 – is the reduction in the number of vacant units. That’s a 5% drop in the number of vacant units nationally. As a percentage of all units, the vacancy rate declined from 3.6% one year ago to 3.4% now.

Home Prices in US Fell Less Than Forecast in Year to May - Residential real estate prices declined less than forecast in the year ended May, another sign that the housing market is on the mend.  The S&P/Case-Shiller index of property values in 20 cities decreased 0.7 percent from May 2011, the smallest 12-month fall since September 2010, after dropping 1.8 percent in the year ended April, the group said today in New York. The median forecast of 29 economists in a Bloomberg News survey projected a 1.4 percent fall.  Stabilizing prices could help drive a housing market that’s starting to recover three years after the end of the recession. Federal Reserve policy makers have said residential construction is a bright spot in the recovery, even as analysts say choppy sales of distressed properties are making it difficult to gauge the trend in home prices.

Case Shiller: House Prices increased 2.2% in May - S&P/Case-Shiller released the monthly Home Price Indices for May (a 3 month average of March, April and May). From S&P: Home Prices Continue to Rise in May 2012 According to the S&P/Case-Shiller Home Price Indices Data through May 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that average home prices increased by 2.2% in May over April for both the 10- and 20-City Composites. With May’s data, we found that home prices fell annually by 1.0% for the 10-City Composite and by 0.7% for the 20-City Composite versus May 2011. Both Composites and 17 of the 20 MSAs saw increases in annual returns in May compared to April. ... All 20 cities and both Composites posted positive monthly returns. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 32.6% from the peak, and up 0.9% in May (SA).  The Composite 20 index is off 32.3% from the peak, and up 0.9% (SA) in May. The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

A Look at Case-Shiller, by Metro Area -- Home prices showed fresh signs of stabilization in May, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 2.2% in May from the previous month and fell just 0.7% from a year earlier. Although prices continue to fall on an annual basis, the rate has slowed indicating that home prices may be close to posting year-over-year gains. Twelve of the 20 cities posted annual increases in May.  None of the cities posted a monthly decline in May. Partly that’s because May is the heart of the strong spring selling season when prices traditionally move higher. But on a seasonally adjusted basis, which aims to correct for the variation, 18 of the 20 cities still posted monthly gains. Just Detroit and Charlotte posted drops on a seasonally adjusted basis. The overall 20-city index was up 0.9% from the previous month by that metric. Read the full S&P/Case-Shiller release.

House Price Comments, Real House Prices, Price-to-Rent Ratio --Here is another update to a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 to 2001 levels depending on the index. The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through May) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, and the Case-Shiller Composite 20 Index (SA) is back to August 2003 levels, and the CoreLogic index (NSA) is also back to August 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to March 2001, and the CoreLogic index back to May 2000. As we've discussed before, in real terms, all of the appreciation early in the last decade is gone.This graph shows the price to rent ratio (January 1998 = 1.0). On a price-to-rent basis, the Case-Shiller National index is back to Q4 1998 levels, the Composite 20 index is back to May 2000 levels, and the CoreLogic index is back to June 2000.

Is Housing Recovery Real? Not Everyone Is Convinced - Housing, the sector that led us into the recession, now looks to be one of the brighter spots in the economy. Homebuilding is at its highest level in nearly four years. More homes are selling, and at higher prices. The question, of course, is whether this is a solid enough foundation to sustain a full housing recovery. Lawrence Yun, the chief economist for the National Association of Realtors, says housing woes are largely behind us. "It's been a harsh downturn, but the downturn is over," he says. "Now we're beginning to turn the corner. [The] question is: How fast will we be turning that corner?" He points to increased home sales, rising rents and low interest rates among several reasons why he's certain the housing market is pointing in the right direction. And low inventories mean that price increases "will surely be sustainable," he says. Yun says it may be counterintuitive, but in places like Las Vegas, Phoenix and southern California, the number of homes for sale is at a fraction of where it should be in a normal market, and the competition among buyers is fierce. And, he says, this housing recovery isn't just regional. Across the country, demand for homes is driven by investors as well as millions of families who put off buying a home in recent years until the market started to improve.

Robert Shiller Questions Whether Housing Has Bottomed, Sees Possible Bubbles - Robert Shiller of the Case Shiller Index, spoke to Fox Business earlier this week. In this short chat, he stresses that the rise in housing prices so far this year look very encouraging, but could prove to be seasonal. He also points out that he is seeing what may be early bubble behavior in San Francisco and Phoenix, and even in Chicago and Atlanta. If that is indeed happening, it’s not a bug but a feature. As many commentators, including yours truly, have pointed out, Greenspan was concerned about the deflationary impact of the dot com bust (somehow failing to recognize that a speculative bubble that is not fueled by debt is far less destructive than one turbocharged by borrowing, since the second type blows back to the financial system). Remember Ben Bernanke’s famous 2002 “Helicopter Ben” speech? Its title was “Deflation: Making Sure “It” Doesn’t Happen Here.” The Fed cut rates, not in its normal recession pattern of driving them really low for one quarter, at the very most two, but for an unheard of full nine quarters. The Fed was perversely indifferent to the housing bubble that resulted from overly loose money and overly lax regulation. Even in 2006, Bernanke maintained that there was nothing to worry about, that even though consumer debt levels has risen, consumer balance sheets were fine….because he thought the worse that could happen was that housing prices remained flat for a few years. So a replacement housing bubble would be perfect, as far as the Fed is concerned.

Lawler: Expect "significant" upward revisions for Q2 New Home Sales - From economist Tom Lawler: D.R. Horton, the largest US home builder in 2011, reported that net home orders in the quarter ended June 30th, 2012 totaled 6,079, up 24.7% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 23% last quarter, down from 27% a year ago. Home deliveries last quarter totaled 4,957, up 8.8% from the comparable quarter of 2011, Standard Pacific Corp., the 13th largest US home builder in 2011, reported that net home orders in the quarter ended June 30th, 2012 (ex JVs) totaled 1,108, up 45.0% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 11% last quarter, down from 14% a year ago. Home deliveries totaled 815, up 33.6% from the comparable quarter of 2011, at an average sales price of $337,000, up 0.6% from a year ago. Here are some summary stats of orders, deliveries, and backlog for builders who have reported results for last year.Obviously, the net orders of the above builders showed considerably stronger YOY growth than 19.5% (not seasonally adjusted) YOY growth rate for Q2/12 reported in the preliminary Census Bureau’s new SF home sales reports. While Census’ treatment of cancellations differs from the builders’ net orders, and while historical data suggest there may be a timing difference between when a builder records a sale vs. when Census counts a home as sold, these results in my view suggest (based on past relationships) that Census new SF home sales numbers for the second quarter of 2012 will be revised upward significantly — and by about the same about as Q1 sales were revised upward from the March new SF sales report.

Lawler on Manufactured Housing - From Tom Lawler: The Commerce Department estimated that manufactured housing shipments ran at a seasonally adjusted annual rate of 54,000 in June, down from 56,000 in May. In the first five months of 2012 manufactured housing shipments ran at a SAAR of 57,000, up from 51,600 in 2011 but just a fraction of the pace prior to last decade’s collapse. The Commerce Department also estimated that manufactured housing placements ran at a SAAR of 47,000 in May, down from 51,000 in April. In the first five months of 2012 manufactured housing shipments ran at a SAAR of 52,200, up from 47,000 in 2011. Here is a graph from Lawler showing the annual manufactured housing shipments since 1959. The column for 2012 is the annual sales rate for the first six months of the year. Although sales are running at about a 10% increase over last year, shipments in 2012 will still be the fourth lowest on record behind only 2009, 2010, and 2011.

Construction Spending in June: Private spending increases, Public Spending flat - This morning the Census Bureau reported that overall construction spending increased in June:  The U.S. Census Bureau of the Department of Commerce announced today that construction spending during June 2012 was estimated at a seasonally adjusted annual rate of $842.1 billion, 0.4 percent above the revised May estimate of $838.3 billion. The June figure is 7.0 percent above the June 2011 estimate of $786.8 billion. Private construction spending increased while public spending was flat: Spending on private construction was at a seasonally adjusted annual rate of $567.9 billion, 0.7 percent above the revised May estimate of $564.2 billion.  In June, the estimated seasonally adjusted annual rate of public construction spending was $274.2 billion, nearly the same as the revised May estimate of $274.1 billion. This graph shows private residential and nonresidential construction spending, and public spending, since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending is 61% below the peak in early 2006, and up 19.4% from the recent low. Non-residential spending is 27% below the peak in January 2008, and up about 33% from the recent low. Public construction spending is now 16% below the peak in March 2009 and near the post-bubble low.  The second graph shows the year-over-year change in construction spending.

Vital Signs Chart: Private Nonresidential Drives Construction Spending - Construction spending rose again in June, the latest sign of improvement in the housing market. Total U.S. construction spending increased 0.4% to an $842 billion annual rate in June, up 7% from a year ago. Construction outlays were driven mostly by private residential builders, while spending on nonresidential construction such as offices barely climbed. The residential activity helped offset falling construction by the federal government.

NMHC Apartment Survey: Market Conditions Tighten in Q2 2012 - From the National Multi Housing Council (NMHC): Apartment Market Hot Streak Continues For the sixth quarter in a row, the apartment industry improved across all indexes in the National Multi Housing Council’s (NMHC) Quarterly Survey of Apartment Market Conditions. The survey’s indexes measuring Market Tightness (76), Sales Volume (54), Equity Financing (58) and Debt Financing (77) all measured at 50 or higher, indicating growth from the previous quarter. “The apartment sector’s strength continues unabated,” said NMHC Chief Economist Mark Obrinsky. “Even as new construction ramps up, higher demand for apartment residences still outstrips new supply with no letup in sight. Despite the need for new apartments, acquisition and construction finance remains constrained in all but the best properties in the top markets.”  This graph shows the quarterly Apartment Tightness Index. Any reading above 50 indicates tightening from the previous quarter. The index has indicated tighter market conditions for the last ten quarters and suggests falling vacancy rates and or rising rents.  This fits with the recent Reis data showing apartment vacancy rates fell in Q2 2012 to 4.7%, down from 4.9% in Q1 2012, and down from 9.0% at the end of 2009. This was the lowest vacancy rate in the Reis survey in over 10 years.

Office rental market in the US has stalled; some metro areas remain tight - The recovery in US office property rental market some were expecting has not materialized. The market is stable, but vacancy rates have stalled and net absorption rate (the rate at which rentable properties are leased out) declined in Q2. Reis Reports: - High hopes for an ongoing recovery in the U.S. office sector were frustrated in the second quarter as vacancy remained unchanged at 17.2%, this despite a respectable 4 million plus square feet increase in occupied space. Expectations for higher rents were similarly dashed with the quarter’s feeble showing of just 0.3% gains in both asking and effective averages. As a result, rents still remain stuck at levels last seen in 2007

Cracks Visible in U.S. Consumer Facade - Given their recent performances, U.S. consumers aren’t going to win gold. Tuesday’s data didn’t possess the “free-fall” feeling of some recent factory reports, but they do suggest consumers are both skittish and stingy. Given that household spending accounts for about two-thirds of demand in the U.S. economy, the outlook is dimming for growth in at least the third quarter and possibly the fourth as well. Consumers need both cash and confidence to lift spending. And on the surface, that would seem to be the case. Personal income managed a solid 0.5% gain in June from the previous month, the Commerce Department said, and the Conference Board‘s consumer confidence index unexpectedly rose to 65.9 in July from 62.7 in June. But a closer examination show cracks in the facade. Annual growth in personal income has slowed to just 3.5% in June, from 5.1% a year earlier. Revisions lowered the level of income in the 2009-2011 period. Meanwhile, consumer confidence remains at a historically low level, according to the Conference Board. Readings in the 90s were more typical at this stage of the 2000s economic expansion. Moreover, economists at Well Fargo say they suspect confidence could fall in coming months thanks to the recent rise in gasoline prices, more uncertainty about the euro-zone situation and “increased political rhetoric around the impending fiscal cliff” in the U.S. The fiscal cliff refers to tax increases and spending cuts scheduled to take effect at the start of 2013.

US Consumer Spending Flat, Income Up 0.5% in June — Americans spent no more in June than they did in May, even though their income grew at the fastest pace in three months. The lack of growth in spending follows a decline in the previous month, suggesting consumers are staying cautious with their money as they economy weakens. Income rose 0.5 percent, the Commerce Department said in its June report on consumer spending and income. That was the biggest gain since March and was driven by a 0.5 percent increase in wages, the largest component of income. After-taxes and adjusting for inflation, income grew 0.3 percent. The extra money in June paychecks went straight to savings. The savings rate rose to 4.4 percent in June, the highest level in a year. Slower growth in consumer spending this spring was the main reason the economy grew at an annual pace of just 1.5 percent in the April-June quarter. That’s less than the 2 percent growth rate in the January-March quarter this year. Consumer spending drives roughly 70 percent of growth.

Personal Income Rebounds In June With Flat Consumer Spending -- Disposable personal income (DPI) is rising again, but consumption remains flat. That’s the message in today’s update for the June income and spending report from the Bureau of Economic Analysis. The trend is certainly encouraging on the income front. But the unchanged level of personal consumption expenditures (PCE) is a problem if it continues. Then again, it's not surprising that the public is inclined to save these days. The paradox of thrift may be a bigger problem in the months ahead if the urge to save rolls on and/or accelerates. But the fact that DPI has made an impressive rebound in terms of its growth rate in June suggests that it's still premature to expect the worst. Savings mixed with higher income is hardly a sign of an economic apocalypse. Then again, one month alone never tells us much. With that caveat in mind, here's how the last 12 months compare for DPI and PCE. The revival in income offers encouragement, or so it appears, but the monthly numbers are subject to lots of volatility and so it's hard to see through the noise.  Rolling one-year percentage changes offer a clearer picture of what's been going on. As the second chart below shows, DPI is looking healthier these days on a year-over-year basis. PCE is merely flat lining in terms of changes in its annual pace, but that's better than the descent that was the norm in previous months. Indeed, PCE stuck at roughly 3.5%, as it has been for the last two months, isn't exactly a danger sign for the business cycle.

Personal Income increased 0.5% in June, Spending decreased slightly - The BEA released the Personal Income and Outlays report for June:  Personal income increased $61.8 billion, or 0.5 percent ... in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $1.3 billion, or less than 0.1 percent. ... Real PCE -- PCE adjusted to remove price changes -- decreased 0.1 percent in June, in contrast to an increase of 0.1 percent in May. ... PCE price index -- The price index for PCE increased 0.1 percent in June, in contrast to a decrease of 0.2 percent in May. The PCE price index, excluding food and energy, increased 0.2 percent, compared with an increase of 0.1 percent. ... Personal saving -- DPI less personal outlays -- was $529.5 billion in June, compared with $472.4 billion in May. The personal saving rate -- personal saving as a percentage of DPI -- was 4.4 percent in June, compared with 4.0 percent in May. The following graph shows real Personal Consumption Expenditures (PCE) through June (2005 dollars). Note that the y-axis doesn't start at zero to better show the change. . This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE. A key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up 1.8%.

Analysis: Cautious Consumers Hold Back Spending - Mesirow Financial Chief Economist Diane Swonk talks with Jim Chesko about this morning’s report showing that Americans’ personal income rose 0.5% in June, but spending slipped by about 0.1%.

Vital Signs Chart: Cautious Consumers Saving More - The saving rate is rising as many Americans brace for economic trouble. The personal saving rate — which looks at what consumers have left after spending and taxes — jumped to 4.4% in June from 4% a month earlier. That is the highest level since June 2011. Despite catching a break in gasoline prices, consumers have been saving for a rainy day.

Reading (And Misreading) Real Consumer Spending In June - A number of pundits today were quick to declare that the business cycle had finally rolled over last month because consumer spending fell slightly in June, as noted in this morning's update via the Bureau of Economic Analysis. One blogger insisted—insisted!—that the 0.1% decline last month in real (inflation-adjusted) personal consumption expenditures (PCE) was a clear and unambiguous death knell for U.S. economic growth. But in the rush to judgment, some analysts are overlooking a few things. Let's consider June's -0.1% drop in real PCE in terms of history. Although no one at this stage will see last month's retreat as encouraging, it's premature to claim that it's a smoking gun. Monthly declines are hardly unusual in periods of growth. Indeed, as the chart below reminds, looking at monthly changes in real (or nominal) PCE is only slightly more valuable than tossing a coin for insight about what happens next. Ergo, there's a reason why looking at year-over-year percentage changes are so valuable—essentially, really—for evaluating economic indicators: a lot of the short-term noise is stripped away. Let's consider real PCE again in terms of its annual changes, as shown below. Note that the case for deep, dark pessimism looks a lot less compelling in the second chart. In fact, the 12-month change in real PCE actually ticked up last month, rising 2.0% vs. its year-earlier level—the best pace since last October.

Personal Consumption Expenditures: Price Index Update - The monthly Personal Income and Outlays report for June was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. The latest Headline PCE price index year-over-year (YoY) rate of 1.52% is a fractional increase from last month's 1.50% (a downward revision from 1.52%). The Core PCE index of 1.80% is a decrease from the previous month's 1.75% (a downward revision from 1.82%).  I've calculated the index data to two decimal points to highlight the change more accurately. PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  In the past, a core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve's price-stability mandate. However, the Fed has now explicitly identified 2% as the long-term target: For a long-term perspective, here are the same two metrics spanning five decades.

Real Disposable Income Per Capita: A Seven-Month Positive Trend  - Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. Now let's take a look at a major component of today's PCE report for an update on a key driver of the U.S. economy: "Real" Disposable Income Per Capita. Note that today's report includes the BEA's annual revisions, which impact the data since January 2009. As I'll illustrate below, today's extensive revisions, while mostly lowering the monthly data, give a more encouraging view of the trend in recent months. Adjusted for inflation, per-capita disposable incomes have struggled for the past two years and are currently at about the level first achieved in December of 2007, the month the Great Recession began. In recent months, however, we're seeing an encouraging reversal of the gradual decline during most of 2011. The interim trough was in November of 2011. Seven months later, real DPI per capita is up 1.81%. Month-over-month June real DPI per capita growth is up 0.27% and 0.96% year-over-year. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.  For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.   Nominal disposable income is up 49.9% since then. But the real purchasing power of those dollars is up a mere 15.3%.

Vital Signs Chart: Mixed July Retail Sales -  Sales at retailers were a mixed bag in July. The 18 companies tracked by Thomson Reuters reported a 4.6% rise in same-store sales, higher than in June but less than the 5.0% rate in July of last year. Several retailers posted strong sales, though some struggled before the key back-to-school season. Weak spending is one of the biggest drags on the economy.

Recovery's pace may depend on worried wealthy - The shaky economic recovery may depend on wealthy consumers to keep spending — and they may not have the confidence to do the job.That's one upshot of Friday's report on second-quarter economic growth, which showed U.S. gross domestic product rose 1.5%, down from 2% in the first quarter and a newly revised 4.1% in the last three months of 2011. Growth in investment is slowing and government spending is down. That leaves consumption, which was 71% of GDP last year, to pick up the slack. But consumers with the most to spend have just as little confidence in the economy as everyone else, some surveys show. The Thomson Reuters/University of Michigan Survey of Consumers shows that the consumer confidence index among those who make more than $75,000 annually has fallen 20% since last year. Even confidence among millionaires has dropped to a nine-month low, according to market researcher Spectrem Group. And it is beginning to show up in spending, too. A Gallup survey says consumers making $90,000 or more report spending $20 less per day on discretionary expenses in June than a year ago. 

US Consumers More Confident in The Economy in July - U.S. consumer confidence rose in July after four months of declines, as a brighter outlook for short-term hiring offset longer-term worries about the economy.  The Conference Board says its Consumer Confidence Index increased to 65.9, from 62.7 in June. That’s the highest reading since April and better than the reading of 62 that economists had forecast.  Still, the index remains well below 90, which indicates a healthy economy. It hasn’t been near that level since the Great Recession began in December 2007. The index fell to an all-time low of 25.3 in February 2009 — four months before the recession officially ended.  Consumer confidence is widely watched because consumer spending drives 70 percent of U.S. economic activity.

Consumer confidence rises in July (Reuters) - Consumer confidence unexpectedly rose in July as Americans were more optimistic about the short-term outlook than they were about their current conditions, according to a private sector report released on Tuesday. The Conference Board, an industry group, said its index of consumer attitudes climbed to 65.9 from a upwardly revised 62.7 in June, topping economists' expectations for a decline to 61.5. June was originally reported as 62.0. Despite the improvement, confidence still remains at historically low levels, Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement. "While consumers expressed greater optimism about short-term business and employment prospects, they have grown more pessimistic about their earnings. Given the current economic environment - in particular the weak labor market - consumer confidence is not likely to gain any significant momentum in the coming months," said Franco. The expectations index improved to 79.1 from 73.4, while the present situation index edged down to 46.2 from 46.6. Consumers' labor market assessment was mixed as the "jobs plentiful" index slipped to 7.8 percent from 8.3 percent, while the "jobs hard to get" index also fell to 40.8 percent from 41.2 percent.

July Consumer Confidence: The Mood Improves Slightly - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through July 19. This is an increase from last month's 62.7, which is a tiny upward revision from the Conference Board's previously reported 62.0. Here is an excerpt from the Conference Board report: "Despite this month's improvement in confidence, the overall Index remains at historically low levels. Consumers' attitude regarding current conditions was little changed in July, but their short-term expectations, which had declined last month, bounced back. Those claiming business conditions are "good" declined to 13.8 percent from 14.2 percent, while those saying business conditions are "bad" decreased to 34.2 percent from 35.9 percent. Consumers' assessment of the labor market was also mixed. Those stating jobs are “hard to get" declined to 40.8 percent from 41.2 percent, while those claiming jobs are "plentiful" decreased to 7.8 percent from 8.3 percent.  [press release] Let's take a step back and put Lynn Franco's interpretation in a larger perspective. The table here shows the average consumer confidence levels for each of the five recessions during the history of this monthly data series, which dates from June 1977. The latest number is well above the bottom of the unprecedented trough in 2008, but it is still below the 69.4 average confidence of recessionary months three years after the end of the Great Recession (based on the official call of the National Bureau of Economic Research).  The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end I have highlighted recessions and included GDP.

Consumer Attitudes Remain Muted -- U.S. consumer economic confidence weakened in August, as households worry more about higher food and gasoline prices, according to a survey released Thursday. The Royal Bank of Canada said its consumer outlook index dropped to 46.4 this month from 47.0 in July. The index has hovered between 45 and 47 for all of 2012, indicating little change in how consumers feel about the economy. “The overall confidence trend since January 2012 has been one of stasis as Americans wait for unambiguous signals that the economy is improving,” the report said. The RBC current conditions index rose to 37.3 from 37.1. The expectations index fell to 56.1 in August from 57.0 in July. The views on jobs and prices both worsened this month. The RBC jobs index fell to 52.7, its lowest reading since February, from 54.5 in July. The inflation index jumped a record 7.5 points to 77.8 in August.

More Inflation Measures Are Slowing - An important piece of economic news Tuesday got very little attention. The Commerce Department reported that several measures of inflation closely tracked by the Federal Reserve have softened. The Commerce Department’s price index for personal consumption expenditures, which is the Fed’s favored measure of consumer price inflation, was up 1.5% in June from a year earlier. That’s below the Fed’s 2% goal and also much lower than last year, when inflation measures neared 3% because of surging gasoline prices.

Weekly Gasoline Update: Fourth Week of Price Increases (But Only a Penny) -- Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, rounded to the penny, rose for the fourth week after 13 weeks of decline: Regular and premium both rose a penny and are both up 28 cents from their interim weekly lows in the December 19th EIA report. As I write this, GasBuddy.com still shows only one state, Hawaii, with the average price of gasoline above $4. Connecticut has the highest mainland prices, averaging around $3.79 a gallon with California as the second highest at $3.78. South Carolina has the cheapest price, averaging 3.18.

AAR: Rail Traffic "mixed" in July, Intermodal at Record Level - Once again rail traffic was "mixed". Building related commodities were up such as lumber and crushed stone, gravel, sand. Lumber was up 9% from July 2011. From the Association of American Railroads (AAR): AAR Reports Mixed Weekly and July Monthly Rail Traffic The Association of American Railroads (AAR) today reported U.S. rail carloads originated in July 2012 totaled 1,103,733, down 7,787 carloads or 0.7 percent, compared with July 2011. Intermodal volume in July 2012 was 946,071 trailers and containers, up 50,431 units or up 5.6 percent, compared with July 2011. The July 2012 weekly intermodal average of 236,518 trailers and containers is the highest July average in history. While lumber related to home construction remained very positive, other manufactured goods either grew more slowly than they have been or actually fell in July,”  This graph shows U.S. average weekly rail carloads (NSA).  Eight of the 20 commodity categories tracked by the AAR saw carload gains in July 2012 year over year, the lowest such number since May 2011. By contrast, 13 of the 20 categories are up year-to-date in 2012 compared with 2011. Grains is off 10% year-over-year due to fewer exports.

GM Ramps Up Risky Subprime Auto Loans To Drive Sales -President Obama has touted General Motors as a successful example of his administration's policies. Yet GM's recovery is built, at least in part, on the increasing use of subprime loans. The Obama administration in 2009 bailed out GM to the tune of $50 billion as it went into a managed bankruptcy. Near the end of 2010, GM acquired a new captive lending arm, subprime specialist AmeriCredit. Renamed GM Financial, it has played a significant role in GM's growth . The automaker is relying increasingly on subprime loans, 10-Q financial reports shows. Potential borrowers of car loans are rated on FICO scores that range from 300 to 850. Anything under 660 is generally deemed subprime. GM Financial auto loans to customers with FICO scores below 660 rose from 87% of total loans in Q4 2010 to 93% in Q1 2012.

The Dinged-Up, Broken-Down, Fender-Bended Economic Recovery Plan - New-car sales, which collapsed to less than 11 million in 2009, are expected to surpass 14 million this year. And forecasters believe that they will increase by around a million annually for the next couple of years. In 2015, we could eclipse 16 million vehicles sold, which is near the precrisis peak. The industry’s buoyancy comes largely from pent-up demand. Many Americans are driving really, really old cars. The average passenger vehicle is now 11 years old — making this the oldest fleet ever — and the percentage being junked has been at near record lows. One manufacturer recently told me that he was selling parts that few cars previously lived long enough to need. The cheap lease prices are built into this calculation. (Though the industry is also benefiting from recent restructuring and low interest rates.) Auto companies price their leases based partly on an estimation of a car’s residual value, or how much they think they can resell it for when the lease expires three years later. The auto industry, Pratt explained, is anticipating that in the next few years Americans, like my dad, will finally ditch their ancient cars and flood dealerships. Some may buy or lease new cars. Many others will buy preowned ones. But in order to have enough of those gently used vehicles ready by 2015, the auto companies need to push new ones into the market now.

U.S. Light Vehicle Sales at 14.1 million annual rate in July - Based on an estimate from Autodata Corp, light vehicle sales were at a 14.09 million SAAR in July. That is up 14% from July 2011, and down 1.7% from the sales rate last month (14.33 million SAAR in June 2012). This was slightly above the consensus forecast of 14.0 million SAAR (seasonally adjusted annual rate). This graph shows the historical light vehicle sales from the BEA (blue) and an estimate for July (red, light vehicle sales of 14.09 million SAAR from Autodata Corp). The year-over-year increase was fairly large because the auto industry was still recovering from the impact of the tsunami and related supply chain issues in 2011. Sales have averaged a 14.12 million annual sales rate through the first seven months of 2012, up sharply from the same period of 2011. The second graph shows light vehicle sales since the BEA started keeping data in 1967.

U.S. auto sales remain soft in July - Major automakers reported U.S. auto sales for July that were somewhat softer than expected as high U.S. unemployment and weak consumer confidence kept would-be buyers on the sidelines. July auto sales showed the continuation of what has been a slowdown in growth since the late spring. Sales early this year shot past even the most bullish forecasts, but starting in May, the rate of improvement started to weaken. "If we were talking in February this year and you asked me what we're going to have July, I'd say at least 14 and a half," "But we're going to barely get to 14." GM, the largest U.S. automaker, reported on Wednesday a 6 percent drop in July U.S. sales, while Ford posted a 4 percent drop. The smallest U.S. automaker, Chrysler Group LLC, posted a 13 percent increase. GM and Ford both pinned their declines on lower sales to fleet customers like rental car companies. GM's fleet sales fell 41 percent, in line with the company's forecast last month.But their overall results were still lower than some estimates. Analysts had expected better financing deals, pent-up demand and increased construction spending to offset the sluggish U.S. economy.

Dallas Fed: "Slower Growth" in July Regional Manufacturing Activity - From the Dallas Fed: Texas Manufacturing Activity Posts Slower Growth Amid Weaker View of General Business ActivityThe production index, a key measure of state manufacturing conditions, fell from 15.5 to 12, suggesting slightly slower output growth.  The new orders index was positive for the second month in a row, although it moved down from 7.9 to 1.4. Similarly, the shipments index posted its second consecutive positive reading but edged down from 9.6 to 7.4. ... The general business activity plummeted to -13.2 after climbing into positive territory in June. Nearly 30 percent of manufacturers noted a worsening in the level of business activity in July, pushing the index to its lowest reading in 10 months.  Labor market indicators reflected stronger labor demand. Employment growth continued in July, although the index edged down from 13.7 to 11.8. ... The hours worked index was 4.1, up slightly from its June reading. This was below expectations of a 2.5 reading for the general business activity index. The regional manufacturing surveys were mostly weak in July. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Dallas Fed Survey Hits 10-Month Low, Cites Washington Uncertainty - Business conditions in Texas-area manufacturing worsened sharply this month amid questions about future government policy although production, orders and employment stayed positive, according to a report released Monday by the Federal Reserve Bank of Dallas. The bank said its general business activity index plunged to -13.2 in July from 5.8 in June. July’s is the weakest number in 10 months. The company outlook index fell to 1.6 from 5.5. Readings below 0 indicate contraction, and positive numbers indicate expanding activity. The Dallas Fed survey is the last of the regional Fed factory reports. In general, the other surveys show a weakening in factory activity, led by falling orders.

Chicago Fed: Midwest Manufacturing Output Increased - 24/7 Wall St.: The Chicago Fed Midwest Manufacturing Index, referred to as the CFMMI, is not coming in negative like so many manufacturing reports we have been seeing of late. The index rose by about 1.1% in the month of June when so many regions were ticking into the red or just about to. This is far from any major growth, but it still supports why GDP was positive a bit more than expected last week. The reading came to a seaso nally adjusted level of 94.1, with the year 2007 equating 100. Unfortunately, the revised data put the index down at -1.4% for the month of May. The Federal Reserve Board’s industrial production index for manufacturing increased by 0.7% in the month of June. Where the report gets interesting is that regional output was said to have risen by some 11.0% in June when compared to the same month in 2011. Also the report on its national output increased 5.6% in June from the same month a year earlier.

Hiring Headwinds in ISM-Chicago Manufacturing Data - The pace of hiring in the U.S. manufacturing sector slowed in July even though overall economic activity picked up slightly during the month, a survey of Chicago-area purchasing managers revealed on Tuesday. The Institute for Supply Management-Chicago‘s business barometer rose to 53.7, from 52.9 in June. The index continued to rebound from a 2 1/2-year low of 52.7 in May. The latest data exceeded expectations. Economists surveyed by Dow Jones Newswires predicted the index would slip to 52.5 in July. It also marked the 34th straight month in which the index was above 50.0, which reflects economic expansion. However, ISM-Chicago’s employment index dropped to 53.3 in July, down from 60.4 in June and the year’s high of 64.2 in February. Investors closely monitor the Chicago Business Barometer because it provides insights on current business conditions. They were particularly interested in the latest report as the Federal Reserve announces Wednesday whether it will provide additional monetary stimulus to aid the economy. Also, the Labor Department on Friday releases its monthly employment report. The consensus estimate of economists is that the economy added 95,000 jobs during the month. July’s unemployment rate is expected to remain at 8.2%.

Business Activity in U.S. Unexpectedly Grows at Faster Pace - -- Business activity in the U.S. unexpectedly grew at a faster pace in July as the economy weathered a slowdown in hiring and household spending. A barometer from the Institute for Supply Management- Chicago Inc. increased to 53.7, the highest since April from 52.9 in June. Readings greater than 50 signal growth. The median forecast of 50 economists surveyed by Bloomberg News projected the purchasing managers’ gauge would decline to 52.5.The need to rebuild auto inventories may be giving a boost to manufacturing, which had been a key driver of the economic recovery. The Federal Reserve is meeting this week to determine if more stimulus is needed as Europe’s fiscal crisis and the threat of more than $600 billion in U.S. spending cuts and tax increases at year’s end curbed demand.

Markit Final Index of U.S. Manufacturing Fell to 51.4 in July - The Markit Economics final index of U.S. manufacturing decreased to 51.4 in July from 52.5 a month earlier, the London-based group said today.  A reading above 50 in the purchasing managers’ measure indicates expansion. The final figure compares with an initial reading of 51.8.  The European debt crisis and slower growth in China and Brazil may limit demand for U.S. goods. At the same time, American consumers are slowing their spending and businesses are tempering equipment purchases.  The industry has weakened across the globe. U.K. manufacturing shrank last month by the most in more than three years, another report today showed. An index of factory output, based on a survey by Markit and the Chartered Institute of Purchasing and Supply fell to 45.4 from a revised 48.4 in June, Markit said.

U.S. Manufacturing Unexpectedly Shrinks for Second Month - Manufacturing in the U.S. unexpectedly contracted for a second month in July, showing a mainstay of the economy was struggling to improve as global economies weakened.  The Institute for Supply Management’s factory index was 49.8 last month, close to the three-year low of 49.7 reached in June. Fifty marks the dividing line between expansion and contraction. Economists surveyed by Bloomberg News projected a reading of 50.2, according to the median estimate.Cutbacks in household purchases, unemployment exceeding 8 percent, Europe’s debt crisis and slower global growth threaten to further restrain an industry that’s been a source of strength for the economy. Factories may also temper production as companies curb spending out of concern that lawmakers will fail to prevent automatic government spending cuts and higher taxes from going into effect next year.

Manufacturing Update (w. 5 graphs) This morning's ISM manufacturing report was a disappointment with the sector posting a second consecutive modest contraction: The new orders index stabilized: but the weight of the global slowdown remains evident in export orders, which extended June's decline: Slowing orders growth is having an impact on employment growth: Still, the employment index remains above 50; traditionally, readings below 50 are associated with a response from the Federal Reserve. This remains one of the indicators arguing for expecting the Fed will continue to stand pat on policy. Notice that the new import orders index fell sharply: We are once again flirting with that expansion/contraction line. I interpret this as indicative that the external slowdown is increasingly feeding through to the domestic economy. Not enough yet to trigger a recession, but enough to keep a lid on growth. And that by itself is worrisome given existing anemic growth and the high level of unemployment. Bottom Line: The global manufacturing slowdown is increasingly washing up on US shores, but obviously not enough to prompt the Fed into action. Unfortunately, the risks still seems to remain clearly on the downside, which means that when and if the Fed moves, they will certainly be behind the curve.

Another Weak Report With The July Update Of The ISM Mfg Index -- For the second month in a row, the ISM Manufacturing Index was under 50—a sign that the manufacturing sector is contracting, if only slightly. Many analysts argue that a reading under 50 for this benchmark is an early warning that a new recession is near, or perhaps one that's already started. But like any other indicator, the ISM index isn't flawless: there have been a dozen or so instances over its 60-year-plus history when a below-50 reading wasn't quickly followed by a recession. Still, the fact that this benchmark is now under 50 for the second consecutive month—the first run of below-50 readings since the last recession—is a sign that the manufacturing sector is struggling. The only good news is that the July reading inched higher vs. June—49.8 vs. 49.7. It's also mildly encouraging that the index remains just under 50, which suggests that the economy is suffering from slow growth rather than a clear case of outright contraction... maybe.

US Manufacturing Sector Contracts For Second Month In A Row, Misses Expectations Of Expansion - Expectations that the American manufacturing sector would expand after "briefly" contracting in June were promptly doused after the Manufacturing ISM printed at 49.8, below expectations of an expansionary print of 50.2, and essentially unchanged from last month's 49.7. Where did offsetting growth come from? The most hollow of indicators - Inventory - which keeps on being built up in expectation of a demand spike that never comes. This is also the third miss in a row for the ISM, whose most watched component, the Employment index, slid from 56.6 to 52.0 confirming that the earlier ADP number was a total noisy fluke as usual.

ISM Manufacturing Business Activity Index: Fractional Contraction -- Earlier today the Institute for Supply Management published its July Manufacturing Report. Today's headline PMI is showing the second month of contraction after 34 months of expansion. Here is the report summary: The PMI registered 49.8 percent, an increase of 0.1 percentage point from June's reading of 49.7 percent, indicating contraction in the manufacturing sector for the second consecutive month, following 34 consecutive months of expansion. The New Orders Index registered 48 percent, an increase of 0.2 percentage point from June and indicating contraction in new orders for the second consecutive month, but at a slightly slower rate. Both the Production Index and the Employment Index remained in growth territory, registering 51.3 percent and 52 percent, respectively. The Prices Index for raw materials registered 39.5 percent, an increase of 2.5 percentage points from the June reading of 37 percent, indicating lower prices on average for the third consecutive month. A growing number of comments from the panel this month reflect a slowdown in their businesses and general concern over increasing economic uncertainty.  The first chart below shows the Manufacturing series, which stretches back to 1948. I've highlighted the eleven recessions during this time frame and highlighted the index value the month before the recession starts.

ISM Manufacturing index increases slightly in July to 49.8 - This is the second consecutive month of contraction (below 50) in the ISM index since the recession ended in 2009. PMI was at 49.8% in July, up slightly from 49.7% in June. The employment index was at 52.0%, down from 56.6%, and new orders index was at 48.0%, up slightly from 47.8%.From the Institute for Supply Management: June 2012 Manufacturing ISM Report On Business® The PMI registered 49.8 percent, an increase of 0.1 percentage point from June's reading of 49.7 percent, indicating contraction in the manufacturing sector for the second consecutive month, following 34 consecutive months of expansion. The New Orders Index registered 48 percent, an increase of 0.2 percentage point from June and indicating contraction in new orders for the second consecutive month, but at a slightly slower rate. Both the Production Index and the Employment Index remained in growth territory, registering 51.3 percent and 52 percent, respectively. The Prices Index for raw materials registered 39.5 percent, an increase of 2.5 percentage points from the June reading of 37 percent, indicating lower prices on average for the third consecutive month. Here is a long term graph of the ISM manufacturing index. This was below expectations of 50.1%. This suggests manufacturing contracted in July for the second consecutive month.

U.S. Factory Orders Fall Unexpectedly - New orders for factory goods unexpectedly fell in the United States in June, a fresh sign that the slowdown in the country’s manufacturing sector will probably stretch into the second half of the year. The Commerce Department said on Thursday that new orders for manufactured goods dropped 0.5 percent during the month. Economists in a Reuters poll had forecast a rise of 0.5 percent. American factories appear to be one of the sectors most vulnerable to Europe’s festering debt crisis. The trend in American manufacturing has appeared softer and has added to concerns the economic recovery is losing steam. The decline in new orders in June will probably mean softer output down the road, which could weigh on economic growth.

Can the Big Shift in Energy bring a Return of Industrial Demand? - Accenture just released a new research report entitled “North America Flexes its Industrial Muscle” assessing the reasons for this change in global competitiveness that is pulling the US back into the game from productivity improvements from automation, rising wages in China and India reducing the US gap, low natural gas prices and abundant supply from shale E&P improve US competitiveness as a source of feedstock for chemicals and other manufacturing.  The US remains a large and attractive market and lower cost US production also benefits from lower transportation costs and a reduced carbon footprint. The report says the US should not expect mass-produced commodities like electronics to be uprooted and rebuilt in North America.  That infrastructure is sunk, demand is expected to grow fast in Asian markets and the purpose of the capital invested was to build an exports-driven industrial base to fuel domestic economic growth. There is even good news in this continued Asian export market growth for North America. The revival back here at home is taking place in high value-added final assembly such as automobiles and in feedstock driven industries in chemicals, pharma and their research units.

ISM Non-Manufacturing Index increases slightly, Employment index declines in July - Earlier ... the July ISM Non-manufacturing index was at 52.6%, up from 52.1% in June. The employment index decreased in July to 49.3%, down from 52.3% in June. Note: Above 50 indicates expansion, below 50 contraction.  From the Institute for Supply Management: July 2012 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in July for the 31st consecutive month, The NMI registered 52.6 percent in July, 0.5 percentage point higher than the 52.1 percent registered in June. This indicates continued growth this month at a slighter faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 57.2 percent, which is 5.5 percentage points higher than the 51.7 percent reported in June, reflecting growth for the 36th consecutive month. The New Orders Index increased by 1 percentage point to 54.3 percent. The Employment Index decreased by 3 percentage points to 49.3 percent, indicating contraction in employment for the first time since December 2011. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

Baffle With BS Continues: Non-Manufacturing ISM Better Than Expected As Employment Drops To Lowest Since 2011 - The strategy to keep everyone utterly confused and merely chasing momentum and trends continues. After the surge in this morning's NFP report, driven entirely by statistical fudging and part-time jobs, which has sent the market higher by well over 1%, we next get a Services ISM update for July according to which the US non-manufcaturing sector improved modestly, to 52.6, on expectations of an unchanged print at 52.1, making the case for NEW QE even more distant. But wait, just to keep everyone totally baffled with BS, the ISM says that the employment index dipped below 50 for the first time since 2011, printing at 49.3 from 52.3: in other words, the employment in the US services sector is now contracting, something which the NFP number roundly denied. Confusion? Mutual exclusivity? It doesn't matter to algos, who are confident that the Fed will certainly launch more QE with the S&P at 2012 highs no matter what the facts say..

$5.5 billion default looming for Postal Service - The U.S. Postal Service is bracing for a first-ever default on billions in payments due to the Treasury, adding to widening uncertainty about the mail agency's solvency as first-class letters plummet and Congress deadlocks on ways to stem the red ink. With cash running perilously low, two legally required payments for future postal retirees' health benefits - $5.5 billion due Wednesday and $5.6 billion due in September - will be left unpaid, the mail agency said Monday. Postal officials said they also were studying whether they might need to delay other obligations. In the coming months, a $1.5 billion payment is due to the Labor Department for workers compensation, which for now it expects to make, as well as millions in interest payments to the Treasury. The defaults won't stir any kind of catastrophe in day-to-day mail service. Post offices will stay open, mail trucks will run, employees will be paid, current retirees will get health benefits. But a growing chorus of analysts, labor unions, and business customers are troubled by continuing losses that point to deeper, longer-term financial damage, as the mail agency finds itself increasingly preoccupied with staving off immediate bankruptcy while Congress delays on a postal-overhaul bill.

It’s D-Day for the Post Office - Welcome to the week the United States Postal Service defaults on a major obligation. D-Day is Wednesday, Aug. 1, when the Postal Service is obligated, by statute, to make a $5.5 billion payment, money that is supposed to be put aside to “prefund” health benefits for future retirees. But, with less than $1 billion in the bank, the Postal Service announced on Monday that it would not be making the payment. It has a second payment, for $5.6 billion, due in September. Unless lightning strikes, it won’t be making that one either.  On the one hand, there is no doubt that part of the reason the post office is struggling is that its world has changed mightily. Everyone knows the story: the rise of e-mail, online bill paying, and so on, have cut deeply into Americans’ use of first class mail, which peaked in 2006. Last year, the Postal Service reported losses of more than $5 billion — even though Congress allowed it to defer its annual prefunding of retiree health benefits. With or without the prefunding, the post office was eventually headed toward a crisis. On the other hand, that prefunding requirement is an absolute killer. It has cost the post office more than $20 billion since 2007 — a period during which its total losses amounted to $25.3 billion. Without that requirement, the post office would still likely be struggling, but it would have a lot more wiggle room — and a lot more cash. (Its pension obligations are also overfunded by around $11 billion.) Not since the debt crisis has there been such an avoidable fiscal mess.

Postal Service to Miss $5.5 Billion Payment to Treasury --The U.S. Postal Service affirmed it won’t make a required $5.5 billion payment due tomorrow to the U.S. Treasury for future retirees’ health care, an obligation the agency said must end for it to become financially viable. The service has said for months it couldn’t afford the payment, which was initially due last September, nor a $5.6 billion payment required by Sept. 30 for this year. Postal legislation passed by the U.S. Senate on April 25 would slow the schedule for those obligations. The House hasn’t acted on a different postal measure aimed at changes to help the service cope with declining mail volume. “This has no effect on mail processing or delivery, no impact on post offices, and employees will continue to get paid,” The Postal Service, which has more employees than any U.S.- based publicly traded company other than Wal-Mart, lost $3.2 billion in the quarter ended March 31. It has said it expects to temporarily run out of cash in October unless Congress alters or ends the retiree health-care obligation and lets it make other changes that include ending Saturday mail delivery. The service also wants to withdraw from the U.S. government employees’ health-care plan and set up its own.

Postal Service Challenges Have Plenty of Answers -- The US Postal Service will default on a $5.5 billion prepaid retiree health benefit payment today, and this will surely lead to calls for privatization or mass jobs cuts. But the default concerns the unusual way in which the USPS, unlike virtually any other company in the world, pre-pays its health benefits many years out. Rep. Elijah Cummings explains: To pay for other parts of the (2006 Postal Accountability and Enhancement Act) and still make sure it remained revenue-neutral, Congress required the Postal Service to begin prefunding nearly 100 percent of its future retiree health care costs over a 10-year period. While this may have made budgetary sense at the time, Congress did not anticipate the 2008 economic crisis and its exacerbating effects on the Postal Service’s finances, which were already struggling with declining mail volume as Internet use increased [...] Though the Postal Service now has more than $45 billion in prepaid retiree health benefits funding, the law requires an additional $5.6 billion payment by Sept. 30, 2012. In fact there are $11 billion in overpayments into that retirement fund. This is a ridiculous mandate on the USPS, which looks designed to send the postal service into default. This won’t immediately end mail service or anything, but it compounds the other challenges that the USPS faces from technological innovation. However, just ending this silly system of pre-funding would stave off the reckoning for many years

JCPenney to Eliminate All Checkout Clerks, Instead Using RFID Chips and Self-Checkout; End of JCPenny? How Many Jobs At Risk?  - By 2014 JCPenney PLans to Eliminate All Check-Out Clerks, and instead use self-checkout machines and RFID chips. Struggling retailer JCPenney is making some big changes that will affect customers and its clerks. The store is getting rid of its check-out counters. CEO Ron Johnson said it will remove check-out counters in stores and replace them with a system that won't require clerks. It's all part of an effort to return the department store chain to profitability. Shoppers will be able to use self check-out machines, similar to those found in grocery stores. JCPenney is also planning to replace traditional bar codes on price tags with high-tech radio frequency identification, or "RFID" chips to make purchases faster. Johnson told "Fortune" magazine he hopes to phase out check-out counters by 2014.

U.S. Unemployment Aid Applications rise to 365,000 -- The number of people seeking U.S. unemployment benefits rose last week, though the data was likely skewed higher by seasonal factors. Weekly applications increased by 8,000 to a seasonally adjusted 365,000, the Labor Department said Thursday. The four-week average, a less volatile measure, fell for the sixth straight week to 365,500, the lowest since March 31. The decline in the four-week average suggests the job market could be improving a bit. But economists are viewing last month’s figures with some caution because the government struggles every July to account for temporary summer shutdowns in the auto industry. This year was even more complicated because some automakers skipped shutdowns, resulting in fewer layoffs. A Labor Department spokesman said the latest figures should be the last affected by the auto shutdown issues.

Jobless Claims Rise, But Remain Near 4-Year Low - Initial jobless claims rose moderately last week, but this doesn’t tell us much. The good news is that claims remain close to a four-year low and the unadjusted year-over-year change in new filings for unemployment benefits continues to fall by roughly 10%. In short, there’s still no sign of trouble in the claims data, which suggests that the labor market will continue to expand slowly. Last week’s increase of 8,000 pushed total claims up to a seasonally adjusted 365,000. But stepping back and considering the jump in context with recent history implies that nothing much changed last week. This data series isn’t improving, but neither is it deteriorating. No news is still marginally good news, however, with the weekly numbers bouncing around the lowest levels in several years.

Weekly Unemployment Claims: Up 8,000 on Top of a 4,000 Upward Revision - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 365,000 new claims was an 8,000 increase from the previous week's upward revision of 4,000. The less volatile and closely watched four-week moving average dropped to 365,500. Here is the official statement from the Department of Labor: In the week ending July 28 the advance figure for seasonally adjusted initial claims was 365,000, an increase of 8,000 from the previous week's revised figure of 357,000. The 4-week moving average was 365,500, a decrease of 2,750 from the previous week's revised average of 368,250.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending July 21, unchanged from the prior week's unrevised rate.  The advance number for seasonally adjusted insured unemployment during the week ending July 21 was 3,272,000, a decrease of 19,000 from the preceding week's revised level of 3,291,000. The 4-week moving average was 3,298,500, a decrease of 11,500 from the preceding week's revised average of 3,310,000.  Here is a close look at the data since 2005 (with a callout for 2012), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

ADP Says U.S. Companies Added 163,000 Workers in July - Companies in the U.S. added more workers than projected in July, indicating the job market was holding up entering the second half of the year, a private report based on payrolls showed.  The 163,000 increase in employment followed a revised 172,000 gain the prior month, Roseland, New Jersey-based ADP Employer Services said today. The median estimate of 38 economists surveyed by Bloomberg News called for an advance of 120,000.

ADP: Private Employment increased 163,000 in July - ADP reports:  Employment in the U.S. nonfarm private business sector increased by 163,000 from June to July, on a seasonally adjusted basis. The estimated gain from May to June was revised down slightly, from the initial estimate of 176,000 to 172,000. Employment in the private, service-providing sector expanded 148,000 in July after rising a revised 151,000 in June. The private, goods-producing sector added 15,000 jobs in July. Manufacturing employment rose 6,000 this month, following a revised increase of 9,000 in June. This was above the consensus forecast of an increase of 120,000 private sector jobs in July. The BLS reports on Friday, and the consensus is for an increase of 100,000 payroll jobs in July, on a seasonally adjusted (SA) basis.

U.S. Unadjusted Unemployment Rate Increases in July -- U.S. unemployment, as measured by Gallup without seasonal adjustment, was 8.2% in July, up slightly from 8.0% in June, but better than the 8.8% from a year ago. Gallup's seasonally adjusted number for July is 8.0%, an increase from 7.8% in June. These results are based on Gallup Daily tracking interviews, conducted by landline and cell phone, with almost 30,000 Americans throughout the month. Gallup calculates a seasonally adjusted unemployment rate by applying the adjustment factor the government used for the same month in the previous year. July data by demographic group are found on page 2. Unemployment had previously dropped to 7.9% in mid-July, the lowest it has been since Gallup began tracking employment daily in 2010. However, the improvement was short-lived, and unemployment increased during the second half of the month. Underemployment, however, did decline -- for the third straight month in July, to 17.1%, the lowest since Gallup started collecting employment data. Gallup's U.S. underemployment measure combines the unemployed with those working part time but looking for full-time work. Gallup does not apply a seasonal adjustment to underemployment.

The Incredible Shrinking U.S. Workforce - Gallup Daily tracking, based on a random sample of more than 29,000 U.S. households, shows a potential dramatic drop in the government's seasonally adjusted workforce participation rate to 63.1% in July down from 63.8% in June. That is, the BLS may report the number of Americans working or wanting to work to be at its lowest level since April 1978. This would be extremely bad news for the U.S. economic outlook in the sense that current economic optimism is so low that millions of Americans are giving up on finding a job. It could also translate into a sharp drop in the U.S. unemployment rate for July to be announced by the government on Friday. Although Gallup's data suggest an uptick in the unadjusted unemployment rate in July, the consensus forecast is that the unemployment rate will remain unchanged at 8.2% in July. Wednesday's ADP report provided some support for the consensus by reporting a surprisingly strong increase of 163,000 jobs in July.  Regardless, if the government's monitoring of the workforce participation rate tracks with Gallup's results, it seems more likely the BLS will report a decline than an increase in the U.S. unemployment rate on Friday. In turn, this will be another sign of how misleading the current way of measuring the U.S. unemployment rate can be.

U.S. Economy Adds 163K Jobs, Rate Rises to 8.3% — U.S. employers added 163,000 jobs in July, a hopeful sign after three months of sluggish hiring. The Labor Department said Friday that the unemployment rate rose to 8.3 percent from 8.2 percent in June. July’s hiring was the best since February. Still, the economy has added an average of 151,000 jobs a month this year, roughly the same as last year’s pace. That’s not enough to satisfy the 12.8 million Americans who are unemployed. The government uses two surveys to measure employment. A survey of businesses showed job gains. The unemployment rate comes from a survey of households, which showed fewer people had jobs. Economists say the business survey is more reliable.

163K New Jobs, But Unemployment Rate Rises to 8.3% - Here is the lead paragraph from the Employment Situation Summary released this morning by the Bureau of Labor Statistics, with the bracketed text added by me: Total nonfarm payroll employment rose by 163,000 in July, and the unemployment rate was essentially unchanged at 8.3 percent [8.2 percent last month], the U.S. Bureau of Labor Statistics reported today. Employment rose in professional and business services, food services and drinking places, and manufacturing.  Today's nonfarm number is above the briefing.com consensus, which was for 100K new nonfarm jobs. However, the prior month's number for new jobs was revised downward to 64K from the original 80K, and despite the higher-than-expected increase in new jobs, the unemployment rate rose fractionally. The unemployment peak for the current cycle was 10.0% in October 2009. The chart here shows the pattern of unemployment, recessions and both the nominal and real (inflation-adjusted) price of the S&P Composite since 1948. The second chart shows the unemployment rate for the civilian population unemployed 27 weeks and over. The latest number is 3.3% — a decline from last month's 3.5%. This measure gives an alternative perspective on the relative severity of economic conditions. As we readily see, this metric sstill remains significantly higher than the peak in 1983, which came six months after the broader measure topped out at 10.8%.  The next chart is an overlay of the unemployment rate and the employment-population ratio. This is the ratio of the number of employed people to the total civilian population age 16 and over.

The Employment situation (with 7 charts) The headline number of a 163,000 increase in payroll employment --172,000 private and a -9,000  fall in government --appeared strong.  But it was really just another .weak employment report.  For example over the last twelve months private payroll employment gains have average some 163,000 so this months 172,000 increase was just barely above the 12 month moving average. The increase in jobs since the recession bottom remains very weak by historic standards, but it is still stronger than in the early 2000s cycle. But the workweek was unchanged at 34.5 hours. The manufacturing workweek and over time hours were also unchanged. Consequently the index of aggregate hours worked for all employees only rose 0.1%, versus a 0.4% gain last month and a -0..2 drop in the previous month. Hours worked for production, or nonsupervisory workers only rose 0.1%, the same as in the last two months. Both measures are now growing slower than the 0.2% average monthly gain established earlier in the cycle. Average hourly earnings for nonsupervisory workers rose from $19.75 to $19.77. This is a 1.28% increase over the past year, the smallest annual gain on record. Weekly earnings are also only up 1.28% over the past year. The major risk to the economy remains that weak earnings feed into weak consumer spending that feeds back into weak hiring and wages in a downward spiral.

July Employment Report: 163,000 Jobs, 8.3% Unemployment Rate - From the BLS:Total nonfarm payroll employment rose by 163,000 in July, and the unemployment rate was essentially unchanged at 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in professional and business services, food services and drinking places, and manufacturing. ... Both the civilian labor force participation rate, at 63.7 percent, and the employment- population ratio, at 58.4 percent, changed little in July. ... The change in total nonfarm payroll employment for May was revised from +77,000 to +87,000, and the change for June was revised from +80,000 to +64,000.  This was a somewhat better month, and the revisions for the previous two months were mostly offsetting. This was above expectations of 100,000 payroll jobs added. The second graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate increased to 8.3% (red line). The Labor Force Participation Rate declined slightly to 63.7% in July (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although most of the recent decline is due to demographics. The Employment-Population ratio declined to 58.4% in July (black line). The third graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

Economy Generates 163,000 Jobs in July; Unemployment Edges Up to 8.3 Percent - The economy added 163,000 jobs in July, its fastest rate of job growth since February. While this number was somewhat higher than consensus predictions, it is consistent with the decline in weekly unemployment claims in recent weeks to levels that are near the low-point for the recovery. The unemployment rate edged up to 8.3 percent. Manufacturing again played a leading role in job gains, adding 25,000 jobs in July, slightly above its 19,000 monthly average over the last year. This number was inflated somewhat by a 12,800 gain reported in auto manufacturing, since this likely reflects changes in the timing of retooling shutdowns. Retail and construction employment were both close to flat. Given recent data in both sectors, it is likely that job growth will be somewhat better in the months ahead. Health care added just 12,000 jobs in July after adding 11,300 in June, well below the average of 25,000 for the last year. If this slowdown continues, it might mean slower cost growth in health care, but it also means that a major source of job growth in the recovery has been weakened. Educational services added 18,200 jobs in July, which reversed the loss of 15,200 reported in June. Clearly this is a seasonal issue. Restaurants added 29,400 jobs, a bit more than the 24,000 average over the last year. The broad temporary help sector added 21,800 jobs on top of the 22,200 jobs added in June. This is good, but not spectacular growth from a sector that is viewed as a harbinger of future job growth. The government sector lost 9,000 jobs in July, the same as in June.

A little brighter start to the second half of 2012 - The labor market began the second half of 2012 a little brighter than in recent months, with the addition of 163,000 jobs and the unemployment rate holding roughly steady (increasing three one-hundredths of a point from 8.22% to 8.25%, the latter rounded to 8.3%). July’s rate of job growth was much stronger than the weak growth of the spring, but since the spring weakness was due in part to negative payback after warm-weather-generated hiring early in the year, July’s payroll job growth probably represents the underlying trend of the first half of the year and not necessarily a new momentum. July’s job growth of 163,000 is encouraging, and more than enough for the labor market to hold its ground as the population grows, but we still need faster job growth to meaningfully bring the unemployment rate down. At July’s rate of job growth it would take more than eight years to get back to full employment.

Private Payrolls Rebound In July - Nonfarm private payrolls rose 172,000 last month on a seasonally adjusted basis, the Labor Department reports. That’s substantially higher than the roughly 100,000 gain predicted by the consensus forecast among economists. Today's number is also a respectable improvement over June’s revised increase of 73,000. The better-than-expected result for July isn’t a complete surprise, however, given the hints in Wednesday’s ADP Employment Report. Surprising or not, today’s employment report offers another data point for arguing that the economy isn’t falling off a cliff into a new recession.  Obsessing over the month-to-month changes in the payrolls report—or any other economic indicator—is subject to lots of statistical noise and so we should take these numbers with a grain of salt. A more robust reading on the payrolls trend comes from monitoring the year-over-year percentage change. The good news is that the annual pace of jobs growth is holding its ground at just under 1.8% (black line in chart below). That’s down a bit from the 2.1% increases logged in January and February, but it’s no trivial matter that the year-over-year rate remains near a six-year high.

Headline Jobs +163,000, But Household Survey Shows -195,000 Jobs; Unemployment +.1 to 8.3% - ADP got the headline job number correct, I certainly didn't. However, one look beneath the surface shows this was actually an anemic jobs report. Unemployment was up, and the household survey shows a loss of 195,000 jobs. The household numbers are even worse because part-time employment went up.  Here is an overview of today's release.

• US Payrolls +163,000 - Establishment Survey
• US Employment -195,000  - Household Survey
• US Unemployment Rate +.01 at 8.3% - Household Survey
• The Civilian Labor Force fell by 150,000. Otherwise the unemployment rate would have risen more.
• Average workweek for all employees on private nonfarm payrolls steady at 34.5 hours
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls steady at 33.7 hours.
• Average hourly earnings for all employees in the private nonfarm workers sector rose by 2 cents.
• The change in total nonfarm payroll employment for May was revised from +77,000 to +87,000, and the change for June was revised from +80,000 to +64,000.

July U.S. Job Growth Beats Expectations -- Despite a downbeat summer, U.S. employment continues to slowly recover. Mark Zandi discusses the numbers with the CNBC crew.

Jobs Report, First Impressions - Employers bucked the recent slowing trend in hiring in July, sending payrolls up by 163,000, the largest payroll gains since February, according to this morning’s jobs report from the BLS.  The private sector was up 172,000, with most industries, including manufacturing, adding more jobs than in the prior few months. On the other hand, the Household Survey, from which the unemployment rate is drawn (the payroll data come from a survey of workplaces), told a less optimistic story about July, with unemployment ticking up slightly and the share of the population employed falling. So, what is one to make of such a tale-of-two-surveys?

• –Don’t read too much into one month as one month does not a new trend make.  July’s reversal of the recent downshift in payrolls is very welcomed, but let’s sees if it hangs around.
• –Regarding employment growth, the payroll survey is a lot more reliable on a monthly basis than the household survey—it’s sample size is much larger and while all these monthly data are noisy, the payroll is less so than the household.  (The household survey goes to 60,000 households; the establishment survey, to about 140,000 businesses and government agencies representing about 490,000 establishments.)
• –Re payrolls, when I find myself scratching my head about the underlying trend in a series that’s jumping around, I take an average, and the jumpier the monthly changes are, the longer the average.  So far this year, average monthly payroll growth has been about 150,000; over the past three months, the average has been about 100,000.
• –Average hourly earnings are up 1.7% over the last year, which is actually the same rate as inflation.Flat real paychecks are better than falling paychecks, but that’s a slow pace of wage growth, consistent with all the slack in the job market.

Economists React: One Step Forward After Three Steps Back - Economists and others weigh in on the gain in jobs in July and the rise in the unemployment rate.

Weather Distortions Draining Out of Jobs Data - Some economists see in July’s job report evidence the lingering influence of a warmer-than-usual winter is finally lifting off the job market, revealing a better picture of the true rate of job gains. The unusual weather spanning 2011′s close and the starting months of this year is widely believed to have disrupted economic activity in a way that goosed up all manner of data at the start of the year. The unexpected weakness that began to emerge in the numbers from the spring forward has been at least partially attributable to some give back from accelerated gains that marked 2012′s opening months, in the view of many. To be sure, weather factors are just one force hurting economic momentum. Europe’s ongoing financial crisis has emerged as a key headwind. There is also the considerable uncertainty of the U.S. government budget and tax situation. Still, according to data released Friday, July hiring rates were better than expected, at a 163,000 gain, with the unemployment rate ticking up to 8.3% from 8.2% in June. July’s number was well above the 95,000 economists had expected. Taken on its own terms, the July gain was modest at best, but it represented a welcome pickup from June’s anemic 64,000 gain and May’s 87,000 rise.

City Hall: Where the Jobs Aren't - Here’s one sign of how the economy is going. Manufacturing added 25,000 jobs in July, It was the 10th consecutive month that manufacturing jobs grew. They have now risen in 27 of the last 30 months. State and local government lost 7,000 jobs. That sector has lost workers in 25 of the last 30 months. Over that 30-month period, manufacturing employment has risen by 532,000 jobs, or 4.6 percent. The last time manufacturing grew that rapidly was in the period ending in November 1985, as the economy leaped after the end of the severe 1981-82 recession. State and local government lost 499,000 workers, or 2.5 percent, over the same period. For the total jobs report, those two canceled each other out over the period. That has contributed to the belief this is a jobless recovery. In fact, the private sector has done reasonably well; it is the decline in government jobs that has been extraordinary.Employment in state and local government peaked at a seasonally adjusted 19.8 million workers in August 2008. Since then, the total is down by 697,000, or 3.5 percent. Since World War II, the only comparable decline was in 1950 and 1951, when payrolls fell by 3.7 percent. Then the issue was employees’ being called up for the Korean War, leaving vacancies that were soon filled. Now the issue is one of governments starved for revenue.

A Record Decline in Government Jobs - Brookings - The labor market continued its modest rate of expansion in July, according to today’s employment report. Employers added 163,000 jobs last month, the largest increase since February. The unemployment rate remained essentially unchanged at 8.3 percent.  A notable aspect of the July employment report is the decline in public-sector employment. In fact, public-sector employment (i.e. federal, state, and local government jobs) declined in 10 of the past 12 months, in sharp contrast to 29 consecutive months of private-sector job growth. Indeed, falling public employment has been among the largest contributors to unemployment in the United States since the end of the Great Recession.  In this month’s employment analysis, The Hamilton Project examines public-sector employment trends over the last three decades and finds that government employment contracted, both in absolute numbers and as a share of the population, during the Great Recession and throughout the current recovery. Additionally, we report on the results of a new analysis that finds that the cuts in public school teachers are projected to reduce the future earnings of today’s students by more than five times as much as the current budget savings.  We also continue to explore the nation’s “jobs gap,” or the number of jobs that the U.S. economy needs to create in order to return to pre-recession employment levels.

The big picture - Employment rose by en estimated 163,000 jobs in July, up from a distressingly low gain of 64,000 in June (revised down from last month's estimate of 80,000). Private employers did better still, adding 172,000 jobs, helping make up for the continued declines in government payrolls. Since labour markets hit a bottom in early 2010, private employment has risen by 4.5m jobs while public payrolls have shrunk by more than half a million positions. Most of that decline has come from state and local governments, where the pace of employment loss is now slowing. Just 7,000 state and local government jobs were lost in July. But nearly 60,000 federal jobs have been shed since early 2010, including 38,000 in just the past year. The mainstays of private job growth remain manufacturing, professional services, and health and education services. A rebound for the housing sector may soon lift construction employment, but the sector has yet to contribute much to job growth. For Mr Obama's political opponents, including his Republican challenger Mitt Romney, the household survey data offers something to work with. The unemployment rate ticked up from 8.2% to 8.3% in July—statistically unchanged but enough for politicians to claim things are headed in the wrong direction. Household data showed a decline in both employment and the size of the labour force. The employment-population ratio reversed recent gains, dropping back to 58.4% from 58.6%.

The Latest Employment Numbers - The BLS this morning reported a job gain of 163,000 in July, which is good news.  But the jobs data had been disappointing over the preceding three spring months.  Before that, during the winter months, employment growth was strong. In terms of perceptions and politics, pundits will say that today’s report is good news for Obama’s re-election prospects, just as they said the spring jobs numbers were bad news for the president.  But my interest is in economics and reality, rather than perceptions and politics.   From a longer-term perspective, a few important facts have not been adequately discussed.

• 1. Regarding the rate of job growth, as inadequate as the numbers have been over the last two years, the rate of employment growth during this period — 137,000 jobs per month — has actually been substantially greater than the rate of job growth during the George W. Bush Administration (76,000 per month) even if one excludes the two Bush recessions that occurred toward the beginning and end of his administration respectively. The Obama Administration looks even better if you confine the numbers to private sector employment, since the government has been shedding jobs under Obama and was growing rapidly under Bush. Of course this is nothing like the sort of progress we would ideally like to see, say, the 237,000 jobs that were created month in and month out on average during the 8 years of the Clinton Administration. 
• 2. An unemployment rate of 8.3% shows that the economy is still in unsatisfactory shape.   Unemployment remains higher than what the Obama Administration hoped we would have by now at the time it took office in January 2009.  Most of the difference can be explained by the fact that the level of economic activity in January 2009 - as a result of the free-fall in the last part of 2008 - was much worse than was realized at the time. The subsequent downward revision by the Commerce Department in the official 2008 GDP statistics can explain why the level of the economy is disappointing 3 ½ years later, more than can the rate of growth over the intervening period.

Why Washington Accepts Mass Unemployment = In the years since the collapse of 2008, the existence of mass unemployment has stopped being something the economic powers that be even pretend to regard as a crisis. To those directly impacted, the economic crisis is an emergency, a life-altering disaster the damage from which will endure for years. But most of those in a position to address it simply have not seen it in such terms. History will record that the economic elite has viewed the economic crisis from a perspective of detached complacency. Two events from the last week have underscored this disturbing reality. The most widely covered was the Federal Reserve’s announcement that, despite a weakening economy, it still would not take steps to stimulate growth. The Fed may not like mass unemployment, but it dislikes inflation even more, and in its calculus, the hypothetical prospect of the latter outweighs the immediate reality of the former. Here’s a second case, smaller but even more telling. The Obama administration has tried to prevail upon Edward DeMarco, the acting director of the Federal Housing Finance Agency, to offer lower mortgage rates to underwater home owners through Fannie Mae and Freddie Mac, which he controls. What interests me is not the proposal itself, nor even DeMarco’s obstinate refusal, but an editorial in the Washington Post applauding DeMarco for refusing to implement the program.

Why Did Unemployment Rate Increase? - The U.S. unemployment rate rose to 8.3% in July and a broader measure ticked up to 15%, even as the economy added 163,000 jobs. Why the increase? The key reason is because the two numbers come from separate reports. The number of jobs added — the 163,000 figure — comes from a survey of business, while the unemployment rate comes from a survey of U.S. households. The two reports often move in tandem, but can move in opposite directions, especially in months such as July where there are big seasonal issues at play. This month, the household survey was telling a darker tale than the poll of establishments. The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks, and that number was up by 45,000 in July. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. This month 150,000 people left the labor force, lowering what is known as the participation rate. That can lead to a drop in the unemployment rate if people previously unemployed leave the labor force. The drop in the labor force even as the number of unemployed grows can be worrying, and indeed there was an increase in discouraged workers in July. A further worrying sign came in the count of persons counted as employed, which fell by 195,000 last month.

'Real' Unemployment Rate Shows Far More Jobless - While the national unemployment rate paints a grim picture, a look at individual states and their so-called real jobless rates becomes even more troubling. The government's most widely publicized unemployment rate measures only those who are out of a job and currently looking for work. It does not count discouraged potential employees who have quit looking, nor those who are underemployed — wanting to work full-time but forced to work part-time. For that count, the government releases a separate number called the "U-6," which provides a more complete tally of how many people really are out of work. The numbers in some cases are startling. Consider: Nevada's U-6 rate is 22.1 percent, up from just 7.6 percent in 2007. Economically troubled California has a 20.3 percent real rate, while Rhode Island is at 18.3 percent, more than double its 8.3 percent rate in 2007. Those numbers compare especially unfavorably to the national rate, high in itself at 14.9 percent though off its record peak of 17.2 percent in October 2009. Only three states — Nebraska (9.1 percent), South Dakota (8.6 percent) and North Dakota (6.1 percent) — have U-6 rates under 10 percent, according to research from RBC Capital Markets.

Employment: Another Fairly Weak Report (more graphs)  - The economy has added 1.06 million jobs over the first seven months of the year (1.12 million private sector jobs). At this pace, the economy would add around 1.9 million private sector jobs in 2012; less than the 2.1 million added in 2011. Also, at this pace of payroll job growth, the unemployment rate will probably still be above 8% at the end of the year. U-6, an alternate measure of labor underutilization that includes part time workers and marginally attached workers, increased so 15.0%. The change in May payroll employment was revised up from +77,000 to +87,000, but June was revised down from +80,000 to +64,000. The average workweek was unchanged at 34.5 hours, and average hourly earnings increased slightly. " There are a total of 12.8 million Americans unemployed and 5.2 million have been unemployed for more than 6 months. Here are a few more graph ... Since the participation rate has declined recently due to cyclical (recession) and demographic (aging population) reasons, an important graph is the employment-population ratio for the key working age group: 25 to 54 years old. This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses. This graph shows the number of workers unemployed for 27 weeks or more. According to the BLS, there are 5.19 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 5.37 million in June. This is generally trending down, but very slowly. Long term unemployment remains one of the key labor problems in the US. So far in 2012 - through July - state and local government have lost 42,000 jobs (7,000 jobs were added in July). In the first seven months of 2011, state and local governments lost 205,000 payroll jobs - and 230,000 for the year. So the layoffs have slowed. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011.

The employment report is weaker than it appears - The US employment numbers this morning generated a sharp rally in risk assets, with crude oil rising 3.5%, S&P500 up 1.8%, copper up 1.6%, and Brazilian Real up 90bp. It's worth taking a quick look at what in this employment report is causing such euphoria and whether it is justified. The markets have focused on the private payrolls increase, which was 62K higher than the forecast. In particular it was the pickup in manufacturing payrolls of 25K vs 10K expected. This is certainly great news, but unfortunately this report is not as strong as the markets' reaction indicates. Here are the reasons:
1. The prior month in private payrolls was revised down by 11K. That's not an insignificant revision.
2. The unemployment rate actually went up from 8.2% to 8.3% and underemployment (U6) went up from 14.9% to 15%.  In fact, this is a third month in a row that saw an increase in U6.
3. Hourly earnings were lower than expected (0.1% vs 0.2%). The YoY growth in hourly earnings is 1.7%, the lowest since 2010. This is not positive for consumer spending.
4. Growth in temp payrolls continues to be significantly stronger than in permanent jobs. It tends to indicate lack of confidence among employers.
5. Manufacturing payrolls increase was driven to a large extent by fewer auto plants being idled for retooling than is usual for this time of the year. It's basically a seasonal glitch that may end up being reversed in August.
6. Another survey of employment also conducted by the government called Household Employment Survey seems to contradict the headline number.

Full-Time Jobs -197,000; Part-Time Jobs +31,000 - We got the pre-spun job quantity data already, where we learned that nearly 3 times the headline print was due to seasonal and B/D adjustments and is thus nothing but noise. Now we get the quality. As can be seen below, courtesy of Table A9 from the Household Survey, in July the number of part-time jobs added was 31K, bringing the total to 27,925, just shy of the all time record of 28,038. Full time jobs? Down 228,000 to 114,345, lower than the February full-time jobs print of 114,408. Once again, more and more Americans are relinquishing any and all benefits associated with Full Time Jobs benefits, and instead are agreeing on a job. Any job. Even if it means working just 1 hour a week. For the BLS it doesn't matter - 1 hour of work a week still qualifies you as a Part-Time worker.

Seasonal And Birth Death Adjustments Add 429,000 Statistical "Jobs" -  Happy by the headline establishment survey print of 133,245 which says that the US "added" 163,000 jobs in July from 133,082 last month? Consider this: the number was based on a non seasonally adjusted July number of 132,868. This was a 1.248 million drop from the June print. So how did the smoothing work out to make a real plunge into an "adjusted" rise? Simple: the BLS "added" 377K jobs for seasonal purposes. This was the largest seasonal addition in the past decade for a July NFP print in the past decade, possibly ever, as the first chart below shows. But wait, there's more: the Birth Death adjustment, which adds to the NSA Print to get to the final number, was +52k. How does this compare to July 2011? It is about 1000% higher: the last B/D adjustment was a tiny +5K! In other words, of the 163,000 jobs "added", 429,000 was based on purely statistical fudging. Doesn't matter - the flashing red headline is good enough for the algos.

July Jobs Report Gives Mixed Signals -- The economy created 163,000 nonfarm payroll jobs in July, and the nation's unemployment rate increased slightly from 8.2 to 8.3 percent, according to figures released today by the U.S. Labor Department. Other indicators of labor market conditions, such as the labor force participation rate and the employment to population ratio, were "little changed in July," according to the agency.   The latest hiring numbers mark an improvement over previous months. This is the most jobs created since February. It is enough to absorb new entrants into the job market due to population growth and to re-employ some of the people who lost their jobs following the 2008 housing crash. But it is not enough to make large gains on the unemployment problem.  According to the Atlanta Fed jobs calculator, if we continue to create 163,000 jobs per month it will take over four years (52 months) for unemployment to fall to 6 percent. So while the July labor numbers at least reversed the recent hiring slide, much higher rates of job creation are required to significantly improve the labor market. How much higher? For the jobless rate to descend to 6 percent within 18 months, the economy would have to produce an average of 279,000 jobs per month.

Number of the Week: Did U.S. Actually Shed 195,000 Jobs in July? -- 195,000: How many fewer people were working in July than June, according to a key measure of employment. The economy added 163,000 jobs last month, but 195,000 fewer people were working, according to two separate Labor Department reports. How is that possible? Though they are reported at the same time, the two data points are derived from different places. The number of jobs added comes from a poll of businesses, called the establishment survey, while the unemployment rate and the number of people working comes from a survey of U.S. households. Over time the two reports generally follow the same pattern, but they can move in opposite directions from month to month. The two surveys count people in different ways. The establishment survey counts jobs, not people. So one person holding two jobs is counted twice. But the household survey also counts people — such as the unincorporated self-employed, family employees who aren’t paid, farm workers and those who consider themselves employed but aren’t being paid — who aren’t picked up in the establishment survey. The Labor Department produces a separate measure of the number of people working that aims to match the establishment concept. To create that number, they subtract the types of workers not counted in the survey of businesses, and then add multiple jobholders. By that measure, the economy added 108,000 jobs — not quite as bright as the 163,000 in the establishment survey, but much closer.

Risky Business: Focusing On Monthly Employment Numbers - Some economics pundits needlessly bang their heads against the wall when it comes to the art/science of digesting the numbers. Today’s example: the Labor Department’s employment report for July. These are two different methodologies for quantifying changes in the labor force that, not surprisingly, don’t always agree on a month-to-month basis—July’s statistical conflict was unusually wide. The divergence creates a fair amount of confusion, but it shouldn’t. You can find a clearer view of the trend in the year-over-year changes, which is an antidote of sorts for the monthly noise. As an example, let’s begin by comparing the monthly figures over the past year for the establishment and household surveys. No one will confuse the two series as dispatching similar, much less identical, results in any given month, as the chart below illustrates. Last month was particularly chaotic: the household survey reported that the number of employed persons in the U.S. fell a hefty 195,000 while the establishment survey advised that total nonfarm payrolls (including changes for government employees) jumped by 163,000 (private nonfarm payrolls increased by 172,000 last month).  There are some in the blogosphere who look at the statistical chasm in the chart above as a sign that the employment numbers, if not quite worthless, are deeply misleading overall. Agreed—if you’re looking at monthly data, which can be a bit like looking for patterns in snowflakes in a wind tunnel.  The good news is that it’s a different story if we compare the data for the two surveys on a year-over-year percentage basis, as shown in the second chart.

Payrolls and error bars - Every month, policy wonks and data-heads pore through the 25 different tables in the report, sometimes looking at their own favorite number (U-6 is particularly popular these days), and sometimes just looking for something to jump out at them. (Look at what happened to youth unemployment among Hispanics!) The latter exercise is particularly dangerous. When you have 25 tables, each with hundreds of datapoints, it’s a statistical certainty that one or two of them are going to be weirdly off in some way. If you then pull out that datapoint and read too much into it, you’re guilty of a logical solecism, a bit like two people who discover they share a birthday and then exclaim at how unlikely that is. But even the simple check-out-this-headline-number exercise, which every major news organization goes through every month, is statistically dubious. The headline payrolls number has error bars which are more than 100,000 people wide in either direction: if the number everybody’s quoting is 163,000, for instance, all that really says is that there’s a 95% chance that it’s somewhere between 59,000 and 267,000. What’s more, there’s a good 5% chance that it’s outside that wide range. Take the last two years of payrolls headlines, and the chances are that somewhere in there, a number is more than 100,000 off.And the unemployment rate is less accurate still. Most people will say that it ticked up this month, to 8.3%; the official news release is closer to the mark in saying that it was “essentially unchanged”. And if you look at the numbers it’s based on, they’re all over the place.

Beyond The BLS BS: New Online Help Wanted Ads Plunge The Most Since January 2009 Just when you thought it was safe to hope that saved-or-created jobs were at least not plunging anymore, the truth is out with online job postings. As opposed to de minimus surveys, or BLShit small pool analysis, the 'fact-based' number of 'New Help Wanted' Online Ads plunged in July by its most since January 2009! The total number of Online Help Wanted Ads also fell by its most in a year and as Credit Suisse points out, in 7 of the last 8 times when we see an outlier of this magnitude it is followed by outright declines in non-farm payrolls and private payrolls. New Online Help Wanted Ads fell by their most since January 2009!

Jobless generation puts brakes on US -- The share of American 18- to 24-year-olds who were employed fell to 54 per cent last year, the lowest since the labour department began tracking data in 1948, according to the Pew Research Center. The share who are in college has risen, but the researchers say this only partly explains the drop. The jobless rate for Americans age 16 to 24 is above 16 per cent, more than twice the national rate. Youth unemployment has reached crisis levels around the world, with almost 13 per cent of the global youth labour force out of work this year, according to the International Labour Organisation.  But the problem has a unique flavour in the US, where the weak job market has collided with record levels of educational debt – about $25,000 for the average graduate. Together, they pose a threat to the future earning power of young Americans such as Mr Grzywacz – and could have long-lasting effects on US growth. The US government has made some moves to ease the student debt burden, accelerating a programme that cuts federal loan payments for low-income borrowers and forgiving unpaid balances after 20 years instead of 25. It is also easier now for nearly 6m borrowers with more than one federal loan to consolidate their debt. But some advocates say such efforts are inadequate given the scale of the problem. A Michigan congressman this year proposed forgiving debt for some graduates – the bill is unlikely to pass – and others are urging the government to offer income-based repayment plans for private loans.

Are the Boomers Screwing the Millennials? - Is it really true that one generation can screw another?  That’s what Joel Kotkin (citing Neal Howe, “a leading generational theorist”) claims.  Boomer Americans, in their greed and shortsightedness, have trashed the global economy.  And so they're the cause of a world of hurt being piled on Millennial Americans. Maybe it’s more fair to say that the Boomers were lucky.  Their wonder and even peak-earning years were during times of strong and pretty constant economic growth and rising housing prices.  But there’s no chance in heck the Millennials are going to get the same kind of breaks. Certainly the Boomers lack of concern with public and private debt is causing many sober Millennials to face the harsh truth that they’ll be no entitlement programs and pension programs around when they get old enough or unfortunate enough to need them. The Millenials, of course, borrowed lots of money for college and really astounding amounts for law school.  But the jobs aren’t there for those with all that education, and their debt remains.  The least that can be said is that they should have gotten better advice about avoiding debt, paying your own way, and so forth from those who mentored them.

Unemployment Stories, Vol. Three: ‘Absolute Hell’ - Every week, we're bringing you true stories of unemployment, from the vast land of unemployed America. Today: depression, redemption, struggle, optimism, and the bitterness of the 99%. This is what's happening out there. I am a mid-30s female with an Ivy League graduate degree. I just received my third layoff in a little over four years. The most dangerous element of unemployment is depression. I'd get comments from friends like, "But you're on 'funemployment!" or "Everyday is Saturday for you!" Yes, I'm on unemployment. No, every day is not Saturday. Every day is a blur where I wake up to what will be another long day of trying to justify my existence, of trying to be productive, of trying to not spiral out of control from depression and stay in bed all day, of working up the strength to leave the house, to put on pants. Some days I'm good — up at 7am, breakfast, workout, at least a few hours of job searching, at least a few hours of housework, maybe a beer with a friend in the evening if I think I can afford it. And some days I stare at the pile of laundry on my floor, the detritus on my desk, the stack of unopened mail, the bare fridge, and I realized that, yep, I've spiraled again. My life irises down to tiny incremental goals. Today I will apply for X number of jobs. Today, I will do at least one load of laundry. Today, I will clean the fucking kitchen. I had to borrow money from my parents. I watched all the hard-won progress I'd made on paying down my student loans evaporate as I had to seek hardship deferment and watch the interest start racking up again. I went from middle class to working class.

Talk to Me, One Machine Said to the Other - Berg Insight, a research firm in Goteborg, Sweden, says the number of machine-to-machine devices using the world’s wireless networks reached 108 million in 2011 and will at least triple that by 2017. Ericsson, the leading maker of wireless network equipment, sees as many as 50 billion machines connected by 2020. Only 10 billion or so are likely to be cellphones and tablet computers. The rest will be machines, talking not to us, but to each other.  The combined level of robotic chatter on the world’s wireless networks — measured in the digital data load they exert on networks — is likely soon to exceed that generated by the sum of all human voice conversations taking place on wireless grids.

Trade-offs between inequality, productivity, and employment - I think there is a tradeoff between inequality and full employment that becomes exacerbated as technological productivity improves. This is driven by the fact that the marginal benefit humans gain from current consumption declines much more rapidly than the benefit we get from retaining claims against an uncertain future. Wealth is about insurance much more than it is about consumption. As consumers, our requirements are limited. But the curve balls the universe might throw at us are infinite. If you are very wealthy, there is real value in purchasing yet another apartment in yet another country through yet another hopefully-but-not-certainly-trustworthy native intermediary. There is value in squirreling funds away in yet another undocumented account, and not just from avoiding taxes. Revolutions, expropriations, pogroms, these things do happen. These are real risks. Even putting aside such dramatic events, the greater the level of consumption to which you have grown accustomed, the greater the threat of reversion to the mean, unless you plan and squirrel very carefully. Extreme levels of consumption are either the tip of an iceberg or a transient condition. Most of what it means to be wealthy is having insured yourself well. An important but sad reason why our requirement for wealth-as-insurance is insatiable is because insurance is often a zero-sum game.

How to Cut Skilled-Labor Costs - To import or to outsource? That is the question. Recent discussions of expanding access to H1-B visas highlight the tensions between employers in the United States in search of highly skilled employees and highly educated American citizens who face increasingly stiff competition in the global labor market. Much of the discussion about expanding H1-B visas focuses on whether there are particular areas of “skill shortage” despite persistently high unemployment. The more fundamental question is how much American employers can cut their costs either by importing highly skilled workers or exporting highly skilled jobs.  The answer is, a lot. Why hire a more expensive employee when a cheaper one is available? Why pay taxes to educate and train highly skilled workers when other countries (and their families and taxpayers) will do that for you? Many workers holding college degrees remained optimistic about the benefits of international trade, celebrating improvements in their own purchasing power. Now, my students can decide for themselves if lower prices will compensate them for reduced opportunities and lower wages. More than half of recent college graduates in the United States are either unemployed or are working in a job that doesn’t require a bachelor’s degree. Entry-level wages for employed college graduates were lower in 2011 than in 2000.

Outsource jobs or insource workers? The choice is clear. In the New York Times' Economix blog, Nancy Folbre worries about foreign competition hurting skilled Americans: To import or to outsource? That is the question...  The disruptive impacts of globalization initially hammered workers without much education...College students in the United States who major in science, technology, engineering and mathematics – often referred to as STEM fields – definitely face better prospects in the labor market than others do. But even they need to be aware of intensified competition down the road.  Professor Matloff, who favors extensive changes to the H1-B visa program, also warns of the growing impact of outsourcing on jobs for computer science majors. Now, I share some of Norm Matloff's concerns about the H1-B program. The visas force high-skilled immigrants to stay with a single employer in order to get green cards, thus turning these immigrants into a sort of indentured servant class. This should end. But concerns over the H1-B program should not translate into a general antipathy towards high-skilled immigration. In fact, concern over outsourcing should make us much more supportive of increased HSI. Reason 1: Taxes. If an American company - say, Microsoft - hires a programmer in Bangalore, the programmer pays income taxes to the Indian government. But if the same Indian programmer moves to San Jose, he pays his taxes to the American government. That means more roads, schools, etc. for America. Reason 2: Clustering. Skilled workers like engineers and programmers are more productive when they're around a lot of other engineers and programmers. They exchange ideas and cooperate and start businesses together and hire each other.

Nearly 40% of Americans Live Paycheck to Paycheck - A new report by the Consumer Federation of America found that two in five American households live paycheck to paycheck—that means no savings, retirement account or emergency fund. The number of families living this way has increased by 7 percent over the last 15 years, in no small part because of the recession. Now, only 30 percent of Americans say they feel comfortable financially, and only one third think they have enough saved to retire before age 65. In addition, the survey found that 51 percent of Americans feel behind on saving for retirement, a figure that has risen over the last decade and a half. These findings go hand-in-hand with statistics Bankrate.com uncovered last month: Roughly half of Americans don’t have enough savings to cover three months of expenses, and a quarter haven’t saved a single cent. This is big news. We know that the earlier we build up our emergency and retirement funds, the better prepared we’ll be and the greater return we’ll see on our money. But that quarter of Americans aren’t so concerned about saving enough–they’re concerned about saving at all.

Wage stagnation isn’t due to a compositional shift - From the mid-1940s through the mid-1970s, inflation-adjusted wages for Americans in the middle and below rose in sync with the economy. Since then, the median wage has barely budged. Steve Landsburg suggests that worry about this is misplaced, because what looks like wage stagnation actually is an artifact of a compositional shift in our labor force: “There’s been a great influx of lower income groups — women and nonwhites — into the workforce. This creates the illusion that nobody’s progressing when in fact everybody’s progressing.” It’s true that employment of women and nonwhites has increased relative to that of white males. But that didn’t begin in the late 1970s. It’s been going on for a long time. Here is the trend in the white male share of total employment since the early 1950s: A compositional shift in employment isn’t what distinguishes the era of wage stagnation from the earlier period of rising wages.

Low-Paying Jobs Are Here To Stay - Stuck in a job with lousy pay? Better get used to it. Some 28% of workers are expected to hold low-wage jobs in 2020, roughly the same percentage as in 2010, according to a study by the Economic Policy Institute. The study defines low-paying jobs as those with wages at or below what full-time workers must earn to live above the poverty level for a family of four. In 2011, this was $23,005, or $11.06 an hour. The economy won't support much growth in jobs with higher salaries, said Rebecca Thiess, policy analyst at the left-leaning Economic Policy Institute, who crunched government data to come up with these projections. "Far too many economic pundits take for granted that the economy of the future will demand far greater skills and credentials," she wrote in a recent paper. Lower wage occupations grew by 3.2% over the year ending in the first quarter of 2011, according to the National Employment Law Project. This was fueled mainly by the expansion of retail salespeople, office clerks, cashiers, food prep workers and store clerks, whose median hourly wages ranged from $7.51 to $13.52.

Top 5 Reasons Why Raising the Minimum Wage Is Good for You and Me - In recent months, a number of states have again taken the lead on measures to raise the minimum wage. Massachusetts is moving toward a minimum of $10 per hour. Other measures are on the table in New York, Illinois, New Jersey, Connecticut and Missouri. Meanwhile Sen. Tom Harkin, D-Iowa, is pressing for the federal minimum wage to rise to $9.80 per hour by 2014. This is far more sensible policy than symbolic nods to the left through gimmicks such as the so-called Buffett Rule, which might raise new revenues from the mega-wealthy through taxes, but will likely amount to very little because gazillionaires can hire clever accountants to help them get around it. No, we need policies that clearly do something for hard-working people who have been clobbered by a financial crisis they didn’t create.Here are five reasons why we should cheer for working America getting a raise.
1. Good for Families: According to economist James Galbraith, raising the minimum wage would raise the incomes of 28 million Americans. Women would particularly benefit because they tend to work for lower wages than men. As Galbraith sees it, raising the minimum wage is family friendly policy:
2. Good for Economic Recovery: To get the economy back on track, spending power has to be in the hands of those who actually spend in the real economy.
3. Helps People Get Out of Debt:
4. Protects Workers From Abuse: A higher minimum wage would also help to mitigate the abusive, exploitative working practices of a number of employers, who take advantage of the currently low minimum wage to seek cut-rate help.
5. Justice for Working Americans: Most of all, a big jump in the minimum wage would be a reparation. The past 30 years have witnessed a dramatic redistribution of national and personal income in favor of profits for the rich.  It would be an act of justice.

Conservatives Should Oppose the Minimum Wage -Last week Adam argued that conservatives should either support the minimum wage or oppose it less.  His analysis correctly reframes the minimum wage as a law that prohibits workers from participating in the labor market if they contribute less than $7.25 per hour to production.  This does not mean that conservatives should support the minimum wage and make it more difficult for inexperienced workers to gain valuable labor market experience. The minimum wage makes it harder for unskilled workers to gain the labor market experience and on-the-job training that would raise their productivity and future pay.  Unskilled workers are less attractive with a higher minimum wage because they produce less per hour and their hiring diverts more senior workers from revenue producing activities to training and supervision.Firms will only invest in human capital if they expect to receive a return on their investment.  Firms will not pay for general skills if workers are likely to leave before firms recoup their investment costs.  The Bureau of Labor Statistics reports that 69% of jobs started by workers age 18 to 24 last less than a year.   Turnover is even higher for teen age workers.  The minimum wage study of Hirsch, Kaufman and Tetyana cited by Ozimek reports that the median job duration was 14 weeks in the firms they surveyed,

Higher wages correlate with lower levels of employee theft - A study co-written by a University of Illinois business professor shows that higher wages are associated with lower levels of employee theft, shedding light on the impact that compensation practices have on shaping employee honesty and ethical norms in organizations. Using data sets from the convenience-store industry, they found that after controlling for each store's employee characteristics, monitoring environment and socio-economic environment, relative wages – that is, wages relative to those received by other employees performing similar jobs in the same sector and region – were negatively associated with employee theft. While previous studies have focused on the effect of higher wages on employee effort or turnover, Chen and Sandino document the effect of higher wages on employee theft as measured by cash shortage and inventory shrinkage. The researchers argue that paying relatively higher wages discourages employee theft for two reasons. First, employees receiving higher wages are less inclined to commit theft because they wish to retain their higher-paying job or as a gesture of positive reciprocity. Second, firms that offer relatively higher wages may attract a higher proportion of honest workers.

This Week in Poverty: TANF, VAWA and Playing Politics with the Lives of Low-Income People - “A partisan disgrace,” declared Speaker John Boehner. “President Obama now wants to strip the established work requirements from welfare,” Governor Mitt Romney charged. . The source of all of this consternation? A memo from Health and Human Services (HHS) announcing that it will “allow states to test alternative and innovative strategies, policies, and procedures that are designed to improve employment outcomes for needy families.… The Secretary is interested in using her authority to approve waiver demonstrations to challenge states to engage in a new round of innovation that seeks to find more effective mechanisms for helping families succeed in employment.” In short, let states explore new ways to get better results from their efforts to employ low-income people in good jobs. Sound familiar? Giving states more flexibility to run their Temporary Assistance to Needy Families (TANF) programs? The notion that local folks might have some of the best ideas on how to help people in their jurisdictions? It’s straight out of the Republican playbook. Only this time around the proposal is from a Democratic Administration, so suddenly it’s not kosher.

Poverty Rate Would Nearly Double Without the Safety Net - As Georgetown University’s Peter Edelman explained in yesterday’s New York Times, the serious hurdles that this nation faces in ending poverty shouldn’t obscure our real achievements in this area over recent decades.  He cites a CBPP estimate that poverty would be nearly double what it is now if not for programs like the Earned Income Tax Credit and SNAP (formerly food stamps). Here are the specifics, as we outlined them last fall: [S]ix recession-fighting initiatives enacted in 2009 and 2010 kept nearly 7 million people out of poverty in 2010 — under an alternative measure of poverty that takes into account the impact of government benefit programs and taxes. . . .[I]f the government safety net as a whole — these temporary initiatives (all were featured in the 2009 Recovery Act) plus safety-net policies already in place when the recession hit — hadn’t existed in 2010, the poverty rate would have been 28.6 percent, nearly twice the actual 15.5 percent (see graph).

When Serving Jail Time for Unpaid Debts Becomes a Debt Spiral - Tell me.  Are we allowed to do anything we like to those with the least power and money in our society? Are there no limits? We know that in some states, private actors have been permitted to charge 500-1,000% for loans, but what about public actors? Can you think of any debtor-credit practices that rise to the level of human right violations? This is question Chrystin Ondersma (Rutgers Newark School of Law) and I have been asking ourselves in connection with a project on which we are working. Earlier this month, the New York Times ran a story that chronicled several people jailed for minor infractions (such as unpaid speeding tickets or other driving violations), and then charged huge prison costs after serving jail time resulting indirectly from these unpaid debts. For example, one woman was fined $179 for speeding, failed to show up at court (she says the ticket bore the wrong date), after which her license was revoked. When she was pulled over for driving without a license, her fees totaled over $1,500. Unable to pay, she was handed over to a private probation company and jailed, racking up an additional fee for every day behind bars. She’s been locked up three times for that one driving offense, serving 40 days, and now owes nearly $3,000. Another guy featured spent a total of 24 months in jail and owes $10,000 for what started out as very small dollar minor infractions. Read the article for more of the same.

Why Can’t We End Poverty in America? - RONALD REAGAN famously said, “We fought a war on poverty and poverty won.” With 46 million Americans — 15 percent of the population — now counted as poor, it’s tempting to think he may have been right. Look a little deeper and the temptation grows. The lowest percentage in poverty since we started counting was 11.1 percent in 1973. The rate climbed as high as 15.2 percent in 1983. In 2000, after a spurt of prosperity, it went back down to 11.3 percent, and yet 15 million more people are poor today. At the same time, we have done a lot that works. From Social Security to food stamps to the earned-income tax credit and on and on, we have enacted programs that now keep 40 million people out of poverty. Poverty would be nearly double what it is now without these measures, according to the Center on Budget and Policy Priorities. To say that “poverty won” is like saying the Clean Air and Clean Water Acts failed because there is still pollution. With all of that, why have we not achieved more? Four reasons: An astonishing number of people work at low-wage jobs. Plus, many more households are headed now by a single parent, making it difficult for them to earn a living income from the jobs that are typically available. The near disappearance of cash assistance for low-income mothers and children — i.e., welfare — in much of the country plays a contributing role, too. And persistent issues of race and gender mean higher poverty among minorities and families headed by single mothers.

All Things Bright and Beautiful - Krugman - Brad DeLong revisits Tyler Cowen’s remarkable defense of lack of social mobility. I’d written about it at the time — and predicted that this sort of thing would start popping up a decade earlier. But I somehow missed this passage: For a given level of income, if some are moving up others are moving down. Do you take theories of wage rigidity seriously? If so, you might favor less relative mobility, other things remaining equal. More upward — and thus downward — relative mobility probably means less aggregate happiness, due to habit formation and frame of reference effects. I believe that this, translated out of economese, is basically the sentiment from All Things Bright and Beautiful:

The rich man in his castle,
The poor man at his gate,
God made them high and lowly,
And ordered their estate.

True, Cowen isn’t advocating a complete caste society — but it’s actually not clear why, since he is suggesting that we’ll be happier as a society if people stay comfortably in the class into which they were born. There was a time when that sort of sentiment would have been considered anti-American. But I guess that was a different country.

Rich, poor increasingly likely to live apart - Rising income inequality has led to a growing number of Americans clustering in neighborhoods in which most residents are like them, either similarly affluent or similarly low-income, according to a new study detailing the increasing isolation of the richest and the poorest.A report released Wednesday by the Pew Research Center said the percentage of upper-income households situated in affluent neighborhoods doubled between 1980 and 2010, rising to 18 percent. In the same time frame, the share of lower-income households located in mostly poorer neighborhoods rose from 23 percent to 28 percent. The percentage of neighborhoods that are predominantly middle class or home to a wider mix of income levels shrank. “The country has increasingly sorted itself into areas where people are surrounded by more of their own kind, if you will,”

Equal Opportunity and Economic Growth - A half-century ago, white men dominated the high-skilled occupations in the U.S. economy, while women and minority groups were often barely seen. Unless one holds the antediluvian belief that, say, 95% of all the people who are well-suited to become doctors or lawyers are white men, this situation was an obvious misallocation of social talents. Thus, one might predict that as other groups had more equal opportunities to participate, it would provide a boost to economic growth. Pete Klenow reports the results of some calculations about these connections in "The Allocation of Talent and U.S. Economic Growth," a Policy Brief for the Stanford Institute for Economic Policy Research.  Here's a table that illustrates some of the movement to greater equality of opportunity in the U.S. economy. White men are no longer 85% and more of the managers, doctors, and lawyers, as they were back in 1960. High skill occupation is defined in the table as "lawyers, doctors, engineers, scientists, architects, mathematicians and executives/managers." The share of white men working in these fields is up by about one-fourth. But the share of white women working in these occupations has more than tripled; of black men, more than quadrupled; of black women, more than octupled.

Readers Respond on the State of the Middle Class - The next major step in our story on the plight of the American economy — part of The Times’s Agenda series — is to examine the causes. As I noted in the initial post, median family income in this country is lower today than 12 years ago, a stretch unlike any other since the 1930s.  On the most basic level, the causes are a slowdown in economic growth and an increase in income inequality: the pie is growing more slowly, and a large share of the gains is going to a small portion of the population. But that statement is as much an accounting statement as anything else. It doesn’t explain the forces driving the changes. More than 700 comments have been posted on that post, and many of these addressed underlying causes. Below, we are excerpting a selection of those comments, because we assume that most readers did not have time to read hundreds of them. I am also using the responses to help me write a survey I’m sending to a range of economists asking them to discuss what they see as the most important causes. Some may rank causes or put them in different buckets of importance. Others may use the survey as inspiration to write a few paragraphs laying out their views.

Republicans vs. Women - NYTimes editorial - A new Republican spending proposal revives some of the more extreme attacks on women’s health and freedom that were blocked by the Senate earlier in this Congress. The resurrection is part of an alarming national crusade that goes beyond abortion rights and strikes broadly at women’s health in general. These setbacks are recycled from the Congressional trash bin in the fiscal 2013 spending bill for federal health, labor and education programs approved by a House appropriations subcommittee on July 18 over loud objections from Democratic members to these and other provisions. The measure would bar Planned Parenthood’s network of clinics, which serve millions of women across the country, from receiving any federal money unless the health group agreed to no longer offer abortion services for which it uses no federal dollars — a patently unconstitutional provision. It would also eliminate financing for Title X, the effective federal family-planning program for low-income women that provides birth control, breast and cervical cancer screenings, and testing for sexually-transmitted diseases. Without this program, some women would die, and unintended pregnancies would rise, resulting in some 400,000 more abortions a year and increases in Medicaid-related costs, according to the Guttmacher Institute, a leading authority on reproductive health.

Jobless Rates Rose in 90% of U.S. Cities in June — Unemployment rates rose in nearly 90 percent of large U.S. cities in June, partly because many young people graduated from school with no firm job prospects. Many of the cities with significant increases in their rates have large universities, where students have begun searching for jobs in recent months. Unlike the national figures, the metro unemployment data isn’t seasonally adjusted for such changes. The Labor Department says unemployment rates rose in 332 large metro areas. They fell in 29 and were unchanged in 11. That’s worse than in May, when rates rose in 255 cities. Nationwide, the unemployment rate was 8.2 percent in June for the second straight month. Employers added only 80,000 jobs, the third straight month of weak gains. The government will issue July’s jobs report on Friday.

What do jobless do when unemployment checks run out? - Since abruptly losing her $312 weekly unemployment check in June, Laurie Cullinan has depleted her savings, sought food from the Salvation Army and lit candles to save electricity. If she can't find a job this month, the Royal Oak, Mich., resident worries she'll be evicted from her apartment, an unthinkable prospect for the 52-year-old, who enjoyed a solidly middle-class lifestyle until she lost her office-manager job two years ago. "What am I going to do if I'm homeless?"  "My mind won't let me comprehend that." Cullinan is among about 1 million long-term unemployed Americans whose jobless benefits are phasing out this year as the federal government reels in Great Recession lifelines that provided unemployment checks for as long as 99 weeks in many states. By year's end, another 2 million will see their checks cut off sooner than Cullinan's were, because extended unemployment benefits will end beyond the standard 26 weeks that states pay for. Congress could renew the program, but many economists say that's unlikely. The cutbacks, required by a federal law passed in February, are already taking a toll. They are nudging some Americans into poverty, straining social services just as states and localities face their own budget woes and further crimping weak economic growth as those who lose benefits spend less.

D.C. food bank to open $37 million facility to combat ‘growing hunger crisis’ - The Capital Area Food Bank’s new distribution center opens on Tuesday. It cost $37 million to build and is the size of two football fields, with a teaching kitchen, warehouse space and 13 loading docks for grocery trucks. The center is immense, but local relief officials say it is needed to combat a “growing hunger crisis” in the Washington region, one of the most affluent areas in the United States. The food bank, the central supplier for more than 700 food pantries and nonprofit organizations that help the needy, is set to give out a record 33 million pounds of food this year, up from 23 million at the beginning of the recession. And it is not enough. Area residents continue to struggle, with some neighborhoods in the District facing double-digit unemployment, poverty on the rise and the cost of living high. “We are still not able to meet the growing demand,” . “The middle class is under stress, and many people who have never needed emergency food services find themselves at food pantries” seeking help. More than 680,000 residents in the area are at risk or experiencing hunger, including 200,000 children, according to census data. The food bank can only help three-quarters of the people who need assistance, Brantley said.

Food Stamps: Married People Need Not Apply - A fundamental difference between unemployment compensation and the food stamp program is their treatment of household income. The result is that food stamp participation among married people is relatively rare. Traditionally, the food stamp program (now called SNAP) was for the poor: participants had to demonstrate that their incomes and assets were both low, and the program was financed out of general revenue. Unemployment compensation was an insurance program, financed from contributions by participating workers and awarded regardless of one’s assets or the earnings of other household members.  Most states admit participants into SNAP using “broad-based categorical eligibility,” which (with the exception of three states) means that assets are not checked. For a few years unemployment benefits were available even for those who had been collecting for almost two years; food stamp participation can continue indefinitely. But an important difference between SNAP and unemployment compensation has remained throughout the recession: the SNAP program checks the income of all household members and bases eligibility on the entire household’s income, not just the situation of the household head.

How The Poor, The Middle Class And The Rich Spend Their Money -How do Americans spend their money? And how do budgets change across the income spectrum? The graph below answers these questions. It shows average household spending patterns for U.S. households in three income categories — one just below the poverty line, one at the middle of the income distribution and one at the top of the distribution.Both the similarities and the differences are striking. Everyone devotes a huge chunk of their budget to housing, for example. Poor, middle class and rich families spend similar shares of their budgets on clothing and shoes, and on food outside the home. But poor families spend a much larger share of their budget on basic necessities such as food at home, utilities and health care. Rich families are able to devote a much bigger chunk of their spending to education, and a much, much bigger share to saving for retirement. (The retirement line includes contributions to Social Security and to private retirement plans, by the way.)

States' Hidden Jobless Woes - California and Nevada are struggling with some of the nation's highest rates of workers who are looking for jobs or not putting in as many hours as they would like, new government data show.  The ranks of these individuals aren't reflected in the overall jobless rate in the U.S. Labor Department's monthly unemployment report. That report—July's figures will be released Friday—is the best gauge of the health of the labor market. But the overall jobless rate, which now stands at 8.2%, doesn't tell the whole story. For example, the national unemployment rate doesn't take into account people who want to work but haven't looked for a job in the previous four weeks because they figured none were available.  The national unemployment rate also doesn't account for people in part-time jobs who would prefer full-time work. To get a broader view that encompasses both groups, economists at the federal Bureau of Labor Statistics track the under-employment, or U-6, rates for states and the entire country. According to Labor Department figures released late last week, California and Nevada are struggling not just with high unemployment, but also severe under-employment. California's average unemployment rate from July 2011 through June 2012 was 11.2%, but its broader under-employment rate was far higher, at 20.3%.

Austerity in the USA: Last Three Years Worst On Record For Public Sector Job Losses - Despite cries from conservatives about the growth of government under the current administration, the public sector has shed more than 600,000 jobs since President Obama took office and has added jobs in just two months since the beginning of 2011. The only other time state governments have contracted in two consecutive years came during the healthier economic times of the mid-1990s. Altogether, the first three years of the Obama administration has been the worst three-year stretch on record for public sector job losses, Reuters reports: The result? The last three years of job losses at the state and local government level has been the most dramatic since Labor Department records began in 1955, according to a Reuters analysis. [...] Local governments have cut 482,000 jobs since the beginning of 2009. They added jobs in just two months since 2011 started. Previously, states only had two consecutive years of layoffs, 1995 and 1996, when they scrapped about 57,000 jobs, or about one-third of the 150,000 cut since the beginning of 2009. The loss of government jobs has had dire effects on the recovery. In 2011, government job losses pushed total layoffs past the 2010 total, despite better job growth in the private sector. “If public-sector employment had grown since June 2009 by the average amount it grew in the three previous recoveries (2.8 percent) instead of shrinking by 2.5 percent, there would be 1.2 million more public-sector jobs in the U.S. economy today,” the Economic Policy Institute found in a recent report.

Which States Have Worst Underemployment? - California ain’t having a great summer. Its economy remains crippled by the housing bust. Its unemployment rate is the nation’s third-highest, after Nevada and Rhode Island. And officials in four of its cities — Stockton, Mammoth Lakes, Compton and San Bernardino — recently filed or indicated they might file for bankruptcy protection. Well, here’s one more not-so-golden medal for the Golden State: It has the worst involuntary-part-time-worker problem. According to new Labor Department figures, California’s average unemployment rate from July 2011 through June 2012 was 11.2% … but its broader “under-employment” rate was a whopping 20.3%. While it’s the government’s unemployment rate that moves headlines every month — the latest, for July, comes out Friday — the “under-employment” rate, or “U-6” rate, includes everyone else affected by the moribund job market: people who want to work but haven’t looked in the last four weeks because they figured no jobs were available and those working part-time gigs but would prefer full-time positions. (By the way, the government’s number-crunchers prefer “four-quarter moving averages” when it comes to state data because of it’s smaller sample size. By taking in longer time spans, the government may boost the reliability of the findings.)

Billionaire Mayor Bloomberg Sues to Keep New Yorkers’ Wages Low - The world's 20th richest man declared recently that a living wage bill passed (over his veto) by New York's city council was the next best thing to Communist central planning. Michael Bloomberg, who's also made news recently trying to ban large sodas, today took the next step in proving how serious he is about keeping wages low--I mean, keeping New York City a "business-friendly" climate.  Bloomberg is suing to prevent not just the living wage bill, but a companion "prevailing wage" bill that the City Council also passed over his veto, from going into effect. The living wage bill requires employers that get more than $1 million in taxpayer subsidies to pay their workers at least $10 an hour with benefits or $11.50 an hour without them, and the prevailing wage bill would up wages to $20 an hour for certain building services workers in buildings that receive subsidies of over $1 million or where the city leases a significant amount of property.

City debt payments poised to soar next year, further clouding budget - City of Chicago debt payments are expected to soar by $278 million next year to the record level of $1.55 billion, according to a city financial analysis released Tuesday by Mayor Rahm Emanuel. As a result, about $1 of every $4 the city will spend in 2013 could go to paying off long-term debt, complicating the city's already strained financial situation. "That's a cause of concern for the rating agencies" that could result in higher borrowing costs and further downgrades in the city's bond ratings, said Laurence Msall, executive director of the nonpartisan Civic Federation budget watchdog group. That was just one of the problems noted in the financial analysis, an annual summertime document that launches the city's budget process for the following year. Aldermen will meet Wednesday with some of the mayor's top aides to be briefed on the report. This year, the analysis shows a projected budget shortfall of $369 million, half of what it once was expected to be. But it's still a big hole that will force the city to find ways to spend less, bring in more money or both.

Court lets Stockton, Calif. cut retiree health care - A federal bankruptcy judge on Friday cleared the way for Stockton, California to cut health care benefits for retirees while it is in bankruptcy proceedings. Stockton is seeking Chapter 9 protection from its creditors and said that it would cut retiree health benefits while it reorganizes. Retired employees sued to stop those cuts. Judge Christopher Klein on Friday issued a temporary order denying the bid to stop the benefit cuts, and he said a formal decision was on its way. Stockton's attorneys had argued that bankruptcy law gave the city wide latitude on how to spend its revenue while it prepares a plan to restructure its finances.

San Bernardino, California, Files Chapter 9 Bankruptcy Petition - San Bernardino, California, after disclosing a $46 million shortfall in the city’s budget, filed for municipal bankruptcy. San Bernardino listed assets and debt of more than $1 billion in a filing yesterday with the U.S. Bankruptcy Court in Riverside, California. It’s the third California city to seek court protection from creditors since June 28.  City officials sped up the timing of the filing because they were concerned that some creditors may take legal action against the city, Mayor Patrick J. Morris said yesterday in a phone interview. Under Chapter 9, all court cases and other legal actions against the city will be halted until the bankruptcy case is over.  One of the main problems is the high cost of the city’s union contracts, particularly for police and fire service, City Councilman Fred Shorett said in a phone interview. Under the city charter, which is like a constitution for municipal governments, city officials must use a specific formula for determining wages and other benefits paid to its police and fire employees, Shorett said. That formula requires the city to set compensation by comparing employee pay in San Bernardino, which has one of the highest home foreclosure rates in California, with cities in the state that are about the same size and have much more money to spend, Shorett said.

San Bernardino, California, files for bankruptcy with over $1 billion in debts (Reuters) - San Bernardino filed for bankruptcy protection on Wednesday citing more than $1 billion of debts and making it the third California city to seek protection from creditors. The city of about 210,000 residents 65 miles east of Los Angeles declared a fiscal crisis last month after a report said local government had tapped out its reserves and projected spending would top revenue by $45 million in the fiscal year that began on July 1. The filing, made in the United States Bankruptcy Court, Central California District, states that the city has "more than $1 billion" in liabilities, and estimated that it has between 10,001 and 25,000 creditors. It also states that San Bernardino has estimated assets of more than $1 billion. San Bernardino's city council voted on July 24 to adopt an emergency three-month fiscal plan that would suspend debt payments, freeze vacant jobs and quit paying into a retiree health fund while city staff produce a more detailed bankruptcy plan. "The bankruptcy filing was just to get the protection in place, to kick the process off," a city spokesperson said.

 Municipal bankruptcy: The lessons of California - In California, the names of the latest victims are well known. San Bernardino, Stockton and Mammoth Lakes all filed for bankruptcy within the last few weeks. And Vallejo emerged from Chapter 9 protection just last year. The questions appear to be "Why all in California?" and "Who will be next?" Although California's problems are extreme, the state is hardly alone in financial difficulties. Towns and counties in Alabama, Illinois, Michigan, New Jersey, New Hampshire, New York, Pennsylvania and Rhode Island are all having trouble meeting their financial obligations. If these conditions continue to spread, the United States will be facing a crippling debt crisis at the state and local levels, which is where Americans receive much of what matters for their quality of life. This was a central point in a report released July 17 by the State Budget Crisis Task Force headed by former Federal Reserve Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch. PHOTOS: California cities in bankruptcy Simply put, in the aftermath of the financial crisis emanating from Wall Street, the federal financial mess is bleeding over into state budgets in profound ways, adding enormous costs to already overburdened state coffers. That spillover, in conjunction with broader national crises in finance and healthcare, is overwhelming state and federal finances.

California cities declare fiscal emergency to support tax hikes In California, cities allegedly facing financial struggles have declared a fiscal emergency in order to heighten the need for a tax hike. A fiscal emergency must be approved by the city council or its governing body unanimously. If this is achieved, cities would not need to wait the required two years for the local election, but would be able to immediately present the tax question to voters. Cities are resorting to the increase of sales taxes, utility taxes, and parcel taxes in order to overcome their fiscal shortcomings. Cities such as Culver City, La Mirada, and Fairfield have declared fiscal emergencies in order to have their proposal to increase sales tax placed on their ballots this November. Cities such as El Monte near the Los Angeles area have even proposed to increase the taxes on drinks sweetened with sugar in order to overcome its deficit. The city proposes to increase the tax on these sugar sweetened drinks by one cent-per-ounce. City officials estimate that this tax increase would earn $7 million annually in revenue.

Goldman to Invest in City Jail Program, Profiting if Recidivism Falls Sharply - New York City, embracing an experimental mechanism for financing social services that has excited and worried government reformers around the world, will allow Goldman Sachs to invest nearly $10 million in a jail program, with the pledge that the financial services giant would profit if the program succeeded in significantly reducing recidivism rates.  The city will be the first in the United States to test “social impact bonds,” also called pay-for-success bonds, which are an effort to find new ways to finance initiatives that might save governments money over the long term.  First used in Britain and now being explored in Australia, the bonds are rapidly capturing the imagination of some public officials in the United States: on Wednesday, Massachusetts announced that it was completing negotiations with two nonprofit groups to finance juvenile justice and homelessness programs, with the promise of repayment only if the programs work.   The federal government, Connecticut, New York State and Cuyahoga County, Ohio, among others, are at various stages of considering using the bonds to harness new funds for human-services programs.

Goldman Sachs Invests in POP Bonds - Goldman Sachs is investing in a New York City pay on performance bond (POP bond also called a social improvement bond). The Pop bond is based on recidivism rates for adolescents, as described by the NYTimes: The Goldman money will finance a program called Adolescent Behavioral Learning Experience…which seeks to improve prospects for black and Latino adolescents. The jail program, which will offer counseling and education for an estimated 3,400 incarcerated adolescent men each year, will be run by two nonprofit organizations, …If the program reduces recidivism by 10 percent, Goldman would be repaid the full $9.6 million; if recidivism drops more, Goldman could make as much as $2.1 million in profit; if recidivism does not drop by at least 10 percent, Goldman would lose as much as $2.4 million. As I wrote earlier: For Pop bonds to work it is critical that outcomes be measured and marked to an appropriate, randomized, control group. If not carefully monitored, the private sector will also excel at innovative and creative gaming at the public expense. The involvement of Goldman Sachs makes me fear that my last sentence will prove prophetic.

Goldman Sachs’s New York prison deal saves all the risk for the taxpayer - Mike Bloomberg, still the mayor of New York after all these years, has announced a new four-year program to keep prisoners from reoffending after their sentences, funded by $9.6m from Goldman Sachs. When we said we wanted to see the bankers in the clink, this is not what we meant. It may sound like a nice philanthropic gesture, but that $9.6m sum isn't a donation; it's a loan. As City Hall explained, Goldman is being incentivized to produce results – if recidivism drops by 10%, Goldman gets the money back, and if it drops further then the GS boys will turn a small profit. (One idea for Lloyd Blankfein: if you really want to end up in the black, just hire the ex-offenders to work at Goldman, where I can't imagine they'd have much trouble fitting in.) You might wonder why, since reducing crime and offering better lives to past offenders are obvious social pluses, the government doesn't just pay for such a program itself. (The usual cries about public sector inefficiency don't apply. The ex-offender education scheme isn't a state program; it's administered by a nongovernmental social enterprise.) Alas, this is the nature of Bloombergism. There is no social problem that can't be reduced to metrics, no public function that an unaccountable private undertaking can't perform better, and no incentive like the profit motive.

K-12 Schools Continue to Shed Jobs - CBPP - Today’s jobs report shows that local school districts continue to struggle with job losses.  After school districts cut 7,000 positions in July, they now have 321,000 fewer teachers and other staff than they did when employment peaked in August 2008.  As the graph below shows, local education jobs have been falling for four years. Local education jobs are at their lowest point since October 2004, but K-12 schools educate hundreds of thousands more students than they did eight years ago.  So many fewer teachers, administrators, and other staff in K-12 schools supporting such greater numbers of students undoubtedly hurts the quality of education that children receive. The cuts to public employment rolls also hurt the recovery.  When teachers and other public employees like police and firefighters lose their jobs, they have to cut back on spending.  Less spending means fewer customers for businesses and a resulting drag on the recovery.

Why Are We Still Firing Teachers? Surprise: It’s the Housing Market - There are many casualties of the horrible housing market, from underwater families to weak car sales. But here's another one that might surprise you: Our public school system. This month, the number of government workers the United States continued its long decline. But on the local level, something interesting has changed. For for the first few years of the recovery, public sector employees of all stripes -- teachers, firefighters, police, etc. -- were getting pink slips. But in the last few months, that's no longer been the case. Local governments have started hiring again outside of schools. Meanwhile, teachers school staff are still getting laid off.Here's employment in public education, dating back to 2009. It's still dipping. Now here's the rest of local government hiring. It seems to be in the early stages of a modest recovery. It's possible that school districts believe they're simply overstaffed. But I think a more reasonable explanation is taxes. Public schools are disproportionately funded through property taxes, while the other arms of local government survive on a combination of income taxes, sales taxes, state allocations, and a potpourri of other charges. During the recovery, total state and local taxes have grown by a few percentage points. But property taxes have actually fallen modestly.

The Price Everybody Talks About and Nobody Really Knows: How Much Does College Cost? -  Higher education is expensive, and getting more so by the year.  But how expensive? Ah, that's a trickier question. What we talk about when we talk about the price of a degree can be a bit murky, thanks to the vast variations in tuition, financial aid, and lifestyle choices that determine how much a student spends during their time on campus. For parents paying the tab, and for wonks who'd like to make higher education more affordable, it's useful to have a realistic baseline for how much a bachelor's actually runs these days.   So without further ado, let's look at the numbers.  In the 2009-2010 school year, the sticker price of tuition, room, and board for a full-time student pursuing a four-year degree was $21,189, or 34 percent of the median family's income. That's already 10 percentage points higher than the beginning of the decade. Here's a graph of college's sticker price as a share of a typical family's budget going back to 2000.

Families to Shoulder Rising College Tuition Costs, Treasury Official Says - Higher education is critical for economic mobility, but rising tuition costs and a decrease of public funding means that more of the financing responsibilities could be shifted to family wealth — a particular challenge in today’s economy, the Treasury Department’s top economist said Tuesday. Tuition has more than doubled over the last three decades, said Jan Eberly, assistant secretary for economic policy at the Treasury. But underlying that trend is a “fundamental shift” in education financing, particularly at public schools. As public funding has been withdrawn, tuition now accounts for more than 40% of revenue, up from only 20% in the late 1980s, Ms. Eberly said. During the same time period, state and local government support fell by almost the exact same share, she said. Ms. Eberly cited Department of Education data that estimated of the 2.9 million people who finished high school in 2009, 70% enrolled in college that same year. A decade earlier, only 63% of recent graduates enrolled in college right out of high school. The federal government has increased its support for higher education through Pell Grants and tax credits, but Ms. Eberly said those kinds of programs have not “completely offset the substantial decline in support from state and local sources.” 

How Recession Will Change University Financing - The latest recession will probably be seen as a turning point for college and university financing.  Indeed, the initial reaction by many youths to soaring unemployment was to stay in or return to college to wait out the bad times and get better prepared to face a tough job market. For-profit and community colleges have been especially attractive, and in the fall of 2011, there were 22 percent more students enrolled in the nation’s 1,200 community colleges than in the fall of 2007. Nevertheless, less than half graduate.  Also, those now leaving college are finding few jobs. Only 54 percent of those age 18 to 24 are employed, the lowest share since data began to be collected in 1948, and the unemployment- rate gap between this demographic group and all working-age adults is the widest on record. Only 49 percent of graduates from the classes of 2009 to 2011 found jobs within their first year out of school, compared with 73 percent of those who graduated three years earlier. About 54 percent of bachelor’s- degree holders under 25, or about 1.5 million people, were jobless or underemployed last year.  In addition, there is now research challenging the economic value of a college education.  Furthermore, the raw lifetime-income differences don’t account for tuition costs, interest on student loans, lost wages while in college, and the discounting of future earnings.

The Ruling Elite and the Perversion of Scholarship -- Fraternities, sororities and football, along with other outsized athletic programs, have decimated most major American universities. Scholarship, inquiry, self-criticism, moral autonomy and a search for artistic and esoteric forms of expression—in short, the world of ethics, creativity and ideas—are shouted down by the drunken chants of fans in huge stadiums, the pathetic demands of rich alumni for national championships, and the elitism, racism and rigid definition of gender roles of Greek organizations. These hypermasculine systems perpetuate a culture of conformity and intolerance. They have inverted the traditional values of scholarship to turn four years of college into a mindless quest for collective euphoria and athletic dominance. There is probably no more inhospitable place to be an intellectual, or a person of color or a member of the LGBT community, than on the campuses of the Big Ten Conference colleges, although the poison of this bizarre American obsession has infected innumerable schools. These environments are distinctly corporate. To get ahead one must get along. The student is implicitly told his or her self-worth and fulfillment are found in crowds, in mass emotions, rather than individual transcendence. Those who do not pay deference to the celebration of force, wealth and power become freaks. It is a war on knowledge in the name of knowledge.

Inside the Coursera Contract: How an Upstart Company Might Profit From Free Courses = Coursera has been operating for only a few months, but the company has already persuaded some of the world's best-known universities to offer free courses through its online platform. Colleges that usually move at a glacial pace are rushing into deals with the upstart company. But what exactly have they signed up for? And if the courses are free, how will the company—and the universities involved—make money to sustain them? Some clues can be found in the contract the institutions signed. The Chronicle obtained the agreement between Coursera and the University of Michigan at Ann Arbor, the first public university to make such a deal, under a Freedom of Information Act request, and Coursera officials say that the arrangement is similar to those with the other partners. The contract reveals that even Coursera isn't yet sure how it will bring in revenue. A section at the end of the agreement, titled "Possible Company Monetization Strategies," lists eight potential business models, including having companies sponsor courses. That means students taking a free course from Stanford University may eventually be barraged by banner ads or promotional messages. But the universities have the opportunity to veto any revenue-generating idea on a course-by-course basis, so very little is set in stone.

For-Profit Colleges Slammed in Senate Report -- The Senate Committee on Health, Education, Labor and Pensions has delivered a fairly scathing report on for-profit colleges, arguing that they have provided far more benefits for shareholders than the students that matriculate at their institutions. As of 2009, the report said, three-quarters of students in for-profit colleges attended institutions owned either by publicly traded companies or private equity firms. It said the schools excelled at recruiting students, but not necessarily at retaining them: More than half of students at for-profit schools who enrolled in the 2008-09 academic year left without a degree, the report found. Half of all non-finishers ended their studies within four months. The findings are in line with concerns voiced last year when the Education Department imposed stricter rules on for-profit schools that benefit from federal student loans. Good for the Washington Post, whose parent company Kaplan owns a for-profit college, for printing this.The lifeline for for-profit colleges turns out to be the federal government. Students access federal loans to enroll in the colleges, and they don’t end up benefiting from the experience. They are also often misled about how much the education will cost. And for-profit colleges devote more money to recruitment than instruction, not caring as much about the individual enrollee after getting their hands on the cash. For-profit colleges account for 1/2 of all student loan defaults.

The "Pain Funnel" and the Harkin Report on For-Profit Schools - Senator Tom Harkin (D-IA) has finally released his major report on for-profit schools, the result of two years of studies and investigations. It's a telling look into the numbers in the for-profit college industry and the growing future of higher learning amid a collapsing public sector. It gives us a reason to reexamine some of the deregulation that took place around this industry during the George W. Bush years. The report also also clarifies one of my new favorite metaphors, and that is the role of the "pain funnel" in our new system of higher education. Instead of government planning, we now have the for-profit industry. And one of the things it brings to the table is its aggressive recruitment techniques, one of which is called the "pain funnel." The Harkin report uncovered a for-profit recruiter's handbook from ITT that included this sales technique. As the Harkin Report notes, "After a recruiter located a prospective student’s pain point, the 'pain funnel' presented a number of questions that the recruiter can ask that are progressively more hurtful. In 'Level 1' a recruiter asks prospective students, 'tell me more about that' or 'give me an example.' In 'Level 2' the recruiter asks 'What have you tried to do about that?' The highest level asks a hurtful question to elicit pain." There's even a chart of the pain funnel from the recruitment materials:

Is Citi Engaging in Criminal Abuses of Active Duty Servicemen on Their Student Loans? - Given all the varieties of bank-perpetrated mortgage fraud that have come to light in recent years, one that got comparatively little attention were abuses under the Servicemembers Civil Relief Act. SCRA shields active duty servicemen cannot be the target of civil until their tour of duty has been completed. That means, among other thing, bankruptcies, foreclosures and even divorces are put on hold. Recent amendments include capping the interest rate on most types of debt at 6%.  Despite the clear provisions of the law, mortgage services were found to be violating on a widespread basis, both by failing to reduce interest charges to 6% and on foreclosing on military personnel who were deployed. 6000 servicemembers were plaintiffs in a suit against one bank, JP Morgan. JP Morgan settled pronto recognizing that this was a potential PR disaster in the making. The Department of Justice launched an investigation (violations of the SCRA are criminal). But of course, no one was prosecuted. The DoJ included a settlement of the SCRA in its mortgage settlement earlier this year. And as Dave Dayen (who has been all over this story) wrote a couple of weeks ago, it appears that this settlement isn’t producing much in the way of restitution to harmed servicemen. Well played, banks! I caught an item on Consumerist earlier this week which raises the question: are there other systematic SCRA violations that have yet to come to light? The Consumerist piece is about Benjamin, who is serving in Afghanistan. He obtained forbearance on his student loan when he received mailed Citi a copy of his orders, which specified that he would serve a minimum of two years.  As the soldier has tried explaining repeatedly, and Citi pretends not to get, orders are in effect until new orders are issued.

Pa. cities underfund pension plans by $6B+ - New figures show municipalities in Pennsylvania are facing more than $6 billion in unfunded liabilities. That total is actually a slight improvement over where things stood two years ago, but the state and its municipalities have a long way to go. The new numbers provide a snapshot of Pennsylvania's roughly 1,400 municipal pension plans at the end of 2011. The state Public Employees Retirement Commission compiled the report. Pittsburgh's pension system is only 62 percent funded, but that's better than it was just two years ago. "What you're looking at is really the effect of the improvement of the funding status in two cities: Philadelphia and Pittsburgh," said James McAneny, PERC executive director. "But $6 billion is still a big number."

City Pension Fund $1.1 Billion in Debt - The city’s of Seattle’s retirement fund, like pension funds across the nation, is suffering, posting a zero percent return in 2011. Overall, after years of lousy performance, the city’s pension fund has $1.1 billion (that’s “billion” with a “b”) in “unfunded liabilities”—essentially, debt the city owes to retirees and doesn’t have the cash to pay. Put in different terms, the city’s unfunded pension liabilities represent two times the city’s entire payroll. Last year, the city agreed to fully fund all of its required contributions to retirees, a condition of maintaining its triple-A credit rating. What that means for the city is that within the next two years, pension payments will amount to 24 percent of the city’s total payroll—ten percent from workers’ paychecks, and 14 percent from city funds. The increase in the city’s portion of pension payments will cost the city about $35 million a year—”funds that will not be available for City services, hiring new workers, COLAs, or other benefits,” according to a city report. The only alternative to losing those funds? Raising taxes (the city’s portion of pensions comes from the general fund, utility taxes, and other public sources). Broken down by household, the shortfall works out to just over $3,800 for every family in Seattle.

State employee retirees' healthcare costs California billions, says report (Video) State employee retirees' healthcare is yet another cost adding pressure to the state budget. A new report by California Common Sense estimates unfunded liabilities outside pensions, known as Other Post-Employment Benefits, to be more than $62 billion. "One of the things that may have caught many analysts and the state off guard was the rising costs of healthcare,"

A Social Security Ditty: "If Privatization is Necessary---" - I came up with this around ten years ago to put a point on the logical trap Social Security privatizers (often unwittingly) find themselves in. It goes like this: If Privatization is Necessary, it Won't be Possible. If Privatization is Possible, it Won't be Necessary. To understand the trap we need to do some parsing on 'privatization' and 'crisis'. Now traditionally 'Social Security crisis' was equated to 'Trust Fund Depletion', which is the point in the future when the Social Security Trust Fund balance projects to go to zero. Over the last twenty years of Social Security reporting the date of Depletion has been projected by the Trustees at various points between 2019 and 2042 (and the reasons for the variation are interesting) but are in recent Report years put in the mid to late 2030s. 'Depletion' has often been sold in terms of 'Social Security won't be there' in the sense of 'no check for me', particularly to the under 40s but a few seconds of thought shows that 'no check' is not a possible outcome as long as payroll tax is being collected, that is benefits can be paid out right up to the amount allowed by then current income. Instead we are talking about a benefit cut, and one relative to the current law baseline (and examining that baseline is interesting as well-subject for later posts). The amount of that benefit cut has been projected variously between 22% and 25% of the 'scheduled benefit' or to flip it around a payout of between 75-78%.

Obama’s Second Term Agenda: Cutting Social Security, Medicare, and/or Medicaid - This is probably the least important Presidential election since the 1950s. As an experienced political hand told me, the two candidates are speaking not to the voters, but to the big money. They hold the same views, pursue the same policies, and are backed by similar interests. Mitt Romney implemented Obamacare in Massachusetts, or Obama implemented Romneycare nationally. Both are pro-choice or anti-choice as political needs change, both tend to be hawkish on foreign policy, both favor tax cuts for businesses, and both believe deeply in a corrupt technocratic establishment.  So while the election lumbers on like the death rattles of the wounded animal known American democracy, no one on either side is asking what the plan is for the next term. For Obama, his team is going into rooms of donors and shouting “Supreme Court”, while mumbling something about bipartisanship and $4 trillion, or Simpson-Bowles. What this means is that term two of the Obama White House will be organized around cutting entitlements. The White House already tried cutting all three main entitlement programs, last year (cuts to Medicaid are actually cuts to Obamacare, for what it’s worth, since an expansion of Medicaid was a key plank of the new health care law).Going after entitlements is in fact a tradition of Democratic politicians since the 1980s. The post-WWII model of dealing with entitlements was to expand them as a way of boosting aggregate demand. But as Carter, Reagan and Volcker ushered in an era of Wall Street greed and austerity, that trend reversed. In the early 1980s

The CEO Plan to Steal Your Social Security and Medicare --  In a column last week, Pearlstein told readers that the top executives of some of the country's largest companies are getting together to craft a budget package that they will try to push through Congress and get the president to sign. While Pearlstein clearly sees these backroom meetings of corporate chieftains in positive terms (he refers to them as "grown-ups" who have been noticeably absent from the conversation about the budget), the rest of us might view this plotting a bit differently. As Pearlstein openly acknowledges, this corporate coup is an end-run around the electorate. As corrupt as the political process may have become, at least we will get a vote in the election. Pearlstein's plotters are not inviting the rest of us into the conversation.Many of the same folks who brought the economy to ruin just a few years ago are now going to come up with a plan that is supposed to set the budget and the economy on a forward path. At the center of their proposal are big cuts in Social Security and Medicare.The most popular Social Security cut among this gang is a reduction in the annual cost of living adjustment (COLA) by 0.3 percentage points. They are betting that are ordinary people are too dumb to notice this cut since it is a relatively small amount each year.

Another New York Times Columnist Attack On Social Security And Medicare - The New York Times contains another elite-columnist attack on our Social Security and Medicare systems today. This time it's in the form of an op-ed by Bill Keller. Recently and regularly, New York Times columnists David Brooks and Tom Friedman have also gone after the things We, the People do for each other. Any discussion of our deficit/debt "crisis" must start with a few quick points about the history of the "crisis":
1) January 26, 2000, Clinton to Propose Early Debt Payoff, President Clinton said Tuesday that the budget he will send Congress on Feb. 7 will propose paying off the entire $3.6-trillion national debt by 2013--two years earlier than had been expected even a few months ago.
2) 2001 Alan Greenspan said we needed to pass the Bush tax cuts because we were paying off the debt too quickly.
3) Bush said it was "incredibly positive news" when the budget turned from surplus to deficit because budget deficits meant there would be pressure to cut entitlements. Bush wanted to continue the "strategic deficits" plan to "starve the beast" that was launched in the Reagan years.

Those (Us) Greedy Boomers - In this AM’s NYT, Bill Keller goes after baby boomers for not getting behind entitlement reform.   As his many links confirm, this is a common argument and while I can’t speak to the anti-boomer part (I was born smack in the middle of the boom, so one must recuse oneself), the economics of this debate are as often muddled as not. The issue of sustainably of Social Security and Medicare—I fear that the word “entitlement” feeds into the frenzy–actually has little to do with greed and is largely a function of our uniquely inefficient system of health care delivery, as that’s from where our real long-term fiscal problems derive.  And this goes well beyond the public sector—private sector health spending is also unsustainable and, unless we slow it down to a rate closer to overall economic growth, will eventually crowd out too much of the other things we want and need. We can and should achieve solvency in Social Security, but sacrifices by baby boomers don’t get you very far, as I’ll show in a moment. Keller’s main point seems to be that boomers, particularly affluent ones, should stop being so self-centered and accept lower benefits in Social Security and Medicare.  But if that’s your view, you shouldn’t write a piece like this without pointing out the following:

Bill Keller Wants to Take Away Your Social Security and Is Either Too Ignorant or Dishonest to Acknowledge that He Is Not a Typical Baby Boomer - The effort by the rich to take away Social Security keeps building momentum. Today Bill Keller urges his fellow baby boomers: "FELLOW boomers, we have done more than our share to make this mess. It’s not our fault that there are a lot of us, but we have resisted any move to fix the system. We should make a sensible reform of entitlements our generation’s cause. We should stiffen the spines of our politicians, and push lobby groups like A.A.R.P. to climb out of the bunker and lead." "Lead" in this context means supporting cuts to Social Security and Medicare. That is really brave for Mr. Keller to stand up and call for sacrifice from his age cohort. Does Keller know that the typical near retiree has total wealth of $170,000. This includes everything in their 401(k), all their other financial assets and the equity in their homes. Another way to put this is that the typical near retiree (between the ages of 55-64) could take all their wealth and pay off their mortgage. After that they would be entirely dependent on their Social Security to cover all their living costs. Does this situation describe Mr. Keller's finances? My guess is that it doesn't. If that is true, how does Keller claim to speak for people who are in a hugely different financial situation than him? Is he really that ignorant of the issues that the NYT gives him a column to write about or is he dishonest?

Speak for yourself, Bill - Who is the “we” we’re talking about? Bill Keller wrote a pretty fricking clueless column about the “Entitled Generation”.  Apparently, if you were born at the tail end of the baby boom, you’re a spoiled rotten brat who has had everything handed to you on a silver platter. You know, I hate to be the one to incite generational warfare but there are actually *two* types of babyboomers.  It’s a shame that the demographers have made no effort to separate the two so I’m going to do it for them. The first cohort born after 1946 was the Love generation.  That was the one that protested and questioned authority and benefitted from low tuition and lots of jobs.  It burned its youthful anger out around 1971.  Then came MY generation.  I don’t know what you would call us. We were born after 1956 or so.  For us, reality was very different.  By the time we were adolescents, there was an oil crisis, the country had stagflation, money to colleges was drying up, tuition was spiking and there were no jobs when we came out of school.  Oh, and all the tax breaks that the previous generations had used had been cut by the time we made our first paychecks. We also PREPAID our social security incomes, Bill.  That’s something the early boomers didn’t have to do for a good decade or so while they were chasing plastics and Mrs. Robinson. We’ve always paid more for everything.  We bought the early babyboomer’s starter homes at a premium while they took their profits and bought the first McMansions.  We paid our student loans over 10 years at inflated interest rates.  We got dumped into HMOs or saw our deductions rise at the time when the early boomers’ kids were already out of braces.  And now, we are watching the early boomers retire while the rest of us are getting laid off in middle age.

Social Security… The Fundamental Truth - If you don’t understand this, you don’t understand Social Security. If you do understand it, all the rest is minor technical detail... or utter nonsense. Social Security is not welfare. Social Security is not an investment plan. Social Security is insurance... to avoid welfare if your investment plan doesn’t work out as well as you hope. Because of the complexity of the modern economy Social Security is insurance that is needed more often than not. It does what the family used to do under the guidance of “Honor your father and your mother.”  But even there you have to understand that while “you” helped out your parents in their old age, they “paid for” that help, first by paying for their own parents in their turn; and second, by paying for you when you were very young; and third, by building the “infrastructure” that made it easier for you when it came your turn to work for a living. There is nothing about Social Security that guarantees you will always have higher benefits than your parents, or pay lower “taxes.” The world changes. There are fat years and lean years. What Social Security does do is guarantee that even in the lean years you can “save enough” for your own old age, by the miracle of pay as you go... paying for your parents old age... which they paid for in their turn. I hope you can understand the dual nature of “paying for.” It is actually the normal way money works.

Study: Many Americans die with ‘virtually no financial assets’ - It is a central worry of many Americans: not having enough money to live comfortably in old age. Now an innovative paper co-authored by an MIT economist shows that a large portion of America’s older population has very little savings in bank accounts, stocks and bonds, and dies “with virtually no financial assets” to their names. Indeed, about 46 percent of senior citizens in the United States have less than $10,000 in financial assets when they die. Most of these people rely almost totally on Social Security payments as their only formal means of support, according to the newly published study, co-authored by James Poterba of MIT, Steven Venti of Dartmouth College, and David A. Wise of Harvard University. That means many seniors have almost no independent ability to withstand financial shocks, such as expensive medical treatments that may not be covered by Medicare or Medicaid, or other unexpected, costly events. “There are substantial groups that have basically no financial cushion as they are reaching their latest years,”

States Cut Medicaid Drug Benefits To Save Money - Kaiser Health News: Illinois Medicaid recipients have been limited to four prescription drugs as the state becomes the latest to cap how many medicines it will cover in the state-federal health insurance program for the poor. Doctors fear the state's cost-cutting move could backfire on patients, who have to get state permission to go beyond the limit. "We understand the state is trying to get its Medicaid budget under control," says Dr. William Werner, president of the Illinois State Medical Society. "But our concern is it not be a hardship for patients and a hassle for doctors in the execution."Sixteen states impose a monthly limit on the number of drugs Medicaid recipients can receive and seven states have either enacted such caps or tightened them in the past two years, according to the Kaiser Family Foundation (KHN is a program of the foundation). The limits vary across the country. Mississippi has a limit of two brand-name drugs. In Arkansas adults are limited to up six drugs a month. Since June, Alabama has had the nation’s stingiest Medicaid drug benefit after limiting adults to one brand-name drug. HIV and psychiatric drugs were excluded.

The Republicans’ Medicaid Cruelty - A new study published in The New England Journal of Medicine shows that providing greater medical insurance coverage for the poor has saved lives. Moreover, the ACA’s expansion of Medicaid requires little state money, since the federal government will pick up more than 90 percent of the costs over time, and 100 percent of the costs for the first few years. Yet Texas, Florida, Louisiana, South Carolina, and Mississippi—which together account for more than a sixth of the overall US population—have already rejected the plan, and as many as twenty other states, including New Jersey, Missouri, Iowa, Nebraska, and Nevada, have indicated they may follow suit.  Furthermore, these states already have among the highest numbers of citizens with no health insurance. Twenty-five percent of non-elderly Texans have no health insurance, for example, compared to the national average of about 18 percent. If the Obama Medicaid reforms were fully implemented, 15 to 17 million of the nation’s 50 million without health insurance would be covered. In a report just issued in late July, however, the non-partisan Congressional Budget Office estimates that the Medicaid expansion will only cover some ten million more, or a full third fewer than anticipated, because of the rejection of the plan by large states like Florida and Texas and others who have not yet formally announced their intentions.

A Question Answered -- Back in April, I posted about Minnesota Attorney General Lori Swanson investigating allegations that Accretive Health Care aggressively collected debts from hospital patients. These allegations included claims that Accreive was obtaining payments from people in emergency rooms and from their hospital bedsides. Yesterday, Accretive settled these claims, agreeing to pay $2.49 million and to withdraw from the state of Minnesota for a period of six years (although it can come back after two years with the attorney general's permission). New York Times coverage is here. Over coffee this morning with a friend, I threw out the same question from my original post. How does an organization get itself to the place where it collectively comes to think such strong-arm collection tactics on hospital patients are a good idea, let alone morally defensible? A profile of Accretive's CEO, Mary Tolan, in Crain's Chicago Business contains this gem: "My objective is just to be a happy, confident capitalist," says the devotee of Ayn Rand's and Milton Friedman's free-market gospel, which she applies with a combative, survival-of-the fittest management style, At least I have my answer.

Doctor Shortage Likely to Worsen With Health Law - In the Inland Empire, an economically depressed region in Southern California, President Obama’s health care law is expected to extend insurance coverage to more than 300,000 people by 2014. But coverage will not necessarily translate into care: Local health experts doubt there will be enough doctors to meet the area’s needs. There are not enough now.  Other places around the country, including the Mississippi Delta, Detroit and suburban Phoenix, face similar problems. The Association of American Medical Colleges estimates that in 2015 the country will have 62,900 fewer doctors than needed. And that number will more than double by 2025, as the expansion of insurance coverage and the aging of baby boomers drive up demand for care. Even without the health care law, the shortfall of doctors in 2025 would still exceed 100,000.  Health experts, including many who support the law, say there is little that the government or the medical profession will be able to do to close the gap by 2014, when the law begins extending coverage to about 30 million Americans. It typically takes a decade to train a doctor.  “We have a shortage of every kind of doctor, except for plastic surgeons and dermatologists,” . “We’ll have a 5,000-physician shortage in 10 years, no matter what anybody does.”

Health Coverage “a New Part of the Conversation” After Tragedy - Fifty-eight injured were taken to area hospitals after the shootings in the midnight showing of “The Dark Knight Rises.” The most seriously wounded continue to fight for their lives and may face medical bills in the hundreds of thousands and even millions of dollars. Among them is 23-year-old Caleb Medley, who is in an induced coma after being shot in the head, and whose wife, Katie, gave birth to their first child last week. The couple has no health insurance, and their friends and family are raising money online to pay their medical bills. Like Medley, many of the victims are between the ages of 19 and 34 – a group with a 28 percent uninsurance rate in Colorado, the highest among any age group, according to a 2011 survey by Calonge’s group. Calonge notes that many young people are employed and have the opportunity to buy insurance through their jobs but decline coverage because they are making comparatively low salaries and see themselves as young and healthy. “One of the things the tragedy points out is that assessment of risk isn’t always right,” he said.

Why the National Health Service played a central part in the Olympic Ceremony - What is perhaps not understood outside the UK is that the British regard the NHS as an institution on an equal par to our monarchy. Not beyond criticism, but seen as absolutely essential to national life. While many aspects of the 1945 post-war social transformation have been swept aside (nationalization of utilities) or greatly modified, the idea that the health service should be free to all and paid for through taxation is sacrosanct. Is this attachment to the NHS national self delusion? ... The NHS embodies a principle that in critical matters involving health, all members of a society should be equal. Overall the UK is not a particularly equal society, and income and wealth inequalities have been growing, but this is one area where there is a strong national consensus that while additional income should mean that you contribute more to a health service, this does not entitle you to receive better treatment. Do the British pay dearly for this attachment to equality in health provision? If you look at measures of quality or efficiency, the UK does reasonably well (for example here or here), but what does appear consistent is how badly the US performs in terms of efficiency. ... So what seems more likely is that it is the US aversion to government involvement in health provision that is a little delusional.

Would Americans Accept "Socialized Medicine"? Yes Last Friday’s exuberant celebration of Britain’s National Health Service during the opening ceremony for the 2012 Olympics, directed by the Oscar-winning filmmaker Danny Boyle, got me thinking about American attitudes about socialized medicine. As might be expected, the event elicited a few tut-tuts from Conservative members of Parliament, and more stern rebukes from the commentariat in the United States, most vehemently by Rush Limbaugh. Bashing the N.H.S. has become a favorite ritual during any debate on health care reform on this side of the Atlantic; any American remarking positively on the N.H.S. runs the risk of being declared unfit to serve in government and vehemently attacked in the blogosphere. The most humorous illustration of American N.H.S.-bashing was supplied during the heated health reform discussions in 2009 by Investor’s Business Daily. In an editorial, the paper asserted, “People such as scientist Stephen Hawking wouldn’t have a chance in the U.K., where the National Health Service would say the quality of life of this brilliant man, because of his physical handicaps, is essentially worthless.” Dr. Hawking, who has lived and worked in Britain all of his life, responded: “I wouldn’t be here today if it were not for the N.H.S. I have received a large amount of high-quality treatment without which I would not have survived.”

What kills us - We can debate the importance of life expectancy as a metric of quality in a health care system, but few can deny it’s still worthwhile to examine what kills us. The CDC has released its latest data on Death in the United States, 2010:

• Life expectancy at birth is 78.7 years. Hispanic females have the longest life expectancy (83.8 years) followed by non-Hispanic white females (81.1 years).
• The largest decrease in mortality between the years 2000 and 2010 occurred in the age group under age 25 years (15.8 percent), followed by those aged 65 years and over (13.3 percent).
• States in the southeast region generally have higher death rates than those in other regions of the country.
• In 2010, the five leading causes of death were: heart disease, cancer, chronic lower respiratory diseases, stroke, and accidents. The ranking of conditions varies according to demographics such as age, sex, and race.
• The infant mortality rate reached a record-low level of 6.14 infant deaths per 1,000 live births in 2010.

The most important statistic is the age-adjusted death rate, because the makeup of the US population with respect to age keeps changing. That rate was 746.2 per 100,000 population, a 0.5% decrease from 2009. The CDC attributes much of this to improvements in our care of heart disease, cancer, stroke, and chronic lower respiratory disease. As always, I want to know what affects children. So this figure caught my eye:

Economics of Antibiotics Resistance - Ramanan Laxminarayan discusses "A Matter of Life and Death: The Economics of Antibiotic Resistance," in the Third Quarter 2012 issue of the always-interesting Milken Institute Review. The problem arises, paradoxically, because antibiotics are such a miraculous medical invention that they are heavily and broadly prescribed, even for relatively minor conditions like bronchitis or ear infections, and even for virus-caused conditions like flu where antibiotics don't even work. When antibiotics are so widely used, bacteria mutate in response and build up resistance. "In the United States, for example, resistance to the bacterium methicillin-resistant Staphylococcus aureus (MRSA), has reached 60 percent. This means six out of 10 patients with this virulent staph infection can no longer be treated with oxacillin, a relatively low cost drug. But what still amounts to a cost problem in rich countries is becoming a serious threat to public health in the developing world: lower-income countries face a growing toll of death and morbidity from curable infections because the generally available antibiotics no longer work." The problems only start with infections that are resistant. Without antibiotics, almost every form of surgery lead to additional and potentially severe infections.

Significant growth of West Nile virus infections in 2012 - National and state health officials are increasingly concerned about the growing number of West Nile virus cases being reported across America, including in Louisiana. More illnesses from the virus have been reported in 2012 than any year since 2004. The virus is spread to people who are bitten by infected mosquitoes. The Centers for Disease Control reported West Nile virus has been found in 42 states in 2012, with 241 cases reported and four deaths recorded. There has been one death in Tangipahoa Parish, one in Mississippi and one in Texas. New Orleans had at least one confirmed human case, the first since 2008. Other cases have been reported in River Ridge, St. Tammany Parish and Terrebonne Parish. Two samples tested positive for West Nile in St. Bernard Parish. Area mosquito control agencies have been reporting a busy pest season since the spring and state officials are worried about the growing number of cases. The state health department reported 19 new cases, bringing the total number of West Nile cases to 33.

Thousands Await Testing for Hepatitis -Thousands of former patients at a New Hampshire hospital must wait at least another week to learn if they were infected with hepatitis C through syringes used by a traveling medical technician now known as the “serial infector.” Testing will be delayed as officials continue to try to develop an orderly process that will allow patients from the Exeter Hospital to be tested quickly and without having to wait too long in line, said Dr. José Montero, director of the state health department’s division of public health. “Several groups are working on the approach,” he said in an interview on Wednesday. He said that he hoped to announce a plan by the end of this week and that testing could begin next week. The New Hampshire health department announced last month that it intended to test more than 3,400 people who had been hospitalized while the technician, David Kwiatkowski, 32, who is believed to have contracted the disease at least two years ago, was working at Exeter Hospital, and it planned to set up mass clinics last weekend at the local high school. But officials pulled the plug on the plan after several former patients complained about the lack of privacy in a mass clinic setting. There were also questions of liability for the volunteers taking blood in such a setting.

Artificial butter flavoring ingredient linked to key Alzheimer’s disease process - A new study raises concern about chronic exposure of workers in industry to a food flavoring ingredient used to produce the distinctive buttery flavor and aroma of microwave popcorn, margarines, snack foods, candy, baked goods, pet foods and other products. It found evidence that the ingredient, diacetyl (DA), intensifies the damaging effects of an abnormal brain protein linked to Alzheimer's disease.

 Study Reveals Caffeinated Waters Off of Oregon Coast - Researchers along the Pacific coastline say that the water has elevated levels of caffeine in the ocean. According to a new study out of Portland State University, researchers tested multiple sites on the Oregon shores of the Pacific Ocean to study caffeine pollution in the waters close to the shoreline.  The lead scientists, Zoe Rodriguez del Rey and Elise Granek, collected over twenty samples along the ocean and adjacent bodies of water; they then brought them back to their lab for further analysis. The samples collected along the shores of the Beaver State were from as north as Astoria, Ore. south to the border with California. The locations, by way of the samples, were classified as potentially polluted as they were situated near wastewater treatment plants, rivers or streams emptying into the Pacific, or densely populated areas. Rodriguez del Rey and Granek's research find that two locations with high caffeine levels were Cape Lookout and Carl Washburne State Park in Florence, Ore. Although these two locations came back as potentially polluted, they are not near any potential pollution sources. Levels were also found after a late season rain and wind storm brought debris and triggered sewage overflows.

Uganda Ebola Outbreak Spreads To Local Prison - While work markets are transfixed by what central planners in various continents may do, but really just say, a tragedy in Africa continues to develop, as the recently reported Ebola outbreak in the infamous country of Uganda, which is not Spain, has now spread to a local prison, even as the number of infected cases has doubled in the last several days since we first reported on this most recent Outbreak which luckily has for now not spread outside of the country. CNN reports: "The hospital at the center of an Ebola outbreak in Uganda is now dealing with 30 suspected cases, including five from Kibaale prison, Dr. Dan Kyamanywa said Thursday. Three patients at Kagadi hospital have been confirmed as having the virus, said Kyamanywa, a district health officer. Doctors are now testing the suspected cases urgently so they can separate confirmed cases from those who do not have the disease, Doctors Without Borders said. Suspected cases are still trickling into the hospital, Kyamanywa said. At least 16 people have died in the current outbreak."

Head of internal medicine at Japan hospital astonished by Fukushima thyroid exams - Immediate evacuation required in high contamination areas  “A violation of human rights for those exposed” When the above four studies are tallied in one table, it becomes obvious that the result of the thyroid examinations of children in the “Fukushima Prefecture Health Management Survey” is astonishing. This is because one-third of the children had developed “ cysts.” A “cyst” is a fluid-filled sac. Cysts don’t mean there is an immediate chance of developing thyroid cancer. However, it is apparent that something extraordinary is happening inside the thyroid gland, such as inflammation or changes in cellular properties. [...] Summarizing the thyroid ultrasound examination results from Japan and overseas, prevalence of “cysts” detected in children around the age of 10 is approximately 0.5-1.0%. The fact that 35% of Fukushima children (average age around 10) have thyroid cysts strongly suggests that these children’s thyroid glands are negatively affected by undesirable environmental factors. There is a strong concern that waiting for further analysis of above data and the completion of follow-up examinations will lead to irreversible health damages in these children. Consequently, it is strongly desired that small children living in Nakadori (adjacent to the coastal region) and Hamadori (the coastal region) in Fukushima receive immediate implementation of preventive measures such as evacuation and more frequent screening examinations.

The Sound of a Damaged Habitat - YEARS ago, when selective logging was first introduced, a community near an old-growth forest in the Sierra Nevada was assured that the removal of a few trees here and there would have no impact on the area’s wildlife. Based on the logging company’s guarantees, the local residents agreed to the operation. I was skeptical, however, and requested permission to record the sounds of the habitat before and after the logging.  On June 21, 1988, I recorded a rich dawn chorus in California’s pristine Lincoln Meadow. It was a biome replete with the voices of Lincoln’s sparrows, MacGillivray’s warblers, Williamson’s sapsuckers, pileated woodpeckers, golden-crowned kinglets, robins and grosbeaks, as well as squirrels, spring peepers and numerous insects. I captured them all. When I returned a year later, nothing appeared to have changed at first glance. No stumps or debris — just conifers and lush understory. But to the ear — and to the recorder — the difference was shocking. I’ve returned 15 times since then, and even years later, the density and diversity of voices are still lost. There is a muted hush, broken only by the sound of an occasional sparrow, raptor, raven or sapsucker. The numinous richness of the original biophony is gone.

Every city needs healthy honey bees (TED talk)

Crop conditions across the US are still deteriorating, with less than a quarter of the corn crop now in "good or excellent" conditions. What's even more troubling is that the weather is not cooperating. The National Weather Service forecast for the continental US over the next 1-2 weeks looks dreadful. The precipitation levels...and the temperature are both expected to be significantly worse than historical averages. This is threatening to cause further crop damage. On the back of these weather forecasts and crop damage estimates, agricultural commodity prices are hitting records again. Bloomberg: - Corn surged to a record, heading for the biggest monthly gain since 1988, as the worst drought in at least a generation lingered in the U.S., threatening yields in the world’s biggest grower and exporter. Soybeans and wheat also rallied. Corn futures for December delivery climbed 2.5 percent to $8.1275 a bushel on the Chicago Board of Trade, after touching an all-time high of $8.1725. The most-active contract has surged 28 percent in July. Soybean futures for November delivery gained 2.6 percent to $16.4375 a bushel on the CBOT. The oilseed, which reached a record $16.915 on July 23, is up 15 percent in July. Wheat futures for September delivery rose 1.8 percent to $9.14 a bushel in Chicago. The grain, which can replace corn in livestock feed, has surged 21 percent this month.

Corn prices hit record as crops shrivel - Corn prices surged to a new record high Tuesday, as the worst drought in more than 50 years continues to plague more than half the country. Almost 90% of the United States' corn crops are in drought ravaged areas, according to the U.S. Department of Agriculture, and nearly 40% are situated in the hardest hit spots. Corn prices have soared more than 50% during the past six weeks as the crops continue to shrivel in relentless dry heat throughout the Midwest. They jumped another 0.7% Tuesday to a record high of $8.20 per bushel on the Chicago Board of Trade. Soybean prices, which are up more than 20% in recent weeks, also advanced. Prices rose 1% Tuesday to $16.63 per bushel, the highest since July 23. Soybean prices will likely continue to rise as the heat lingers in the area where soybeans are the major crop.

Vital Signs Chart: Soaring Corn Prices - The price of corn has soared during recent weeks as extremely hot and dry weather bakes states in the Midwest. Corn futures surged almost 22 cents on Monday to $8.20 per bushel, near the all-time high of $8.24½ hit on July 20. Investors are worried the U.S. drought will ravage crops. That has pushed corn up 27% this year and stirred fears of higher food prices.

Milk price outlook has changed dramatically - The milk price outlook has changed dramatically from last month. Days of high summer temperatures along with high humidity over much of the U.S. has put milk cows under stress reducing both the level of milk production and butterfat tests. Lower butterfat tests also reduce the yield of dairy products per 100 pounds of milk. In addition, drought conditions over about 58 percent of the U.S. has reduced the yield of hay per acre and deteriorated the condition of both corn and soybeans. Dairy farmers are concerned about not only the cost of hay, other forages and grain and concentrate prices this fall and winter, but also having enough feed supplies to maintain their cow numbers.If significant rainfall would develop fairly soon, there would be some improvement in the feed situation. Dairy farmers will be assessing their feed situation for fall and winter and making decisions as to whether or not to reduce cow numbers. But, a reduction in the size of the nation’s dairy herd will likely occur this fall and winter. In July USDA revised downward its milk production forecast for 2012 and 2013 due to concern over high feed costs reducing returns to dairy farmers that will reduce cow numbers as well as milk per cow.

US farmers urge Obama administration to suspend ethanol quota amid drought - The Obama administration was urged on Monday to stop diverting grain to gas amid warnings of an "imminent food crisis" caused by America's drought. US government forecasts of a 4% rise in food prices for US consumers because of the drought have sharpened criticism of supports for producing fuel from corn-based ethanol. Meanwhile, research published last week by the New England Complex Systems Institute warned of an "imminent food crisis" because of the diversion of corn stocks to ethanol. "Necsi has warned for months that misguided food-to-ethanol conversion programs and rampant commodity speculation have created a food price bubble, leading to an inevitable spike in prices by 2013. Now it appears the "crop shock" will arrive even sooner due to drought, unless measures to curb ethanol production and rein in speculators are adopted immediately," the researchers warned. In the latest move, the country's meat, dairy and poultry producers called on the Environmental Protection Agency to suspend this year's quotas for corn ethanol production. "The extraordinary and disastrous circumstances created for livestock and poultry producers by the ongoing drought in the heart of our grain growing regions requires that all relevant measures of relief be explored," said the petition to the EPA's administrator Lisa Jackson.

Should the Ethanol Mandate be Temporarily Suspended? - There seems to be a big push to roll back the ethanol mandate, at least temporarily, due to the crop losses and high prices for corn, soybeans and wheat we're experiencing this year.  See, for example, Colin Carter and Henry Miller's Op Ed in the New York Times. How much would a temporary suspension of the mandate affect prices?  As I write, the future price for corn delivered in December 2012 is $7.95/bu.  The price for delivery in December 2013 is just $6.30.  So, there is no incentive to store commodities, and inventories are very low.  So, any reprieve on the demand side will push directly on this year's price. With regard to prices, it would be equivalent to reducing the size of crop losses.  If we lose 1/3 of the crop from heat and drought, and we reduce demand by 1/3 by temporarily halting ethanol production, we'd probably go back to early-Spring prices of around $4-5/bu. One problem with this back-of-the-envelope calculation is that ethanol production is unlikely to stop completely just due to a temporary suspension of the mandate.  There are shutdown and startup costs, and a 10% ethanol blend is firmly in place.  So prices probably wouldn't fall back that far, but they would fall a lot.

The Age of Scarcity - This has been a brutal summer. Record drought across the Midwest has forced the U.S. Department of Agriculture to slash its forecast for 2012 corn production by 12 percent. Corn prices are already 90 percent higher than in July 2010. They’ve gone above 2007-08 levels, when soaring food prices sparked riots in more than 30 countries. On July 25 the U.S. government reported that corn prices may push the cost of meat 4 percent to 5 percent higher next year. And there’s good reason to believe that the upward trend is a taste of worse things to come—in particular, for the world’s poorest people, who spend 60 percent to 80 percent of their limited incomes on food. This latest peak in corn prices is the fourth since 2006. For people in the developing world, rising food costs increase the risk of malnutrition, which reduces cognitive abilities and can have a lifelong impact on both health and earnings. World Bank researchers estimate that food-price changes between June and December 2010—including a 73 percent rise in corn prices—pushed 44 million people back below the $1.25-per-day extreme poverty line. If recent volatility is the start of a long-term pattern, it could significantly slow global progress against poverty over the next 50 years.

Food and water scarcity could spike prices for years to come. — Record heat, dry skies, and acres of drought-stricken corn are stressing farmers and cereal makers, but commodities and natural resource investors are cool and composed.  Weather has caused a “supply shock” that observers say only reinforces a longer-term investing theme in the scarcity of food and water. A hungry and thirsty world is growing, and “you can’t triple a population in a lifetime without consequences,” said Jeremy Grantham, a closely followed value investor and co-founder of asset management firm GMO LLC., in a speech at the Morningstar Investor Conference in June.  The situation is equal parts opportunity and clock-ticking pressure to devise new ways to use and produce finite resources and their alternatives, and to grow food on dwindling arable land. Agriculture demand will continue to spur innovative irrigation techniques and to address the need for fresh drinking water in developing countries. And therein lies another potential investment — water solutions.  For now, the focus is on supply. June was the fourth-hottest month in the U.S. since 1880, according to the National Oceanic and Atmospheric Association (NOAA) and July has been toasty too. The heat and drought prompted officials to cut harvest expectations. USDA’s July 11 report featured a 12% drop in the outlook for domestic corn output, crossing out predictions for a record harvest. The U.S. soybean crop, which pollinates later than corn, is on track to be the smallest in four years. Global wheat production estimates are down 1% from a June prediction.

Buy farms and food: Grantham - The road to Dystopia is paved with dust and hardship.  Such is the gloomy worldview of Jeremy Grantham, chief investment strategist of Boston-based institutional money manager GMO LLC. He envisions a future of scarce resources, where food and the means to produce it is the coin of an unstable realm.  “We are five years into a severe global food crisis that is very unlikely to go away,” Grantham wrote in a letter to GMO clients, published late Tuesday. Read Grantham's letter, and GMO's investment outlook. “It will threaten poor countries with increased malnutrition and starvation and even collapse,” Grantham predicted. “Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments.” Food, and the lack of it, will be the world’s foremost social, economic and political priority for several decades, Grantham said. The crisis is unlikely to abate “at least until the global population has considerably declined from its likely peak of over nine billion in 2050.”

The Not-So-Mighty Mississippi: How the River’s Low Water Levels Are Impacting the Economy - For those who make their livings along the Mississippi River, helping to ship many of the country’s most vital commodities, this year’s drought has inevitably raised the specter of 1988. That’s when the river got so low that barge traffic came to a standstill — and the industry lost $1 billion. Unfortunately, 2012 could be worse. Along the 2,500 miles of the Mississippi, America’s most important waterway, signs of the country’s worst drought in 50 years can be found at almost any point. Near Memphis, the river is about 13 feet below its normal depth, according to the National Weather Service. In Vicksburg, Mississippi, it’s more than 20 feet below. Overall, the river is about 13 feet below normal for this time of the year — that’s 55 feet below last year’s flood levels. Those levels have forced barge, tugboat and towboat operators to drastically change how they move goods up and down the river.As the river dries up, two things happen: It gets narrower, and it gets shallower. The narrowness forces barges to sail more closely past each other, often slowing their speeds. Some sections have become so narrow that only one-way traffic has been able to move through. At the same time, the shallowness of the Mississippi has forced shippers to load less cargo on barges because of fears that they’ll run aground. The U.S. Army Corps of Engineers is tasked with making sure that the channel is at least nine feet deep so ships can safely pass.

Our current infrastructure was built for a different planet - It's easy to forget that every piece of our current infrastructure--roads, rails, runways, bridges, industrial plants, housing--was built with a certain temperature range in mind. Our agricultural system and much of our electrical generating system (including dams, nuclear power stations and conventional thermal electric plants which burn coal and natural gas) were created not only with a certain temperature range in mind, but also a certain range of rainfall. Rainfall, whether it is excessive or absent, can become a problem if it creates 1) floods that damage and sweep away buildings and crops or 2) if there isn't enough water to quench crops and supply industrial and utility operating needs. This summer has shown just what can happen when those built-in tolerances for heat, moisture (or lack of it) and wind are exceeded. The New York Times did an excellent short piece providing examples of some of those effects:

1. A jet stuck on the tarmac as its wheels sank into asphalt softened by 100-degree heat.
2. A subway train derailed by a kink in the track due to excessive heat.
3. A power plant that had to be shut down due to lack of cooling water when the water level dropped below the intake pipe.
4. A "derecho", a severe weather pattern of thunderstorms and very high straight-line winds, that deprived 4.3 million people of power in the eastern part of the United States, some for eight days.
5. Drainage culverts destroyed by excessive rains.

Lion's share of US crops to swelter into August - The midday weather model suggested a slightly wetter pattern for the U.S. Midwest where corn and soybean crops have withered under an extensive drought, but rainfall will be only scattered and light, agricultural meteorologists forecast Tuesday. "There's going to be rain, but it's just not going to be heavy enough to dramatically improve the situation in very many areas. There's no general soaking over the next two weeks," High temperatures in the triple-digits Fahrenheit were expected to persist in southwestern areas of the Midwest, but the rest of the region could be slightly cooler, he said. More than half of the U.S. corn and soybean growing region will see little change from the heat and drought that have withered and degraded crops. Corn and soybean conditions in the U.S. Midwest deteriorated further last week as the most expansive drought in more than 50 years ate away at crops in major producing states including Iowa and Illinois, government data released on Monday showed. The U.S. Department of Agriculture rated 24 percent of the corn crop in good-to-excellent condition as of Sunday, and 29 percent of the soybean crop in good-to-excellent shape, both down 2 percentage points from the previous week. The ratings for each were the worst since the comparable week in 1988, another year of severe drought in the nation's crop-growing mid-section.

As drought worsens, Congress fails to agree on farm relief - — Even as the drought worsened in the Midwest and Great Plains, Congress proved unable to provide relief for farmers and ranchers before leaving for a month of campaigning. The House on Thursday approved a scaled-down $383-million package primarily to help ranchers whose livestock losses and feed costs are mounting as arid conditions make land unusable for grazing. But the Senate declined to consider the bill before recessing, preferring a broader bipartisan measure that it passed overwhelmingly last month. The vote in the House was 223 to 197, with 35 mostly farm-state Democrats joining Republicans in support. Most Democrats held out for the broader bill. "This House should not go home while literally hanging our ranchers out to dry without a safety net to get through this drought," said freshman Rep. Kristi Noem (R-S.D.), who is from a ranching family. Democrats, who control the Senate, prefer the broader farm bill, which would provide more robust drought relief to other agricultural sectors. Democrats also object to the GOP's plan to offset the costs by cutting conservation funds.

Of corn and Chinese pork - The recent surge in global food prices triggered by the drought in US has raised fears of another round of food inflation, particularly in the emerging markets. As for China, Barclays is relatively optimistic, suggesting that China is better at coping with that than in the past. Société Générale, however, brought up the following chart last week.  This is the year-on-year changes of global corn price and pork price in the CPI.  According to Société Générale, almost 90% of the variation in Chinese pork prices can be explained by the variation of corn price with one quarter lag and soybean price by two quarters lag.  Also, the ratio between the pork price and corn price has moved below break-even, suggesting some inflationary pressure in China’s food prices: This will likely push up inflation modestly towards the end of this year should the prices of agricultural commodities remain elevated for longer.  If that does happen, it could be an unwelcome situation, especially if economic growth does not recover as the market is hoping for in the second half.

Corn’s 60% Surge Is More Dangerous Than Euro Mess - If Jim Yong Kim was hoping for a honeymoon, the new World Bank president can forget it: To his headaches over Europe’s debt crisis he can add surging food prices.  Kim’s first month on the job was largely about gauging how Europe is affecting the plight of the poor. There are troubling signs that China and India are slowing, and that might leave Asia, which has the largest share of extreme poverty, devoid of growth engines.  That’s almost manageable compared with what’s confronting Kim in month No. 2: the worst U.S. drought in 56 years and dry weather in agricultural regions in India, Kazakhstan, Russia and Ukraine. Coupled with exploding demand for food, the phenomenon is causing violent commodity-price volatility at the worst possible time for Asia.  Rising food prices limit how much central bankers can cut interest rates to safeguard growth. More troubling would be the potential setback to poverty-reduction programs for decades to come.

More Than 50 Percent Of U.S. Counties Declared ‘Disasters,’ Mostly Due To Drought -The drought and heat gripping much of the United States this summer continue to worsen. According to Agriculture Secretary Tom Vilsack, 50.3 percent of all counties in the U.S. — 1,584 across 32 states — are now under disaster designations, with 90 percent due to drought. The Los Angeles Times reports:“The drought has intensified in the most parched areas of the country, with more than a fifth of the contiguous United States experiencing “extreme” or “exceptional” drought, according to numbers released Thursday morning by the National Drought Mitigation Center. “Just three weeks ago, the portion of the lower 48 states receiving those two most serious drought designations stood at 11.6 percent. That area has now doubled, to 22.3 percent. The jump in the past week from 20.6 percent represents an increase of about 32 million acres.”” The drought has taken a toll on the nation’s corn crops. According to the National Corn Growers Association’s Larry Fields, more than three quarters of the corn belt is being impacted by the drought.

Drought may cost $20 billion in crop insurance -- As the drought continues to ravage the nation's corn, wheat and soybean fields, crop insurance losses are expected to break records. With nearly half of the continental United States under severe drought conditions, crop insurance losses are mounting daily, according to a report from the National Drought Mitigation Center at the University of Nebraska-Lincoln released on Thursday. "It will be a major loss situation," said Thomas Zacharias, president of the National Crop Insurance Services, a lobbying group representing private crop insurers. "The companies are in the field adjusting claims as we speak." An economist with the group roughly estimated that losses could top $20 billion. And taxpayers will ultimately shoulder most of the cost the nation's scorched fields. While there are no official estimates available yet, National Crop Insurance Services Economist Keith Collins said crop losses this year look as bad or worse than other terrible drought years.

Drought looms large in India - The spectre of drought looms large over major parts of northern and western India following a poor monsoon that has already hit sowing of kharif (monsoon) crops and left farmers and livestock in distress, media reports said. Shortage of drinking water and an adverse impact on the prices of fruits, vegetables, pulses, sugar has been felt in several areas. Livestock has been hit by fodder shortage. The situation is grim in Karnataka, Punjab, Haryana, Maharashtra, Gujarat and Rajasthan. There has been shortfall in paddy sowing in Nadia, South 24-Paraganas, Murs hidabad, Birbhum, Bankura and West Midn apore districts in West Bengal as well. A worried Union agriculture minister Sharad Pawar, who has called a meeting of Empowered Group of Ministers here on Tuesday to deal with the situation.

Russia’s Drought Seen Raising Food Prices and Inflation - Russia’s drought, which is cutting grain yields, may increase food prices and push inflation above the central bank target of 6 percent this year, according to Renaissance Capital. Inflation may reach 6.5 percent “due to the unanticipated, and temporary, food price shock,” Ivan Tchakarov, Moscow-based chief economist for Russia and the Commonwealth of Independent States at the bank, wrote in a report today. The average wheat yield reached 2.46 metric tons a hectare (2.47 acres) as of July 26, down from 3.44 tons a hectare a year earlier, according to Agriculture Ministry data. Russia, which was the world’s third-biggest wheat exporter last season, has 16 regions affected by drought this marketing year. The country may ship 12 million tons and drop to fifth place among exporters of the grain, according to the U.S. Department of Agriculture. Russia exported 27.2 million tons of grains in the season that ended June 30, according to ministry data. About 21.3 million tons of wheat were shipped, the USDA estimated. Russia’s grain supply and demand balance “does not point to dramatic food price increases,”

Russian battles record-breaking wildfires in Siberia -- worse than 2010 - Several regions in Siberia are battling massive wildfires that have left cities shrouded in smog after a heatwave, an environmental group said on Monday. "More and more burns every year," said the head of the forest programme at Russian Greenpeace Alexei Yaroshenko. "Last year nine million hectares (22 million acres) burned in the whole year, this year 10 million has burned already." The full scope of the damage was hard to estimate, he said, partly because the areas worst affected are covered by thick haze that makes satellite monitoring difficult, but 2012 may set a record for the past decade. A string of flights were cancelled at airports in the Siberian cities of Omsk and Tomsk at the weekend due to the smog, forcing passengers to be bussed to other cities.

Half of US counties now considered disaster areas - Nearly 220 counties in a dozen drought-stricken states were added Wednesday to the U.S. government's list of natural disaster areas as the nation's agriculture chief unveiled new help for frustrated, cash-strapped farmers and ranchers grappling with extreme dryness and heat. The U.S. Department of Agriculture's addition of the 218 counties means that more than half of all U.S. counties — 1,584 in 32 states — have been designated primary disaster areas this growing season, the vast majority of them mired in a drought that's considered the worst in decades. Counties in Arkansas, Georgia, Iowa, Illinois, Indiana, Kansas, Mississippi, Nebraska, Oklahoma, South Dakota, Tennessee and Wyoming were included in Wednesday's announcement. The USDA uses the weekly U.S. Drought Monitor to help decide which counties to deem disaster areas, which makes farmers and ranchers eligible for federal aid, including low-interest emergency loans.As of this week, nearly half of the nation's corn crop was rated poor to very poor, according to the USDA's National Agricultural Statistics Service. About 37 percent of the U.S. soybeans were lumped into that category, while nearly three-quarters of U.S. cattle acreage is in drought-affected areas, the survey showed.

Is The Great Drought Here To Stay? - The worst drought in more than half a century is smothering America, and it could go on for years. The severe and widespread phenomenon is wiping out crops, endangering farmers’ livelihoods, and threatening to jack up food prices in grocery stores nationwide. It’s caused the government to declare one-third of the nation’s counties federal disaster areas, and is even drawing comparisons to the 1930s Dust Bowl — hardly surprising as an alarming 60-plus percent of the contiguous United States is suffering from moderate to extreme drought, according to the U.S. Drought Monitor. How long could it last? Experts say looking beyond seasonal climate projections is difficult. According to current forecasts, some relief could be on its way this winter in the form of El Niño, a warming of ocean waters in the equatorial Pacific that favors wetter conditions in the southeastern and southwestern United States. Whether that will manage to offset the effects of a drought that has been building for nearly two years is another matter. “I somehow doubt that will be enough to get rid of the worst areas of the drought, but it will certainly lead to some amelioration,”  The current drought is largely a result of La Niña, a cooling in the equatorial Pacific that brings dry conditions to the southwestern United States and Mexico. La Niña alternates with El-Niño in the Southern Oscillation cycle, and all the major droughts of the 20th century — the Dust Bowl of the 1930s, the harsh dry spells in the Southwest of the 1950s, and the intense drought of 1998-2002 — have been linked with periods of La Niña, the effects of which can last up to a decade.

Cities Across U.S. Bore Brunt of Record-Setting July Heat - Preliminary climate data for July shows that many cities across the U.S. experienced record-setting months, with temperatures propelled upwards by a massive area of High Pressure, more popularly known as a Heat Dome, that kept cooling rains at bay. For example, in St. Louis, Mo., where the year-to-date has been the warmest such period on record, the city has already exceeded its all-time record for the greatest number of days with high temperatures of 105°F or above, beating the 10 such days that occurred during the Dust Bowl in 1934.

Feel the Burn: Making the 2012 Heat Wave Matter - There have been two, maybe three, landmark heat waves in the history of man-made global warming. The first was in 1988. Then as now, the eastern two-thirds of the United States was broiling while relentless drought parched soil and withered crops across the Midwest. But in Washington, the underlying problem was being named for the first time. On June 23, NASA scientist James Hansen testified to the Senate that man-made global warming had begun. The New York Times reported his remarks on Page 1, and the rest of the media at home and abroad followed suit. By year’s end, “global warming” had become a common phrase in news bureaus, government ministries and living rooms around the world.The second landmark heat wave occurred in 2003. It escaped many Americans’ notice because it took place in Europe, which suffered the hottest summer on record. By August, corpses were piling up outside morgues in Paris. Initial estimates suggested a death toll of 15,000. But a comprehensive study by the European Union later concluded that, in fact, there had been 71,449 excess deaths. And the third landmark heat wave? It’s very possible we’re living through it right now. Summer 2012 has broken thousands of records, bringing misery and worse to millions of Americans. By mid-July the death toll was nearing 100, said Wunderground.com. That is certain to rise—not just because the forecast is for hot weather to persist but because, as in 2003, many heat wave deaths are epidemiologically traceable only well after the fact.

Many U.S. cities unprepared for future heat waves -  What’s the deadliest natural disaster? In the United States, it’s heat. Between 1979 and 2003, heat waves killed at least 8,015 Americans, according to the Centers for Disease Control and Prevention. That’s more than hurricanes, lightning, tornadoes, floods and earthquakes combined. And it’s largely an urban problem—the bulk of those deaths occur in cities. Why are cities so susceptible to heat waves? Well, in part because that’s where most people live (obviously). But there’s another factor, too: Cities tend to run much hotter than nearby rural areas. This is due to what’s known as the urban heat island effect. There are fewer trees and plants in the city to enable evaporation. Buildings and pavements absorb more warmth from the sun. And factories and automobiles give off waste heat. That all adds up. On a hot summer afternoon, a large city can easily run 5-18 °F hotter than surrounding rural areas, enough to turn an unpleasant heat wave into a deadly calamity.  A new study in the journal Landscape and Research Planning finds that many large U.S. cities are warming twice as fast as the rest of the country.

Climate science: the gathering storm - If average temperatures increase, so will temperature extremes. As temperatures increase, so will evaporation. As evaporation increases, so will precipitation. As tropical seas get warmer, so will the increased hazard of cyclone, hurricane or typhoon. Nine of the 10 warmest years on record have occurred in this century. Last year was the second rainiest year on record worldwide; the winner of this dubious derby was 2010, which, with 2005, was also the warmest on record. A springtime hosepipe ban in southern England was promptly followed by unprecedented rain and flooding in much of the country. Some of the most catastrophic floods and lethal heatwaves ever observed have claimed many thousands of lives in the last decade, and the increasing probability of such extremes has been predicted again and again: by the World Meteorological Organisation; by the Intergovernmental Panel on Climate Change; by the UN's inter-agency secretariat for disaster reduction; and by researchers at the Potsdam Institute for Climate Impact Research in Germany who have listed the 19 hottest, wettest or stormiest ever events, all in the last decade. There are other, less direct indicators. The northern hemisphere growing season has expanded by 12 days since 1988. Sea levels are rising. Higher sea levels make storm surges – and consequent catastrophic floods in estuaries, flood plains and coastal cities – more likely, more costly and more deadly. The signals are clear enough. Climate is changing, and local weather patterns are responding. Conditions that seem bad now may be regarded as relatively benign in decades to come. Any single episode of good or bad weather is a chance outcome, like the throw of the dice. But the dice now seem to be loaded.

U.S. Thunderstorm Insured Losses: 1980-2011 (graph)

Pacific region on brink of El Nino: NZ weather scientists (Reuters) - The Pacific region is set to experience in the next three months an El Nino weather pattern, which can bring dry weather and affect crops, New Zealand scientists said on Wednesday. Sea surface temperatures in the equatorial Pacific are warming, and tropical sea temperatures are near El Nino levels. "Conditions in the tropical Pacific are currently on the brink of El Nino, and it is likely El Nino will develop during the early spring period," the National Institute of Water and Atmosphere (NIWA) said in its latest climate outlook. "The majority of climate models which NIWA monitors predict that the El Niño threshold will likely be exceeded during the August to October period." The El Nino typically brings rainfall below the average to the Asia-Pacific region, threatening the yields of agricultural crops, while parts of Latin America and the continental United States may be hit by weather that is wetter than average.

Earth sucking up increasing amounts of carbon dioxide - The Earth's ability to soak up man-made carbon dioxide emissions is a crucial yet poorly understood process with profound implications for climate change. Among the questions that have vexed climate scientists is whether the planet can keep pace with humanity's production of greenhouse gases. The loss of this natural damper would carry dire consequences for global warming. A study published in Thursday's edition of the journal Nature concludes that these reservoirs are continuing to increase their uptake of carbon — and show no sign of diminishing. In an accounting of the global "carbon budget," researchers calculated that Earth's oceans, plants and soils had almost doubled their uptake of carbon each year for the last half-century. In 1960, these carbon sinks absorbed around 2.4 billion metric tons of carbon; in 2010, that figure had grown to around 5 billion metric tons. "Since 1959, approximately 350 billion [metric tons] of carbon dioxide have been emitted by humans to the atmosphere, of which about 55% has moved into the land and oceans," they reported.

Deny This: Contested Himalayan Glaciers Really Are Melting, and Doing So at a Rapid Pace-Kind of Like Climate Change - Remember when climate change contrarians professed outrage over a few errors in the UN Intergovernmental Panel on Climate Change’s last report? One of their favorite such mistakes involved an overestimation of the pace at which glaciers would melt at the “Third Pole,” where the Indian subcontinent crashes into Asia. Some contrarians back in 2010 proceeded to deny that the glaciers of the Himalayas and associated mountain ranges were melting at all. But now, using satellites and on-the-ground surveys, scientists note that 82 glaciers in the Tibetan Plateau are retreating, 15 glaciers have dwindled in mass, and 7,090 glaciers have shrunk in size. Why? The culprits include rising average temperatures characteristic of ongoing global warming and changes in precipitation, another sign of climate change, according to Lonnie Thompson of Ohio State University and his colleagues from the Chinese Academy of Sciences. The study appeared online in the journal Nature Climate Change on July 15 and is bad news for the hundreds of millions of people who rely on such glaciers to feed water into major rivers such as the Ganges, Mekong or Yangtze.

Arctic sea ice melting on par with 2007 record -With about a month and a half remaining in the Arctic melt season, sea ice cover continues to decline at a rapid pace, and is currently on par with where the 2007 record melt season stood at the same time of year. Arctic sea ice extent has been declining at a rate of about 12 percent per decade since the start of satellite measurements in 1979, and a new study suggests that natural climate variability explains some, but not the majority, of this trend. The study concludes that manmade global warming is the most plausible explanation for recent sea ice decline. According to the National Snow and Ice Data Center (NSIDC) in Boulder, Colo., Arctic sea ice extent tracked at "very low levels" during July, setting daily records early in the month. Sea ice volume measurements, which incorporates measurements of ice extent as well as thickness, is currently running below where it was at this time during 2007, and well below the 1979-2011 average. This follows an unusually early start to the melt season in most areas of the Arctic, and the region experienced its largest June sea ice loss in the satellite era, when about 1.1 million square miles of ice — equivalent to the combined land area of Alaska, California, Florida, and Texas, melted. According to the NSIDC, ice extent as of mid-July was especially low in the Barents, Kara, and Laptev Seas where open ocean extended "as far north as typically seen during September, the end of the summer melt season," the NSIDC said in a July 24 statement. Ice extent in the Chukchi Sea, north of Alaska, was near average levels.

NOAA: Summer weighing heavily on Greenland Ice Sheet  -In late July, NASA announced that satellites had detected signs of melting across virtually the entire surface of the Greenland Ice Sheet in mid-July, even at the two-mile-high summit of the ice cap—a first for the satellite record and a historically rare occurrence based on ice core data.  The unusual melting event followed several months during which high pressure systems repeatedly parked over Greenland. As many a weather forecaster has explained, high pressure generally leads to calm winds and sunny skies, both of which boost temperatures during the all-day sunshine of mid-summer at high latitudes. The map on the left shows the difference from average pressure at the 700 millibar pressure level from May-July 2012 compared to the 1981-2010 average. Gold colors indicate higher-than-average pressure. A large dome of high pressure camped over Greenland and the Northwest Atlantic this summer. The influence on temperatures (map on right) was dramatic. Temperature anomalies at the same altitude were as much as 11 degrees Fahrenheit warmer than average over Greenland.

James Hansen: Climate change is here — and worse than we thought - When I testified before the Senate in the hot summer of 1988, I warned of the kind of future that climate change would bring to us and our planet. I painted a grim picture of the consequences of steadily increasing temperatures, driven by mankind’s use of fossil fuels. But I have a confession to make: I was too optimistic. My projections about increasing global temperature have been proved true. But I failed to fully explore how quickly that average rise would drive an increase in extreme weather. In a new analysis of the past six decades of global temperatures, which will be published Monday, my colleagues and I have revealed a stunning increase in the frequency of extremely hot summers, with deeply troubling ramifications for not only our future but also for our present. This is not a climate model or a prediction but actual observations of weather events and temperatures that have happened. Our analysis shows that it is no longer enough to say that global warming will increase the likelihood of extreme weather and to repeat the caveat that no individual weather event can be directly linked to climate change. To the contrary, our analysis shows that, for the extreme hot weather of the recent past, there is virtually no explanation other than climate change.

The Conversion of a Climate-Change Skeptic - CALL me a converted skeptic. Three years ago I identified problems in previous climate studies that, in my mind, threw doubt on the very existence of global warming. Last year, following an intensive research effort involving a dozen scientists, I concluded that global warming was real and that the prior estimates of the rate of warming were correct. I’m now going a step further: Humans are almost entirely the cause.  My total turnaround, in such a short time, is the result of careful and objective analysis by the Berkeley Earth Surface Temperature project, which I founded with my daughter Elizabeth. Our results show that the average temperature of the earth’s land has risen by two and a half degrees Fahrenheit over the past 250 years, including an increase of one and a half degrees over the most recent 50 years. Moreover, it appears likely that essentially all of this increase results from the human emission of greenhouse gases.  These findings are stronger than those of the Intergovernmental Panel on Climate Change, the United Nations group that defines the scientific and diplomatic consensus on global warming. In its 2007 report, the I.P.C.C. concluded only that most of the warming of the prior 50 years could be attributed to humans. It was possible, according to the I.P.C.C. consensus statement, that the warming before 1956 could be because of changes in solar activity, and that even a substantial part of the more recent warming could be natural.

MOMCOM's Mass Suicide & Murder Pact - 4 - In this series we have been discussing mass suicide - mass murder pacts, indicating that some of those who go along for the ride do not substantially comprehend what is really happening. In individuals this unawareness can exist as a result of a mental impairment, naiveté, or a strong follow-the-crowd personality. In meme complexes, such as political groups, churches, international corporations, or nations, it is more of a function of the institutionalization of dysfunctional ideology. In the post today, we are going to focus on the institutionalization of the dysfunctional ideology associated with the addiction to oil: But what all these climate numbers make painfully, usefully clear is that the planet does indeed have an enemy – one far more committed to action than governments or individuals. Given this hard math, we need to view the fossil-fuel industry in a new light. It has become a rogue industry, reckless like no other force on Earth. It is Public Enemy Number One to the survival of our planetary civilization. "Lots of companies do rotten things in the course of their business – pay terrible wages, make people work in sweatshops – and we pressure them to change those practices," says veteran anti-corporate leader Naomi Klein, who is at work on a book about the climate crisis. "But these numbers make clear that with the fossil-fuel industry, wrecking the planet is their business model. It's what they do."

How Our ‘Growth’ Obsession Drives Inequity, and May Kill Us All - COLORLINES: Our growth-centrism is animated by misguided assumptions. Left unaltered, they will make life on this planet, particularly for the marginalized and less well off, ever more unbearable and unsustainable. That’s why we must transform them. The core problem is that the very formula used to determine prosperity, gross domestic product, or GDP, embeds dangerous misconceptions into every facet of economic life. GDP is measured by totaling up the value of all goods and services produced in one year. The forecast for GDP, alongside inflation, is the single most influential economic number out there. It’s used by almost every organization, from the White House to corporations to non-profits, as the basis for allocating resources. GDP assumes that natural resources—energy, water, land—will always be available in unending quantities at small costs. But we know this is totally false. The amount of clean water, fossil fuels, and land that humans can use productively is limited. There’s no more of these things today than when our ancestors began to walk upright 2 million years ago. As with natural resources, GDP also assumes labor is available for a marginal cost at endless supply. This means that when labor becomes too expensive in one place, employers immediately begin to seek out newer, less expensive employees in another. The false designation of these environmental and human resources as cheap leads the economic system to misuse them, with horrific consequences.

US climate change policy: not a hopeless case - First, the policy situation isn’t nearly as bad as might be supposed, given the failure of the Waxman-Markey cap-and-trade bill, and the absence of any real push from the Administration. The fact is, that, in the current US situation, achieving coherent outcomes from legislation is just about impossible. Increasingly, the Obama Administration relies on executive and regulatory actions. In the case of climate change, the important ones are fuel economy standards for cars (CAFE), and EPA regulation of CO2 emissions and other pollution from power stations. Obama has pushed through rules requiring a near doubling of fuel efficiency by 2025. The EPA regulations effectively make new coal-fired power stations uneconomic and require the shutdown of many old stations previously exempted from the Clean Air Act. Reliance on executive action has all sorts of problems, and regulation is an inefficient way of reducing emissions. Still, if Obama is re-elected, the US can expect to see continued reductions in emissions over the rest of the decade. It’s important to observe that, even with the current limited policies, US emissions have already peaked and begun to decline. If Obama wins, the EPA and CAFE regulations will be locked in, and there’s the potential to go further, particularly in the context of an agreement with China.

The Hidden Epidemic Of Murder: Environmentalists Are Being Killed In Record Numbers Around The World -- I described in my last column, Haviv and I were detained by security officials when we tried to visit the mine site and later tear-gassed by riot police during a demonstration protesting the killing of five opponents of the Conga project earlier that day.  When we went back to our hotel later that night, we went online to find details of the newly declared state of emergency. What we found sharing the day’s headlines was a wire service story reporting that Chinese officials had halted work on a new molybdenum-copper alloy plant in Sichuan province after mass demonstrations in which 13 people were hospitalized after being attacked by riot police. A couple of minutes on Google then took us in quick succession to two people (or perhaps four — reports are contradictory) killed in protests in late May against a giant copper mine in the southern Peruvian province of Cusco. And from there to the bodies of two Brazilian environmental activists found tied up and drowned 50 miles north of Rio de Janeiro. The two men had been involved in protests against a huge new petrochemical complex, financed by the state oil company, Petrobras, which would threaten the rich fishing grounds of Guanabara Bay. (Ironically, the men disappeared on June 23, one day after dignitaries from around the world were putting their initials on the final Rio+20 declaration [pdf], with its ringing reaffirmation of the world’s commitment to people-centered sustainable development). And so it went on, case after case, country after country, a veritable worldwide epidemic of killing.

Have the French shown that water privatization is dead? - Some time ago, @ModeledBehavior has requested comment on this article.  Excerpt: Across the nation cash-strapped municipalities are considering the sale of their public-utility systems. These moves are intended to raise cash and rid the municipalities of expensive liabilities such as debt service and pension obligations. But officials considering this approach might do well to look to France and other nations that are rapidly moving in the opposite direction with a “remunicipalization” of their utility systems. In 2010, Paris, in the best known case of remunicipalization, ended contracts with the world’s two biggest water service companies, Suez and Veolia, bringing an end to their 100-year private duopoly. The reversal of a century-old practice in Paris was an acceleration of an international movement away from private control. So what’s up?  I see it this way.  For advanced water systems, there is no cost advantage to having a privatized system.  It is a regulated monopoly and over time it acquires skill in manipulating the political process, most of all its regulators.  Why expect lower costs and prices?  A wide variety of studies of this topic, including studies by “market-oriented” economists, find no cost advantage for the private sector in this setting.

Scientists Use Microbes to Make ‘Clean’ Methane - Microbes that convert electricity into methane gas could become an important source of renewable energy, according to scientists from Stanford and Pennsylvania State universities. Researchers at both campuses are raising colonies of microorganisms, called methanogens, which have the remarkable ability to turn electrical energy into pure methane -- the key ingredient in natural gas. The scientists' goal is to create large microbial factories that will transform clean electricity from solar, wind or nuclear power into renewable methane fuel and other valuable chemical compounds for industry. "The whole microbial process is carbon neutral," he explained. "All of the CO₂ released during combustion is derived from the atmosphere, and all of the electrical energy comes from renewables or nuclear power, which are also CO₂-free."

House energy panel report seeks to reheat Solyndra furor - Republicans on the House Energy and Commerce Committee released a 154-page majority staff report Thursday on their nearly 18-month Solyndra investigation, concluding that officials in the Obama administration had ignored warning signs about the California solar manufacturer’s perilous financial conditions and then “were willing to take extraordinary measures in order to keep the company afloat.” But at first glance, the report didn’t appear to back up some of the more lurid accusations that Republicans have made about the Solyndra affair in campaign ads, including Mitt Romney’s claims that money for Solyndra went to “campaign contributors” or “friends and family.”

Report Shows the US has Nearly 200,000 GW of Solar Potential - The National Renewable Energy Laboratory (NREL) has released a report titled US Renewable Energy Technical Potentials: A GIS-Based Analysis. As the title suggests, the report provides an in depth analysis of the renewable energy potential in the US. It shows that rural utility-scale photovoltaic solar farms could dominate the US energy mix in the future, with 153,000 GW of potential.  Texas boasts 14% of the entire countries rural solar potential and about 20% of the concentrated solar power potential. The Lone Star State could change from a fossil fuel powerhouse to a renewable energy icon, and with that change could also see massive increase in economic growth. There is the potential for 38,000 GW of concentrated solar power, 4,200 GW of potential for offshore wind, and 4,000 GW of geothermal potential.

Renewable energy potential in every U.S. state, study shows: — A new study of renewable energy's technical potential finds that every state in the United States has the space and resource to generate clean energy.The U.S. Department of Energy's National Renewable Energy Laboratory produced the study, U.S. RE Technical Potential, which looks at available renewable resources in each state. It establishes an upper-boundary estimate of development potential. Economic or market restraints would factor into what projects might actually be deployed. The report is valuable for decision-makers and utility executives because it compares estimates across six renewable energy technologies and unifies assumptions and methods. It shows the achievable energy generation of a particular technology given resource availability -- solar, wind, geothermal availability, etc. -- system performance, topographic limitations, and environmental and land-use constraints. The study includes state-level maps and tables containing available land area (square kilometers), installed capacity (gigawatts), and electric generation (gigawatt-hours) for each technology. 

US Opens Public Land for Utility Scale Solar Projects - The Whitehouse has released plans to increase access to public land for solar installations with the hope of encouraging more capacity. 285,000 acres in parts of Arizona, California, Colorado, Nevada, New Mexico, and Utah will be made more accessible through easier permit application processes. Before Obama’s presidency started no solar projects were allowed on public lands in an attempt to preserve their natural state. However, since 2009 the Department of the Interior has approved 17 large scale solar projects on such ground, expected to generate 5,900 MW of power when completed, enough to supply 2 million homes. It is expected that the new land will enable a further 23,000 MW of solar capacity to be installed, and provide sufficient electricity for nearly 7 million homes. Steven Chu, the US Energy Secretary, said that “developing America’s solar energy resources is an important part of President Obama’s commitment to expanding American-made energy, increasing energy security, and creating jobs. This new roadmap builds on that commitment by identifying public lands that are best suited for solar energy projects, improving the permitting process, and creating incentives to deliver more renewable energy to American homes and businesses.”

Wind Industry Wins Senate Panel’s Support for a Tax Break - NYTimes.com: Ever since Solyndra, a solar module maker, cost taxpayers half a billion dollars when it went bankrupt last September, Republicans have attacked subsidies for solar, wind and biofuels. Those subsidies have been steadfastly supported by President Obama, even as the presumptive Republican presidential nominee, Mitt Romney, has attacked them as a waste of money. On Thursday, the wind industry convinced a key Senate committee that green can be good politics in red states as well as blue ones. The Senate Finance Committee voted to renew a tax credit for wind power that is set to expire at the end of this year, with several Republicans joining Democrats to support extending the credit for one more year at a cost of $3.3 billion. The provision, which will apply to projects under construction by the end of 2013, was included in a $200 billion package of popular tax breaks that the committee passed on a bipartisan 19-5 vote. The bill is expected to go to the Senate floor when Congress returns from summer recess, although it is unclear if the House will take up similar legislation. The wind industry considers the subsidy, called the production tax credit, to be vital as it tries to make wind power more competitive with electricity generated from fossil fuels like coal and natural gas. Wind farms can generally choose to receive a continuing credit of 2.2 cents per kilowatt-hour of electricity produced or receive a one-time payment equivalent to 30 percent of the cost of developing a project.

Ailing Calif. nuke plant cost: $165 million so far - The tab for the long-running crisis at the San Onofre nuclear power plant in California has hit at least $165 million, and it would cost $25 million more to get one of the damaged reactors running at reduced power, officials said Tuesday. Financial records released by Edison International - the parent company of operator Southern California Edison - provided a sober assessment of the troubles at the seaside plant, where malfunctioning steam generators damaged scores of tubes that carry radioactive water. The plant has not produced power since January. In a conference call with Wall Street analysts, Edison International Chairman Ted Craver left open the possibility that the heavily damaged generators in the Unit 3 reactor might be scrapped. It's also possible the plant will never return to its full output of electricity, unless the four generators are replaced.

Prosecutors Start Criminal Probe Into Fukushima Nuclear Accident - Fukushima prosecutors began a criminal investigation into last year’s nuclear-plant accident after more than 1,300 residents filed a complaint against executives of Tokyo Electric Power Co. including former Chairman Tsunehisa Katsumata.  The Fukushima City prosecutor yesterday accepted the complaint and will start a probe to determine whether there was professional negligence in Japan’s worst civil nuclear-plant accident, an official at the office said, who declined to be named in line with policy. “Our complaint includes professional negligence resulting in bodily injury by radiation exposure and the death of hospital inpatients during transfer from Futaba Hospital” near the Fukushima plant, said Ikuo Yasuda, who runs his own law office and represents the residents. Yasuda confirmed the complaint was accepted yesterday by the Fukushima District Public Prosecutors Office.  Tokyo Electric said it hadn’t been informed by prosecutors that a complaint against former executives was accepted. “We can’t comment on this because we don’t know the complaint’s content,”

Worst blackout in decade leaves 300m without power -  A massive grid failure in Delhi and much of northern India left more than 300 million people without electricity on Monday in one of the worst blackouts to hit the country in more than a decade.  Power supply in the northern states, that faced blackout since around 2am on Sunday night, was partially restored after nearly 8 hours of disruption.  Seven states of the northern region, including Delhi, had no electricity since 2:32 am following a massive disturbance in the northern grid near Agra in UP. Initial reports said that a total of 35,669 MW power had been affected due to the fault in the grid.

Massive Failure: 670 Million In India Lose Power; Grid Collapses For Second Day - Things have gotten even worse in India, where a power failure that affected about 370 million people on Monday was followed by an even larger grid collapse today that left about 670 million without access to electricity. That's nearly 200 million more people than the combined populations of Canada, the U.S., Mexico and the nations of Central America. The outage is affecting about half of India's population. From New Delhi, correspondent Elliot Hannon tells our Newscast Desk that "around 1 o'clock in the afternoon local time [today], the country's northern and eastern power grids failed. ... In New Delhi, schools and office workers poured out into the afternoon drizzle to try to beat the rush home. Stop lights were dark for the second straight day and the city's metro system again failed."

Wow! 600 million Indians without power! - The worst blackout in India’s history spread to more than half the country Tuesday, as an electrical grid collapse in 14 states deprived at least 600 million people of power, many for a second day. The blackout, the largest in global history by the number of people affected, dramatically underlined the concerns industry leaders have raised for years – that the nation’s horribly inefficient power sector is dragging on the economy and could undermine its longer-term ambitions. India's energy crisis cascaded over half the country Tuesday when three of its regional grids collapsed, leaving 620 million people without government-supplied electricity for several hours in, by far, the world's biggest blackout. More generally, it renewed concerns about India’s failure to invest in the infrastructure needed to support its rapidly growing economy, in sharp contrast to neighboring China. It also destroyed one myth about the country – that its entrepreneurial spirit and vibrant private sector could somehow deliver a brighter future without a dramatic improvement in the way the country is governed.

Lack of Rain a Leading Cause of Indian Grid Collapse - According to a senior electricity official, who was not willing to be identified because he was not authorized to speak publicly, "Apparently, North was drawing 1300 MW from West and 0 MW from East when West-North connectivity failed, putting the entire load on East-North connectors. That also collapsed and North was plunged into darkness. Apparently deficit in Northern Region was 21 to 26 percent. With start-up power from West and East, North was limping back to normalcy and now that has gone again. A high level enquiry committee has been set up and no one is prepared to say anything." A peculiarity of the Monday failure is that the first outage happened in the middle of the night—not when most people would expect the grid to be at peak load. "Common sense says at 2:30 AM, the power drawn should not be so high,"  During the day, industrial customers can only draw a limited amount of power. But after 10pm, the restriction is withdrawn, and they're allowed to draw as much as they want. "At midnight, when the demand should have been lower, it is higher,"  Large power outages can happen anywhere, of course, but India is unique in its dependence on seasonal rainfall.  Less rain means that farmers need to pump more water from deep boreholes, using highly subsidized electricity. Haroon Yusuf, Delhi's Power Minister was quick to blame neighboring agricultural states for drawing more power than they were allotted.

Weak Monsoon Worsens India's Power Crisis - India's paralyzing power outages this week have focused attention on this year's weak monsoon season, as below-normal water levels in some hydroelectric dams mean both less electricity to go around and farmers pumping more water instead of depending on rain. The combination of lower supply and higher demand is adding stress to a system that already has proved very rickety and that earlier this week suffered two massive hourslong outages. Tuesday's blackout was the largest yet, spanning an area of northern and eastern India inhabited by 680 million people. The specific cause of those outages is still being investigated. Some initial reports have blamed the collapse on rain-deficient states overdrawing their power allotments from the grid, while others say the fault was technical and due to shabby infrastructure.Either way, analysts say the effect of insufficient monsoon rains is likely to mean that widespread outages—though not necessarily on such a colossal scale—become more frequent in coming weeks and months, especially in breadbasket states.

 Peak Minerals: Shortage of Rare Earth Metals Threatens Renewable Energy  - Not only are supplies of oil and natural gas under imminent threat of failing to meet demand for them, but so is a whole range of precious metals, along with indium, gallium and germanium and other vital elements such as phosphorus and helium, as is discussed throughout this Commentary.. Of particular concern are indium, used in touch screens and liquid crystal displays, and rare earth elements (REEs) particularly neodymium and dysprosium, used to fabricate highly efficient magnets for electric cars and wind turbines. Platinum group metals are an issue too, used in catalytic converters and fuel cells. As is true of oil and gas, and indeed world population, such resources are not evenly distributed around the globe, and for example 80% of available new platinum is extracted from just two mines in South Africa. 92% of the niobium used in the world (for superconducting magnets and highly heat-resisting superalloys e.g. in jet-engines and rocket subassemblies) is exported from Brazil, and 97% of REEs are presently supplied from China. In developing a low-carbon transport infrastructure, it is proposed that biofuels should be used principally for aviation where there is no practical alternative to liquid fuels.  Roughly one fifth of all fuel in the UK is used for aircraft, or around 13 million tonnes. At a yield of 952 L/ha and a density of 0.88 g/cm3, to produce this much biodiesel would take 15.5 million hectares of arable land, of which the UK has only 6.5 million hectares

Rare earth metals under Greenland’s melting ice sheet could trigger mining rush -- Europe has been engaging in a strenuous bout of diplomacy with the home rule government of Greenland to allow access to the island’s natural resources. According to geological estimates, below Greenland’s vast ice sheet could lie enough rare earths to satisfy at least a quarter of global demand in the future. The vice-president of the European commission, Antonio Tajani, has led the push, forging an agreement with Greenland to look at joint development of some of the deposits. The agreement will extend beyond rare earths to metals such as gold and iron, and potentially to oil and gas, which are abundant in the waters around the island.

The rare earth riches buried beneath Greenland's vast ice sheet - Inside every wind turbine, inside computers, phones and other high-tech equipment from medical scanners to electric cars, are materials known as "rare earths". This small group of 17 elements are in extraordinary demand – but their supply is limited, and most of the existing sources have already been snapped up by China in its quest for ever more rapid economic growth. Last month China – which controls more than 90% of the reserves of these essential elements – warned that its supplies were diminishing, despite quotas to limit exports. Beijing's top officials said in a memo: "After more than 50 years of excessive mining, China's rare earth reserves have kept declining and the years of guaranteed rare earth supply have been reducing." This could spell disaster for the future of green technologies such as renewable energy and low-carbon vehicles. That is why Europe has been engaging in a strenuous bout of diplomacy with the home rule government of Greenland to allow access to the island's natural resources. According to geological estimates, below Greenland's vast ice sheet could lie enough rare earths to satisfy at least a quarter of global demand in the future.

Hot weather, production drop have driven natural gas prices 69 percent since April -  — As the temperature keeps rising, so does the price of natural gas. Natural gas futures in New York have surged 69 percent since hitting a 10-year low this spring. Power plants are burning more natural gas for electricity as homes and businesses crank up the air conditioning. And natural gas companies are finally cutting back after a production boom that pushed supplies this winter to the highest level on record.The price jumped another 6.6 percent Monday after forecasters predicted an especially toasty August, with unseasonably warm temperatures throughout the Midwest. Natural gas ended the day at $3.214 per 1,000 cubic feet, a high for the year. “As long as we see strong cooling demand, prices are going to go higher,” said Gene McGillian, a broker and analyst at Tradition Energy. Still, natural gas is about 35 percent cheaper than at this time last year. And the recent jump in prices probably won’t impact utility bills. Electricity rates are shielded from price spikes in a couple of ways: Utilities lock in gas prices for years at a time to protect themselves from quick shifts in price. And in many states, rates are set by regulators every year or two.

Heat Wave Can't Get You $8 Natural Gas in 2012 - The Energy Department reported that natural gas in storage grew by 26 billion cubic feet to 3.189 trillion cubic feet for the week ended July 20. The inventory level was 15.8% above the five-year average of 2.754 trillion cubic feet, and 18% above last year's level. Low natural gas prices in the U.S. this year has not only tanked the stocks of many gas-weighted producers, but also dragged down profits of U.S-based oilfield services companies as a result of reduced gas drilling activity (See Chart Below). However, since hitting a 10-year low of below $2/mmbtu in April, Henry Hub benchmark prices has surged 69% hitting $3.214/mmbtu on Monday, July 30, the high of the year. The latest bullish sentiment is fueled mostly by forecasts for more unusual heat this summer to increase air conditioning use. In addition, there's also an increase in usage/demand as lower natural gas prices have also attracted many utilities to switch from coal to natural gas for power generation. According to the EIA, electricity generated using natural gas was roughly even with coal for the first time ever in April. Historically, natural gas typically supplied just over 20% of the domestic electricity needs.

CO2 emission reductions: fracking, recession, renewables? - Several people have pointed out the remarkable fact that carbon dioxide emissions from fossil fuel combustion have fallen almost to 1995 levels. As the Institute for Energy Research noted, The Energy information Administration reports that energy-related carbon dioxide emissions in the United States are 2.4 percent less in 2011 than they were in 2010, and 9.1 percent less than in 2007 when they hit their peak level. Why are carbon dioxide emissions on a downward trend? IER identifies the main hypotheses for this reduction: economic recession reduces energy use, high oil prices reduce petroleum consumption, switching from coal to natural gas for electricity generation, and some switching to renewables for electricity generation. At The Atlantic, Alexis Madrigal charts out the changes over time in the share of electricity generation coming from coal, natural gas, and petroleum. His main point is the dramatic pace of change in the past two years in the switch from coal to natural gas, a pace not usually seen in electricity generation. Ron Bailey at Reason points to the role that fracking has played in the drastic reduction of the absolute and the relative price of natural gas (and, as IER noted, EPA regulations increase the relative price of coal, exacerbating the price effect underlying the switch). Merrill Matthews at Investor’s Business Daily also attributed the reduction to the increase in fracking. When an energy source that’s got half the carbon emissions effect also gets cheaper in absolute terms as well as relative to coal, economic and environmental benefits are aligned (I will defer to Mike and his earlier posts on the environmental impacts of fracking itself.

No to ‘fracking’ doesn’t mean no - Steve Neeley estimates that he has spent more than $500,000 over the past 12 years to build a country estate in southern Portage County. When a Chesapeake Energy land man approached him months ago with an offer to lease the Utica shale mineral rights beneath his meticulously landscaped 9.5-acre property in eastern Ohio, Neeley declined. That’s when, Neeley says, the land man told him, “We’ll just take it.” Neeley and 23 of his neighbors are the first group of Ohio landowners forced to take part in Utica-shale drilling under a seldom-used state law. The law lets companies add properties to large “ drilling units” even if leases with landowners haven’t been obtained, to maximize access to deeply buried oil and gas.Even the state isn’t immune from the law. The Chesapeake Energy drilling unit of 959 acres in Portage and Stark counties includes a 4-acre corner of Quail Hollow State Park northeast of Canton. That makes it the first state park in line for “fracking.” Ohio Department of Natural Resources officials say the “unitization” law guarantees fair compensation, and that the properties of unwilling landowners won’t be damaged.

John Kasich Claim About Oil And Gas Recovery Ruled Wrong By Experts: — Ohio Gov. John Kasich's claim that a single energy company could recover $1 trillion worth of oil and gas from the state's shale is an exorbitant overestimate, according to experts interviewed by The Associated Press. At current oil prices, that figure represents more than four times U.S. oil production last year. Viewed another way, every drop of oil produced in America for the next four years will be worth roughly $800 billion, based on current prices and production rates. "I think he's way off base," said Arthur Berman, a Texas-based petroleum geologist and independent energy consultant. "My best estimate is he's probably wrong by a couple of zeroes." U.S. crude oil production in 2011 was 2.078 billion barrels. At roughly $100 a barrel, that's $200 billion worth of oil. The revenue potential of newly accessible deposits of oil, natural gas and natural gas liquids under the state is important because Kasich is pursuing an increase in a state tax that large-volume oil and gas producers pay on what they extract. Proceeds from the tax would fund modest statewide income tax relief.

Maps: The Secrets Drillers Can Hide About the Fracking in Your Backyard - A new analysis by the Natural Resources Defense Council shows that most states where fracking occurs have no disclosure laws at all, and that those that do are woefully behind when it comes to revealing behind-the-scenes details of their operations. While the Obama administration has put some new rules in place, many decisions about what drillers are allowed to hide are left to the states; Interior Secretary Ken Salazar complained to Reuters that state-level regulation is "not good enough for me, because states are at very different levels, some have zero, some have decent rules." That's a problem, study author Amy Mall said, because unlike coal plants and other large-scale energy operations, fracked natural gas wells are often in close proximity to houses, schools, or other high-traffic areas. At stake is a trove of information: exact ingredients of the chemical cocktail used to frack a particular site, when and where drillers plan to frack, how toxic wastewater is to be dealt with, and many more basic details, all of which could be useful to local politicians and residents concerned about health impacts, groundwater and air pollution, and seismic activity associated with fracking. "The state laws on the books aren't anywhere near where they need to be for the public to have information to protect their communities," Mall said.

Fracking 'Doomed' - Proponents of natural gas fracturing and oil drilling are delirious with joy over the ability to recover shale gas, which has brought down world gas prices and made the US a major player again. Likewise, North Dakota wells are set to produce up to 800,000 barrels of oil a day soon. (Although, since the world uses roughly 89 million barrels a day, and the US uses a fifth of that, and demand in Asia will likely spike in coming years, the ND addition is just not that much). Fracking is dangerous to ground water purity, and both oil and gas, as hydrocarbons, contribute to global climate change, which is a dire threat to human well-being in coming decades and centuries. But oil and gas triumphalists have another thing coming. It is that the cost of generating electricity by wind and solar is falling rapidly. However hard they try to suppress government funding and tax breaks for renewables, Big Oil and Big Gas are doomed to lose, and in only about 4 years. At that point where it is just cheaper to generate electricity with renewables, no one is going to invest in hydrocarbons.  But if their delaying tactics can make them billions in the meantime, they have every reason to go for it, especially if they are moral cretins who don’t care about the health of the planet. Here is some of the writing on the wall in today’s news:

A "War on Shale Gas"? -  That's how Aubrey McClendon, CEO of Chesapeake Energy, described the New York Times' coverage on Mad Money on June 28, 2011, apparently referring to reporter Ian Urbina and the speakers in emails he published, shale gas skeptic and federal reserve board advisory member Deborah Rogers, and Art Berman, the so-called “third-tier geologist.” Jim Cramer, the show’s host, also questioned Berman's and the Times’ credibility, saying: “If we're being duped by the nat gas industry, as this article suggests, then how come Exxon Mobil spent 31 billion to buy nat gas giant XTO? Were they fooled, too?” It’s worth noting that Art Berman’s analysis is looking highly prescient these days. Official government estimates for shale gas have been slashed significantly. And the most basic element of his thesis – that caution is in order because it’s too early to know for sure how much and how long fracked wells will produce  — has even been echoed by an unexpected source: former CEO of ExxonMobil Lee Raymond. “It’s going to be a little while before people are really confident that there is going to be a sufficient amount of gas for 30 years to support the construction of an LNG plant,” Mr. Raymond told Bloomberg News during a February interview. “I’m frankly not sure that we have enough experience with shale gas to make the kind of judgment you’d have to make.”

Drought Strains U.S. Oil Production -- One of the worst droughts in U.S. history is hampering oil production, pitting farmers against oilmen and highlighting just how dependent on water modern U.S. energy development has become. Over 60% of the nation is in some form of drought. Areas affected include West Texas, North Dakota, Kansas, Colorado and Pennsylvania, all of which are part of the recent boom in North American energy production. That boom is possible partly by hydraulic fracturing. Known as fracking for short, the controversial practice gets oil and natural gas to flow by cracking shale rock with sand, chemicals, pressure and water. Lots of water. Each shale well takes between two and 12 million gallons of water to frack. That's 18 Olympic-sized swimming pools worth of water per well. "We're having difficulty acquiring water," said Chris Faulkner, CEO of Breitling Oil and Gas, an oil company with operations in many of the new shale regions including Bakken in North Dakota and Marcellus in Pennsylvania. Faulkner said officials in two Pennsylvania counties have stopped issuing permits for oil companies to draw water from rivers, forcing them to go further afield to obtain the crucial resource. In Kansas, he said much of the industry's water comes from wells owned by farmers. Farmers used to sell him water for 35 cents a barrel. Now, he said, they are turning down offers of 75 cents or more. As a result, between 10% and 12% of the wells Breitling planned on fracking have been put on hold.

MSC: Drought effects pose problems for US refiners -- US refiners’ ability to meet federal requirements for renewable fuels will be strained for the rest of 2012. But that’s nothing compared with what they face in 2013, according to a recently updated analysis of grains and ethanol by Dallas consulting firm Muse Stancil & Co. Severe drought since late spring in the largest corn-producing US states caused the US Department of Agriculture in early July to slash its earlier forecast for a record corn harvest. And since then, the drought has only worsened. What had been earlier this year a comfortable margin for refiners and blenders between corn-based ethanol and motor gasoline prices has now nearly evaporated, due the much higher corn prices resulting from the worsening drought.

Study: Dispersants may have hurt Gulf food chain - A study on possible effects of the 2010 BP oil spill indicates dispersants may have killed plankton - some of the ocean's tiniest plants and creatures - and disrupted the food chain in the Gulf of Mexico, one of the nation's richest seafood grounds. Scientists who read the study said it points toward major future effects of the spill. One called its findings scary.For the study, Alabama researchers pumped water from Mobile Bay into 53-gallon drums, then added oil, dispersant or both in proportions found during the oil spill to simulate the spill's effects on microscopic water-life in the bay.Over more than 12 weeks in 2010, BP's well spewed nearly 200 million gallons of oil into the Gulf of Mexico. The company used more than 1.8 million gallons of dispersants - more than 770,000 gallons of it at the oil's source on the ocean floor - to break up the oil into tiny droplets.The researchers found that, within days, the numbers of plant-like phytoplankton and ciliates - plankton that use hairlike cilia to move - increased under an oil slick. But they dropped significantly in the drums with dispersant or dispersed oil, while the numbers of bacteria increased.

Enbridge spills again: Pipeline dumps 50,000 gallons in Wisconsin - Enbridge, a beleaguered Canadian oil pipeline company, has spilled more than 50,000 gallons of light crude oil in rural Wisconsin -- shortly after the company said it had implemented safety reforms after a massive 2010 spill in Michigan. Officials for Alberta-based Enbridge Inc., one of the United States’ most vital suppliers of Canadian oil, said Friday's spill has been contained by cleanup workers, who are now trying to repair and restart the 24-inch pipeline known as Line 14, which carries more than 300,000 barrels a day. The incident is another black mark for an ambitious energy company ridiculed earlier this month by U.S. safety officials, who likened Enbridge workers to the Keystone Kops. The comparison came after an investigation of a broken pipeline that released more than 800,000 gallons of heavy crude near Marshall, Mich. -- one of the largest inland oil spills in U.S. history and certainly the most expensive. The new spill, in sparsely populated Adams County, Wis., forced the evacuation of two homes. It is the company’s worst spill since the 2010 disaster, and it drew the ire of U.S. Rep. Ed Markey (D-Mass.), ranking member of the House Natural Resources Committee. "Enbridge is fast becoming to the Midwest what BP was to the Gulf of Mexico, posing troubling risks to the environment,"

Enbridge races to clean up Wisconsin oil spill, restart line- Canada's Enbridge Inc. raced on Sunday to repair a major pipeline that spilled more than 1,000 barrels of oil in a Wisconsin field, provoking fresh ire from Washington over the latest in a series of leaks. The spill on Friday, which comes almost two years to the day after a ruptured Enbridge line fouled part of the Kalamazoo River in Michigan, has forced the closure of a major conduit for Canadian light crude shipments to U.S. refiners and threatens further reputational damage to a company that launched an over $3 billion expansion program just two months ago.  Enbridge said it intended to begin repairs to Line 14 late on Saturday after making "excellent progress" in clean-up, allowing for visual inspection of the line. But it still did not know what had caused the incident and provided no estimated on when the 318,000 barrels per day Line 14 might resume service. An image of the site posted on Enbridge's website showed a patch of damp, blackened earth near a stand of trees about one-third the size of a football field. It found some oil on two small farm ponds, but said they did not connect to moving waterways and that drinking wells did not seem to be affected.

TransCanada gets final OK for last leg of Keystone pipeline down middle of U.S. - TransCanada just got final approval to build its pipeline from the tar sands of Alberta all the way to the Gulf Coast of Texas. The Keystone XL pipeline has been held up.  But what you may not know is that Keystone XL would augment a section of pipeline that already brings tar-sands oil from Canada to Nebraska. On Friday, the Army Corps of Engineers signed off on the last permits TransCanada needed for a still-empty stretch from there to the Gulf Coast. Which means that the company will soon have a complete shunt traversing the entire height of the United States. President Barack Obama encouraged TransCanada to move ahead with the segment that will run from a refinery in Cushing, Okla. to Texas after he rejected the broader [Keystone XL] plan, saying the pipeline needed to be rerouted around Nebraska’s sensitive Sand Hills region. For that project, TransCanada needs presidential approval because it crosses an international border. The shorter portion only requires permits from state and federal agencies. TransCanada said the final of three permits it needed from the Army Corps of Engineers had been approved. …

June Oil Supply Confirmed Down - The IEA has now publicly released their June figures for total liquid fuel supply and so I can update my graphs accordingly. As you can see, June shows a downtick which adds to the overall impression that supply has been at best flat throughout 2012. This combines with the very sharp drop in oil prices in June: The overall impression continues to be that the global economy is faltering (meaning that even though supply is not rising, demand, or perceived demand, is lower than supply). 

The High Stakes Chess Game For Iraqi Oil - It started late last year with ExxonMobil, then a month ago Chevron joined in, followed this week by Total and now Gazprom. That’s four of the world’s biggest international oil and gas giants that have defied Baghdad to sign up for concessions to drill for oil in the Kurdistan region of northern Iraq. Baghdad has blacklisted the oil giants from future bidding rounds for southern fields, and has condemned the sweet deals that the Kurds have been offering as in violation of the Iraqi constitution. “Unless Total reviews the deals, it will face severe consequences… Total will be blacklisted for violating Iraqi law.” Big talk, but so far no details on punitive measures. Don’t think for a second that the oil companies are worried. “It’s a chess game, that’s how I read it,” an international oil tycoon with investments in Kurdistan told me recently. For Big Oil, these moves are part of a chess game, played with the intention of forcing Baghdad to rationalize the laws governing Iraq’s oil industry.

The meaning of China's economic slowdown - Less than a year ago I, along with several colleagues, published a paper entitled “When Fast Growing Economies Slow Down.” In it we predicted that a significant slowdown in Chinese growth was coming. While it was not possible to be precise about the timing, we warned that the number of years for which China’s GDP would continue to grow at high single-digit rates could likely be counted on the fingers of one hand. We got considerable pushback from critics in China and elsewhere. We had underestimated China’s enormous growth potential, these commentators warned. We failed to appreciate that the country’s growth model was unique and that it was not possible to extrapolate China’s future from the experience of other fast-growing economies. Well, the slowdown is here. Chinese growth in the second quarter slowed to 7.6 percent, down significantly from the double-digit norms of the past. Indeed the official figures may understate the magnitude of the change. The growth of electricity consumption has been falling even faster; at its most recent reading it has fallen to virtually zero. Unless the Chinese steel and aluminum industries have discovered how to make do without electricity, it would appear that their growth has virtually ground to a halt. That producer prices are falling is more evidence of weak demand.

China Manufacturing Teeters Close To Contraction - China’s manufacturing teetered on the edge of contraction in July and South Korea’s exports and inflation declined, indicating that stimulus efforts have yet to bear fruit. The Purchasing Managers’ Index in China unexpectedly fell to 50.1 in July, the weakest in eight months, from 50.2 in June, a government report showed today. Fifty marks the dividing line between expansion and contraction. South Korea’s exports slid by more than double the amount forecast by analysts and inflation moderated to a 12-year low. The data increase odds China and South Korea will add to interest-rate cuts in the coming months as a record-high jobless rate in the euro area drags on global growth. Leaders of China’s ruling Communist Party pledged yesterday to keep adjusting policies to ensure stable growth while signs of a revival in the housing market may improve chances of reversing the nation’s slowdown.

Chinese rail cargo still sinking - China’s vice premier Li Keqiang was widely reported to have said that China’s GDP figures are not reliable. According to Reuters, he is said to rely on electricity consumption, rail cargo volume, and banking lending. In case you have not been watching, the rail cargo volume growth on a year-on-year basis has just turned negative in June. Total volume of freight handled by railways amounted to 315 million tonnes, fell by 3.1% compared to a year ago. The year-on-year change has turned negative for the first time since September 2009. The chart below shows the cargo volume by transportation mode. With the exception of rail cargo volume growth, the data points seem rather random in comparison to GDP growth. If Li Keqiang is correct about the usefulness of rail cargo volume, then the economy has probably not bottomed in the second quarter.

Chinese Auto Makers May Be Forced Into Bankruptcy - Some of China’s struggling auto makers, burdened by debt, may be forced into involuntary bankruptcy, the Ministry of Industry and Information Technology said last week.The Ministry said in a note published on Tuesday that it is considering the introduction of a withdrawal mechanism to force near-bankrupt automakers out of the bloated automotive industry. China has around 1,300 automobile makers, including 171 car, truck and bus makers and more than 900 specialty vehicle manufacturers, according to the government. Nearly a quarter of these manufacturers are on the verge of bankruptcy, barely producing anything despite obtaining production approvals from supervising authorities, the statement said. Passenger vehicle producers that make no more than 1,000 vehicles annually for two consecutive years, or large and medium-sized bus producers and light and heavy-duty truck producers that assemble no more than 50 vehicles annually, will be ordered to overhaul production. If they are still unable to meet the required standard in two years, they will be disqualified for production, local media reported. 

China’s Manufacturing Barely Grows in July — China’s manufacturing barely grew in July and analysts said weakening export demand pointed to the need for more efforts to revive growth. The state-affiliated China Federation of Logistics and Purchasing said Wednesday that its purchasing managers’ index, or PMI, fell 0.1 percentage point to 50.1 in July, the slowest growth in eight months and just above the 50 level signifying expansion. The index was at 50.2 in June, 50.4 in May and 53.3 in April. “The index dropped with off-season declines in production and construction, allowing little evidence the economy is bottoming out,” the federation said in its report. “Current demand is weak and downward pressure has yet to eliminate oversupply.” A second survey, by HSBC, showed overall manufacturing activity deteriorating at a slower rate. Factory production rose for the first time in five months but manufacturing employment declined at the sharpest rate in over three years, it said. HSBC’s PMI rose to 49.3 in July, up from 48.2 in June. Although still below 50, it was the sharpest month-on-month increase in nearly two years, HSBC said. The PMI indexes measure overall manufacturing activity by surveying numerous indicators including orders, employment and actual production.

China PMI Misses And Prints Lowest In 8 Months With 10 Of 11 Sub-Indices Contracting - The seemingly exuberant levels of the China Manufacturing PMI data when compared to HSBC's Manufacturing PMI have largely disappeared now as the two are the closest together in 9 months. As China's PMI drops to its lowest print in 8 months at 50.1 (less than the expected 50.5), we note that 10 of the 11 sub-indices (including employment and new orders) are all lower and now in contraction mode. Only the Output sub-index remains above 50 (in the if-we-build-it-they-will-come period). New Export Orders also fell notably. Of course having learned their lesson with the unintended consequences of their last major stimulus effort, we suspect the PBoC will be a little more careful with the method to resuscitate this time. China's HSBC PMI came at 49.3 (slightly below the Flash print) but up from last month.

China's Biggest Problems Are Political, Not Economic - Although China has successfully confronted its recent short-term economic problems, large challenges remain. Some are economic. But the bigger challenges are political, both internally and with the rest of the world. China's critics predicted an economic hard landing when its growth began to slow, pulled down by shrinking export markets and the excess industrial and residential investment the country had generated in response to the global downturn at the end of the previous decade. Overcoming this slowdown was made more difficult by China's need to reverse a rise in domestic inflation, particularly the surge in real estate prices.

Time for China’s One-Child Policy to Go-Becker - Around 1980, China adopted the “one child” policy, which meant in practice that urban families were limited to one child, while exceptions were made for some rural families, minorities, and others. This policy was enforced strictly in urban and many rural areas; some women were even forced to undergo abortions during the 6^th or 7^th months of their pregnancies. Whatever sense this policy made at the time-not enough sense, I believe, to justify such draconian measures- its continuation is imposing considerable harm on China. These beliefs about the harmful effects of high fertility overlooked the fact that other Asian countries and regions with much greater population densities than China, including Korea, Japan, and Taiwan, had managed rapid economic development out of high levels of poverty without forcing reductions in birth rates. Birth rates fell rapidly and naturally because of economic growth and rising education of women.  Therefore, birth rates in China would have come down substantially even without its one-child policy as the extension of market reforms and other decentralizations of its economic policies pushed China toward rapid economic development and a much more urbanized economy. I do not believe that the one-child policy significantly increased China’s economic development, and it could even have retarded development, partly because reducing birth rates in an arbitrary fashion made many families very bitter.

China's index of leading indicators points to further economic erosion -- A couple of months ago some analysts from Credit Suisse took a trip across Asia to conduct a survey of China's steel industry. They later wrote in their report that the sector is in worse shape than it was in 2008. We got a number of e-mails suggesting that this report surely must be erroneous. It turns out that it wasn't. FT: - Chinese steelmakers saw their profits plunge by 96 per cent in the first half compared to a year ago, a Chinese official said on Tuesday, as the economic slowdown turned the industry into a “disaster zone”. And it doesn't look like the situation is getting any better. In spite of the recent pop in the manufacturing PMI number, key indicators are pointing to a continuing slowdown. The Index of Leading Indicators hit a post-2009 low today,... and so did the equity market. China's major cyclical sectors that depend so heavily on double digit growth are in trouble.

More Chinese regions propose mega-stimulus - While China’s central government is reluctant to start a stimulus programme comparable to the previous RMB4 trillion one, and despite the fact that the previous massive stimulus is widely regarded as a mistake, local governments are considering stimulus like last time. Since Premier Wen put growth back to the top priority, while stopping short of massive stimulus, many little things have happened, ranging from plans to bring future investment forward to cutting interest rates twice. Now, local governments are proposing some massive stimulus on their own. International Finance News has a summary of what kind of growth stabilising measures local governments are considering. For instance, Ningbo and Nanjing have announced plans to stimulate consumption and rebalance their economic structures. Meanwhile, Guizhou will announce plans to develop ecotourism which may include some RMB3 trillion of investment if implemented in full (we have no idea why such plans require RMB3 trillion, we speculate that they want to clone dinosaurs *). Last week, I mentioned that the Changsha government has an investment plan that amounted to 147% of the city’s GDP if implemented in full.

China prepares vast stimulus as slump threatens Asia - China has ditched its reform strategy and prepared a vast stimulus package as the country’s soft-landing turns uncomfortably hard, with recession warnings flashing across East Asia. The bellwether economies of Taiwan and Singapore both contracted in the second quarter. Korea’s industrial output fell in June, while Japan’s manufacturing PMI index fell in July to the lowest since the Fukushima disaster, with the export gauge crashing to recession levels. “Factory output, new orders and exports all decreased at the fastest rates since April 2011. These are worrying developments given the weakness of global demand,” said Markit’s Alex Hamilton. While China has ostensibly held up much better, electricity use has been falling in recent months. “Unless the Chinese steel and aluminium industries have discovered how to make do without electricity, it would appear that their growth has virtually ground to a halt,” said Berkeley professor Barry Eichengreen. China’s president, Hu Jintao, has told officials to brace for economic shocks from abroad, calling for “fiscal and monetary support and efforts to expand domestic demand”.

Chinese buying of U.S. business at record pace - Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday. Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group.  That would top the previous record of $5.7 billion reached in 2010, said Thilo Hanemann, research director with Rhodium Group, which tracks all acquisitions and investments in manufacturing facilities, warehouses, labs and offices by foreign companies in the United States valued at $1 million or higher.In manufacturing, the biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, Hanemann said. Opening up a plant in the United States allows Chinese firms such as Golden Dragon Precise Copper Tube Group, Inc. -- which broke ground this year on a $100 million plant in Thomasville, Ala. -- to avoid these tariffs.

Philippines: The circus is still in town - The chief justice of the Philippines was very publicly impeached and removed from his post in May. By then, the country had been gripped for four months by the seemingly endless twists and turns of his trial. It was all aired live across the media. But the soap opera, (or “telenovela” as Filipinos refer to it), didn’t end when the widely-unpopular and now-former chief justice Renato Corona was found guilty of breaking the public’s trust and being partisan. It was just the beginning. The summer was over and “American Idol” (another Filipino obsession) had drawn to a close. The time was ripe for the telenovela’s next round – finding a new chief justice. And yes – in keeping with President Benigno Aquino’s push for transparency and accountability – the search was conducted, historically, LIVE (again) across the media. For the first time, the Judicial & Bar Council (JBC) conducted the interviews of the nominees for the post on TV. The JBC prepares a shortlist from which the president then makes the final appointment. The Council composed of a representative each from various sectors – the three branches of government, the private sector, the academe, retired justices, and the legal community.

Defying Gravity: Is Asia’s Economic Miracle About to Stall? - Asia has its own share of economic troubles, which threaten to derail its heralded economic miracle. We can see that in the current slowdown in the region. Despite Asia’s burgeoning wealth, its economies are still to a great degree dependent on the advanced economies of the West, and as the recovery there sags, so have Asian exports, manufacturing output and GDP growth. China is likely to post its worst economic performance in 13 years in 2012. South Korea notched its slowest growth rate in nearly three years in the second quarter. Growth in India has fallen precipitously as well. The IMF predicts the economies of developing Asia will expand by 7.1% in 2012 – not bad, of course, but a sharp drop from the 9.7% recorded in 2010. Clearly, there is a limit to how much Asia can defy the gravity of the global economy. Most in Asia assume that this slowdown is a temporary, cyclical phenomenon, fixed by a bit of easy money and the eventual global recovery. That is likely accurate – to a point. A recent study by HSBC economists Frederic Neumann and Sanchita Mukherjee asks the uncomfortable questions: Is the current downturn a signal that something deeper and scarier is going on? Will the region’s billions, accustomed to rapid progress, have to get used to slower growth? Simply put, is Asia losing its mojo?

Asia readies for QE3 roller coaster - Quantitative easing (QE) in the U.S. has typically been a recipe for higher prices in Asia, and a signal for investors to seek refuge in hard commodities or currencies. For Hong Kong, with its pegged exchange rate, the result is invariably an inflationary and asset-price surge — particularly unwelcome when property prices are at all time highs. According to Bank of America Merrill Lynch we can expect the Fed to launch a $600 billion round of QE at its September meeting. For Asia, they say the impact is usually far more visible on inflation than growth, largely via higher commodity prices. They also note that, with previous rounds of QE, Asian currencies such as the Taiwan dollar, Korean Won or Singapore dollar have tended to strengthen against the greenback. While there is still some second-guessing on QE3, the market already appears to be looking past China’s growth scare and at the prospect of new stimulus.

India’s Budget Deficit Reached 37.1% of Fiscal-Year Goal in June - India’s budget deficit in the three months through June was 37.1 percent of the fiscal-year goal as the nation struggles to narrow a shortfall that the central bank says may exceed the government’s target. The shortfall was 1.9 trillion rupees ($34 billion), the Controller General of Accounts said on its website today. The government’s target for the 12 months through March 2013 is 5.14 trillion rupees. Prime Minister Manmohan Singh is grappling with a budget deficit amid pressure to keep subsidies for fertilizer and diesel to help the 824 million Indians living on under $2 a day. His administration projects record borrowing of 5.69 trillion rupees in 2012-2013 to fund its targeted shortfall of 5.1 percent of GDP, down from 5.8 percent last year.

Japan utility gets US$12.8 billion bailout -- The Japanese operator of the nuclear power plant devastated in last year's disasters received a 1-trillion-yen (US$12.8 billion) bailout Tuesday, putting it under government ownership, while international experts visited another plant that survived the tsunami's impact. Tokyo Electric Power Co. (TEPCO) apologized for the “inconvenience and anxiety” from the disaster at the Fukushima Dai-ichi plant in northeastern Japan, and for raising electricity charges to cover the costs of dealing with the crisis. The company faces massive compensation demands from those forced to evacuate and whose land and products were contaminated by radiation leaks following the crisis that began March 11 last year when Japan's northeast was hit by a massive earthquake and tsunami. TEPCO must also shoulder the enormous costs of decommissioning three reactors with melted cores and putting nuclear fuel rods from a fourth reactor into safe storage.

Prosecutors open criminal probes over Fukushima meltdown disaster -- Prosecutors opened converging criminal probes Wednesday into the March 2011 triple-meltdown disaster at Tokyo Electric Power Co.'s Fukushima No. 1 nuclear plant, looking to hold people in positions of power accountable, including then Prime Minister Naoto Kan. The Tokyo District Public Prosecutor's Office and two other district prosecutor's offices acted in response to five criminal complaints, including accusations that Tepco executives and government officials committed acts of professional negligence that resulted in deaths, injuries and exposure to high levels of radiation that could have been avoided, sources said. The other investigative tacks were initiated by the Fukushima District Public Prosecutor's Office and the Kanazawa District Public Prosecutor's Office in Ishikawa Prefecture. The prosecutors waited until a government investigative panel released its final report on the crisis on July 23 to avoid influencing the results. But the prosecutors may face a number of difficulties in establishing their cases, the sources said.

Japan Stands Up - iMFdirect - As a Japanese proverb has it: “Knocked down seven times, get up eight.” In a display of its resilience, Japan is getting up once again after the devastating earthquake and tsunami of a year ago.  But the world’s third largest economy still faces multiple challenges, and in our latest assessment of the country’s economy, the Japanese mission team at the International Monetary Fund has proposed a range of mutually reinforcing policies to strengthen confidence, raise growth and help restore Japan’s economic vitality. A year and four months ago, Japan was reeling from the Great East Japan earthquake and accompanying devastation. Yet, since then, the country has shown its resilience, with reconstruction contributing to strong first quarter growth of 4¾ percent. But despite this hopeful sign, all is not well. A contentious debate over how to address the large and growing public debt has occupied the political center stage. Deflation continues to affect economic activity, euro Area turmoil is casting clouds on growth prospects, and the appearance of an army of office workers in “cool biz” attire is a reminder of continuing energy shortages. Against this backdrop, the IMF conducted its regular health check of the world’s third largest economy.

The problem of Japan’s household savings - Almost two years ago, in September 2010, the Japanese currency reached an all-time high of just 83 yen to the dollar. The Bank of Japan, shocked into action, brought out the big guns: a massive intervention in the fx market, which immediately sent the currency down more than 3%. And I responded with a blog post headlined “Why Japan’s FX intervention might actually work”: the intervention was unsterilized, which meant that the Bank of Japan was essentially printing money. If a central bank prints enough money, the currency will, eventually, fall. Of course, that didn’t happen. A commenter, gpowell, looked into the details of what was going on and discovered that the intervention was only technically unsterilized: in reality, the Ministry of Finance ended up issuing new debt within days to repay the central bank. And so the inevitable happened, and the yen kept on strengthening. It’s now hitting new all-time highs around 78 yen to the dollar: the Japanese wish it were back at the 83 level which seemed so unacceptable two years ago. The Bank of Japan’s actions are barely making a dent in deflation, let alone weakening the yen. Now Martin Fackler has a good piece on the psychology and politics behind the central bank’s actions. The politics are simple: Japan’s politically-powerful elder generation is living on fixed incomes and loves deflation and cheap imports.

Japan’s Production Unexpectedly Falls as Korean Confidence Sinks: -- Japan’s industrial production unexpectedly declined and South Korean manufacturers’ confidence dropped to a three-year low, building the case for extra monetary and fiscal measures to aid growth.  Production fell 0.1 percent in June from May, when it slid 3.4 percent, Japan’s Trade Ministry said today. The median estimate of 29 economists surveyed by Bloomberg News was for a 1.5 percent gain. The South Korean confidence index for August was at 70 after 81 for July, the central bank said.  The signs of weakness kick off a week that UBS AG says will be among the year’s most important for financial markets, with the U.S. Federal Reserve and central banks in the U.K. and the euro region meeting to consider fresh stimulus efforts. The Reserve Bank of India will release its monetary policy decision tomorrow as it weighs inflation risks against the weakest economic growth since 2003.

Japan Manufacturing PMI Shows Output and News Orders Down at Accelerated Rate - Economic conditions in Japan continue to accelerate to the downside as PMI signals sharpest deterioration in operating conditions since April 2011. Key Points:
Output and new orders down at accelerated rates
New export business decreases at sharpest rate in 15 months
Average costs fall to greatest extent since November 2009
July data from Markit/JMMA showed manufacturing output falling at the sharpest rate in 15 months, as both new orders and new export business decreased at accelerated rates. After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) posted 47.9 in July, down from 49.9 in June, a level indicative of a moderate deterioration in operating conditions. Moreover, the latest index reading was the lowest in 15 months. All three market groups registered a worsening of business conditions, with investment goods producers noting the steepest deterioration. Japanese manufacturing production declined for a second successive month in July, and at an accelerated rate. The overall reduction in factory output reflected lower levels of incoming new business, according to survey respondents.

Global slowdown bites across Asia -- Asia's biggest economies posted disappointing export and manufacturing figures on Wednesday in the latest sign that the region is following the US and Europe into an economic slowdown. China reported a slight deterioration in manufacturing activity for July while South Korea saw a sharp fall in exports, just a day after Taiwan unexpectedly reported that its economy shrank in the second quarter. "Asia is finally getting caught up in the European mess with trade finally starting to buckle," said Frederic Neumann, regional economist at HSBC. "The latest data suggests there is much more pain to come on the export side." As the first Asian economy to report export data, South Korea is closely watched by investors. The 8.8 per cent decline in shipments in July from a year earlier is by far the sharpest monthly fall this year and bodes ill for economic growth.

Collapse -- NEW data on manufacturing conditions across much of the world are out today, and the figures are just brutal. Things look particularly grim for the euro area, as the chart at right shows (a reading below 50 indicates contraction). It's a shame Ireland's economy is only 2% or so of euro-area GDP. Manufacturing activity for the euro area as a whole is down to its lowest level since mid-2009, and weakness in new orders suggests more trouble is ahead. Unsurprisingly, euro-area unemployment continues to rise. There were 17.8m unemployed in June, up over 100,000 from May and more than 2m from June of 2011. Chris Williamson, the chief economist at Markit observes: The only country to show any sign of emerging from the downturn so far this year is Ireland, where output is beginning to increase again due to rising exports. The brighter picture from Ireland perhaps sends a message that other countries do not necessarily face the inevitability of deepening downturns if competitiveness can be improved, though the current weakness of global economic growth suggests that all producers face a challenging environment in export markets as well as at home. No kidding. The hope for Europe's periphery was that it might survive a collapse in domestic demand (due to capital outflows and austerity) by improving competitiveness and exporting more. This was an almost impossible hope from the outset, given that euro members' largest trading partners were other euro members' all of which were trying to slash budgets and raise net exports. With virtually all of the world's large economies also facing slowdowns or contracting outright the road ahead leads to depression.

Global PMI Update: 10 Of 11 European Countries In Contraction - Overnight, global July PMI data was released. In a nutshell: the contraction in the world economy is accelerating primarily due to that fulcrum continent, Europe, where 10 out of 11 countries indicated they are now in contraction. And since Europe is the nexus economy for global trade, what happens in Europe happens everywhere. As BAC summarizes: "From June’s levels’ global PMIs were mixed with roughly half (13) of the manufacturing PMIs decreasing over the course of the month. Out of the 23 countries that have reported so far, sixteen of the PMIs indicate that their manufacturing sectors are contracting – indicated by a PMI reading below 50. Europe’s sovereign debt and banking crisis continues to take a toll on the region’s manufacturing sector. Out of the 11 European countries that we reported on today, 10 printed with a PMI below 50. In other words, the majority of the global manufacturing weakness is stemming from Europe."

Europe’s very ugly PMIs --And so the fallout from the European suicide pact continues. Overnight we had another round of PMI data and once again the results were woeful. From Markit Economic’s chief economist: “The Eurozone manufacturing sector’s woes intensified again in July. Output fell at the fastest rate since mid-2009, consistent with the official measure of production falling at a quarterly rate in excess of 1%. Manufacturing therefore looks to be on course to act as a major drag on economic growth in the third quarter, as the Eurozone faces a deepening slide back into recession. “The July survey is characterised by faster rates of decline in output and new orders, leading manufacturers to cut back on headcounts and inventory holdings and suggesting a fear among companies towards ongoing weakness in the coming months. “Rates of decline hit the fastest for three years or more in Germany and France, but Spain and Greece continue to stand out in seeing particularly disappointing performances. “The only country to show any sign of emerging from the downturn so far this year is Ireland, where output is beginning to increase again due to rising exports. The brighter picture from Ireland perhaps sends a message that other countries do not necessarily face the inevitability of deepening downturns if competitiveness can be improved, though the current weakness of global economic growth suggests that all producers face a challenging environment in export markets as well as at home. ”

Global PMI shows stalling growth - J.P.Morgan has released its global manufacturing PMI for July and its an unhappy story: The global manufacturing sector slid further into contraction territory at the start of Q3 2012. At 48.4 in July, the JPMorgan Global Manufacturing PMI™ – a composite index produced by JPMorgan and Markit in association with ISM and IFPSM – posted its lowest level since June 2009. The PMI remained below the neutral 50.0 mark for the second straight month, to signal back-to-back contractions for the first time since mid-2009. Europe remained the main source of weakness during July, while the performances of the US, Brazil and much of Asia were only sluggish at best. Manufacturing PMIs for the Eurozone and the UK sank to their lowest levels for over three years. Within the euro area, the big-four nations fell deeper into recession, while Greece continued to contract at a substantial pace. Eastern Europe fared little better, with downturns continuing in Poland and the Czech Republic. The ISM US PMI posted a sub-50.0 reading for the second successive month in July. Rates of contraction accelerated in Japan, South Korea, Taiwan and Vietnam, but eased slightly in Brazil and China. Brighter spots were Canada, India, Indonesia, Ireland, Mexico, Russia and South Africa, which all signalled expansion during the latest survey period.

Falling Demand Spreads World-Wide Factory Flu - Across the world, production lines are shutting down and factory workers’ hours are being cut. A dearth of demand has fallen back on goods producers, suggesting the global slowdown won’t turn around soon. Wednesday brought news that factory activity either downshifted significantly or outright contracted in July. The euro-zone factory recession worsened last month. China posted its weakest official manufacturing reading since November. Readings from Australia and the U.K. were the lowest in at least three years. The Institute for Supply Management said the U.S. factory sector contracted for a second straight month.  Germany, a factory powerhouse, reported machinery orders fell for a ninth consecutive month. In Brazil, the orders index dropped for the fourth month in a row. In the U.S., new orders dropped for a second consecutive month. The problem is that falling demand feeds upon itself. Concerns about the euro-zone debt crisis and China’s past tightening action to slow inflation have led consumers and businesses around the world to cut their spending. Less global demand leaves less work for global manufacturers who, in turn, order fewer supplies and commodities from other producers.

World-Wide Factory Activity, by Country - Manufacturing in much of the world remained in contractionary territory in July, as concerns about a crisis in Europe and a Chinese slowdown continued. In the U.S., the Institute for Supply Management‘s purchasing managers’ index was essentially flat in July at 49.8, compared to 49.7 a month earlier. Reading below 50 indicate contraction. Though a subindex for employment offered an expansionary reading, growth slowed, which suggests subdued hiring.Meanwhile, according to an official measure China remained in expansionary territory, but just barely. Domestic demand may be propping the nation up, as most of the surrounding Asian countries slow down. Europe continues to struggle, with the euro zone contraction getting worse. Individual members France, Germany, Greece, Italy and Spain were all contracting. Ireland provided one bright spot with a slightly faster expansion.The following chart lists PMIs from a variety of countries. Readings above 50 indicate expansion. Click any column head to re-sort.

Is the ECB Ready and Able to Cross the Rubicon? - The big news of the day on Thursday was Mario Draghi’s pronouncement that the ECB would do “whatever it takes” to shore up the Euro. He also used the same phrases about the need to keep the monetary channel open prior to preceded previous interventions. Two-year Spanish bond yields, which had risen to unprecedented levels, came in by over 150 basis points and global stock markets rallied. But how seriously should we take this talk? While the ECB is the only actor that can buy the Eurozone enough time for the member states to put in place the needed fixes (and bear in mind there is no guarantee that process will be a success), even measures the Eurocrats appeared to think were on the “shock and awe” scale fizzled. For instance, the ECB’s last big intervention, the LTRO, was a back-door bailout to sovereigns (banks could borrow at 1% from the LTRO and buy sovereign paper at much higher yields). Even Euroskeptics thought the LTRO would buy the Eurozone 12 to 18 months of breathing room. Instead, its impact had worn off within three months. However, the specter of Spain in such a dire situation and Italy going seriously wobbly has focused the minds of the authorities. Key politicians may appear to be coming around to dropping some of the idees fixes that have stood in the way of giving the ECB rein to hold the crisis at bay.

What Draghi Didn’t Do - Krugman - Actually, he hasn’t done anything, at least yet. But it’s now widely hoped that the ECB will start buying government bonds (although it’s not at all clear whether the Germans will allow this, particularly on a sufficient scale); this has caused a significant decline in Spanish interest rates from their peak. Limiting interest rates on peripheral borrowing is, however, only part of what the euro needs. As I and others have been arguing for a long time, Europe also needs sufficiently high inflation over the next few years to make it possible for Spain etc. to regain competitiveness without devastating deflation. So have market expectations of inflation risen from their unworkably low levels of recent months? No:  Update: And this sounds like a “nein” from the Germans.

Here Bee Draghi - Krugman - Given the tsunami of reporting about Mario Draghi’s remarks last week, not to mention the huge market reaction, it’s kind of strange how few links I’ve seen to what he actually said, which is considerably stranger than you’d gather from the coverage — and has a definite plaintive note, too. Here’s the passage that caught my eye: The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing. Only considerably later did he make the declaration that the ECB would do “whatever it takes” — a declaration everyone seized on, but which may mean little.The thing is, we know pretty well why the bumblebee was able to fly: massive capital flows from the core to the periphery, which led to an inflationary boom in said periphery, and which therefore also allowed the German economy — which was in the doldrums in the late 1990s — to experience a big gain in competitiveness and hence a surge in its trade surplus without needing to go through painful deflation. This meant, in turn, modest inflation in the eurozone as a whole — slightly above 2 percent over 1999-2007.

Draghi on Offensive as Game Changer Sought in Crisis - European Central Bank President Mario Draghi has gone on the offensive as he seeks a game changer in the battle against the sovereign debt crisis. Draghi, who sparked a global market rally last week by pledging to do whatever it takes to preserve the euro, is trying to build consensus among governments and central bankers for a plan to ease borrowing costs in Spain and Italy before ECB policy makers convene on Aug. 2. He meets with U.S. Treasury Secretary Timothy Geithner in Frankfurt today and is also attempting to win over Bundesbank President Jens Weidmann, a critic of ECB bond purchases. Berlin, Paris and Rome have already endorsed Draghi’s approach, echoing his language in saying they will do what’s needed to protect the 17-nation euro. Draghi must now deliver or face a renewed selloff on bond markets, where soaring Spanish and Italian yields have fueled speculation that the monetary union could fall apart. Draghi “put his personal credibility on the line” and “would not have done so without being confident about his key constituency,”

ECB’s Super Mario takes the stage (Reuters) - Mario Draghi may not need to show his money this week, but impatient markets will be unforgiving if the European Central Bank chief does not flesh out his dramatic promise to do whatever is needed to save the euro. Given the threat that the long-running euro zone crisis poses to the global economy, Thursday's ECB policy-setting meeting and subsequent news conference were always going to be important. But they have become pivotal since Draghi vowed in London last Thursday that "within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." Specifically, Draghi said the ECB had a mandate to act if diverging borrowing costs were disrupting the transmission of monetary policy across the 17-country single currency area. This is patently the case. The ECB's interest rate cut on July 5 to 0.75 percent has failed to reduce the giddily high cost of money for governments, banks and companies on the rim of the bloc, notably Spain and Italy. Sovereign yields in Germany and the Netherlands, by contrast, are negative. Yet even as capital flees the periphery and euro zone output shrinks, few economists think Draghi is ready to announce that the ECB is resuming secondary-market bond purchases to lower yields, a policy it has pursued in the past with limited success.

Crash of the Bumblebee, by Paul Krugman - Last week Mario Draghi, the president of the European Central Bank, declared that his institution “is ready to do whatever it takes to preserve the euro” — and markets celebrated. ... But will the euro really be saved? That remains very much in doubt. First of all, Europe’s single currency is a deeply flawed construction. And Mr. Draghi, to his credit, actually acknowledged that. “The euro is like a bumblebee,” he declared. “This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years.” But now it has stopped flying. What can be done? The answer, he suggested, is “to graduate to a real bee.” Never mind the dubious biology, we get the point. In the long run, the euro will be workable only if the European Union becomes much more like a unified country.  But a United States of Europe won’t happen soon, if ever, while the crisis of the euro is now. So what ... could turn this dangerous situation around? The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe’s borrowing costs down and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years — that is, create a temporary rise in German inflation. The trouble is that Europe’s policy makers seem reluctant to do (a) and completely unwilling to do (b).

Mario Draghi Shows the Power of Expectations - Last Thursday, ECB President Mario Draghi said the following: Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.  The response was euphoric - stock markets railed, risk premiums on the Eurozone periphery fell, and the Euro strengthened - and demonstrated that expectations matters.  Without actually doing anything, the ECB was able to catalyze a shift in portfolios toward riskier assets that, if followed through, could kickstart a recovery.  It is what Matt O'Brien calls the Jedi mink trick or Nick Rowe dubs the Chuck Norris approach to central banking.  This power by central banks to manage expectations is often overlooked or dismissed by many observers.  The markets' response to Draghi's speech should give them pause. Now the power of expectation management is nothing new.  It is the reason FDR was able to spur a rapid recovery in 1933.  It is also why some Fed officials are now promoting an open-ended form of QE.  Finally, it also why Market Monetarist have been calling for nominal GDP level targeting for some time.

How the ECB came to control the fate of the world economy - World stock markets and European bond markets rallied last week in response to three words that came from the mouth of Mario Draghi, the head of the European Central Bank: that the ECB would do "whatever it takes" to preserve the euro. This was widely interpreted as a promise to intervene in the sovereign bond markets to push down borrowing costs for Spain and Italy. What does this all mean to the average person in the eurozone, or in Spain, where unemployment just hit a record 24.6%? Or in developing Asia, or Africa, or Latin America – or even the US? Most importantly, it means that the ECB has always had, and continues to have, the power to end the immediate crisis in the eurozone, but has refused to do so. Not for any of the economic reasons commonly believed – such as worries about sovereign debt or inflation. Rather, they have refused to end the crisis for a nefarious political reason: in order to force the weaker economies of Europe to accept a regressive political agenda – including cuts in minimum wages and pensions, weakening of labor laws and collective bargaining, and shrinking the state.The ECB and its allies feared that if they stabilized these bond markets, their leverage over the peripheral countries would be reduced. So, for more than six months now, the ECB has refused to buy Spanish bonds, which would push down yields as it did in similar crises last year. This is a nasty and dangerous game of chicken, because the ECB obviously doesn't want to reach a point where the crisis spins out of control.

Did Draghi act on his own? - We've all heard ECB's president Mario Draghi's pledge to do "whatever it takes to preserve the euro."  Risk assets have rallied dramatically on this announcement. Spanish 10-year bonds moved up over 7% in price for example. Everyone of course assumes that the ECB has put together some type of plan to change its policy course. But did this statement come from the ECB (similar to the announcements of the FOMC) or is Draghi trying to do this on his own? Did the Governing Council of the ECB actually agree on this policy move of incremental asset purchases? Apparently this announcement came as a total surprise to some at the ECB. DER SPIEGEL: - ... experts at the central banks of the euro zone's 17 member states had no idea what to do with the news. Draghi's remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then. This is a bizarre action by a head of a central bank - a statement that is interpreted as a policy shift that apparently has not been vetted by the governing body. It seems that Draghi, possibly without consulting his colleagues, has succumbed to political pressures.

Quick Euro Update, by Tim Duy: Mostly quiet on the Euro front today, but there are some bits and pieces worth chewing over. To recap, ECB President Mario Draghi raised expectations that a big plan was in the works to save the Euro. In short, Draghi's commitment to do everything necessary to save the Euro was interpretted to mean that the ECB was prepared to act as a lender of last resort to bring down yields in struggling periphery nations. There is an alternative explanation. Draghi was simply making some off-the-cuff remarks, saying things he thought he largely said before, and not intending to illicit the subsequent market response. If so, market participants may be set up for a phenomenal dissapointment this week. With that in mind, Spiegel says that Draghi dropped a bomb on other ECB members: The audience treated the remark as just another platitude coming from a politician. But International financial traders understood it as an announcement that the ECB was about to buy up Italian and Spanish government bonds in a big way. So they did what they always do when central banks suggest they might soon be firing up the money-printing presses: They clicked on the "buy" button... ...Meanwhile, experts at the central banks of the euro zone's 17 member states had no idea what to do with the news. Draghi's remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then.

More on Draghi’s “The ECB is All In” Bluff -- The more news comes out, the more it looks like Mario Draghi’s pledge that the ECB would do all it would take to save the Euro was a bluff. The best guess is that he hopes to appease the market gods until September 12, when the German Constitutional Court will render its decision on whether the “permanent” rescue mechanism, the ESM, is permissible. The assumption, of course, is the the ESM will be approved. The headfake earlier today was a photo op between Geithner and Finance Minister Schaeuble which was touted by Bloomberg as Germany supporting the Draghi move, when a more level headed reading would see this as a non-endorsement. Here is the opening para of the article: U.S. Treasury Secretary Timothy F. Geithner and German Finance Minister Wolfgang Schaeuble backed a commitment by European leaders to do everything needed to defend the euro area while failing to mention its weakest link, Greece. Um, that’s already qualified. And then we get to the critical part: In a joint statement issued after they held talks, Geithner and Schaeuble “took note” of comments made last week by European leaders to “take whatever steps are necessary to safeguard financial stability” in the 17-nation currency area. “Took note”? That actually a remarkable formulation. It’s an acknowledgment of Draghi’s remarks, not approbation. There is nothing concrete in the Bloomberg story that would lead a reader to conclude that Schaeuble had changed his position from the one he took over the weekend, that the existing facilities were adequate and that additional action was not warranted.

Eurozone crisis live: how the markets reacted to proposed ECB intervention Guardian

ESM armed with a banking license - the ultimate bailout "bazooka" - Should the ESM, the Eurozone's permanent bailout facility, be granted a banking license? Apparently some within the ECB believe that it should. Bloomberg: - European Central Bank council member Ewald Nowotny said there are arguments in favor of giving Europe’s rescue fund a banking license, reviving the debate on bolstering its firepower as leaders face the prospect of a full-scale Spanish bailout.  “I think there are pro arguments for this,” Nowotny, who heads Austria’s central bank, said in an interview in his office in Vienna yesterday. “There are also other arguments, but I would see this as an ongoing discussion,” he said, adding he’s “not aware of specific discussions within the ECB at this point.” It's a powerful concept because being a bank, the ESM could tap the ECB's unlimited lending facilities to leverage its holdings of sovereign paper. By granting the ESM a banking license, it can effectively buy Spanish and Italian bonds "on margin", with the ECB being the margin provider. This entity would wield buying power several times larger than the Eurozone's original ESM commitment, making it the ultimate bailout "bazooka". (grahic) So far Mario Draghi had not been supportive of the idea - at least officially. Bloomberg: - ...ECB President Mario Draghi said that such a move amounts to the central bank financing governments, which is prohibited by European Union law...

Moody's Says ECB Can't Resolve Euro-Zone Debt Crisis --The European Central Bank can buy time for euro-zone policy makers, but it can't resolve the region's debt crisis, Moody's Investors Service stressed Monday. Writing in the Moody's Credit Outlook, Alastair Wilson, chief credit officer for Europe, Middle East and Africa at the credit rating firm, noted that recent comments by ECB President Mario Draghi had raised expectations that the central bank would take further action to support stressed euro-zone sovereigns. But while that strengthens the view that the ECB ultimately will do everything in its power to help the region's officials--and such support will be essential to preserve the euro--that won't be enough to solve the euro-zone's woes, he said. "The ECB can do no more than buy time: its actions alone will not resolve the debt crisis," Mr. Wilson said. "Resolution will ultimately rest on achievement of fundamental changes to member states' budgetary positions and debt stocks, on structural economic changes required to stimulate growth, and on institutional reform to the economic and fiscal governance of the euro area," he said, noting that each change could take years to achieve.

Mirabile Dictu! ECB Chief Draghi Being Investigated for Membership in the Group of Thirty  - It’s easy for Americans to labor under the delusion that other parts of the the world have less obvious forms of corruption or its milder form, conflict of interest, than our revolving door system (one of my favorites was when the NY Fed staffer tasked to overseeing AIG left….to AIG).  And ex banking, that actually is true in most advanced economies. But as a reminder of how backs get scratched in Europe, we have Mario Draghi. The former head of the Bank of Italy, now ECB chairman, was responsible for European operations for Goldman from 2002 to 2005, and predictably has no memory of the currency swaps deal that enabled Greece to camouflage the size of its budget deficit. The new contretemps involves his membership in the Group of Thirty (aka G30), which despite its grand claims, is a bank lobbying group, even as he is serving as the head of the ECB. An alert reader pointed me to the story in Der Spiegel (German version only) and Google translate does a serviceable job.  The inquiry was set in motion by Corporate Observatory Europe, which is an anti-lobbying group. From a recent article on its website: Industry experts and corporate lobbyists have effectively captured key areas of policy advice within the European Commission, according to new research carried out by the Alliance for Lobbying Transparency and Ethics Regulation (ALTER-EU) which finds that two thirds of DG Enterprise and Industry’s advisory groups are dominated by corporate representatives.

Paranoia Strikes Shallow - Krugman - OK, this is bizarre: ECB President Mario Draghi is being investigated by the EU’s ombudsman over his role in the Group of Thirty lobby group, the German magazine Der Spiegel reported Monday in its online edition. EU Ombudsman Nikiforus Diamandouros has asked the ECB to report back by the end of October on Draghi’s role in the G30 and whether his membership could be considered a conflict of interest, according to Der Spiegel. The EU’s ombudsman is charged with fielding and investigating complaints lodged against EU institutions by citizens or associations.The G30 is a lobby group of senior bankers and economists, including some former and current central bankers. I’m a member of the G30, and have been since 1988. If it’s a lobbying group, nobody told me. It’s a talk shop; I value it because I get a chance to hear what people like Trichet and Draghi have to say in an informal setting. No illusions on my part — they’re pitching a case, always; and while I’ve heard some smart things from people with a role in real-world decisions, I’ve also heard a lot of very foolish things said by alleged wise men. But then that’s a learning experience too. Of all the things to worry about right now, the great G30 conspiracy is really off base.

Dos and Don’ts for the European Central Bank - Recent statements by European Central Bank President Mario Draghi and Bank Governor Ewald Nowotny have reopened the debate about the desirable limits to ECB policy. The issue is not just the ECB’s legal authority under the Maastricht Treaty, but, more importantly, the appropriateness of alternative measures. Nowotny, the president of the National Bank of Austria, suggested that the European Stability Mechanism (ESM) might (if the German Constitutional Court allows it to come into existence) be given a banking license, which would allow it to borrow from the ECB and greatly expand its ability to purchase eurozone sovereign bonds. Draghi later declared that the ECB can and will do whatever is necessary to prevent high sovereign-risk premia from “hampering the functioning of monetary policy.” Draghi’s statement reprised the rationale used by his predecessor, Jean-Claude Trichet, to justify ECB purchases of eurozone members’ sovereign debt. Not surprisingly, financial markets interpreted his declaration to mean that the ECB would buy Spanish and Italian government bonds again under its Securities Markets Program, as it did earlier this year. Although the previous purchase of more than €200 billion ($246 billion) had no lasting effect on these countries’ risk premia, the presumption is that the effort this time could be much larger. But is that what the ECB should be doing?

Internal Devaluation, Inflation, and the Euro (Wonkish), by Paul Krugman - I’ve been writing for a long time about how the euro area needs more inflation. But I suspect that many readers don’t quite see how this ties into the macro story. So here’s something that may or may not clear things up — a stylized little model linking euro inflation and the adjustment problem to overall monetary policy. So, imagine a currency area with just two countries, Spain and Germany, which I’m going to represent in an aggregate supply-aggregate demand framework. On demand, I’ll make two assumptions I don’t believe. The first is that the ECB can determine nominal GDP for the euro area. By assuming that the ECB chooses nominal GDP, we get an aggregate demand curve for the euro area as a whole: Py = Y, where P is the price level, y is real GDP, and Y is the target nominal GDP. Now for my second assumption: Cobb-Douglas preferences, so that a fixed share of total spending falls on Spanish and German output respectively. This doesn’t have to be true, and surely makes no difference to the final conclusion — but it means, given the overall target, individual-country AD curves reflecting that fixed division of the total. Meanwhile, on the supply side, I’ll assume that prices can rise but not fall (because of downward nominal wage rigidity), so that the AS curve in each country is a backwards L. Given all that, the current situation looks like this: Spain is deeply depressed, while Germany is close to full employment.

The Euromess Continues, by Tim Duy: Excitement is almost guaranteed this week, with both the Federal Reserve and the European Central Bank pondering their next moves. At the moment, I am more fascinated with the latter, as it represents the more fast moving policy failure for the moment. In response to that disaster to date, it is now widely expected that the ECB will deliver a significant policy expansion, possibly accepting its responsibility of lender of last resort for sovereign debt in the Eurozone.  But the Eurozone will still be fundamentally hobbled by a devotion to re-balancing via austerity-driven internal devaluation. This does not offer a promising long-run outcome. The sequence of events of last week is becoming clearer. Last Monday, Spanish Economy Minister Luis de Guindos met with his German counterpart. Initial reports indicated no new initiatives were in the works. Subsequent reports suggest otherwise. Friday we learned, via Reuters:Spain has at last conceded it may need a state bailout and policymakers are considering writing down Greek debt to their central banks, European officials said on Friday, as markets anticipated radical new action to pull the continent out of its debt maelstrom...So it sounds like de Guindos went to Schaeble with hat in hand, only to be told that at best Spain would need to wait its turn. Meanwhile, market participants, sensing Spain is teetering on the brink, were pummeling the nation's stock and bond markets, sending yields soaring, thus ensuring a bailout was necessary. ECB President Mario Draghi, smelling disaster in the wind, breaks down and delivers some now famous remarks in London, including this line: To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.

U.S., Germany Stress Cooperation to End Euro Crisis — U.S. Treasury Secretary Timothy Geithner and his German counterpart stressed the need for coordinated action Monday in the face of the eurozone debt crisis and faltering global growth, but left open what joint steps Europe and the United States would take to shore up the world economy in the coming months. Geithner traveled to the German North Sea island of Sylt for informal talks with Finance Minister Wolfgang Schaeuble, before meeting later Monday with Mario Draghi, the president of the European Central Bank. Geithner and Schaeuble praised efforts by Ireland, Portugal, Spain and Italy to turn their debt-ridden economies around, and voiced optimism about economic reforms meant to deepen integration among the 17 eurozone members. The joint statement made no reference to Greece, which has struggled to implement the reform package agreed with its creditors. The country faces the possibility a chaotic exit from the common currency area if it fails to meet its bailout conditions.

Proposed EU sovereign CDS regulation is useless - EU regulators (the European Commission) are putting in place a new set of regulations (in the works for some time now) on sovereign CDS. The goal is to prohibit "naked shorting", requiring that all CDS purchases be "covered". These types of proposals have been circulating in the US for a few years as well. The EU rule applies to protection buyers, while protection sellers can do whatever they want. Under these rules a CDS is said to be covered if it is used to hedge a specific exposure. "Permitted exposure" that is allowed to be hedged with CDS can be the following:
1. Sovereign debt
2. Public sector entities debt
3. Private sector debt (if the the debt will be materially affected by the sovereign default)
4. Derivatives mark to market exposure (counterparty risk)
Basically as long as the buyer can identify any exposure in a specific country that is deemed "correlated" to sovereign debt, CDS buying is permitted. "Correlated" is loosely defined and is required to meet some quantitative or qualitative criteria. CDS size has to be "proportional" to the exposure size. CDS market makers are exempt if the protection they hold is part of "market making activities".

Spain’s Jobless Rely on Family, a Frail Crutch - As the effects of years of recession pile up here, more and more Spanish families — with unemployment checks running out and stuck with mortgages they cannot pay — are leaning hard on their elderly relatives. And there is little relief in sight.  Spain’s latest round of austerity measures appears to have done little to restore investor confidence. And new employment statistics released Friday showed that the jobless rate had risen to a record 25 percent. Pensions for the elderly are among the few benefits that have not been slashed, though they have been frozen since last year. The Spanish are known for their strong family networks, and most grandparents are eager to help, unwilling to admit to outsiders what is going on, experts say. But those who work with older people say it has not been easy. Many struggle to feed three generations now, their homes overcrowded and the tensions of the situation sometimes turning their lives to misery.

Foreigners Dump Nearly €80 Billion in Spanish Debt; Haircuts Come After More Dumping - Through the first half of the year, foreigners reduced Spanish debt by Nearly €80 Billion as banks in Spain gobbled up more of the toxic garbage.Foreign investment in Spanish public debt has decreased by 7 €78.168 billion in the first six months of the year, standing at  €203.271 billion euros, compared to  €281.439 billion which reached the end of 2011. This is a break of 27.7% over last year.The largest decreases were recorded in February and March, at nearly €25 billion each month.  Analysts note that Spanish financial institutions that are supporting strongly the Treasury issues and thus raising their level of debt thanks to interventions by the ECB. Contrary to popular belief, the LTRO and other ECB financing programs that allowed Spain to accumulate more Spanish bonds is not a favor to Greece but rather a favor to foreigners who are now unloading the debt.  Just as happened with Greece, as soon as foreigners dump enough Spanish debt, haircuts on the bonds will come.

Spanish GDP contracts 0.4% in second quarter -  Spanish gross domestic product contracted 0.4% in the second quarter, versus the prior quarter, according to preliminary estimates released by the national statistics office Monday. On an annual basis, GDP contracted 1%. Both figures matched figures released by the Bank of Spain released a week ago. The International Monetary Fund said Friday that the economic outlook for the country "remains very difficult and vulnerable to significant downside risks." Fears that the country may need a full bailout pressured Spanish bonds in recent weeks, sending yields soaring. Yields retreated late last week, however, on speculation that the European Central Bank could take action aimed at bringing down borrowing costs. The yield on the 10-year Spanish bond eased 8 basis points Monday to 6.62%.

Spain's Economy Contracts More Sharply - Spain's economy contracted at a faster pace in the second quarter and inflation jumped in July due to higher drug prices and cuts to medical subsidies as austerity measures continued to take their toll. The euro zone's fourth-largest economy contracted 0.4% from the first quarter and 1% from the second quarter of last year, Spain's statistics institute INE said Monday. The preliminary reading, in line with a central bank estimate released last week, isn't as bad as some feared following a quarter in which Spain's then-fourth-largest lender Bankia applied for €19 billion ($23.04 billion) of government aid and Madrid secured €100 billion in European Union aid for its banking sector. INE said the economy was hurt by worsening domestic demand, only partially offset by a positive contribution from external demand, which was similar to that of the first quarter. INE will release full details on Spain's second-quarter gross domestic product Aug. 28. In the first quarter, Spain's economy had contracted 0.3% on a quarterly basis and fell 0.4% on an annual basis. 

Spain Recession Deepens, New Austerity to Take Effect - Spain slid deeper into recession in the second quarter as a tough new round of austerity to head off the budget crisis that threatens the euro took effect both on overall demand and the price consumers have to pay for goods. The first official numbers on gross domestic product showed the economy shrank 0.4 percent from the previous quarter after contracting 0.3 percent in the first three months of the year. The economy was 1.0 percent smaller than a year earlier. Consumer prices according to both Spanish and EU methodology rose 2.2 percent year-on-year, with the EU-harmonized increase above forecasts being due to medicine price hikes put in place by the government to save money and deflate the deficit. Economists warned price hikes, and especially a 3-point rise in value-added tax due to come into effect in September, would distort consumer prices while the deepening recession reflected slower domestic demand. That will further weaken the government's efforts to get the economy growing again—vital if it is to meet targets on reducing its budget shortfall and halting a market-inspired crisis in how it finances its debt. 

Temptations of a Peseta default in Spain - Defying charges of heresy, Spanish economist Lorenzo Bernaldo de Quiros has penned a piece in El Mundo that more or less calls for Spanish withdrawal from the euro – unless Mario Draghi conjurs up real magic at the ECB. My rough summary/translation: Spain is heading for insolvency as big chunks of debt come due later this year. Events are moving fast. The relevant issue is no longer whether this will happen, but whether it is better for Spain to restructure its debt "inside or outside" EMU. "Inside the euro and without financial resources, a debt reduction is pointless. The Spanish economy would have to go into deepening internal deflation, with cuts in prices and salaries, to restore competititeness. This is impossible, or at least improbable." The process would take too long. Capital flight would continue. It would lead to another debt resturturing in short order (as in Greece). "The snake would bite its own tail in a diabolic spiral," he said. Mr Bernaldo de Quiros — who heads Freemarket Corporate Intelligence — seems to assume that there will not fact be a eurozone rescue (or that the Rajoy government will refuse to accept Troaika terms).He notes the success of Britain, and the Scandinavian states in leaving the Gold Standard in 1931 – and those Latin American states that did so later (perhaps a better parallel, since Spain today has net external debt near 100pc of GDP). Their recoveries were in stark contrast to those like France, Poland, Belgium, Italy, and the Netherlands that clung to the dysfunctional fixed-exchange system until the bitter end, trapped in perma-slump.

Capital flight from Spain up to $200 billion in first 5 months of 2012 - Spain’s central bank says €163 billion ($200 billion) has been pulled out of Spain in the first five months of the year, reflecting plunging confidence in the government’s ability to manage its financial problems. Figures released Tuesday showed €41.3 billion was withdrawn in May, compared to €9.5 billion in the same month last year. May saw Bankia, one of Spain’ largest banks, announcing it would need a whopping €19 billion in rescue funds.Bankia’s announcement spurred the government to seek a rescue loan of up to €100 billion from its eurozone partners. The net capital outflow stems from foreigners selling stocks and shedding Spanish state debt and private bonds, as well as Spanish banks and citizens depositing money abroad.

100,000 Workers in Spain Will Not be Paid Because Regional Government of Catalona is Broke - The crisis in Spanish regional governments continues to escalate. El Pais reports Catalona Will Not Pay Hospitals or Private Centers and 100,000 workers are affected. This month, the Government of Catalona cannot tackle  payments owed to hospitals, schools, residences, social organizations, and children in care centers and workshops. These are the services provided by entities, public and private, funded by the Government but managed not depend on it. The move affects up to 7,500 associations and some 100,000 workers, according to the third sector.  Sources from the Departments of Health and Welfare explained ten days ago it "could not meet the payments this month." Welfare, however, has ensured that other non-contributory pensions paid or the minimum income. The federations that warn-grouped after an emergency meeting with Social Welfare that many of them are on the verge of "collapse" in a situation "unprecedented". And is that the default is added to other cuts that have affected the sector this year, as 56% of the budget on labor market policies. The Catalan Association of Relief calculated that 63% of companies cannot meet the payroll this month. To alleviate this choke, Acra has asked for help from families, proposing that advance a couple of months of contributions.

Europe’s Debt Crisis Seems Bad? Look at Its Car Industry - Just how bad are things in motoring Europe? On Wednesday Peugeot reported it lost over $993 million in the first half of 2012 alone. The same day, American maker Ford announced second quarter net income of just over $1 billion world-wide — but a $404 million loss in Europe, where the company now expects total losses to exceed $1 billion by year’s end. Meanwhile, General Motors Europe affiliate Opel-Vauxhall has lost a whopping $14 billion since the start of the century, and is almost certainly facing the same sort of layoffs and plant closures Peugeot has announced. And partners Chrysler and Fiat are also facing grim employment and production decisions to survive the sector’s tightening crisis. What’s more, the sector is almost certain to see more bad news on the revenue front. According to the Brussels-based European Automobile Manufacturers’ Association (EAMA), new car registration declined by nearly 7% in the first half of the year. All told, projected total sales of 12.4 million cars in 2012 would represent a nearly 20% slide in volume over 2007, when the current string of annual shrinkage began.

GM's Channel Stuffing Goes To Germany: Is Europe's Largest Economy A Fraud? - We have long argued that auto manufacturers have been channel-stuffing (and subprime-lending) themselves back into a disaster and as such class-action lawsuits have begun. Recently we also pointed out the epidemic of dealer-inventory-stuffing in China (and again this morning the Chinese luxury car market's over-stuffing). So today's report from Reuters that German auto manufacturers have been stuffing dealer channels just like the rest of the world as Europe's largest car market is in recession even if few outside of the industry would know it. "Essentially, the carmakers are deceiving their shareholders, since they make it look as if the vehicles were actually sold. They want to pull the wool over their eyes," as three in every ten new vehicles in Germany are sold not to customers, but to carmakers and their dealers - a type of automotive industry pump priming known as "self-registration". At nearly half a million such registrations in the six months through June, the total is greater than the entire new car market in Spain. Is Germany's economy really what it is reported to be given all this fake demand pull-forward - or is it a total fraud?

Eurozone's manufacturing contraction is now driven by Germany -- As the Eurozone recession (which started months ago) worsens, the area's manufacturing activity, as measured by the PMI index, is contracting at a pace not seen since 2009.A great deal of this decline however is now driven by Germany (rather than the periphery), whose manufacturing PMI is showing a rapid deterioration. It is somewhat surprising, given that we had signs of economic improvements in Germany as recently as May. But the German "decoupling" hopes did not materialize, as the economy is pulled down by the rest of the Eurozone combined with the slowdown in China, one of the nation's largest export markets.  WSJ: - Business activity in the euro zone continued to shrink in July, new orders plunged and German private-sector activity fell at its steepest rate in more than three years, a sign that the euro zone's debt crisis is taking its toll on the region's biggest economy and main source of financial support.  The figures suggest the 17-nation euro-zone economy is heading for a period of contraction and recovery is a distant prospect.

Eurozone Retail Sales Sink 9th Month; 17th Month of Contraction in Italy; Margins Collapse in France; Germany Barely Above Contraction -- Eurozone retail sales continue to dive and not even Germany is immune. German manufacturing has been in contraction off-and-on, and retail sales are once again on the verge contraction as well.Let's take a look at some reports.
- Markit reports Downturn in retail sales continues in July July data pointed to a further reduction in activity in the Italian retail sector, with sales down markedly both on the month and compared with levels one year ago. The rates of decline in employment, purchasing activity and inventories all accelerated, while profitability continued to deteriorate sharply. Cost pressures, however, eased to the weakest in 20 months amid stronger competition between suppliers.  The downturn in Italy’s retail sector extended to a seventeenth month in July. Furthermore, the rate of contraction in like-for-like sales accelerated from the previous month and was marked. This was signalled by the seasonally adjusted Italian Retail PMI® posting 40.7, down from 41.7 in June. - Markit France PMI shows Record Drop in Retail Margins French retailers encountered another tough month in July. Sales fell at a sharper rate on both a monthly and an annual basis, while margins were squeezed to the greatest extent in the survey history. The pace of job shedding accelerated [fastest rate in nearly three years], while retailers scaled back their purchasing of goods and lowered their inventories. The headline Retail PMI® remained below the 50.0 no-change mark for a fourth successive month in July. At 46.7, down from 48.9 in June, the index signalled an acceleration in the monthly rate of decline in sales.
- Markit reports German Retail PMI hits three-month low during July The recent rebound in German retail sales faded in July, with like-for-like sales rising only marginally since the previous month. At 50.3, down from 52.4 in June, the seasonally adjusted Germany Retail PMI signalled the slowest expansion in the current three-month period of growth.

Europe Is ‘Stuck In A No-Growth Trap’ - In a new report titled Stuck In A No-Growth Trap, Morgan Stanley's Europe Economics team cut its 2012 and 2013 GDP forecasts for the euro area. "The reasons for revising down our growth outlook are slower global growth, additional austerity measures, elevated funding costs and surging policy uncertainty," wrote economist Elga Bartsch. "Instead, we now expect the euro area economy to again contract after having stabilized in early 2012." Her current forecasts for the euro area:

• 2012: -0.5% (previously -0.3%)
• 2013: 0.0% (previously +0.9%)

"Only in the spring of next year do we now expect the euro area to return to positive growth rates," she writes.The report also included forecasts for individual countries in the euro area:

Europe’s Zero-Sum Poison - Whenever a society regards its problems solely through the prism of distributional disputes, its chances of solving them diminish greatly, because the “us versus them” mentality distorts analysis and blocks solutions that would unambiguously improve the overall situation. Every policy choice is perceived as a zero-sum game, whereby a gain for one group is necessarily a loss for another group. The very notions of trust and progress vanish. We have seen in the past the extent to which such conflicts – between rich and poor, landlords and industrialists, or capital and labor – can hamper development. We are seeing today in the United States how entrenched antagonisms result in a stalemate on tax and budgetary matters. And there are many examples of failed economic reforms that fundamentally boil down to the same zero-sum logic.But that logic is nowhere as salient today as it is in Europe. Since the euro crisis began, almost three years ago, there has been a continuous struggle between two readings of it.

Procyclicalists Across the Atlantic Too -   My preceding post bemoaned the tendency for many US politicians to exhibit a procyclicalist pattern:    supporting tax cuts and spending increases when the economy is booming, which should be the time to save money for a rainy day, and then re-discovering the evils of budget deficits only in times of recession, thus supporting fiscal contraction at precisely the wrong time.  Procyclicalists exacerbate the magnitude of the swings in the business cycle.   This is not just an American problem.  A similar unfortunate cycle — large fiscal deficits when the economy is already expanding anyway, followed by fiscal contraction in response to a recession — has also been visible in the United Kingdom and euroland in recent years.   Greece and Portugal are the two most infamous examples. But the larger European countries, as well, failed to take advantage of the expansionary period 2003-07 to strengthen their public finances, and instead ran budget deficits in excess of the limits (3% of GDP) that they were supposed to obey under the Stability and Growth Pact. Then, over the last few years, politicians in both the UK and the continent have made their recessions worse by imposing aggressive fiscal austerity at precisely the wrong time.

Euro-Area Unemployment Rate Reaches Record 11.2%: Economy - The jobless rate in the euro area reached the highest on record as the festering debt crisis and deepening economic slump prompted companies to cut jobs. Unemployment in the economy of the 17 nations using the euro reached a revised 11.2 percent in May and held at that level in June, the European Union’s statistics office in Luxembourg said today. That’s the highest since the data series started in 1995. In Germany, unemployment climbed for a fourth straight month in July, a separate report showed. Policy makers are weighing options to counter the turmoil that has forced five euro-area nations to seek external aid, eroded investor confidence and pushed companies to trim their workforces. European Central Bank President Mario Draghi, who met with U.S. Treasury Secretary Timothy Geithner yesterday in Frankfurt, has pledged to do everything to preserve the euro. “Companies generally are under serious pressure to keep their labor forces as tight as possible to contain their costs in the face of the current limited demand, strong competition and worrying and uncertain growth outlook,”

Unemployment at Record High in Euro Zone - — Unemployment in the countries that use the euro remained at a record high in June, official figures showed Tuesday, underlining the debilitating effect of Europe’s continuing debt crisis on its economy. The numbers from the European Union’s statistical agency, Eurostat, come before the meeting Thursday of the European Central Bank’s governors, a gathering upon which many hopes have been pinned for a decisive new intervention to stem the crisis. According to Eurostat, the seasonally adjusted unemployment rate for the 17 European Union members using the euro was 11.2 percent in June, stable compared with the revised May statistics but significantly higher than the 10 percent a year earlier. For the 27 nations of the European Union, the unemployment rate was also stable, at 10.4 percent.  Eurostat estimates that 25.1 million men and women were unemployed in the European Union in June, of whom 17.8 million were in the euro zone.

Eurozone Unemployment  - The numbers came out yesterday and are as above - a slight stall, but no real evidence of a reversal.  Also, every one of the PIIGS countries saw their unemployment rate get worse in the latest month. So there is still no sign of stabilization in the real economy in Europe.

Record joblessness in euro zone; hope fades for quick ECB cure (Reuters) - Joblessness in the euro zone hit on Tuesday its highest level since the single currency was born, a further sign of economic desperation as hopes erode that the bloc will be saved by its central bank this week. An additional 123,000 people were out of work in the euro zone in June, figures from Eurostat showed, bringing the unemployment rate to a record high 11.2 percent across the 17 countries that use the single currency. The rate hides wide divergences, with unemployment as low as 4.5 percent in Austria and as high as 24.8 percent in Spain, where a shrinking economy makes it ever more difficult to pay off debt. New data showed capital fleeing Spanish banks at a growing rate. Spain has come dangerously close to losing affordable access to financial markets, raising the prospect of a bailout that would swamp the euro zone's hastily erected defences. If Spain goes, Italy, with an economy twice the size, could follow.

Evidence of Hampered Monetary Policy Transmission Channel in the Euro Area - Rebecca Wilder - Mario Draghi cautioned on the ‘hampered’ transmission channel of monetary policy in his now famous London speech last week:To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate. I referred to the clogging of rates policy back in April via evidence from mortgage lending rates. I address Draghi’s point that the ECB 1% refi rate will support economic activity through the lens of the mortgage market. Specifically, I find that the interest rate channel is clogged in the economies that are in most desperate need of lower rates: Spain, Portugal, and Italy. Here I show that on a relative basis, while the household lending rate is quietly trending down for key periphery markets, the real problem lies in the non-financial corporate rates transmission channel. Specifically, rates in Portugal, Italy, and Spain have seriously diverged from both the trend in the refi rate (ECB policy rate) and those of other countries in the Euro area. The trend in key periphery household mortgage rates is consistent with the ECB rate cuts: down.  The magnitude still favors the core – the drop in German mortgage rates is 91 basis points since the max mortgage rate of the Euro area as a whole in August 2011 – but the trend is down for all countries.

Why a Euro Zone Crisis Can’t Be Avoided Very Much Longer - There are three seemingly unavoidable problems:The next round of losses in Greece cannot be charged mostly to private-sector lenders. When Greece was bailed out in March, banks and other private investors took most of the losses, which they were willing to do because they also stood to lose a lot if Greece defaulted. But now that the share of Greek sovereign debt held by commercial banks, insurance companies and investment funds has been greatly reduced, future bailouts will necessarily diminish the value of debt owned by government banks and international financial institutions.  Austerity and ECB lending have not been able to hold down interest rates. Bailouts and budget cuts have been enough to persuade investors to keep lending to overindebted countries. As a result, bond yields were reduced for a time in key countries, such as Spain and Italy. Within the past month, however, yields on 10-year Spanish bonds climbed back up to 7.6%, well above the 7% that is generally considered to be the danger mark. Yields on Italian bonds also rose, reaching 6.6%.  The growing magnitude of the problem will run up against political constraints. There is a limit to the amount of money the ECB, the International Monetary Fund and other such lenders have available for bailouts. As those institutions use up their reserves, they will need large amounts of new money if they hope to keep postponing a euro crisis. But where will that money come from? . Both France and the Netherlands, which supported and helped pay for previous bailouts, now have financial problems of their own. And resistance is growing in Germany against taking on further liabilities (not to mention the fact that contributing to larger bailouts may raise constitutional problems).

Euro zone crisis heads for September crunch (Reuters) - European Central Bank President Mario Draghi must back up his pledge to do what it takes to protect the euro when the bank's policymakers meet on Thursday or else face deep disappointment from investors hungry for - and expecting - immediate action. In his boldest comments to date, Draghi said last week that, within its mandate, the ECB was ready to do whatever it takes to preserve the euro, fuelling expectation the bank could revive its bond purchase program as it did a year ago when it started buying the government debt of Spain and Italy. The talk has already lowered Italian and Spanish bond yields, and the extent to which markets are now primed for a move on Thursday was clearly spelt out in a Reuters poll. Nineteen out of 24 money market traders said they expect the ECB to restart its mothballed bond-buying program with purchases of Spanish and Italian debt, with 10 out of 19 expecting it announce this on Thursday. But such a step is far from certain, and the ECB may hold off to intervene in tandem with the euro zone's EFSF rescue fund.

Extinction Of The Middle Class - The middle class forms the backbone of modern democratic societies. It is the part of society that makes the economy’s machine function, by and large it supports the rule of law, and provides the pool from which the executives of the public sector’s administrative machine are drawn. It is the middle class that ultimately carries the country’s largest burden and responsibility. Greece’s middle class has its own peculiarities, not only because this is true of all countries, but also because certain traits make it very different from the middle classes in other parts of Europe, a fact that has become more than evident as a result of the crisis. The members of the Greek middle class who carry this mentality -- which of course is not solely defined by income -- are a minority, even within their own ranks. The rest can be described as “nouveaux riches” -- the creation of a useless and corrupt state -- or “lumpen” or as uniting all of the above. What has started to happen in the past few years, however, and especially because of the crisis, is that the Greek middle class is being pushed down. The voices of people who are making an effort to do what’s right, to contribute to society and to defend Greece’s position in Europe because they know that the future will be even worse outside the eurozone are muffled.

23 crucial days for Greece - On 20th August, the Greek government will have to borrow 3.2 billion from one arm of the Eurozone (from the EFSF) in order to repay another (the ECB). Yet Greece is insolvent. The very idea of an insolvent entity borrowing more from a community, like the Eurozone, in order to repay that same community is obscene. All it does is to shift the burden from the Central Bank to the taxpayers of Germany, Holland, Austria and Finland. This is not an act of solidarity with Greece. It is an act of irresponsible kicking-the-can-up-a-steep-hill. The simple point I have been trying to drive home for a long while now is that the Eurozone must make a simple decision: Either to give Greece a proper chance of exiting its current death spiral. Or to dump Greece now, before the Greek state loses all its remaining assets and before it gets deeper into debt. And if our Eurozone partners are not prepared to make up their minds (caught up in their own short term concerns and shenanigans), then Athens must force their hand to decide within the next 23 days. How? By announcing that Greece will NOT be borrowing on 20th August monies it cannot repay under the present scheme of things.  The other day I published an extensive article in Greek making this point (see here). Today some good people, unknown to me, have re-posted that article in German (click here). English speakers can read it by using Google Translate (which does a decent job of it). Meanwhile, here is how I described the Eurozone’s dilemma concerning Greece on BSkyB (Sky News). The footage comes from the eve of the Greek parliamentary election (16th June). But it is still pertinent, I think.

CDU's Michael Fuchs "Greece Cannot Be Saved, That Is Simple Mathematics" - Since it has now become the norm to spread myth, fairy tales and magic during the week, only to collapse the wave function of an insolvent "developed world" with a double dose of reality during the weekend when markets are conveniently closed (recall the Draghi in a Box phenomenon) only to repeat it all again the coming week, here is some more truth which may force Citi to hike its estimate of Greece leaving the Eurozone from 90% to 110% (or about how much of QE3 is now priced into the market): "Greece cannot be saved, that is simple mathematics," Michael Fuchs, deputy leader of the parliamentary group of Merkel's Christian Democrats and their Bavarian sister party told weekly business magazine Wirtschaftswoche." Indeed, truth hurts, especially when accompanied by math. Which sadly is the problem these days in a world where math and surreality can no longer coexist. And sadly, in the absence of money growing trees, where one can create wealth out of thin air, not fiat dilution, disappointments such as these will only propagate until the game (over) theoretical equilibrium we discussed yesterday has no choice but to finally make its appearance.

Near-bankrupt Greece says cash reserves drying up(Reuters) - Near-bankrupt Greece is fast running out of cash while it waits for its next installment of aid from international lenders, a deputy finance minister said on Tuesday, sounding the alarm on the country's precarious financial position. Greece's European partners have repeatedly promised the country will be funded through August, when it must repay a 3.2 billion euro bond, but the details of the funding have yet to be disclosed. In the absence of that money, Greece would run out of funds to pay everyday public expenses ranging from police and other public service wages to pensions and social benefits. The country is wholly reliant on aid from its European partners and the International Monetary Fund, who have turned up the pressure in recent weeks by withholding further aid until an assesment of Greece's compliance with reforms is complete. "Cash reserves are almost zero. It is risky to say until when (they will last) as it always depends on the budget execution, revenues and expenditure,"

Greece Runs Out Of Money. Again - While we are not certain how many times we have used the above headline in the past we know it is not the first time. Nor the fifth. Yet here we are again, reporting that Greece is out of money again. "Near-bankrupt Greece is fast running out of cash while it waits for its next installment of aid from international lenders, a deputy finance minister said on Tuesday, sounding the alarm on the country's precarious financial position. Greece's European partners have repeatedly promised the country will be funded through August, when it must repay a 3.2 billion euro bond, but the details of the funding have yet to be disclosed. In the absence of that money, Greece would run out of funds to pay everyday public expenses ranging from police and other public service wages to pensions and social benefits. "Cash reserves are almost zero. It is risky to say until when (they will last) as it always depends on the budget execution, revenues and expenditure," Deputy Finance Minister Christos Staikouras told state NET television"

For Greece there is an alternative to austerity - Dean Baker -Clearly things are not panning out as the IMF and the rest of the troika – the European Central Bank and the European Union – had planned. Budget cuts and tax increases in the middle of a downturn are having exactly the effect predicted by the old economics textbooks: they are reducing demand, slowing growth and raising unemployment. Furthermore, since lower output means less tax revenue and higher unemployment means more payouts for unemployment benefits and other transfers, the austerity imposed on Greece is doing little to even bring down its deficits. This is why Greece will almost certainly miss its deficit targets for this year. In principle, this is supposed to trigger a cutoff of funds from the EU. That would lead to a default by Greece and force Greece to leave the euro and bring back the drachma. That sounds very scary for Greece, a situation implying a fully fledged financial crisis. As bad as this situation sounds for Greece, however, the troika, propelled by its leading actor Germany, fears this outcome even more. The issue for Germany is that Greece may provide a good example for other heavily indebted countries, most importantly Spain and Italy. The period of transition will cause enormous economic disruption and pain, but once the new currency is in place, Greece's economy can return to a healthy growth path. In the case of Argentina, the transition period was less than six months.

51% of Germans Believe Germany Better Off Outside Eurozone, 71% Favor Greece Leaving; Implications on Constitutional Court Ruling - A recent poll says 51 percent of Germans now believe Germany would be better off without the euro.  The Emnid poll for the Bild am Sonntag mass circulation weekly showed 51pc of Germans believed Europe's top economy would be better outside the 17-country eurozone. Twenty-nine percent said it would be worse off, AFP reports. The survey also showed that 71pc of Germans wanted Greece to leave the euro if it did not live up to its austerity promises. Economy Minister Philipp Roesler told Bild am Sonntag there were "considerable doubts whether Greece is living up to its reform promises."  That poll, with only 29% believeing the euro is a good thing, suggests that if the German constitutional court forced Merkel to put the euro to a referendum, that Germany would vote to leave the eurozone. On September 12, the German constitution court is expected to rule on the ESM as well as the fiscal treaty chancellor Angela Merkel signed in March. Is it any wonder ECB president Mario Draghi is loathe to do anything but talk before the court meets?

Germans Getting Even More Opposed to Being in the Eurozone - Over the weekend, the newspaper Bild released the results of a new poll on German sentiment on the Euro. It found that 51% thought Germany would do better by leaving the Eurozone with 29% saying Germany would fare worse. In addition, 71% of the respondents said Greece should be expelled from the Eurozone if it could not live up to its austerity commitments. These results aren’t particularly novel; a large cohort of Germans have been vocally opposed to Eurorescues for some time. What is new about this poll is how low the percentage is that sees being in the Euro as good for Germany. And some respondents don’t seem to understand that expelling Greece is probably fatal to the Euro project. While Greece by itself is almost certainly enough to impair the Eurozone, a Greek exit is likely to escalate the crisis in Spain and Italy. Remember, Spain just quietly asked for €300 billion Euros and was rebuffed. And no wonder. The EFSF has less than €250 billion remaining, and the ESM has yet to be launched. Reuters reports that a separate Bild-sponsored poll found support for Merkel’s handling of the crisis to be cratering: The survey by YouGov, due to be printed in Monday’s edition of Bild newspaper, found 33 percent in favor of her stance but 48 percent against, a setback for the chancellor who is to seek a third term in a 2013 federal election, which she has vowed to make a vote on Europe. Asked in the survey whether they feared for their savings, 44 percent of Germans said that they did.

Bundesbank says ECB should focus on prices: report -- Germany's central bank wants monetary policy in the euro zone to remain strictly focused on price stability, while members having fiscal problems should utilize fiscal instruments, such as the European Financial Stability Facility, to address them, an unnamed Bundesbank official told CNBC on Tuesday. Strategists said the remarks indicate the Bundesbank isn't in favor of restarting the ECB's bond-buying program, which it has long opposed, or seeing the central bank take other aggressive steps to bring down high borrowing costs for Spain and Italy.

ECB must respect mandate: Bundesbank's Weidmann -- The European Central Bank must remain aware of its independence and is "obliged to respect" and not exceed its own mandate, Bundesbank President Jens Weidmann said in an interview conducted in late June for the German central bank's internal magazine and published on its website Wednesday. Weidmann, as head of a national central bank, is a member of the ECB's Governing Council, which meets Thursday. ECB President Mario Draghi last week said the institution would do whatever was needed within its mandate to preserve the euro, stoking expectations for renewed bond purchases by the ECB. The Bundesbank has opposed such measures in the past. In the interview, Weidmann said the Bundesbank has more influence than other national central banks on policy. "We are the largest and most important central bank in the euro system," he said

Merkel Allies Harden Opposition to Granting ESM Bank License - German Chancellor Angela Merkel’s coalition rejected granting the permanent euro rescue fund access to European Central Bank liquidity via a banking license, as the Finance Ministry said it saw no need for any such move.  The rules of the European Stability Mechanism don’t provide for refinancing through the ECB, the ministry in Berlin said today in an e-mailed response to questions. The ministry isn’t holding talks on the topic nor are secret meetings taking place on such proposals, it said. France and Italy are building support for a previously floated plan to allow the permanent backstop to wield unlimited firepower courtesy of the ECB, Germany’s Sueddeutsche Zeitung newspaper reported today, citing a European Union official it didn’t name. Leading ECB governing council members are among those who now back the idea, the newspaper said. Lawmakers from all three parties in Merkel’s coalition immediately repudiated the suggestion. It is a “dangerous attempt” to bypass the ban on the central bank financing states directly, said Hans Michelbach of the Bavarian Christian Social Union. The Free Democratic Party’s Rainer Bruederle told Die Welt newspaper such a mechanism is a “wealth-destroying weapon,” while Norbert Barthle of Merkel’s Christian Democratic Union said it won’t happen.

France passes budget that taxes business more - France's parliament has passed a budget amendment that raises a slew of new taxes on businesses and the wealthy while barely cutting spending. The final version of the law was agreed Tuesday by both houses of the legislature, the National Assembly and the Senate. The law revises the 2012 budget after economic growth fell short of projections, and sets the tone for President Francois Hollande's Socialist administration. It rolls back several measures the previous, conservative government passed to shake up a hidebound labor market. It eliminates a tax break on overtime pay, for example.

Portugal budget monitor sees revenue goal missed (Reuters) - Portugal's weak first-half tax collection means this year's revenue target is all but unreachable, posing further risks to a 2012 deficit goal agreed under an EU/IMF bailout, a parliament body that monitors budget execution warned. It had already said earlier this month that Portugal, hit by a steep recession and unemployment, is likely to miss the 2012 budget deficit target unless the nation sees a hefty improvement in indirect tax revenues soon. Still, the UTAO body said some state spending was being reduced more than expected, which should offset at least part of the revenue slippage. It also acknowledged that the public deficit for the first half of 4.14 billion euros ($5.1 billion), was below the 4.4 billion euro ceiling set under the bailout. It did not provide forecasts for the overall 2012 deficit. The government has acknowledged there are risks but insists it can meet the budget deficit target of 4.5 percent of GDP agreed under the recession-hit country's 78-billion euro bailout. "Meeting budget goals for revenues and social security does not seem feasible anymore," UTAO said in a document published on parliament's web site. "The tax revenue in the first half was way below what could be expected, meaning the main budget risk of the year is beginning to materialise."

Monti's race against time - Italy’s Prime Minister Mario Monti is in a race against time. He needs to secure government funding via a pan-Eurozone bond buying program before Italy's economic conditions deteriorate further. Bloomberg/BW: - Italy’s Prime Minister Mario Monti is pressing his European counterparts to sign on to collective action to fight the financial crisis, trying to bridge a north- south divide in the euro area for help to lower borrowing costs.  Monti, who is due in Helsinki today for talks with Finnish Prime Minister Jyrki Katainen, is seeking to capitalize on a pledge by European Central Bank chief Mario Draghi to do whatever it takes to defend the euro. Bundesbank President Jens Weidmann said the ECB shouldn’t exceed its inflation-fighting mandate, according to an article published on the German central bank’s website today. He has a reason to move quickly. The onset of Italy's deep recession may damage the nation's fiscal conditions as tax revenues decline. Without a backstop from the Eurozone (ESM and ECB) it may become increasingly difficult to roll government debt. With over €100bn of bonds to roll this year alone, this backstop becomes critical. And the latest economic indicators from Italy are showing a further deterioration.

Shame on All of Us -- Italy’s leader Mario Monti is to make a last-ditch effort tomorrow to persuade Spain to swallow its pride and accept a formal rescue, hoping to clear the way for double-barrelled action by bail-out funds and the European Central Bank.  The frantic diplomacy comes as investors wait nervously to see if German-led hawks on the ECB’s governing council will stand behind the bank’s chief, Mario Draghi, who triggered a euphoric stockmarket rally last week with hints of intervention in the Spanish and Italian bond markets.  "The situation is dramatic: markets will react very badly if the ECB doesn’t deliver,”  The bond markets are continuing to signal deep alarm, with safe-haven flows into German two-year debt pushing yields to minus 0.08pc.  Former ECB governor Athanasios Orphanides said Mr Draghi had boxed himself into a corner. “Expectations are now so high, the ECB will have to announce something,” he said. Bundesbank chief Jens Weidmann shows no sign of relenting, warning on Wednesday that the ECB must not “overstep its mandate” or stray into fiscal rescues. He issued a blunt reminder that the German central bank is master of the euro project, and not “just one” bank among others. “We are the biggest and most important central bank in the euro system,” he told the Bundesbank journal.

Spain to Urge More Regional Budget Cuts as Deficit Deepens - Budget Minister Cristobal Montoro will urge Spain’s regions to extend budget cuts today during a meeting Catalonia plans to boycott, as efforts to prevent them defaulting deepen the central government’s own deficit. Representatives of Spain’s 17 semi-autonomous regional governments are scheduled to convene in Madrid at 4:30 p.m. for a budget checkup. Data released today showed the central government exceeded its target for the 2012 budget shortfall with half the year still to go. The biggest contributor to Spain’s economy, the Catalonia region centered on Barcelona, said today it won’t take part in the meeting to protest the central government’s rigid stance on deficits. No news filtered out from a separate gathering before the talks between Prime Minister Mariano Rajoy and regional executives from his People’s Party

Problems in Spain: Revenues Collapse, State Spends Twice as Much as Previously Admitted in First Half - It's hard to meet budget targets as promised to the bureaucrats in Brussels when revenues collapse and the State Spends Nearly Twice as Much as Revenues Collected in First Half. Via Google translate from El Confidencial:  The Spanish economy continues its adjustment process. But the results in terms of deficit reduction, remain meager. Very meager. To the extent that in the first half of the year-on-national accounts, government spending-which really is committed to spend but have not been paid, have grown by 17.6% over the same period of 2011 . Or what is the same, the central government already has obligations amounting to 87.967 billion. The resources, however, only amounted to 44.879 billion (-4.1%), which means that during the first six months of the year the state has spent (or is obliged to spend) almost double what it has collected in revenues. Debt service has become the second biggest problem in the budget (after unemployment benefits). In fact, interest payments of 12.239 billion euros, is already 23% more than the government pays public employees (9.953 billion euros). This does not mean, however, that the debt service is causing the budget shortfall. In fact, the primary deficit (excluding interest payments) amounted to 30.839 billion in just six months. Rising unemployment has forced the state to make some additional contribution of 4,404 billion euros to the Public Employment Service (SPEE), while Social Security has received an additional 2.575 billion euros.

Greece’s GDP to contract 7% in 2012, Moody’s - The outlook on Greece’s banking system remains negative due to the deep and prolonged economic contraction, elevated sovereign credit risk and fragile depositor confidence which will continue to erode banks’ asset quality, capital, profitability and funding, says Moody’s Investors Service. In a new Banking system outlook published today (2 August), Moody’s said that following a 6.9 per cent contraction in real gross domestic product in 2011, it expects that real GDP will shrink 7 per cent in 2012 and 2.3 per cent in 2013, exerting further pressure on the “already stressed” banking system. Declining purchasing power and liquidity of banks’ retail and corporate customers, exacerbated by reductions in government expenditures and increasing unemployment, will continue to erode repayment capacity and constrain banks’ business opportunities. In addition, Moody’s says the risk of Greece exiting the euro area remains material although it is not included in the agency’s central scenario. However, an exit would trigger “acute economic dislocations and severe downside consequences” for the banking system. Moody’s believes the Greek banking sector will remain loss-making in 2012 and 2013, following record losses in 2011 mainly due to the Greek government debt-exchange.

Euro Area Retail Sales Portend Negative Quarter of Real Consumption - Rebecca Wilder - Today Eurostat released its June estimate of real retail sales for the Euro area. On a month/month basis, real retail sales increased at a rate of 0.1%. However, on a trended basis, the 3-month/3-month average growth rate was down 0.7% in the three months ending in June. Given that the 3-month trended pace of contraction quickened compared to Q1, real consumption is likely to detract from Q2 GDP growth (spending components released on August 23). On a Y/Y growth basis, there’s a 96% correlation between real retail sales and real private consumption by households and non-profit institutions. Using a simple linear regression, the annual growth rate of consumption should stabilize somewhat in Q2 compared to Q1.  Across the region, real retail sales in Ireland, Estonia, and Germany are the only reported countries to see growth through Q2. Note: the chart below illustrates the 3-Month/3-Month growth rate through June 2012 (Q2/Q1).  On balance, Q2 domestic consumption spending in the Euro area is expected to be buoyed by Germany through June. The problem is, German retail sales growth have just a 38% correlation with real consumption growth, so the bump in retail sales won’t necessarily feed through to consumption at the aggregate level.

Europe's top banks feel pain from debt crisis -- Europe's biggest banks on Tuesday took massive hits on their second-quarter profits as the eurozone debt crisis sliced into earnings and added to pressure to boost their capital defences. In Germany, the biggest lender Deutsche Bank said it would axe 1,900 jobs as the crisis slashed its bottom-line profit nearly in half in the period from April to June. In neighbouring Switzerland, giant UBS blamed a 58-percent slump in second-quarter net profit on lower trading and services revenues while operating costs rose. In Spain, the country's second biggest bank, BBVA, said its earnings slumped due to a drastic rise in provisions, ordered by the government to cover its exposure to the beleaguered real-estate market. And in Austria, the number one lender Erste Bank, a specialist in Eastern Europe, saw its second-quarter net profit tumble 46 percent owing to problems in Hungary and Romania.

Max Keiser: Bankers and Central Bankers are Responsible for Eurozone Debt Crisis, Barack Obama's Devastating Missed Opportunity -- Max Keiser discusses the mess created by bankers and central bankers, and the abysmal performance of Barack Obama:

Could Euro-Zone Central Banks Buy Private-Sector Assets? - Much of the speculation surrounding Thursday’s European Central Bank meeting centers on the central bank’s usual crisis tools: rate cuts, cheap-bank loans and government-bond purchases. Some economists see another possibility: purchases of bank debt and other private-sector securities by national central banks that make up the euro zone. “We forecast the announcement of measures to permit [national central banks] to purchase private-sector assets under their own risk to implement ‘credit easing’, within a general framework approved by the Governing Council,” Goldman Sachs economists wrote in a research note.

ECB weighing two-pronged bond-buy plan: report -- The European Central Bank is planning to undertake coordinated action with the European Stability Mechanism, the euro-zone's permanent rescue fund, to buy Spanish and Italian government bonds, German daily Sueddeutsche Zeitung reported Thursday, citing unnamed sources. A final decision, however, wouldn't come until September when Germany's Constitutional Court is scheduled to rule on challenges to German participation in the fund, the report said. Under the plan, the ESM would buy bonds in the primary market, while the ECB would act in the secondary market, the report said. News reports late last week said ECB President Draghi was pursuing such a two-pronged strategy. The ECB is expected to leave interest rates unchanged when it announces the outcome of its policy meeting later Thursday.

Draghi prepares for fresh bond buying - Draghi admitted to Bundesbank reservations about bond-buying and made clear that governments would first have to apply to the eurozone’s rescue funds – the European Financial Stability Facility and the European Stability Mechanism – and accept “strict and effective conditionality”. “First of all governments need to go to the EFSF; the ECB cannot replace governments.” Mr Draghi also said the ECB “may consider” further non-standard measures but declined to elaborate. Mr Dragi indicated there would be no immediate intervention. “In the coming weeks we will design the appropriate modalities for such policy measures,” he said.” He said that all members of the ECB’s governing council had endorsed the framework of measures “with one exception." “It's clear and it's known that Mr Weidmann and the Bundesbank have their reservations about the programme of buying bonds,” he added. He also ruled out giving the eurozone’s rescue funds a banking licence, a move that could vastly increase their firepower but which is firmly opposed by the Germany and other core eurozone members. “The current design of the ESM does not allow it to be recognised as a suitable counterparty.

Are Eurobonds inevitable - That’s the title of my latest piece at The National Interest, opening paras below, follow the link for the whole thing: “Whatever it takes.” Those were the words followers of the euro zone have been waiting to hear ever since Mario Draghi replaced Jean-Claude Trichet as head of the European Central Bank. To spell out the quote in full, Draghi said: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Central bankers are famously gnomic in their utterances. This is, however, about as unambiguous as they ever get. Jean-Claude Trichet used exactly the same phrase in reference to his determination to put inflation control ahead of all other objectives, and he demonstrated it with policies that came to the edge of destroying the euro in order to save it from inflation. Draghi’s choice of words therefore amounts to, at the minimum, a sharp change of course. Of all the actions open to the ECB, there is only one that is sufficiently big, and sufficiently controversial, to justify Draghi’s statement. That is a decision to buy the bonds of EU member states, if necessary printing euros to do so, and accepting the risk of higher inflation.

Draghi is set to disappoint - Late last week the ECB president, Mario Draghi jawboned the world’ markets with the statements: Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate These words set off a short burst of ‘risk on’ as equity markets rose and periphery bond yields fell. However, as I wrote early this week , although there does appear to be some political agreement that action needs to be taken the details of exactly what will be done are vague at best. Before Europe can actually move forward with any concrete plan there are a number of outstanding issues that need to be addressed, most important of which is a decision by the German constitutional court of the validity of the ESM. The wording of Mario Draghi comments suggest some sort of ‘big bazooka’ action which has led to speculation that we will see some form of implementation of pseudo lender of last resort for the Euro. This plan would include the re-starting of the ECB’s secondary market bond buying program (the SMP) mixed with new primary market purchases via the EFSF/ESM. In order to provide even more fire-power the ESM could be granted a banking license, along the same lines as the EIB, which would have then allowed it to leverage up via the ECB. This part, however, appears to have already hit a road block: German Chancellor Angela Merkel’s coalition rejected granting the permanent euro rescue fund access to European Central Bank liquidity via a banking license, as the Finance Ministry said it saw no need for any such move.

So that's what he meant - A WEEK ago, after Spanish 10-year bond yields had jumped well over 7%, panicky markets were quelled by a few words from Mario Draghi, the president of the European Central Bank (ECB). Traders and investors fastened on to his pledge at a London investment conference on July 26th for the ECB “to do whatever it takes to preserve the euro” and his assurance that “believe me, it will be enough”.  Anyone expecting the council to make a further cut in interest rates, to follow the quarter-point reduction made a month ago, was swiftly disabused of the notion, even though there was further evidence from business surveys published this week that the euro-area economy is on the slide, in core Europe as well as the troubled periphery. Instead, like the Bank of England which decided to keep its monetary stance unchanged today, the ECB kept its benchmark interest rate at which it lends to banks at 0.75% and also held the deposit rate, which acts as a floor for money-market rates, at zero. At the press conference following the council’s meeting attention then turned to what Mr Draghi had to say. Once again there was some disappointment—stockmarkets fell—with the fact that he did not follow through his remarks in London with concrete action. Instead he sketched out a plan under which the bank would play its part along with the euro area’s rescue funds together with undertakings by governments—most likely Spain and Italy—to carry out reforms and get their public finances back into shape.

European Bank Willing to Buy Bonds to Save Euro - Draghi urged leaders of the 17 countries that use the euro to use their bailout fund to take the same action, sending a clear message: Europe’s financial crisis requires more forceful remedies than leaders have so far been able to muster. The move towards bond buying came a day after the Federal Reserve hinted it was leaning toward further action to stimulate U.S. growth, highlighting the growing pressure on central bankers to rescue weak economies across the globe. Financial markets were disappointed by the lack of immediate action and that the bank had few specifics to offer on the bank’s emerging plan to save the euro. Draghi said ECB policymakers will work on a more detailed plan in coming weeks, including how much money to put into the effort to lower interest rates on governments’ short-term bonds. The bank would hope for better results than an earlier bond-buying effort that had only limited impact.

"Shorter part of the yield curve"? - It was all going well when Draghi started speaking. Yes the ECB is "working" on a bond buying program. Until this comment came out: "Draghi Says EC will Focus on the Short End of the Yield Curve"  But we know the "shorter part of the curve" isn't the problem. Both Italy and Spain have the ability to roll short-term paper. The issue for these nations is being shut out of the long-term markets and having to constantly auction bills, risking market disruptions. We all know what happens when firms rely on short-term funding when markets lose confidence (Lehman). Needless to say, markets reversed the initial euphoria, as Italian 10y bonds swung 3% and the euro went into the red on the day

Draghi engineers a "reverse Twist", again  - By focusing on the short end of the Eurozone periphery curves, Draghi's comments resulted in curve steepening for both Italy and Spain. And as anyone at the Fed will tell you, this is exactly the opposite of the effect one needs to help these economies. The Fed's effort for almost a year now has focused on flattening the yield curve, while the ECB (both in July and today) has managed to accomplish the opposite.

Draghi Heads Toward Fed-Style QE Bond-Purchase Plan - The European Central Bank is edging toward a bond-buying program that investors say could end up printing money, echoing efforts by the Federal Reserve and other central banks to fix a credit crisis nearing its sixth year. ECB President Mario Draghi yesterday left open the question on whether the bank would neutralize future bond purchases, a step it has taken with all of its interventions to date. He also said the size of the new program would be “adequate to reach its objective” of curbing Italian and Spanish borrowing costs, a contrast with the “limited” scope of the previous approach. “You shouldn’t assume that we will not sterilize or sterilize,” he told reporters in Frankfurt. Spanish and Italian bonds slumped as Draghi steered clear of spelling out all the full details of his plan, which is being resisted by Germany’s Bundesbank. Spain’s 10-year borrowing cost jumped 17 basis points to 7.33 percent at 8:17 a.m. London time.

Draghi Continues Handwaving as EuroCrisis Worsens – Yves Smith - Despite the high expectations, nay, demands of the Bond Gods, ECB chief Mario Draghi, who had promised to part the seas and deliver investors to a promised land of Eurotranquility, which these days means at least a few weeks of relief, instead resorted to more brave-sounding talk. Today his message was he and his fellow Eurocrats were still working on a plan to do something really big, not to worry. Markets “recoiled,” in the words of the Financial Times. Spain’s 10 year bond yields rose to over 7%; the increase in short-term yields, which had been particularly alarming prior to Draghi’s bazooka talk of last week, didn’t blow out as badly due to his contention that buying short-term debt would be part of “classical monetary policy,” meaning the Bundesbank couldn’t throw a hissy fit over that. The Spanish stock index fell over 5% and the Italian, 4.6%.  From Draghi’s statement, one can infer what the plan is likely to look like. The ECB will not buy bonds in isolation, save maybe on the short end, and even then, one suspects not too much. However, it will buy bonds alongside the EFSF/ESM facilities (something Ambrose Evans-Pritchard has suggested might happen for some time). This is the operative section: As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.

Draghing their feet - Mario Draghi disappointed markets yesterday by not offering a clear commitment to any concrete policy action to resolve the turmoil in European financial markets. Nothing new: the inability of European policy makers to resolve the crisis continues as markets keep going back and forth between excitement and depression. My reading of his statements (a few days ago) and yesterday is slightly different and possibly more optimistic. Mario Draghi has made very concrete statements about what the ECB is willing to do that go beyond what was said before. In particular, what I heard yesterday is that "Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible." These are strong statements in support of the Euro (not that surprising) but also about mispricing of certain risks in bond markets (this is more surprising). Some are disappointed that he only talks about risks related to the reversibility of the Euro and not about default risks, but central bankers need to choose their words carefully. It would be difficult to expect from a central banker an explicit statement about specific country default risks.

European Bonds Give Up ALL Draghi "Believe" Gains In Worst Day In Over A Decade - Spanish sovereign bond spreads blew almost 60bps wider today - that is the single-largest absolute move in spreads on record. Almost the entire gain in bonds post-Draghi 'Believe' speech from last week has been retraced in a mere few hours and while the front-end of the Italian and Spanish curves has outperformed, the sad fact is that in promising to maintain that end, then the entire rest of the curve becomes subordinated and therefore is sold as hope fades. Swiss, German, and Dutch short-dated bond yields all dropped to new record low rates. EURUSD has retraced its entire gain from Draghi-'believe', back to 1.2150 - despite his call not to short the EUR. Equity markets in Europe has dumped across the board today - with Italy and Spain -7% from pre-Draghi this morning - though notably still full of some hope from last week. It would seem that perhaps Mr. Draghi should keep his arrogant mouth shut a little more as we thought price stability was his mandate? The largest rise in EGB yields in a decade - all on the back of his misguided and over-confident egotistical attempt to jawbone markets to his reality. All mouth; no trousers.

Spain PM says difficult for Spain to refinance debt (Reuters) - Spain's Prime Minister Mariano Rajoy reiterated on Friday that it has become increasingly difficult for the state to refinance its debts. "The biggest problem for our country is that we owe a great deal and we must repay that money and, right now, it's very difficult that anyone would lend to us, or would refinance the debts that we have," he said. Spain paid the second highest rate since the launch of the euro in 1999 to auction 10-year bonds on Thursday as investors become increasingly concerned the country may need to apply for a sovereign bailout.

Spain inches closer to seeking sovereign bailout (Reuters) - Spain inched closer to seeking a sovereign bailout on Friday as Prime Minister Mariano Rajoy opened the door to a request, although he said he needed first to know the attached conditions as well as the form the rescue would take. At a news conference on Friday, the first he has attended after the weekly cabinet meeting since he took power in December, Rajoy said no decision could be taken until further details are agreed. But he said he was ready to do what is best for the country. He went further than he did on Thursday when, during a press appearance with Italian Prime Minister Mario Monti, Rajoy three times declined to say whether he would seek aid and trigger a concerted action of the European Central Bank and the European Union rescue funds to bring down Spain's borrowing costs

Central Bankers Aren't Supposed to Fake Out Markets - I remember Greenspan saying that the Fed doesn't make surprise moves; it strongly hints at what it will do until the market gets it. There are all kinds of criticisms one can make about Greenspan's policy decisions, but this operational tactic makes a lot of sense. Central banks want to reduce volatility and uncertainty, since those are things that cause losses, create bail-outs, and generally make the public angry at central bankers. Draghi's conflicting statements increased volatility and uncertainty; he made a bad situation worse. Bond traders clearly interpreted his "whatever it takes" comment as a strong hint that big action was coming. As soon as he realized that the markets had over read his comments, he should have immediately put out strong corrective hints. Instead the bond investors bought big, and today they lost big. You may not care that bond investors over interpreted a comment and lost money. But governments need bond investors to finance debt, and the taxpayers needs low interest rates. If bond investors perceive the world as capricious then they will demand higher yields to buy debt. What Draghi did definitely makes the Euro debt and currency seem more capricious.

The Epic Failure of Central Banking - The two major central banks of the world demonstrated this week they are fine watching the global economy go over the cliff.  Yesterday, it was the Fed.  Today, it was the ECB's turn.  Their failure to act in the midst of the ongoing crisis amounts to a passive tightening of global monetary policy.  This is because their inaction raises the global demand for safe assets while allowing existing ones to be destroyed.  Since these safe assets effectively act as money, the central banks are worsening the excess money demand problem that underlies the global aggregate demand shortfall.  This passive tightening has been going since mid-2008 and confirms that we are witnessing what Ryan Avent calls the epic failure of central banking.   Future historians will not be kind to these central banks. Michael Darda explains why the ECB's decision today was particularly egregious.

Second Policy Failure of the Week, by Tim Duy: This week's policy and communication failures of ECB President Mario Draghi border on epic. It would almost be funny if it wasn't so sad, not just for the ECB, but for the ever-increasing number of unemployed in the Eurozone. Teetering on the abyss with record high unemployment putting the lie to his claims about the strength of the Eurozone, Draghi chooses to play mind games with financial markets. This marks a new low in European crisis management. As is now widely known, last week, in the midst of surging bond yields in the periphery, Draghi delivered some what now appear to be off-the-cuff remarks signaling the ECB was prepared to do whatever it takes to save the Euro. This was interpretted by market participants as capitulation on the part of the ECB, as it is generally believed that saving the Eurozone, at least with any semblance of economic dignity, requires the ECB to acknowledge its role as lender of last resort for sovereign debt. This follows naturally from the realization that only the ECB has the firepower to snuff out the debt crisis that engulfs one European nation after another. Draghi, however, did not intend to send such a signal, showing a phenomenal lack of cognizance about the fragile state of financial market confidence in Europe.

Was Draghi really a disaster? - Convertibility, seniority… “modalities”. Was it a disaster or not? Anyway here’s the goods: The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible. First – hate to say I told you so, but that’s why “convertibility risk” was key to note. There’s a real shift in principle here. It is far harder for a Bundesbanker to attack policies as ‘too much’ when they tackle de-euroisation, versus credit risk. But, second – there’s the plain disappointment the ECB didn’t buy bonds right away. It’s ‘Worst sell-off in Spanish 10-year bonds since records began in 1993′ disappointment. Certainly President Draghi looked weak on several points, and sounded weak, as he stiffly retreated to that statement some five or six times to answer questions. Unlike last week’s London speech, this was a script. This is embarrassing – it’s also misguided. When the market doubts monetary policy conducted in euros will be in euros for much longer, the problem is fundamental for the ECB. End of story.

Why there’s more in Draghi’s may-day speech than markets realise -- At first sight, Mario Draghi’s performance on Thursday was an utter disappointment. As expected, he held out the prospect of future bond purchases by the ECB. However, he did not mention any amounts, dates or interest rate target. For the cursory observer, his statement was vague and woolly. Once again, it looked like European policy makers relying on words rather than deeds. It was all about “may” and “could”. The dearth of detail turned financial markets off.  However, from my perspective, the disappointment about Draghi’s may-day speech is a bit over to top. If you take a closer look at Draghi’s speech, things start to look differently. Between the lines the message was perfectly clear. The Bundesbank might not like it, but the ECB will intervene in the bond markets in the foreseeable future. And big time.

Why Eurobonds are Un-American - The emerging consensus in Europe nowadays is that only “debt mutualization” in the form of Eurobonds can resolve the euro crisis, with advocates frequently citing the early United States, when Alexander Hamilton, President George Washington’s treasury secretary, successfully pressed the new federal government to assume the Revolutionary War debts of America’s states. But a closer look reveals that this early US experience provides neither a useful analogy nor an encouraging precedent for Eurobonds. First, taking over a stock of existing state debt at the federal level is very different from allowing individual member states to issue bonds with “joint and several” liability underwritten by all member states collectively. Hamilton did not have to worry about moral hazard, because the federal government did not guarantee any new debt incurred by the states. Second, it is seldom mentioned that US federal debt at the time (around $40 million) was much larger than that of the states (about $18 million). Thus, assuming state debt was not central to the success of post-war financial stabilization in the new country; rather, it was a natural corollary of the fact that most of the debt had been incurred fighting for a common cause. Moreover, the most efficient sources of government revenues at the time were tariffs and taxes collected at the external border. Even from an efficiency point of view, it made sense to have the federal government service public debt.

Unemployment: No recovery | The Economist - YESTERDAY, the Fed declared itself basically happy with the current American recovery. Today, the European Central Bank suggested it was considering how to intervene in a fast-weakening euro-area economy but isn't ready to jump in just yet. There is a startling lack of concern or urgency in addressing a very serious economic situation. A bit of context: (see chart)  The most distressing part is that things might well get worse.

European lenders take Libor scandal hit - The spreading scandal over the manipulation of key lending rates and the downturn of Europe’s economy took their toll on two of the region’s leading investment banks, Deutsche Bank and UBS, which both revealed increased provisions and sharp profit falls. Both banks are caught up in the scandal around the alleged manipulation of the London Interbank Offered Rate and related benchmark lending rates and on Tuesday topped up their estimates for litigation risk by a combined €580m. This reflects in part the expected costs of settling regulatory probes round the world. The dual impact of recent banking scandals, including the Libor affair, and struggling profitability has led to a crisis of confidence in the sector. Sentiment has been particularly bleak in Europe, amid growing anxiety that the eurozone crisis will worsen over the coming months.In the three months to the end of June, Deutsche increased its estimate on unprovisioned litigation costs from €2.1bn to €2.5bn, while UBS added SFr210m to its litigation and regulatory provisions.

Bankers found to have rigged Libor rates face jail - Bankers found to have rigged Libor could face jail after the Serious Fraud Office said it will look to bring criminal charges against those who attempted to manipulate Libor, a key global borrowing rate. David Green QC, director of the SFO, said existing legislation could be used to bring criminal actions against banks implicated in the Libor rigging scandal. Mr Green did not specify the precise charges that could be brought but it is possible bankers found guilty of manipulation could receive prison sentences of up to 10 years. The decision to pursue prosecutions comes just over three weeks after the SFO formally announced an investigation into Libor and in particular whether it was possible to launch criminal proceedings against individual banks and bankers found to have rigged borrowing rates. In a statement the SFO said it was “satisfied that existing criminal offences are capable of covering conduct in relation to the alleged manipulation of Libor and related interest rates”.

RBS nationalisation - The Economist - THE Financial Times announced this morning that "cabinet ministers" have been discussing the nationalisation of the Royal Bank of Scotland. Britain's government already owns 82% of the bank after bailing it out in 2008. Fed up with the lack of lending, "senior government figures" are discussing whether to spend £5 billion buying up the 18% of RBS the state doesn't own. A clash is likely to develop between the hard-nosed Tory chancellor George Osborne, who is opposed to most state expansion, and the long-toothed Liberal business secretary Vince Cable, who is looking for a more radical solution. In a leaked letter to the Prime Minister David Cameron in March, Mr Cable suggests breaking up RBS to create a "British Business Bank with a clean balance sheet and a mandate to expand lending rapidly to sound business".  This suggestion sounds a lot like the one reported in the FT. (Are "cabinet ministers" Vince Cable? No, surely not!) To expand lending to business, the current shareholders would have to be bought out. The holders of 18% of RBS could object to state-targeted loans and sue the government for dereliction of duty. Buying the 18% stake—in effect, full nationalisation—would get rid of that risk.

U.K. to Miss Deficit Target as Economy Shrinks 0.5%, Niesr Says - The British economy will shrink by 0.5 percent this year, forcing Chancellor of the Exchequer George Osborne to miss his budget-deficit target, said the National Institute of Economic and Social Research. The economic deterioration has been “even more pronounced” than previously forecast as private-sector retrenchment is made worse by fiscal consolidation and a “dysfunctional” financial system, the London-based research group said a quarterly report published today. Osborne will borrow 12.5 billion pounds ($19.5 billion) more than planned in the year through March 2013, Niesr said. “All these factors will be a major drag on economic performance,” Simon Kirby, an economist at the institute, said in an interview. “The major problem in the U.K. economy is a lack of demand and the government can do things to boost demand.”

Doing A Cameron - Paul Krugman  - Do you remember the adulation heaped on David Cameron and George Osborne when they boldly decided to ignore the lessons of the 1930s, not to mention basic textbook macroeconomics, and impose fiscal austerity in a depressed economy? David Broder even urged Obama to “do a Cameron”. Today:“Cameron is giving us a big sales pitch, but we are not taking any notice of that,” said the head of an Asian multinational. “We want to know what’s happening to the economy and what are the prospects for us.” One US corporate chief called bluntly for the government to change course after last week’s official figures showed the UK economy shrank 0.7 per cent between April and June. “You need a short-term fiscal policy to boost demand and a credible long-term plan to address welfare, taxes and the labour market. If you do that, the bond market will be fine,” he said.

UK should have waited to enforce austerity - When Britain’s coalition government announced its plan for aggressive fiscal consolidation on taking office in May 2010, three key arguments were advanced by its supporters. The first was that there was no alternative: if borrowing continued on its current track, the gilts market would panic. In its extreme form, this was always scaremongering.  Yet long-term interest rates in Britain are at historic lows just as they are in virtually every industrialised country with monetary independence. This is the result of low growth, not fiscal consolidation.  The second argument was that fiscal consolidation would help, or at least not derail, recovery. Again, this relied more on faith than economics. While we shouldn’t read too much into last week’s output figures, the UK economy is hardly thriving. Its weakness is in large part the result of fiscal policy – the International Monetary Fund estimates that this has reduced gross domestic product by about 2.5 per cent so far.  The third, much more compelling, argument was that since, over the long run, the books have to balance, fiscal consolidation was inevitable. So why delay the pain? This sounds logical. But it contravenes the textbook prescription – followed successfully by the 1992-97 government – that deficit cutting should follow, not precede, sustained recovery.

U.K. Mortgage Approvals Decline to Lowest Level in 18 Months - U.K. mortgage approvals fell more than economists forecast in June to an 18-month low as concerns about the euro area mounted and Britain’s recession deepened.  Lenders granted 44,192 loans to buy homes, compared with a revised 50,544 the previous month, the Bank of England said today in London. That’s the lowest since December 2010. Economists predicted that approvals would drop to 48,000, based on the median forecast of 19 estimates in Bloomberg News survey.  Recent housing-market data suggests weakening demand is hurting prices, with a Hometrack Ltd. report today showing home values fell for the first time in seven months in July. The U.K. economy shrank 0.7 percent in the second quarter, and Chancellor of the Exchequer George Osborne said last week that Britain has “deep-rooted economic problems.”

UK manufacturing falls at fastest rate for three years - The UK's manufacturing sector shrank at its fastest rate for more than three years in July, according to a closely watched survey. With any number below 50 indicating contraction, the Markit/CIPS manufacturing purchasing managers' index fell to 45.4 last month, from a downwardly revised 48.4 in June. July's reading was the lowest from the index since May 2009. The EEF trade organisation said more had to be done to boost the economy. The survey also highlighted a big fall in export orders for manufacturers, which it said had fallen at the sharpest rate since February 2009. Rob Dobson, an economist at Markit, a financial information service, said: "The domestic market shows no real signs of renewed life, while hopes of exports charting the course to calmer currents were hit by our main trading partner, the eurozone, still being embroiled in its long-running political and debt crises." Lee Hopley, EEF chief economist, said the latest date "raises question marks over whether we will see a bounce back in the near future".

Argentina Celebrates Bond Payoff as End of an Era -  Bond payoffs are supposed to be boring, but Argentina’s president is celebrating Friday’s final $2.3 billion payment on a bond given to people whose savings were confiscated a decade ago, calling it a lesson for European countries now mired in foreign debt. The nation’s economic disaster left thousands with a grim choice after the government seized their dollar-denominated deposits to stop bank runs in 2002. They could switch to devalued pesos and regain access to what was left of their savings, or accept a piece of paper promising to repay the money in dollars over the next 10 years. Few had any faith in the government’s promises back then. Argentina had just defaulted on more than $100 billion in foreign debt, banks were shuttered, the economy was in ruins and streets were filled with pot-banging protesters whose chants of “throw them all out” would send five presidents packing. But Argentina has mostly paid up after all, making good on 92.4 percent of that defaulted debt so far, including $19.6 billion in U.S. currency over the years to cancel the Biden 2012 bond. Most of the hard-luck account-holders later sold the bonds at a loss, but as the government makes its last $2.3 billion payment on Friday, the few stalwarts who kept the faith have been made whole, while earning a modest 28 percent profit over the years.

Iceland Could Be First Western Nation Since Financial Crisis To Break Up Its Banks -- Bloomberg News reports that Iceland is “on course to become the first western nation since the global financial crisis hit five years ago to force banking conglomerates to split their business.” An Icelandic lawmaker is pushing a measure to separate risky investment banking from more traditional banking practices, saying “the best way to stop banks creating asset bubbles is to pass laws akin to the 1933 Glass-Steagall Act, which separated commercial and investment banking in the U.S. for more than six decades.” Last month, Sandy Weill — who all but invented the too-big-to-fail bank when he oversaw the creation of Citigroup — said that the U.S. should consider breaking up its biggest banks